The Ultimate Professor

RESEARCH ARTICLE

Chinese Infrastructure Investment in Latin America—an Assessment of Strategies, Actors and Risks

Bettina Gransow1

Published online: 19 August 2015 # Journal of Chinese Political Science/Association of Chinese Political Studies 2015

Abstract This paper links China’s pattern of infrastructure lending to Latin America and the Caribbean (LAC) with China’s own development experience in this regard. It raises the question whether Chinese infrastructure investments in LAC have the potential to promote sustainable development in the region. The paper consists of four parts. Part 1 outlines China’s massive domestic infrastructure construction projects as a specific development strategy which has contributed considerably to the country’s rapid internal development, but has simultaneously given rise to complex dynamics of social and environmental risk. Part 2 assesses the strategies involved in China’s infrastructure investment in LAC. Part 3 identifies key actors involved in China-LAC infrastructure cooperation and how they relate to different ways of financing infrastructure projects. Part 4 focuses on policy guidelines for managing the social and environmental risks of infrastructure projects. The paper concludes that more research, more capacity-build- ing, and new forms of multinational development cooperation are needed to strengthen the social and environmental policies associated with China’s infrastructure investment in LAC countries, to help uphold existing social and environmental standards, and to extend project benefits more effectively to local communities and people.

Keywords China . Latin America . Infrastructure Projects . Sustainable Development .

Social and Environmental Risks

“要想富先修路” “If you want to get rich, first build a road” (Chinese proverb)

J OF CHIN POLIT SCI (2015) 20:267–287 DOI 10.1007/s11366-015-9362-2

* Bettina Gransow [email protected]

1 Institute of East Asian Studies, Sinology, Freie Universität Berlin, Fabeckstr. 23-25, Room 1.1131, 14195 Berlin, Germany

Introduction

Infrastructure investments have become an increasingly important element of China’s economic cooperation with Latin America and the Caribbean (LAC). Given that investment in infrastructure has also been the backbone of China’s internal economic upsurge since the 1990s, it seems that China is now transferring its own successful development model of economic growth to the outside world, including LAC coun- tries. Within a very short period of time China has changed from a capital importer and recipient of foreign aid to a capital exporter and donor country. As can be learned from the country’s internal development, infrastructure investments in China have contrib- uted not only to high growth rates and accelerated regional economic development, but also to extensive environmental damage, involuntary resettlement of millions of people in both rural and urban areas, losses in cultural heritage, impoverishment of project- affected people, and broader processes of social polarization [15, 16].

Along with this economic growth paradigm and the externalization of social and environmental costs since the 1990s, a competing paradigm of sustainable development has been evolving in China. It calls for environmental protection and social fairness to be included as two additional pillars in a comprehensive understanding of sustainable development. As part of this emerging sustainability paradigm, ever more sectors (such as construction, water resources, and transport) have started to design their own social and environmental guidelines for their investments, and an Environmental Impact Assessment (EIA) law came into effect in 2003. But there has yet to be an analogous Social Impact Assessment (SIA) law in China, and a myriad of difficulties is associated with putting the EIA law and related guidelines into practice. Nevertheless, more and increasingly progressive social and environmental policies related to investment pro- jects are being developed in China.

This paper links China’s pattern of infrastructure lending to LAC countries with China’s own development experience in this regard. It raises the question whether Chinese infrastructure investments in LAC have the potential to promote sustainable development in the region. The paper consists of four parts. Part 1 outlines China’s massive domestic infrastructure construction projects as a specific development strat- egy, which, with the support of multilateral donors such as the World Bank (WB) and the Asian Development Bank (ADB) as well as bilateral donors such as Japan, has contributed considerably to the country’s rapid internal development, but has simulta- neously given rise to complex dynamics of social and environmental risk. Part 2 assesses the strategies involved in China’s infrastructure investment in LAC, including the strategic interests on both sides, the types of infrastructure investment, the volume and distribution of infrastructure loans, and the conditions of repayment such as oil-for- loan arrangements. To better understand the constellation of actors involved in China- LAC infrastructure cooperation, part 3 identifies key actors and how they relate to different ways of financing infrastructure projects. Part 4 focuses on policy guidelines for managing the social and environmental risks of infrastructure projects. The paper concludes that more research, more capacity-building, and new forms of multinational development cooperation are needed to strengthen the social and environmental poli- cies associated with China’s infrastructure investment in LAC countries, to help uphold existing social and environmental standards, and to extend project benefits more effectively to local communities and people.

