Triple-win model

SONG CHEN/CHINA DAILY

Third-party market cooperation presents opportunities for each participant to consolidate own comparative advantages while magnifying collective benefits

China and advanced economies such as France and the United Kingdom, which have signed third-party market cooperation agreements, are gearing up to jointly explore creative cofinancing and co-investment mechanisms in emerging markets, especially those under the framework of the Belt and Road Initiative, unlocking the "1+1+1>3" potential.

Against the backdrop of the dual crises of climate change and the COVID-19 recession, this cooperation nexus also creates a unique opportunity to build "bankable "pipelines of sustainable infrastructure projects while mobilizing private financing to close the multitrillion-dollar financing gaps.

Third-party market cooperation has been evolving over the past seven years. Since the Joint Statement on China-France Third-Party Market Cooperation was issued by the governments of the two countries in June, 2015, the first of its kind, Chinese companies, financial institutions and their international counterparts have been actively engaged in various forms of partnership, including syndicated loans and joint-equity investment. As of June 2019, 14 countries had signed such agreements, according to China's National Development and Reform Commission.

In February, China and France signed the Fourth Round China-France Third-Party Market Cooperation Pilot Project List, covering seven projects worth $1.7 billion. The cooperation has various modes, ranging from joint financing, joint investment to Chinese EPC(engineering, procurement and construction) plus French investment, etc. Projects in the List have a geographic focus on Africa, Southeast Asia and Central and Eastern Europe with a sectoral priority on infrastructure, environmental protection and clean energy.

Similarly, the triple-win model has seen a great success with the Kenya A13 Road LOT3 Upgrade project with a recently-signed loan agreement. This Public-Private Partnership (PPP) project is an exemplary case of China-UK-Kenya cooperation. With a total investment of $180 million, Chinese companies provide EPC services and 60 percent of the equity financing through a Special Purpose Vehicle; Guarant Co, funded by the UK government, offers guarantees for part of the debt financing led by a mix of local and international lenders; the Kenyan government issues letter of support and also provides capital. Additionally, this project leverages the political insurance from the Multilateral Investment Guarantee Agency under the World Bank Group, and Emerging Africa Infrastructure Fund funded by the governments of the UK and the Netherlands, etc., among others. In the upcoming construction stage, Chinese stakeholders have pledged to stringently follow the international environmental and social standards in compliance with the host country's law, Chinese official guidance, and international lenders' "Equator Principle".

Indeed, third-party market cooperation is a market-oriented mechanism based on shared interests and comparative advantages. Environmental, social, and debt sustainability are central to this cooperation model to yield benefits for all participants.

However, for the project host countries, such as countries in Africa and Southeast Asia participating in the Belt and Road Initiative, there exist two challenges in financing sustainable projects.

First, exacerbated by the COVID-19 pandemic, many developing countries face sizeable infrastructure investment gaps due to their widening budget deficits and inadequate access to international capital. According to a 2019 World Bank study, low- and middle-income countries require investment topping $1.5 trillion per year until 2030 to stay on track to infrastructure-related Sustainable Development Goals and a 2 C temperature increase scenario under the Paris Agreement.

Second, host countries lack a pipeline of "bankable" projects overall, which include those that are climate-resilient and in low-carbon sectors. The potential lenders and investors are primarily concerned about the risk profiles of these projects. It is almost impossible for them to tap in if residual risks are unmitigated or unallocated to the proper parties.

As a response, third-party market cooperation brings a whole package to life--multiple offshore capital streams, including project preparation funds, international banks, insurers, and pensions, their associated expertise in project planning, structuring, risk management, and advanced technologies and cost-competitive EPC services. Noteworthily, host countries are also critical to providing local financing sources and an enabling environment throughout the project life-cycle.

On the part of China, besides promoting its EPC services and encouraging exports (e.g., wind turbines and solar panels), for those Chinese companies acting as project sponsors, third-party market cooperation helps diversify their financing channels and potentially lower their financing costs. Meanwhile, for Chinese financial institutions, this model brings in international capital's sophisticated risk assessment and management capacities, including environmental and social (E&S) risks, which often come with stringent E&S requirements for the borrowers.

As highlighted again in the latest "Guidelines on the Joint Implementation of Green Development in the Belt and Road Initiative" published by three Chinese ministries and the National Development and Reform Commission in March, Chinese companies are advised to comply with common international standards that meet the requirements of most international commercial lenders, multilateral financial institutions and long-term capital providers.

As for advanced economies, not only are they eager to share the risks and returns through joint ventures but also to position themselves in the global infrastructure landscape. Within the third-market cooperation model, advanced economies are able to export some of their niche technologies and, more importantly, their expertise in project preparation and risk management, complementary to Chinese strengths in EPCs. Meanwhile, their institutional investors, such as pensions and (re) insurance companies, have global investment opportunities with balanced risk profiles.

With the world facing multi-trillion-dollar infrastructure gaps and urgent needs to combat climate change, it is not a zero-sum game but rather a rare"1+1+1>3" opportunity for each participant to align their sustainability agendas and exploit their comparative advantages.

The author is deputy director of the Green Belt and Road Initiative Center at the International Institute of Green Finance. The author contributed this article to China Watch, a think tank powered by China Daily.

The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn