Chinese firms need professional help with B&R

By Li Qiaoyi Source:Global Times Published: 2017/7/11 23:13:39

Illustration: Peter C. Espina/GT


It's well known that abundant opportunities await Chinese businesses along the route of the Belt and Road (B&R) initiative, but it could be highly risky if companies fail to avoid the pitfalls associated with infrastructure investment, particularly with regard to securing land rights.

For there to be more secure investment, Chinese companies seeking a foothold along the route should become adept at using project finance arrangements and hiring fundraising consultants to keep their B&R investments financially viable.

Chinese-made products have grown in popularity worldwide, laying the groundwork for the upcoming Chinese wave to spread across a lot of markets along the route, particularly in the sphere of infrastructure construction. But it's often the case with Chinese companies that they hope to win contracts quickly but are not then ready for the project financing.

As a consequence, they are normally more fast-paced than their international counterparts when it comes to signing project contracts. That's not to say they sign the contracts in a casual way, but they might sometimes be overly confident that what's proven effective in the domestic market would be equally feasible in foreign markets.

It's often the case that technology isn't a problem for Chinese companies while a lack of understanding of local market conditions does pose an impediment for their plans to secure the local market. A common concern for Chinese companies building infrastructure projects beyond their home territory is the securing of land rights, which in many developing countries requires repeated communications and cannot solely rely on lawyers to minimize potential losses.

As such, collateral loans, the conventional method of fundraising, are no longer the best choice for Chinese companies expanding their footprint in more than 60 countries and regions along the B&R route, as the variety of political and economic risks involved in B&R investment could put pressure on their balance sheets.

That said, the use of project financing, which allows shareholders to book debt in an off-balance sheet manner and allows for various risks including the potential risks arising from land rights to be managed financially, is of undoubted importance for Chinese companies looking to capitalize on opportunities in B&R markets.

Particularly worth pointing out is that policy banks will likely become increasingly picky about B&R projects that are eligible for their funding, which means projects falling under B&R investments, especially those undertaken by privately run businesses, will primarily be commercially funded. If that is the case, project finance arrangements that do a good job of risk distribution and management could maximize the potential of securing funds for the project, which means the source of financing could be commercial loans or project bonds, among others. In doing so, the losses could also be minimized in the event of a default.

Having said all this, Chinese companies still need the help of fundraising professionals to devise competitive yet commercially viable project finance agreements. It's already a common practice for their international rivals to hire fundraising advisors, as it takes too much time and energy to figure out the best financing arrangement, not to mention the many complicated aspects of the project that need to be evaluated in financial terms and that should be considered when negotiating the terms of the contract. This might initially add to the cost of winning the project, but that's only a small amount of money given that infrastructure projects usually involve hundreds of millions of dollars. It would probably be money well spent.

The article was compiled by Global Times reporter Li Qiaoyi based on an interview in Beijing in late June with Lim Wee Seng, managing director and head of Project Finance at DBS Bank. bizopinion@globaltimes.com.cn

Posted in: EXPERT ASSESSMENT

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