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Eastern and Western Paradigms in Developing Economy Infrastructure Investment

Marc Solsona Bernet
Tuesday, July 19, 2016

International Infrastructure investment gained rapid traction as an investment instrument during the 20th century. Historic examples of these initiatives include the two of the most relevant and critical transportation infrastructures that have positively disrupted and later shaped modern world trade: The Suez Canal was constructed and operated by the French Suez Canal Company, while the Panama Canal was originally started by the French and later completed by the United States, which operated the Canal and adjacent territories until 1999. These investments, often seen as strategic financial plays by the nations that sponsor them, are at times viewed with caution and suspicion by the local community and stakeholders.

By many estimates today, the demand for infrastructure investment has burgeoned to a point where it continues to outweigh the availability of capital funds. Annually, only US$ 2.7 trillion is invested out of the USS 3.7 trillion needed to support global infrastructure demand [1]. Consequently, this shortage in funds has constrained the ability for developing nations to provide reliable and affordable infrastructure, dampening the multiplier effect of these investments and their contribution to socio-economic development.

Within this context, governments of developing nations often depend on multilateral institutions for financing the development of new infrastructure. Since the end of World War II, this is a responsibility that has been undertaken primarily by Western economies, mainly through the World Bank Group and its partners. In the past few decades, however, there has been an increasing shift of this financing burden to advanced developing nations (as some of these nations have transitioned from developing economies to market economies). The differences between these two paradigms, with certain limitations, can be exemplified by studying the west’s World Bank Group and the east’s China Policy Banks.

This shift has been increasing in recent years and likely will continue to do so. According to the Financial Times, China Policy Banks (China Development Bank and China Export-Import Bank) lent more capital to other developing economies than the World Bank Group in 2011[2]. This trend is not only present in multilateral lending, but China has also transitioned from capturing about 0% of global FDI Market share in the year 2004, to capturing about 12% in 2014 [3].  These investments have mostly been focused on infrastructure in developing countries. One such example is Africa, where China was by far the largest investor in the continent’s infrastructure (almost 2X the investment amount by other Multilateral Development Banks) in 2012 [4].

The World Bank Group’s stated objective in investing in infrastructure is to end poverty while the China Policy Banks’ objective is to foster Chinese trade and development. While the underlying objectives of these two actors are different the shift in developing economy investment has enticed and captured both scholars and media attention. Exploratory research and journalism have been conducted into understanding the direct and indirect implications for borrower nations when choosing between these alternative funding sources.

The Stanford Global Projects Center, in partnership with the Stanford Center on Democracy, Development and Rule of Law, is currently conducting a study of the impacts of various financing sources on project outcomes. The research objective is to identify the substantial differences between eastern and western paradigms in infrastructure development, and its implications for borrowing countries in terms of project execution, longevity, and social and environmental safeguards. The study will also examine a set of case studies comparing eastern- and western-funded development projects.

On a cursory review of scholarly and media coverage of these projects, there are a few general hypothesis that can be drawn for this research. One is that eastern paradigm projects are financed faster, while western paradigm projects are more bureaucratically tedious with delays caused by stringent social and environmental safeguards, layered and slower decision-making process, as well as a general lack of coordination between approval authorities and stakeholders. Another related hypothesis is that western paradigm projects have far fewer quality issues or negative externalities post-construction.

These hypotheses are partially validated when analyzing World Banks’ and China Policy Banks’ governance structures, decision process, and social and environmental safeguards standards. Indeed, one of the first learning points is that China Policy Banks’ project cycle is significantly shorter than World Bank’s (a World Bank’s assessment for a project is 6 months [5], while China Policy Banks complete the assessment in 30 days [6]) and requires significantly less bureaucratic approval processes. Conversely, the World Bank’s social and environmental safeguards are more comprehensive than the standards used by China Policy Banks, which do not always include public consultations, grievance mechanisms or industry-specific standards.

These hypotheses are also anecdotally validated when examining the Highway 2000 project in Jamaica. Highway 2000 consists of a tolled highway, featuring a four-six lane, controlled-access, tolled motorway with fully graded, separate interchanges, and intersection that will cover approximately 230km across the entire island from Kingston through the central regions of the island and onto the primary tourism areas surrounding Montego Bay and Ocho Rios.  Due to its complexity, the project was divided into various phases. Interestingly, as of today, two phases of the project have been developed: Phase 1A by French contractor Bouygues Travaux Publiques (BTP), and Phase 2A by the China Harbour Engineering Company (CHEC).

