China’s climate change projects in countries along the Belt and Road have made remarkable progress. In the first half of 2020, BRI energy-related investments were predominantly climate-friendly for the first time. However, compared with some international institutions, China’s development of climate investment and finance is still at an early stage. Influenced by political, economic and environmental factors, as well as project structure and former cooperation experience, problems with China’s climate change projects in countries along the Belt and Road continue to exist.
This article briefly introduces the status of China’s climate investment and finance in countries along the Belt and Road, analyzes the main problems faced by investors, and puts forward suggestions for improvement.
1. State of China’s climate change projects along the Belt and Road Initiative
Since the launch of the Belt and Road Initiative in 2013, Chinese enterprises have actively invested in projects in countries along the Belt and Road Initiative. To help the countries enhance their capacity of mitigating and adapting to climate change, Chinese companies have carried out a few climate projects. By the end of 2019, China had participated in more than 160 climate projects in countries along the Belt and Road①, involving rail transportation, wind power, solar power, hydropower, biomass power, geothermal and other types of projects. Some of these projects are listed in Table 1. These projects are all over Southeast Asia, South Asia, West Asia, Central Asia, Europe and other regions, not only meeting the infrastructure needs of local residents, improving the living standards of the whole society, but also generating benefits, such as improving social conditions.
Table 1: Some of China’s climate change projects in countries along the Belt and Road Initiative (BRI) (Source: yidaiyilu.gov.cn)
|1||Railway||Laos||China-Lao Railway Project|
|2||Railway||Kenya||Mombasa-Nairobi Railway Project, Kenya|
|3||Railway||Russian||Moscow-Kazan High-speed Rail Project|
|4||Railway||Burma||China-Myanmar International Railway Project|
|6||Railway||Thailand||Thailand’s Three Major Airport High Speed Rails Project|
|7||Railway||Hungary, Serbia||Hungary-Serbia Railway|
|8||Railway||Indonesia||Yavan High Speed Rail Project|
|9||Railway||Ethiopia, Djibouti||Addis Ababa-Djibouti Railway Project|
|10||Railway||Pakistan||Lahore Rail Transit Orange Line Project, Pakistan|
|11||Urban Rail Transit||Russian||Moscow Metro Southwest Line Project|
|12||Urban Rail Transit||Israeli||Red Line Light Rail Project|
|13||Urban Rail Transit||Egypt||Suburban Railway Project in 10th of Ramadan, Egypt|
|14||Urban Rail Transit||Bangladesh||Dhaka Urban Rail Transit Project|
|15||Urban Rail Transit||India||Mumbai Metro Line 1|
|16||Waterborne Transport||Bangladesh||Padma Bridge and River Dredging Project|
|17||Wind Power||Ethiopia||Adama Wind Power Project, Ethiopia|
|18||Wind Power||Pakistan||Davao Wind Power Project, Pakistan|
|19||Wind Power||Vietnam||Binh Thuan Wind Power Project, Vietnam|
|20||Wind Power||Kazakhstan||Zanatas Wind Power Project, Kazakhstan|
|21||Wind Power||Montenegro||Mozura Wind Power Project, Montenegro|
|22||Wind Power||Croatia||Saini Wind Power Project|
|23||Solar Photovoltaic||Sri Lanka||100MW Rooftop PV project, Sri Lanka|
|24||Solar Photovoltaic||Pakistan||900 MW Photovoltaic Power Plant (on Ground) in Punjab Province, Pakistan|
|25||Solar Photovoltaic||Pakistan||100 MW Solar Photovoltaic Power Station, Pakistan|
|26||Solar Photovoltaic||Algeria||233 Photovoltaic Power Plant Project, Algeria|
|27||Solar Photovoltaic||Hungary||Greensler Solar Power Station|
|28||Solar Photovoltaic||Ukrainian||Large-scale Solar Power Plant Project in Central Ukraine|
|29||Solar Photovoltaic||Pakistan||30MW PV Plant, Pakistan|
|30||Solar Photovoltaic||Thailand||SRT275kw Rooftop PV Project, Thailand|
|31||Solar Photovoltaic||Mongolia||Bagakhangai 50 MW PV Project, Mongolia|
|32||Solar Thermal + Solar Photovoltaic||Morocco||Nouvelle-Zazate Solar Hybrid Project|
|33||Solar Thermal + Solar Photovoltaic||Saudi Arabia||Dubai Solar Hybrid Project (CSP+PV)|
|34||Natural Gas||Myanmar||Yangon Dajida Combined-cycle Gas Turbine (CCGT) Power Plant Power|
|35||Natural Gas||Iraq||Al-Khafaya Natural Gas Processing Plants, Iraq|
|36||Hydropower||Laos||Laos Nanjian Hydropower Station Project|
|37||Hydropower||Pakistan||Kallot Hydropower Station Project, Pakistan|
|38||Hydropower||Pakistan||Nirum-Jelum Hydropower Station|
|39||Hydropower||Nepal||Sangdee A Hydropower Station|
|40||Hydropower||Cambodia||Elesai Hydropower Station, Cambodia|
|41||Hydropower||Malaysia||Malaysia Baler Hydropower Station|
|42||Hydropower||Belarus||Vitebsk Hydropower Station|
|43||Geothermal||Indonesia||SMGP 240MW Geothermal Power Project, Indonesia|
|44||Nuclear Power||Pakistan||Chashma Nuclear Power Project, Pakistan|
|45||Biomass Power||Thailand||Biomass Power Plant in Southern Thailand|
|46||Biomass Power||Sri Lanka||Karawalagama Biomass Power Plant Project|
|47||Biomass Power||Bulgaria||Biomass Power Plant Project, Bulgaria|
|48||Biomass Power||Myanmar||Biomass Power Plant Project, Myanmar|
|49||other||Pakistan||CCCL Phase II Waste Heat Power Project|
|50||other||Saudi Arabia||YCC Cement Group Cement Waste Heat Power Project in Saudi Arabia|
2. Problems in climate change projects in countries along the Belt and Road Initiative
Carrying out climate change projects in countries along the Belt and Road Initiative is accompanied with political, economic, environmental, cultural, religious and many other risks. Accordingly, investors and developers dealing with these risks are confronted with a number of challenges during project implementation. Specifically, the main problems encountered by climate change projects in this region include the coordination between the investing enterprises and the BRI countries, the market competition for the projects, as well as the risk assessment system and financing methods for project investment.
Failure to adequately adapt to the infrastructure needs of BRI countries to address climate change
A fundamental objective of the Belt and Road Initiative (BRI) is to promote sustainable economic and social development in this region, mostly by investing infrastructure in countries along the routes. However, China’s investments in the BRI is still concentrated in a few countries, with the number of climate change projects accounting for less than one tenth of the total, and the number, scale and types of mature projects remaining underdeveloped. In the future, when selecting projects in BRI countries, Chinese enterprises should not only focus on economic benefits, but also take the social and environmental effects of the projects in the host countries into consideration, so as to match the countries’ infrastructure needs in addressing climate change.
Intense competition for projects leads to unhealthy competition
While the BRI is a Chinese initiative, countries of the BRI are also seeing investments from other countries. Countries such as the US, Russia, Japan, European Union and India also have various cooperation and investment initiatives, with many countries also having their own infrastructure development strategies. The active participation of more and more investors has increased competition for projects in BRI countries, leading to potentially underbidding with a potential risk of corruption with negative consequences for environmental and climate considerations and possibly also project quality.
Inadequate investment risk assessment and protection mechanisms
Since the initiative was launched, Chinese enterprises have experienced many failed investments along the Belt and Road Initiative. Difficulties are found in the process of project implementation, such as project suspension or budget overrun, leading to negative impact on their investment income.
