10.12.2019 | Health checks for FDI projects could boost emerging market investment

US-led vetting and certification of big-ticket projects may go a long way to allaying western investor concerns about rule of law and transparency issues.

Click here to read the Alaco article in fDi Intelligence.

 

 

Seemingly a rather belated response to China’s multi-billion Belt and Road Initiative (BRI) and the attendant concerns over partner countries accruing high levels of debt, the embryonic US-led Blue Dot Network, BDN, is a multi-stakeholder certification scheme. Led by the US, partnered initially by Japan and Australia, it is aimed at encouraging private finance into transparent and financially sustainable road, port and other big-ticket projects in the developing world. Its name is a reference to the late astronomer Carl Sagan’s description of a Voyager 1 photograph of Earth as a ‘pale blue dot’.

Unlike BRI, which is massively backed by Chinese state finance, BDN is not intended to be a source of investment funds. For many developing countries hungry for China’s cheap development loans that may serve to undercut its appeal. Yet for an increasing number of those that feel they have incurred unsustainable debts that they will struggle to repay, the ability to engage western investors in projects that have been internationally validated could prove attractive.

For resilient investors bucking the downturn in foreign direct investment (fdi) in emerging markets – reflecting a decline in the globalisation of manufacturing production – the prospect of having an authoritative stamp of approval for potential projects and, by extension, local partners will help to mitigate a whole string of business environment risks, some of which appear to have grown more acute in recent years.

An EY survey published last year suggested that perceived levels of bribery and corruption in emerging markets had doubled those in developed markets since the last study in 2012. This despite increased regulation, enforcement and compliance efforts. Sanctions risks are also more severe in certain jurisdictions, primarily as a result of President’s Trump’s growing use of economic penalties as a means of exerting diplomatic pressure.

Over recent years, the US has watched nervously – and largely helplessly – as BRI, a series of land and maritime economic corridors connecting China with the West, has extended its footprint across much of the developing world. From Asia to Africa, Beijing’s concessionary loans have been funnelled into port, road, rail, dam and other infrastructure projects. Increasingly, though, the benefits accruing to recipient countries have been overshadowed by concerns over the opaqueness of many of the Chinese deals and their long-term implications.

In a number of BRI partner countries, there has been criticism of the influx of Chinese workers to help implement projects as well as deeper anxieties about the latter falling into China’s hands if heavy debts prove to be too onerous to repay. That was the case in Sri Lanka, whose port at Hambantota was handed over to China on a 99-year lease. It is a fate that could befall others heavily indebted to Beijing, like Djibouti for example. Some countries, notably, Malaysia and Pakistan, have cancelled projects for fear of seeing their economic sovereignty undermined. 

Given the anxieties over Chinese contracts, BDN should at the very least arouse interest among China’s BRI partners, particularly those worried about the consequences of falling behind on loan repayments. While it may not draw the easy finance that emerging markets have grown accustomed to, BDN certification could give international banks and development-led financial institutions the reassurance they need to support western companies wishing to get involved in validated projects. 

For foreign investors themselves, the benefits of being able to reduce investment risk by committing to a project that has already been vetted by a trusted authority cannot be underestimated. BDN standards, according to a senior US State Department official, will be based on “respect for transparency and accountability, sovereignty of property and resources, local labour and human rights, rule of law, the environment, and sound government practices in procurement and financing”.

Few other details of the certification methodology have been made public, however. But if the scheme addresses some of the perennial corruption and regulatory bugbears facing investors in emerging markets, it could not only quickly establish itself as a sought-after accreditation but also serve as a blueprint for future similar schemes.

Investing in emerging markets will always carry with it a fair degree of risk primarily because the rule of law is not as well developed and entrenched as it is in first world economies. Arbitrarily enforced local content rules, opaque sectoral regulation, corrupt business introducers and consultants, local partners beneficially owned by sanctioned individuals and kickback demands from corrupt state officials are just some of the red flags western companies need to be alert to. These are hard enough to navigate at the best of times. But with rising protectionism and trade wars increasingly threatening investors’ margins, they need to feel confident that whatever asset they are investing in is not going to throw up any unpleasant surprises.

Of course, even validated projects may not be immune to corruption and regulatory threats over time. Emerging markets are fluid and volatile and an investment environment that seems promising at the point of inspection may become less so in the event of political change or economic instability. Some level of project monitoring would likely be needed to firm up BDN’s credibility. Nonetheless, the scheme clearly mitigates many of the business risks faced by investors in the developing world. It is too early to tell whether it will prove to be a counterweight to BRI. But by setting high certification standards, it may encourage emerging economies to seek something similar from their Chinese partners.