Paw Tracker newsletter (The Year-End Issue)

As we approach the end of this turbulent year, we wish all our readers a well-deserved break and a very Happy New Year. Thanks for staying with us for this difficult period. Yes, this will be our last issue of the Paw Tracker for 2020. We will also use this slightly quieter moment to reflect on our work and think about how we can “blog back better”. 

As usual at this time of year, people are putting together year-end reviews of their respective fields. And for us Paw Trackers, what’s better than a long read by Sinosure analysts rounding up the performance of Chinese engineering contractors along the Belt and Road? If anything, it adds a new angle to the recent debate over whether or not the BRI is being curtailed as a result of the pandemic and general economic trends. A summary of the analysis can be found in the Talk of the Town section below.

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This week's highlight projects

Argentina: Chinese companies got major contracts to upgrade Argentina’s freight rail system

According to the official BRI website, Argentina’s Ministry of Transportation and its national railway operator granted four contracts worth USD 4.69 billion to three Chinese companies (CMEC, CRCC and CRRC) for the upgrading of freight rail systems that include northern Argentina's Belgrano Cargas railway, San Martin Cargas railway and the Norpatagonico Train in the south.

The deal is expected to boost connectivity between Argentina’s crop growing regions with its ports. China is a major destination of Argentinian agro-products. 80% of the country’s soybeans are exported to China. It is also eyeing China’s large pork and beef market, especially after African swine flu and other factors suppressed domestic production in China. 

Sri Lanka: Chinese company begins expansion of Colombo’s Jaya Container Terminal  

CCCC’s official website reported that expansion work of the Jaya Container Terminal (JCT) in Colombo, carried out by China Harbor Engineering Corporation (CHEC), had officially kicked off. It is the fifth phase of the terminal’s expansion, which, upon its completion in July 2022, will expand container ship berthing capacity at Port Colombo.

Sri Lanka has seen large-scale Chinese investments in maritime infrastructure in recent years. Those investments include the Colombo International Container Terminal (CICT) and the controversial Hambantota port. Port Colombo has recently become a theatre of competing regional interests, with India reportedly getting involved in the port’s East Container Terminal(ECT). The port complex currently consists of 3 terminals: JCT, ECT and CICT.

Other project & corporate updates

Bangladesh: Barisal coal power plant construction underway in spite of government backtrack on coal

Last week Power China reported that construction at the 700MW Barisal coal power plant in Bangladesh has been “fully restored” and that work on the foundations for the plant’s 217m chimney have begun. The corporate update also stated that the EPC contractor will “fight to catch time and accelerate the pace of construction.” The construction starts are occurring, however, in spite of a widely publicised plan by the country’s Ministry of Power, Energy and Mineral Resources to “review” all except three currently planned coal power plants, of which Barisal is not one. In November Bangladeshi media reported that the cancellation of the second unit of the Barisal coal fired power plant has already been finalised.

Africa: The African Union signed onto BRI

On Dec 16, the African Union (AU) formally signed an MOU with China’s National Development and Reform Commission (NDRC) to “jointly advance collaborative plans under the BRI”. It is the first regional body to formally sign up to the initiative. According to a report by People’s Daily, the MOU connects BRI with the AU’s “2063 Agenda”, and specifies key collaboration projects, with road maps and timelines.

Talk of the Town

In the past week, a set of MOFCOM statistics floated around in Chinese news reports, showing how the pandemic has affected one important aspect of the BRI: EPC contracts. In recent years, Chinese companies such as CEEC and Power China have quickly emerged as the world’s largest engineering contractors. The data shows that this “backbone of the BRI” took a hit in 2020. Both new contracts and revenues are down from 2019 levels. From Jan-Oct 2020, Chinese contractors signed 3838 new contracts in 61 Belt and Road countries, with a total value of 92.5 billion USD, a 17.5% drop year-on-year. “Accomplished turnover” (payments received for fulfilling contract obligations) in the same period (60.7 billion USD) was also down by 4.4%. 

Analysts at Sinosure, China’s state-owned insurance underwriter of outbound credits, offered a detailed reading of the data. In an end-of-year overview, the insurer depicts a sobering but hopeful picture of the business landscape for Chinese engineering contractors. 

Besides the obvious disruptions to travel and logistics caused by Covid-19, Chinese EPC contractors were also affected by protection measures such as the EU’s Guidance to the Member States concerning foreign direct investment with the intention of preventing “asset grabs” amidst the crisis. The deteriorating fiscal conditions of many Belt and Road countries added to difficulties by severely limiting the host countries’ sovereign debt financing capabilities. 

Interestingly, Sinosure analysts highlight the situation faced by the Chinese banking sector as an important influence on the business prospects of EPC contractors overseas. China’s banks, mostly state-owned, have this year been tasked with the domestic imperative to bankroll the government’s post-pandemic recovery agenda, including the building of so-called “new-infrastructure” such as 5G networks and data centers. Such government-prioritized megaprojects act to “squeeze the margins” of those banks domestically, pushing them to seek higher returns from outbound financing. This in turn increases the financing costs of Chinese EPC contractors engaged in projects overseas.

The analysts were nevertheless upbeat about the prospects for Chinese engineering firms in the new year. The ASEAN region, they claimed, is on track to turn its economy around. Latin American governments are kicking off ambitious recovery plans, including Peru’s “Reactiva Peru” program, Chile’s economic recovery plan and Brazil’s initiative to rebuild the country, all involving major spending on infrastructure. Overall, they project a bullish overseas market for Chinese EPC contractors, with both new contracts and accomplished turnover expected to bounce back to positive territories in 2021 (+4.5% and +3.9% respectively).

Looking ahead, the analysts advocate for Chinese companies to go beyond the “low margin” EPC model, which only brings one-off low-paying businesses. Equity-driven business opportunities, where contracts are generated through long-term holding and managing of foreign assets, are more sustainable for Chinese infrastructure builders, they claim. Equity investments is in fact a trend that has already been emerging in certain BRI sectors. “Proactively embrace more advanced models such as PPP and BOT in a post-Covid world”, Sinosure recommends. 

This general re-thinking of BRI business models might explain another set of data from MOFCOM: even though both Chinese and host-country governments are more cautious about debt financing, foreign direct investment by Chinese enterprises in 57 Belt and Road countries was up 23% year-on-year in the first 10 months of 2020. 

The pandemic appears to be reshaping the modus operandi of BRI investors in  significant ways.