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Infrastructure Development as a Core Reform Strategy in China

From the second half of the 19th century to today, the Chinese development goal of making the country “wealthy and strong” (fuqiang) has changed very little. The associated policies, strategies and practices, however, have in fact undergone consid- erable change. The comprehensive process that started with Deng Xiaoping’s modern- ization program to “reform” and “open up” Chinese society comprises a number of different transformations, in particular those from an agrarian to an industrialized, urbanized, and service-oriented information society, from a planned to a market economy, from a policy of national autarchy to one of openness to the world, and from a top-down one-party political system to a one-party governance model of deliberative authoritarianism. These transformations are interrelated and mutually in- fluential. They have proceeded at different paces in different regions of the country and at different times during the reform process which can be divided into the 1980s, the 1990s and the first decade of the 21st century. In each of these stages China had a clear development agenda including a road map on how to use foreign aid adequately. In contrast to the beginning of the reform period when foreign aid helped to establish the economic infrastructure or “hardware” for development, since the 1990s more invest- ment has gone into environmental protection and other sectors that could be termed “soft”.

The first period of the reform process (1980s) was characterized by economic liberalization. Main strategies included: (1) Institutionalizing the Household Responsi- bility System in the countryside which had a tremendous impact on poverty reduction, and later introducing price reforms in urban areas; (2) encouraging Town and Village Enterprises (TVEs) resulting in peasants leaving agriculture but not the countryside; and (3) allowing different regional development patterns marked by industrialization, urbanization and migration. During the 1980s development in China was constrained by a lack of foreign exchange. Foreign aid was dominated by preferential loans used primarily in the transport and communication, energy and major raw material sectors. Foreign donors contributed to the development of the country’s economic infrastructure by providing capital and modern technologies.

The second period (1990s) was marked by economic growth and by externalizing the costs (namely social and environmental) of this development. Foreign capital was used to focus strongly on developing infrastructure, which mainly benefited the urban areas and generated a rising income gap. Main strategies included: (4) setting up special economic zones (SEZs) and attracting foreign direct investment (FDI); and (5) investing in infrastructure. Foreign loans continued to concentrate on transport, energy and raw materials, yet at the same time more investment went into agriculture, forestry, water conservancy and poverty reduction, and also started to flow into environmental protection and social development.

The third period (2000s) featured continued economic growth with an emerging internalization agenda vis-à-vis the social and environmental impact of rapid growth. Main strategies included: (6) pursuing sustainable development with Chinese charac- teristics; (7) striving for a harmonious society inside and outside China; and (8) going global—Chinese investment abroad. An emerging agenda of internalizing the social and environmental consequences of rapid growth meant that as of 2000, more invest- ment went into environmental protection, clean and renewable energies, resource

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conservation, health, culture and education, climate change, public goods and high- level policy consultancy ([24]: 003).

A look at the sectors of the Chinese economy benefiting from foreign lending shows that over half of all bilateral and multilateral loans between 1979 and 2005 went into the transport and energy sectors; indeed, over two thirds of lending from the Asian Development Bank (ADB) and Japan was directed to these sectors ([24]: 003,024,029) (Fig. 1).

Japan has been the largest bilateral donor to China by far, and it was also one of the first. Japanese loans enabled China to complete a large number of urgently needed national infrastructure projects ([22]:55/56). After normalizing its diplomatic relations with Japan in 1972 and signing the Japan-China long-term trade agreement and the peace and friendship treaty in 1978, China formally started to request yen loans in 1979. In response the Japanese government launched a diplomatic campaign to have OECD member states include China in the OECD/DAC list of official development assistance (ODA) recipients. It argued that ODA loans would support China’s Open Door policy and promote stability not only in Japan and China, but also in the Asian region as a whole and worldwide ([20]:462). Yen loans made up the lion’s share of Japan’s ODA. China applied for these loans to finance infrastructure construction projects in energy and transportation. Another factor in Japanese assistance was that China relinquished its claim to war compensation against Japan. Providing ODA was thus an important sign of Japan’s friendly diplomatic stance towards China.

