Photo Credit: Pakistan Tribe
BY ALVIN CHENG-HIN LIM
Political Risk and the Belt and Road Initiative
Aug. 06, 2018 | | 0 comments
Recent difficulties facing the implementation in various countries of infrastructure projects that are being constructed under the banner of China’s Belt and Road Initiative have highlighted the political risk faced by such multiyear construction projects when hosted in countries with democratic systems of government. Zheng Yongnian observes that such countries carry political risk for long-term projects, since a newly-elected government could introduce “upheavals not just in personnel but also in policies. The newcomer may even tear down his predecessor’s work totally.”
The Belt and Road Initiative (BRI) is Chinese President Xi Jinping’s ambitious plan to accelerate global development through the construction of major infrastructure projects such as ports, high-speed railways, oil and gas pipelines, power plants, highway networks, and telecommunications infrastructure. In 2013, President Xi announced the first two arms of the BRI: the Silk Road Economic Belt, which spans the Eurasian landmass, and the 21st Century Maritime Silk Road, which spans the countries of the South China Sea and the Indian Ocean. In 2015, the Chinese government’s BRI action plan specified the inclusion of the countries of South Asia, the South Pacific and the Mediterranean Sea, and in 2017 the BRI expanded with the inclusion of “three ‘blue economic corridors’ spanning Europe, Africa, Asia and Oceania.” In 2018 the BRI expanded further with the inclusion of the Trans-Pacific Maritime Silk Road which includes the countries of Latin America and the Caribbean, as well as the Polar Silk Road which focuses on the Arctic.
While a country with a democratic system of government may have difficulty managing such a long-term and expensive collection of megaprojects — given that its government risks getting replaced with each election — China, with its stable long-term government under the Communist Party of China (CPC), does not face this form of political risk. The removal in 2018 of the term limit on the presidency allows President Xi to manage the implementation of the BRI and his other projects indefinitely into the future. Beyond Xi, the CPC itself will ensure long-term management of the BRI. The party’s long-term interest in the BRI was symbolized by the CPC writing the BRI into its party constitution in 2017.
In contrast to the long-term stability within China of the government’s management of the BRI, many of China’s international BRI partners are democracies which hold regular elections, giving rise to the political risk of changes to their elected governments. This risk was materialized recently in Malaysia, when its general elections in May 2018 led to the ouster of Najib Razak, whose government had friendly relations with China and which had begun to implement a number of major BRI projects. The new government — led by the hitherto retired Prime Minister Dr. Mahathir Mohamad — suspended several of these projects in July 2018. The new government has explained that it will review the infrastructure projects signed by the previous government and renegotiate their contracts if necessary in order to reduce “Malaysia’s estimated US$250 billion national debt and other liabilities.” The suspended BRI projects include “two pipeline deals and a 688-kilometre (430-mile) rail link worth a combined 90.4 billion ringgit (US$22.35 billion).”1
The Chinese government will hence have to carefully negotiate its BRI projects with Pakistan, Myanmar, and other partner countries carefully to ensure the continued long-term global expansion of the BRI.
Similar political risk has also materialized in Pakistan, which held its general elections in July 2018. In the run-up to the elections, the political opposition had pledged to “to publish secret details about the financing of Chinese projects,” and local business leaders had appealed to the candidates to offer “less-generous perks for Chinese companies.” Significantly, the new government has inherited a debt problem from the previous government and “is likely to seek a bailout from the International Monetary Fund … Such a bailout would likely include restrictions on borrowing and spending … which would force the country to curtail its Belt and Road program with China, known as the China-Pakistan Economic Corridor, or CPEC.”2
A debt crisis connected with CPEC could be problematic for the BRI as it could dissuade interested countries from cooperating with China on BRI projects. A similar debt crisis in Sri Lanka has already had a negative impact on other countries. In the Sri Lankan case, involving the Chinese development of the port of Hambantota, the government had “borrowed heavily to build the port, couldn’t repay the loans, and then gave China a 99-year lease for debt relief.”
The Hambantota case subsequently led the government of neighboring Myanmar to reevaluate the terms of the Chinese port development project at Kyaukpyu. Soe Win, Myanmar’s Planning and Finance Minister, expressed his government’s worries about China’s proposed loan for the Kyaukpyu project: “The amount of interest is quite substantial … What we are afraid of is that we will end up like Sri Lanka.” The Myanmar government eventually decided to renegotiate the Kyaukpyu project with China, so as to make the project “as lean as possible” and remove “all the unnecessary expenses.” As Soe Win explained, the Myanmar government had “learned from our neighboring countries” — likely Sri Lanka and/or Malaysia — that “overinvestment is not good sometimes … The bigger the projects, the bigger the responsibility to pay back.”
Such worries about debt can be connected to the issue of political risk, since the voting public’s unhappiness over a debt crisis could compel them to vote for a new government in an election. The situation is different in China, as the absence of the political pressure that democracies face from their election cycles allows the Chinese government to have long-term management of debt. As of October 2017, China Railway Group, a Chinese state-owned enterprise, has accumulated USD 700 billion in debt from its construction and operation of the 25,000 km high-speed railway network in China — the world’s largest. China Railway’s debt problem has been exacerbated by declining revenues, especially since the Chinese government is “maintaining a policy of keeping fares down,” and the company has survived thanks to continued state subsidies. Indeed, in January 2018, China Railway announced USD 112.4 billion in further fixed-asset investment to help achieve the government’s goal of expanding China’s high-speed railway network to 30,000 km by 2020.
For the Chinese government, the accumulation of large levels of debt by its state-owned enterprises serves a useful purpose. As Noah Smith explains, the huge expenditure in infrastructure construction and other projects, financed by loans from state-owned banks, has functioned as a fiscal stimulus which “for the last quarter-century” has helped China to avoid a recession.
However, as the Chinese government is now witnessing, the same does not apply to other governments which, due to their political systems, have reason to be wary of excessive debt. Should its mounting debt eventually force the Pakistani government — as some experts predict — to issue a long-term lease of Gwadar port to China the same way the Sri Lankan government did with Hambantota port, this could stall the expansion of the BRI, as interested governments would then have an additional precedent to view proposed BRI projects as potential “debt traps.” The Chinese government will hence have to carefully negotiate its BRI projects with Pakistan, Myanmar, and other partner countries carefully to ensure the continued long-term global expansion of the BRI.
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1. Following the suspension of the construction of the East Coast Rail Link, China Communications Construction Company (CCCC), the project’s primary contractor, fired almost a thousand of its employees, mostly Malaysian locals, as “because they have no idea when or if the suspension will be lifted.” In addition, a training program CCCC had organized with Beijing University for its Malaysian staff has been suspended.
2. Following the original report from the Wall Street Journal, the Chinese Embassy in Pakistan argued that Chinese preferential loans only account for 10% of Pakistan’s foreign debt, while 42% comes from multilateral institutions and 18% from the Paris Club, which means that “even if there is a so-called ‘debt trap,’ the initiator is not China.” However, the Wall Street Journal notes that the numbers cited by the Embassy exclude “more than $12 billion of Chinese commercial loans that Pakistan’s official statistics show have gone to completed and ongoing energy projects, as well as some $3 billion in emergency funding that Pakistani officials say has come from Chinese commercial banks to support Pakistan’s foreign-exchange reserves.”