Filling the Infrastructure Gap

By Margaret Myers

Much has been made of China’s remarkable inroads into Latin America over the past two decades, and with good reason. In 2017 alone, China exported $140 billion in goods, spent about $17 billion on mergers and acquisitions, and provided $9 billion in state finance to the region. In addition to announcing some new investment initiatives in Peru and Brazil in recent months, Beijing also recruited two new political allies—Panama and the Dominican Republic—from Taiwan’s dwindling diplomatic partners in the region. 

Now, as Latin America is gradually incorporated into China’s Belt and Road Initiative (BRI)—Chinese President Xi Jinping’s signature, connectivity-based foreign policy—governments are increasingly looking to China to address the region’s glaring infrastructure deficit. The hope is that Chinese state banks, such as the China Development Bank and China Export-Import Bank, or other China-backed financial platforms, such as the $40 billion Silk Road Fund or Asian Infrastructure Development Bank, can provide some of the estimated $300 billion per year needed to modernize the region’s infrastructure in the next decade. 

However, if history is any indication, China’s commitment to Latin American infrastructure development is unlikely to result in a slew of mega-projects in the coming years. Transport and energy sector construction has been a primary focus of Chinese engagement with Latin America for more than a decade, and is a centerpiece of Chinese policy toward the region. Even so, Chinese firms and financiers only rarely deliver operational infrastructure in Latin America, despite relatively deep pockets and considerable appetite for risk.

Rousseff and Keqiang
Then-Brazilian President Dilma Rousseff and China’s Prime Minister Li Keqiang signed a cooperation plan until 2021, including feasibility studies for a Bioceanic Railway Connection.

 

Despite some examples of successful project delivery, occasionally at record speed, Chinese investors are still wary of operating in Latin America. Many view the region’s distance from Asia as prohibitive, and some countries’ regulatory environments and bidding processes exceedingly complex or taxing. As Zuo Pin of the Shanghai International Studies University noted in Chinese journal Guoji Guancha in 2015, whether it’s part of the BRI or not, Latin America is considered a difficult investment environment.

Moreover, the frequent failure of Chinese companies to practice due diligence in the region has led to unforeseen conflicts and resulting project delays. Preferring not to interfere in the domestic affairs of host countries, many Chinese infrastructure companies rely on host government risk assessments and feasibility studies when planning a project, despite a history of unfortunate outcomes.

Take, for example, the involvement of China Three Gorges and China International Water and Electric Corporation in the Rositas hydroelectric dam in Bolivia, a priority project for President Evo Morales. A separate Chinese firm, Hydrochina Corporation, was hired to perform engineering and financial feasibility assessments and to take part in designing the nearly US$1 billion project, but none of the Chinese companies involved sufficiently understood—or were reportedly informed of—the potential for opposition to the project by local communities, whose concerns about displacement and food security have delayed the project indefinitely. The potential effects on these communities were such that the United Nations Permanent Forum on Indigenous Issues eventually took up their demands.

In other cases, Beijing knowingly accepts high levels of risk in order to strengthen political partnerships in the region, ensure economic gains, or advance an especially high-profile project. Of all of China’s proposed infrastructure projects in Latin America, the Bi-oceanic Railway is arguably the most emblematic of BRI principles, including infrastructure-based connectivity and trade facilitation. If built, the mega-project would link Brazil’s soy heartland to the Peruvian coast, enabling safer and quicker transport of soy to China, and connecting fragmented railway segments across South America. The Michel Temer and Pedro Pablo Kuczynski governments in Brazil and Peru both shelved the project in 2017, citing environmental and other concerns, but Beijing continues to promote the railway and to favor a so-called “northern route,” running from Ica, Peru, to Santos, Brazil. The northern route would be the most cost-effective for China, but is widely recognized as the most environmentally and socially costly of three proposed options. Initial plans have it passing through especially biodiverse areas, such as the Isconahua Reserve and Vale do Rio Juruá, and through relatively untouched forests in Brazil’s Mato Grosso, Rondônia and Acre states.