The first batch of yen loans (1981–1985) focused on railways and transport of coal from inland regions, especially from Shanxi province, to southern China and for export to Japan. A program was launched in 1981 to modernize China’s state-run factories under the guidance of Japanese experts. The second batch of yen loans (1986–1990) still focused mainly on economic infrastructure, but also included social infrastructure projects such as urban water and gas supply and sewage treatment. Transport, power, telecommunications and agriculture were the focus of the third batch (1991–1995). In addition to economic infrastructure in the coastal regions, the fourth batch (1996–2000) added environmental concerns, inland development, food supply and poverty

Source: Compiled froom NDRC 20009:003, 0244, 029 Fig. 1 Sector distribution of loan projects in China (1979–2005)

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reduction. In the second half of the 1990s, an increasing number of environmental protection projects were started. In 2008, Japanese ODA loans to China came to an end.

Japanese ODA addressed the critical issues of each stage of China’s reform period. According to Naohiro Kitano, the major contributions of the yen loans can be summa- rized as follows: infrastructure bottlenecks were alleviated by providing external financial resources, regional development was guided, poverty reduction was assisted, advanced facilities were provided and modern technologies transferred, and institution- al frameworks for infrastructure development were transferred, including feasibility studies, international competitive biddings and ex-post evaluations ([20]: 480). China reciprocated by supplying raw materials. Poverty reduction was not high on the agenda of Japanese assistance to China. Many of the Japanese infrastructure projects did not assess or mitigate the associated social risks, and therefore missed valuable opportuni- ties to extend project benefits to local populations, particularly the most vulnerable groups therein.

The major characteristics of China’s development strategy of expanding its infrastructure can be summarized as follows: The infrastructure expansion strategy was initially part of a development paradigm oriented solely to economic growth, or was viewed as a necessary first step on the road to prosperity and strength for the nation. As Deng Xiaoping put it, “Some people will become rich first.” Environ- mental and social costs were externalized. In the early stages of the reform process in the 1980s and 1990s, support was needed in the form of foreign infrastructure loans within an international development aid framework to put this economic growth strategy into practice. The World Bank and the ADB were involved here on the multilateral side, and Japan on the bilateral side. There were also interna- tional loans at market conditions as well as domestic loans. Although this strategy generated the desired growth, its negative consequences became increasingly evi- dent: environmental damage such as air and water pollution, large-scale land expropriation and resettlement with the accompanying risk of impoverishment, and considerable subsequent debt on the part of local governments. With the increasingly evident repercussions of this strategy and influenced by rising inter- national discussion of sustainability in light of climate change, ever more signifi- cance was attached to a sustainability-oriented development paradigm in China as well. The current decelerating growth rates in China appear to be having conflicting effects: on the one hand sustainability rhetoric is increasing in China too; yet the weakening economy is also strengthening adherents of a development strategy oriented unilaterally toward growth.

Chinese Infrastructure Investment in Latin America and the Caribbean—a Win-Win Strategy?

The 2004 visit by then president Hu Jintao to Brazil, Argentina, Chile and Cuba marked the start of China’s growing economic activity in the region. Over the following decade, China became a significant trading partner for many Latin American states, and provided extensive loans in exchange for oil and other natural resources. In recent years, infrastructure construction has emerged as a highlight of China-LAC cooperation with the potential to drive it to higher levels [33].

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Chinese Overtures to LAC

In 2008 (at the time of the global financial crisis) the Chinese government released its first ever policy paper on LAC. Viewing these countries at a similar stage of development, the paper states that China seeks to build a comprehensive and cooperative partnership with LAC based on the Five Principles of Peaceful Coex- istence, deepening cooperation and win-win results, intensified exchange and the One-China principle. In addition to political, cultural, social, security and judicial cooperation, the focus is on economic cooperation in the fields of trade, investment and finances, agriculture and industry, infrastructure, resources and energy, and economic and technical assistance. The most important aspects of China’s support for infrastructure development in LAC are investment cooperation (supporting qualified Chinese companies in investing in LAC), financial cooperation (supporting Chinese financial institutions and commercial banks in their activities in LAC), infrastructure construction (strengthening practical cooperation with LAC in transport, information and communication, water conservancy and hydroelectric power and scaling up project contracting in the region), and resources and energy cooperation (expanding mutually beneficial projects) [6]. In 2008 China also joined the Inter-American Development Bank (IDB) and committed 350 million US$ to public and private sector projects ([7]: 12).

A subsequent milestone in the intensification of China-LAC economic relations was the visit by Chinese president Xi Jinping to Brazil, Argentina, Venezuela and Cuba in the summer of 2014. This visit saw China and Brazil sign 56 cooperation agreements, mostly in infrastructure construction including railway transportation and electricity transmission. Infrastructure deals were also signed with Venezuela and Argentina. China, Peru and Brazil issued a joint statement on a railway to run from the Peruvian Pacific coast to the Brazilian Atlantic coast. During this visit, Xi Jinping suggested a “1+3+6” framework for promoting mutually beneficial cooperation between China and LAC: “1” stands for one plan (the 2015–2019 China-LAC cooperation plan); “3” means the three engines of trade, investment and financial cooperation; and “6” refers to the six fields of energy and resources, infrastructure construction, agriculture, manufacturing, scientific and technological innovation, and information technology. The establishment of a new BRICS development bank is expected to further support China-LAC infrastructure cooperation [33].

In January 2015 China hosted the first China-CELAC 1 Forum. This created a regional platform for China-LAC cooperation, comparable to the Forum on China- Africa Cooperation (FOCAC) and the China ASEAN Summit. Alongside a host of cooperation agreements, China pledged to increase trade with Latin America to $500bn and to invest upwards of $250bn over the next decade. China also pledged $20bn in loans for China-Latin America infrastructure projects and created a $5bn China- CELAC Cooperation Fund [11].

This development needs to be seen within the broader context of globalization and China’s “Going out” (zou chuqu) policy. The Chinese government has been using this slogan since the start of the 21st century to encourage Chinese companies to invest in

1 CELAC, or the Community of Latin American and Caribbean States, was formed in 2011 and comprises 33 countries in the Americas, without Canada or the United States.

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foreign countries, a call followed mainly by Chinese state companies.2 Many different focal regions have crystallized within the overarching “Going out” strategy: neighbor- ing Asian countries, Central Asia, Africa, Latin America, the Middle East, Europe, the USA, Canada, Australia and Oceania; in other words, hardly any part of the world is excluded. The strategy focuses on economic interests, securing the natural resources that China needs, and acquiring new markets; and Latin America is no exception in this regard.

While the “Going out” strategy refers primarily to foreign direct investment on the part of Chinese companies, at the same time China has been seeking to heighten its profile as a provider of development aid. Under the heading of South-South coopera- tion, it is highlighting mutual benefits (“win-win” situations) and refraining from intervening in the internal affairs of the recipient countries. Development aid plays only a subsidiary role in China-LAC relations. China’s second white paper on foreign aid published in 2014 reduces aid for LAC to only 8.4 % [19], down from 12.7 % in its first white paper on foreign aid in 2011 [18]. This 4.3-percent drop in aid to the LAC region represents a strong confirmation of China’s regional priorities regarding foreign aid to Africa (upgraded from 45.7 % in 2011 to 51.8 % in 2014), Asia (slightly downgraded from 32.8 to 30.5 %) and Latin America. This regional ranking is emphasized by the 2014 white paper on China’s foreign aid, which calls for: (1) promoting a new China-Africa Strategic Partnership, (2) promoting practical coopera- tion with ASEAN, and (3) supporting the economic and social development of other regions, including practical cooperation with the Caribbean countries where China, by the end of 2012, under the framework of the Third China-Caribbean Economic and Trade Cooperation Forum, had provided concessional loans totaling 3 billion RMB for infrastructure construction. The 2014 white paper on foreign aid also shows a new distribution of China’s foreign aid to different areas. In particular, “social and public infrastructure” increased from just 3.2 % in 2011 to 27.6 % in 2014 [18, 19].

