By P.K.Balachandran/Daily Express
Colombo, August 2: China’s ‘debt-trap diplomacy’ has to be looked at from a variety of angles to understand its existence and take corrective measures, says a paper published by the Beijing-based Carnegie-Tsinghua Center for Global Policy.
In their paper entitled: “Why unsustainable Chinese infrastructure deals are a two-way street,” Matt Ferchen and Anarkalee Perera say that China as well as the aid-receiving countries have lessons to learn from the operation of Beijing’s global investments under the Belt and Road Initiative (BRI).
China alone cannot be blamed. The host countries have contributed to the crisis in equal measure. There is politicization of the process and a grievous lack of awareness of realities both in China and the host countries, which have contributed to growing dissatisfaction over BRI projects, the paper points out.
The popular narrative is that China is engaging in problematic debt trap diplomacy purposely to create unsustainable debt in infrastructure deals with developing countries in order to grab the assets sooner or later.
Sri Lanka’s Hambantota port, which a Chinese state-owned firm acquired via a 99-year lease in 2017 after the Sri Lankan government could not service its loans, is repeatedly cited as a classic example of debt-trap diplomacy.
But Ferchen and Perera point out that analysts have overlooked two crucial aspects tied to project selection and debt sustainability.
“First, leaders in some countries, including Sri Lanka, have used Chinese lending for their own political ends. In doing so, they have actively contributed to unsound project selection and implementation. Second, the distorted commercial and political incentives some Chinese actors face, as well as Beijing’s limited experience in evaluating political risk, help explain Chinese willingness to pursue unsustainable projects,” Ferchen and Perera maintain.
“While most critiques of the debt trap narrative have largely focused on China’s strategic intentions, other observers have noted that Beijing’s partners are strategic players in their own right,” the authors say.
After the conclusion of the 30-year war in 2009, the then Lankan President Mahinda Rajapaksa wanted to develop his country and when he looked for aid, the West did not come forward to help citing human rights violations. In fact, the EU withdrew GSP Plus duty concessions. As other Western financing dried up, Sri Lanka increasingly turned to China to fill the void. Beijing’s avowed foreign policy principle of non-interference in other countries’ domestic affairs and its demonstrations of support for Sri Lanka at the UN also positioned China as a key partner toward the end of the conflict and afterward, the authors point out.
China’s willingness to provide large sums of money, and quickly, not only insulated the former Sri Lankan government from international pressure linked to the conduct of the war, but enabled him to advance his broader domestic political agenda, Ferchen and Perera say.
“Right after the civil war, Rajapaksa actively sought out Chinese-funded economic projects to solidify his hold on his political base by transforming his home district of Hambantota into the country’s second-largest commercial and trade hub. He used Chinese loans to build large-scale projects such as the Hambantota port and Mattala Rajapaksa International Airport in one of the least developed parts of the island.”
However, as expected, these stand-alone projects failed as they were not part of a larger and inclusive scheme of development. They did not generate sufficient income. They cost the government billions of dollars in additional debt.
Therefore, the blame could not be put at the door of the Chinese entirely. It was Rajapaksa who was hell-bent on these projects and China exploited the opportunity to set up what it thought would be good links in its chain of ports and airports across the globe and therefore a good investment from a long term perspective.
But the reality is grim both for the host countries and China. While the host countries are burdened with unsustainable projects and debt, China too is losing money.
According to the IMF, 30% of the potential benefits from emerging market public investment, including in infrastructure, is lost due to inefficient planning, implementation, and corruption. Such challenges are certainly true of China–Sri Lanka deals but they also apply more generally to many Chinese-financed BRI infrastructure projects, the authors say.
Commercial PPPs Work Well
However, in contrast, commercially-driven Public-Private Partnerships (PPPs) have worked well both in Sri Lanka and in other countries, the authors point out.
“Chinese deals negotiated under different models such as public-private partnerships (PPPs) seem to do considerably better than those financed predominately through state-to-state loans. Crucially, such arrangements do far more to spread and balance risk, because they involve actual Chinese investments rather than loan packages in which almost all the risk is borne by the host government in question,” the authors point out.
In this context they cite the US$ 500 million deep-water Colombo International Container Terminal (CICT), as an example of a successful and profitable PPP enterprise.
“In contrast to Hambantota, the Colombo port’s CICT was negotiated as a PPP between China Merchants Port Holdings and the Sri Lanka Ports Authority from the start, and the deal has been instrumental in transforming the Colombo port into a global shipping hub.”
“In the first half of 2018, the Colombo port was among the fastest-growing ports in the world. The port of Piraeus in Greece, in part because it was financed through a PPP-model of Chinese investments rather than loans, similarly experienced increased operational efficiency after a Chinese firm took over its management. Recent figures on the Hambantota port, which has also been re-negotiated as a PPP, attest that similar efficiency gains along the lines of Colombo and Piraeus may be possible.”
Importance of Local Conditions
One of the lessons that China ought to learn is that domestic conditions in the host countries vary and may not always be favorable for large scale loan offers and projects.
Taking Sri Lanka as an example, the authors say that Sri Lanka is not ideal for big investments. In 2019, Sri Lanka ranked 100 out of 190 countries in the World Bank’s Ease of Doing Business Index, the authors point out.
“Despite attempts to reform the country’s regulatory environment, red tape and bureaucratic impasses are still pervasive. Structural economic weaknesses, such as decreasing trade, rising protectionism, and declining government revenue have also contributed fundamentally to the country’s inability to service foreign debt.”
“Hambantota may be the most famous poster child for unsustainable Chinese development financing, but is far from the only example. In Southeast Asia, China’s relations with Malaysia took at least a short-term hit when Kuala Lumpur demanded that debt and infrastructure deals inked by former prime minister Najib Razak be re-negotiated. The controversial Myitsone Dam and Kyaukpyu deep water port project in Myanmar have continued to prompt local concerns.
“Likewise, poorly planned and badly executed energy and infrastructure deals involving China in Latin American countries like Venezuela and Ecuador have increasingly attracted critical headlines. Even in Europe, Beijing’s efforts to finance and build a railway between the capitals of Hungary and Serbia have run into obstacles and sparked backlash.”
Simplistic Assumptions and Lack of Experience
The root cause of all this is that Chinese-backed projects rely on over-simplistic, or even mistaken, assumptions, Ferchen and Perera maintain.
“A central problem is that almost all Chinese participants involved in this financing and infrastructure binge—including policy bankers, state-owned enterprise managers, and diplomats—face distorted economic and political incentives to ink more, rather than fewer, BRI deals.”
“These distorted and overlapping incentives are exacerbated by China’s questionable or nonexistent political risk assessment. Many banks, firms, and state officials have barely more than a decade of experience working outside China, and they often possess minimal background knowledge about the history, culture, or politics of the countries where they are operating.”
“Given that many BRI projects are in developing countries with long-term economic and governance challenges, including recent or ongoing conflicts, it should be no surprise that major miscalculations and mistakes would be frequent. Especially since some projects are driven by host governments for non-economic reasons, the lack of proper risk analysis and context-specific expertise looms all the larger,” the authors say.
(The featured image at the top shows the Hambantota harbour in Sri Lanka)