Phase 1 was awarded to BTP in 2001 after an international competitive bidding and it consisted of a DBFOM contract for 35 years. The construction process included public consultations with various stakeholders and there were no overwhelming social concerns regarding work quality or environmental standards. However, Phase 1 had to be subdivided into 3 sub-phases. Initially funded by the Government (using bonds and loans) and the Developer (using equity and commercial debt), the project was only completed after a refinancing of the debt by a syndicate of multilateral and bilateral agencies (which included the EIB, IADB, IFC and PROPARCO) on a second instance.  Construction of Phase 1A started on June 2002, and Section 1B was finished on August 2012. Phase 1C is still in planning.

Phase 2 was also started by BTP, but delays and unexpected costs on a geotechnical challenging section pushed the Government of Jamaica to request further proposals on the section. The Government extended an invitation to CHEC, already active in projects on the island, to offer a proposal. This action was widely criticized for its lack of transparency, with critics arguing that the bid should have been opened to international tendering. The Jamaican Government was convinced by CHEC's action plan, and the Chinese company took over the project under a DBFOM scheme over a 50 year time window, which also includes the exploitation of 1200 acres of terrain along the highway for commercial and touristic purposes. The US$ 720 M needed was fully financed by CHEC and the China Development Bank, with the Government of Jamaica providing no loans nor traffic revenue guarantees - a stark difference to the model established with BTP.

Phase 2 started in January 2013 and was successfully completed within the agreed budget and schedule in January 2016. Despite the apparent success of the project, various concerns were raised around the quality of the executed works [7], the workers’ conditions [8]and the application of environmental safeguards[9]. The concerns were also fueled by the fact that CHEC had also signed an agreement with the Government of Jamaica to invest $1.5B on the development of a transshipment port in an environmentally protected area in the Island.

This particular case study reinforces the hypotheses listed above. Phase 1 passed through a transparent process which did not trigger environmental nor social red-flags, but unfortunately led to various process re-structuring as well as budget and timeline compromises. Phase 2 was executed within the budget and schedule requirements, but at the expense of transparency, public consultations and potential social and quality standards.

That said, additional research should extend into comparing the policies and processes between a wider variety of counterpart institutions in both regions (i.e. the newly set Asian Infrastructure Investment Bank and the World Bank) as opposed to a singular comparison between China Policy Banks and the World Bank. Additionally, it is imperative to recognize that the China Policy Banks and the World Bank are at different stages of maturity. The Chinese institutions have less than one fifth of the runway that the World Bank has had to fine-tune its policies, regulations, and grounding on social and environmental safeguards.

Additional research and case studies under this research initiative will aim to identify more subtle implications and causes of various project outcomes as they relate to development financing, and develop practical implications for developing economy project sponsors in sourcing capital for new infrastructure investment.


Sources

[1]      World Economic Forum, “Strategic Infrastructure Steps to Operate and Maintain Infrastructure Efficiently and Effectively,” no. April, 2014.

[2]      J. A. and H. S. Geoff Dyer, “China’s lending hits new heights,” Financial Times, 2011.

[3]      U. Nations, “UNCTAD Stat,” 2016. [Online]. Available: http://unctadstat.unctad.org/EN/. [Accessed: 04-Mar-2016].

[4]      S. Johnson, “China by far the largest investor in African Infrastructure,” Financial Times, 2015.

[5]      The World Bank, “The World Bank Project Cycle.” [Online]. Available: http://web.worldbank.org/WBSITE/EXTERNAL/PROJECTS/PROCUREMENT/0,,contentMDK:20109658~pagePK:84269~piPK:60001558~theSitePK:84266,00.html. [Accessed: 12-Apr-2016].

[6]      MOFCOM, “China Overseas Investment Policy,” Official Act. [Online]. Available: http://www.mofcom.gov.cn/article/b/c/201409/20140900723361.shtml.

[7]      S. Laville, “Beijing highway: $600m road just the start of China’s investments in Caribbean,” The Guardian, 2015.

[8]      B. Henry, “North-South Highway strike continues,” Jamaica Observer, 2014.

[9]      NEPA, “Court battle looms over Highway 2000 northsouth link,” 2012.