In 2010, during China Railway Construction Corporation (CRCC)’s implementation of Saudi Mecca light rail project, the project owner frequently modified the original design, not only putting forward new functional requirements, but also significantly increasing the capacity demand, leading to a sharp increase in project workload and cost. CCER suffered a loss of 4.153 billion RMB, setting a record for losses in China’s overseas projects.The fundamental reason for this is lack of reasonable estimation of the project difficulty level and related costs at the early stage, and lack of careful analysis of the contract and specific terms, which led to frequent changes in the project. In order to ensure the effective implementation of more climate change projects in BRI countries, the existing risk assessment mindset, assessment framework and assessment tools need to be improved and optimized. At the same time, a dispute resolution mechanism as well as an overseas investment protection mechanism should be established as soon as possible.
Large demand for investment, yet limited methods of financing
In the context of international cooperation, the development needs of countries along the Belt and Road come not only from the construction of major infrastructure projects, but also from the need to address climate issues. It is estimated that in order to meet the Paris Agreement’s goal of a global temperature increase of no more than 2 degrees Celsius, the Belt and Road countries will need US$11.8 trillion in green investment by 2030. (vi)
Chinese enterprises finance climate change projects along the Belt and Road mainly through debt, but they still face many difficulties. The high cost of foreign currency lending from Chinese banks, the stringent loan requirements, the short financing period and the necessary insurance requirements all make it more difficult for Chinese enterprises to obtain financing. On the one hand, Chinese enterprises do not have convenient debt financing channel; on the other hand, mortgaged property takes up a large amount of company assets, which also affects the enterprises’ subsequent financing.
3. Recommendations for investors of climate change projects along the Belt and Road Initiative
1. Scaling up investments in clean energy
In the process of investment in climate change projects in BRI countries, local ecological conditions should be fully taken into account at the initial stage, and priority should be given to developing projects with high income stability and environmental benefits. BRI are abundant in renewable energy resources and have large potential for development. Investment in clean energy along the Belt and Road should be scaled up to give full play to the huge energy advantages of these countries, which can ensure the projects’ climate effect and also solve the problem of insufficient energy supply in the countries along the routes. It is suggested that Chinese enterprises make use of their technological advantages to help the countries develop renewable energy power generation projects, which are currently still difficult for these countries to complete.
2. Improve investment risk assessment and protection mechanisms
Chinese enterprises should develop different investment and financing strategies according to the characteristics of different BRI and improve the risk assessment mechanism in advance of the investment to protect the legitimate rights and interests of Chinese enterprises and mitigate risks during the process. For projects that have already encountered interest disputes, it is recommended to make flexible use of consular protection, overseas security and other dispute resolution tools such as international arbitration, international commercial courts and relevant international treaties, to protect the legitimate interests of Chinese enterprises. It is suggested that a protection mechanism should be gradually established for climate investment and financing along the Belt and Road, to provide effective protection for relevant activities.
3. Diversify access to debt financing
Under the framework of debt financing, it is recommended that Chinese enterprises can try to make loans from international financial institutions and expand their scale of financing by leveraging the financing and risk control capabilities of foreign financial institutions. Besides, Chinese enterprises can also directly issue bonds to finance the projects. Some enterprises have already issued Belt and Road green bonds, which have been actively subscribed in the market. When developing higher-risk projects, they can try to finance their operation through loans at the early stages and refinance later through bonds to replace the loans. Through the above methods, enterprises can operate more flexibly and constantly seek a more appropriate debt financing method.
4. Make use of equity financing
In addition to debt financing, the role of equity financing should also be appropriately brought into play, so as to improve the capital structure of the investing entities, attract more capital investment and support subsequent debt financing. Enterprises can consider packaging their existing assets and projects, and raise funds through public offerings. Or they can also seek investment from international long-term investment funds, thereby attracting more investors and improving their projects’ financing capability and operational sustainability.