Why LAC is Interested in Chinese Infrastructure Investment

During the second half of the 1980s and the 1990s, LA governments drastically reduced their investment in infrastructure. Structural reforms imposed by the IMF, plus the combination of austerity programs and the transference of responsibilities in this area to the private sector, led to large and often abrupt fiscal adjustments resulting in the deterioration of infrastructure. In the 1990s the private sector responded only reluc- tantly to the opening up of infrastructure projects to private participation. Public investment by the six biggest economies in the region sank from 3.1 % of GDP during the first half of the 1980s to 0.8 % of GDP between 1996 and 2001 ([31]: 212). Regarding classical infrastructure sectors in LA, only the telecommunications sector has a relatively good position. According to Toro Hardy, shortages are particularly evident with regard to bridges, airports, ports and similar structures. Water infrastruc- ture is also reported as insufficient even if the hydroelectric subsector is well placed in some countries such as Brazil, Venezuela and Argentina. Most LA countries are in need of major investment in energy development. Infrastructure limitations have become an

2 This does not mean, however, that China no longer wishes to remain an attractive object of foreign investment itself.

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obstacle to opportunities for economic growth, competitiveness and poverty reduction (ibid. 211). Brazil is a good example of the problems that inadequate infrastructure can pose to a booming economy (for example, when goods become more expensive on their way to the market because of insufficient roads and highways). Experts consider 4 % of GDP to be the right percentage of investment in infrastructure, but this might be difficult to achieve in the near future. Chinese investment in the region may help to overcome these bottlenecks (ibid. 213). As such, LA countries are in considerable need of infrastructure investment and often lack the necessary capital and expertise. In general, therefore, they are interested in infrastructure investments from the Chinese.

Forms of Chinese Infrastructure Investment and Financing in LAC

According to the UN ECLAC, there are basically three forms of Chinese infrastructure investment in LAC:

(1) Chinese foreign direct investment in infrastructure. This means Chinese firms acquiring existing assets, and is the quickest way to enlarge a market share. Until 2012 only the State Grid electricity transmission corporation has followed this route in LA by acquiring assets in Brazil for US$ 1.7 bn in 2010 and another acquisition in 2012, both from Spanish companies.

(2) Loans (at more or less concessional terms). These comprise Chinese state-owned banks providing loans to Latin American government entities to construct specific infrastructure projects on the condition that the work is carried out by Chinese companies. Examples include power plants constructed by Sinohydro for Ecuador and Venezuela.

(3) Engineering and construction contracts. Chinese companies, especially those with higher technological capacities (such as Huawei and ZTE, which manufac- ture and install telecommunications equipment), commonly acquire private engi- neering and construction contracts. ([32]:15)

When looking at Chinese infrastructure investment and financing in LAC it is important to distinguish between Chinese FDI in LAC on the one hand, and Chinese development aid (in the form of preferential infrastructure loans) on the other. Partic- ularly in the case of Chinese foreign aid there is some overlap which is not easy to discern. In general, the levels of both, Chinese FDI and Chinese foreign aid, to LAC are small in absolute terms and as a percentage of infrastructure investment and financing ([8]: 2; [19]).

In 2012, Chinese FDI to LAC was 9.2 billion US$, which amounted to 5.3 % of total FDI in LAC in 2012 this year ([27]:12). According to the same source, Chinese FDI in LAC was 13.7 billion US$ in 2010 and 9.3 billion US$ in 2011 ([32]:11). MOFCOM lists somewhat lower figures with 10.5 billion US$ Chinese FDI to LAC in 2010. In any case, most of this sum went to tax havens: 3.5 billion US$ to the Cayman Islands and 6.1 billion US$ to the Virgin Islands (2010). Chinese FDI stock in LAC was 43.9 billion US$ in 2010 ([23]: 85/86, 92). Exact figures on Chinese FDI in LAC infra- structure are not available, but should account for only a very small fraction of total Chinese infrastructure investment in LAC. Even less information is available on what the UN ECLAC paper [32] describes as the third form of infrastructure investment:

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engineering and construction contracts between companies. Chinese companies work- ing under construction contracts in the region are usually linked to financing agree- ments with state-owned Chinese banks and do not officially fall under the category “FDI”. So far, only few Chinese construction companies have been awarded large public works contracts in the region ([4]:36). As for China’s foreign aid, only 8.4 % of the total of US$ 14.4 bn for 2010–2012, or approximately US$ 1.2 billion, was provided to LAC [19].

We will now focus on financing in the form of loans for infrastructure projects, which are increasingly coming to the forefront in Chinese-LAC economic relations.

Chinese Infrastructure Loans in LAC: Size and Distribution by Region/Sector

According to the China-Latin America Finance Database [14], from 2005 to 2014, China provided nearly US$ 119 bn in loan commitments to Latin American countries and companies (Table 1).

