China's ‘Belt and Road’ initiative – the flagship foreign policy of President Xi Jinping – has the potential to open a raft of new development opportunities for African infrastructure, mining and power projects. The extent to which the initiative covers Africa is still a little unclear but it appears to cover North Africa and parts of East Africa at the very least, with Kenya acting as the gateway to the initiative’s links to Africa through its modern ‘maritime Silk Road’.
Although the practical application of the initiative is still developing, to date we are seeing greater focus by Chinese SOEs on countries subject to the initiative, shorter and easier outbound approvals and easier credit approvals within Chinese banks. Chinese SOEs have been preparing business plans for investment in the Belt and Road projects and countries, as well as demonstrating progress against those plans internally. Chinese companies will insert long explanations on links to the Belt and Road in all of their approval applications. One immediately obvious consequence is the number of previously shelved projects being dusted off and started again as part of The Belt and Road Initiative.
The key opportunity for non-Chinese sponsors is to tap Chinese capital for The Belt and Road projects in North and East Africa. One way is by working with a Chinese EPC contractor to bring in Chinese banks and Sinosure cover.
There are a number of issues to think about when tapping Chinese funding, including the following:
The Chinese EPC contractor is the key route to the banks
It is important to remember that the contractor, not the borrower/sponsor, is the bank’s customer. That means using the contractor to obtain good financing terms and overcome negotiation obstacles.
Establish finance support up-front
Contractors frequently promise finance on attractive terms, but the key is to understand the substance to that support as early as possible. Many projects stall when credit approval falls through late in the day.
To the extent possible key finance terms should be agreed up-front
Negotiate key points, such as pricing, parent support, and change of control, up front when the contractor is competing hard for the project. This is not always easy to achieve but on some occasions sponsors have stapled a finance term sheet to the back of terms agreed with the contractor.
China Inc. and information flow
The sponsor will be surrounded by Chinese kit, EPC, debt and export credit cover. Information flows freely within China Inc. but does not flow so freely across to a foreign sponsor. It’s important to be aware of this.
Maintain competitive tension as long as possible
Chinese negotiations can drag and sometimes an EPC contractor will pull out because of unexplained outbound or state owned asset approvals difficulties, or because of credit approvals issues. Maintaining competitive tension as long as possible avoids the downside if this occurs and also keeps the pressure on the Chinese contractor.
Keep documents and structures simple
As far as possible, use structures that have been approved and negotiated before, as these can typically be negotiated and approved much more quickly. New structures are possible, particularly for strategically important projects, but the contractor, as the bank’s customer, will need to assist to push these through.
Partnering with foreign sponsors is a key aspect of The Belt and Road initiative. This is an important aspect to being sensitive to host country concerns, diversifying risk for China and also an important element to China's SOE reforms which aim to see China's SOEs partnering with the private sector. It also should in theory reduce some of the moral hazard concerns that SOEs with strong policy support may build projects that don't need to be built.