At present, China is perhaps the only actor that could carry out a project of this scale, but it’s hard to imagine that any Chinese entity could do so without causing considerable public backlash, reputational fallout or damage to the broader China-Latin America relationship. Latin American civil society and watchdog organizations have already made known the likely effects of northern route construction on tropical savanna and forest, and on the hundreds of indigenous communities living there. 

Belgrano Cargas Project, Argentina
Belgrano Cargas Project, Argentina.

 

To be sure, there are also examples of Chinese companies taking necessary precautions and complying with local procedures and regulations, yet still grappling with Latin American political uncertainty in its various forms. Mexico’s annulment of a high-speed passenger train line linking Mexico City to Queretaro in 2014 reportedly shocked China Railway Construction Corporation, which had won a bid for the project as part of a Chinese-Mexican consortium. The agreement was rescinded after an outcry from Mexican lawmakers and amidst speculation that public works projects benefited allies of Mexican President Enrique Peña Nieto and his Institutional Revolutionary Party. For China, which was actively seeking to export increasingly high-tech products and services, Mexico’s about-face was an awkward development, especially considering that this deal was highly publicized in the Chinese media. Chinese citizens took to the Internet en masse to condemn Mexico’s decision. Even so, China may very well participate in a resurrected version of the project, recently promoted by Mexican President-elect Andrés Manuel López Obrador. 

Whatever the reason, setbacks for Chinese infrastructure companies are more the rule than the exception in most Latin American countries. So, while we may see a BRI-related uptick in Chinese bids for regional infrastructure projects, Latin Americans would be well advised to temper their expectations. China is just as likely to attach the BRI label to existing projects—as it has in other regions—than to pursue dozens of new high-profile deals. The Bangladesh, China, India and Myanmar (BCIM) Economic Corridor, a core component of the BRI, was conceived as far back as 1999, for example, fourteen years before Xi Jinping ever mentioned the Belt and Road. 

None of this has stopped Chinese officials and executives from expressing interest in Latin American roads, rail, ports and other forms of infrastructure in recent months. Chinese Foreign Minister Wang Yi called for “greater connectivity integrating land and ocean” during the January 2018 China-Community of Latin American and Caribbean States (CELAC) Forum. More recently, Chinese Ambassador Jia Guide announced $10 billion in Chinese investment in Peru over the next three years, including in the country’s telecommunications, construction and infrastructure sectors. In addition, Panama, Trinidad and Tobago, Antigua and Barbuda, and Bolivia joined the list of around seventy Belt and Road Cooperation Agreement signatories this year, while the Panama City-David railway became an official BRI infrastructure project. More Latin American and Caribbean states are expected to formalize their ties to the BRI in the coming months, with the expectation of securing China-backed infrastructure deals. 

Whether any of this materializes will depend, among many other factors, on the extent to which Latin American governments are inclined to engage in policy coordination and strategic planning in the coming years. Chinese companies would benefit considerably from a register of regional projects that are not only badly needed, but also thought to be executable and sustainable by a variety of Latin American stakeholders. The Initiative for the Integration of Regional Infrastructure in South America (IIRSA), an effort by South American governments to produce a new infrastructure network for the continent, including dozens of roads, waterways, ports, and energy and communications projects, is an important start. However, according to non-governmental organization International Rivers, few attempts have been made to assess the cumulative impacts of IIRSA’s ambitious plans.

Chinese attention to the many externalities associated with public works and other projects would also improve success rates. Beijing will continue to take on high levels of overseas risk in support of political objectives, to ensure energy and food security, and to promote economic growth in China, but individual Chinese companies can learn from the setbacks they’ve encountered in Latin America as they pursue new projects. Many, such as mining company MMG in Peru and State Grid in Brazil, are already arguably doing so. China’s success in crafting a “community of shared destiny” with Latin America—a cooperative framework promoted by Chinese officials in recent months—will depend on the continued application of lessons learned by Chinese firms. Until its companies improve their rates of project completion in Latin America, China can be expected to make only a marginal dent in the region’s infrastructure deficit. 

 

Margaret Myers directs the Latin America and the World program at the Inter-American Dialogue, a Western Hemisphere affairs think tank headquartered in Washington, D.C. She tracks Chinese state finance to Latin American and the Caribbean annually.