Chinese lending to LAC started in 2004 and reached its highest point thus far in 2010. Following a substantial decline in 2012 (which however might be attributable to technical difficulties in absorbing the loans in the recipient countries), loan commit- ments increased again considerably in 2013 and even more so in 2014. This was a welcome sign, especially for those Latin American countries such as Venezuela which were hit particularly hard by the drop in oil prices in 2014.

Infrastructure loans make up a considerable share of Chinese loans to the LAC region. As can be seen in Table 2, a solid 40 % of all Chinese loan commitments from 2005 to 2014 were in the infrastructure sector.3 Venezuela and Argentina received by far the largest share of these loans.

Table 1 Chinese loan commit- ments to LAC countries and com- panies by year (2005–2014) and amount

Source: Gallagher and Myers [14]

Year Amount (in US$)

2005 231 million

2006 4.8 billion

2007 –

2008 6.3 billion

2009 13.6 billion

2010 37.0 billion

2011 17.8 billion

2012 3.8 billion

2013 12.9 billion

2014 22.1 billion

Total 118.5 billion

3 This figure derives from the listings in the China-Latin America Finance Database. The actual share of infrastructure loans is probably higher, because some of the “energy” listings, such as dams, are also classic infrastructure projects.

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From 2005 to 2011 alone, the total volume of large-scale loans (of more than one billion US$ each) provided by Chinese banks to LAC recipients, which amounted to 68.9 billion US$, was much higher than that from traditional multilateral and regional donors, i.e., the World Bank and the IDB, which provided only 17.8 billion US$ combined in the same period of time ([12]:9, table 3). This is not only a quantitative difference, but also a qualitative one: Chinese banks channel most of their loans to LAC into the infrastructure, energy, transportation, mining and housing sectors, whereas these sectors account for only 29 % of IDB loans and 34 % of World Bank loans. The IDB and World Bank direct more than a third of their loans to e.g., health, social and environmental sectors which were not a target for Chinese loans to LAC (or at least not until 2011) ([12]:17).

Gallagher et al. ([12]:17) present different arguments from the literature as to why Chinese loans concentrate on certain sectors such as infrastructure. There are at least four different explanations for this differential mode of lending to the LAC region. One is that China fosters a different development model than international financial institu- tions (IFIs), namely one that favors infrastructure and industrialization over health and social service interventions (ibid.). A second explanation holds that Chinese loan strategies reflect Chinese interests in the region by gaining access to key natural resources and markets. A close association between infrastructure investments and natural resource projects is also suggested by the fact that infrastructure projects predominated in the first half of the 2001–2011 period and thereby paved the way for follow-up natural resource development in the second half of that period ([34]: 23f). This argument, however, receives only scant confirmation from more recent loan

Table 2 Chinese loan commitments by country and sector (US$, b = billion, m = million) (2005 to 2014)

Country Total loan commitments Infrastructure Energy Mining Other

Venezuela 56.3 b 28.4 b (1)a 6.0 b (3) 2.4 b (1) 19.5 b (1)

Brazil 22.0 b 800 m (6) 12.2 b (1) 1.4 b (3) 7.5 b (2)

Argentina 19.0 b 14.0 b (2) 4.9 b (4) – 60 m (8)

Ecuador 10.8 b 392 m (7) 8.4 b (2) – 2.0 b (3)

Bahamas 2.9 b 2.9 b (3) – – –

Mexico 2.4 b 1.4 b (4) 1.0 b (5) – –

Peru 2.3 b 100 m (11) – 2.0 b (2) 150 m (7)

Jamaica 1.4 b 1.2 b (5) – – 189 m (6)

Bolivia 611 m 300 m (8) 60 m (7) – 251 m (5)

Costa Rica 401 m – – – 401 m (4)

Honduras 298 m – 298 m (6) – –

Chile 150 m 150 m (9) – – –

Guyana 130 m 130 m (10) – – –

Colombia 75 m 75 m (12) – – –

Uruguay 10 m – – – 10 m (9)

All countries 118.7 b 49.9 b 32.9 b 5.8 b 30.1 b

Source: Gallagher and Myers [14] and own compilation a The numbers in parentheses rank the loans in each sector by size

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commitments. A third explanation is given by Chinese banks themselves, which say that they seek to support economic growth directly instead of supporting social welfare. The Chinese EXIM Bank views this as a way for projects to generate foreign exchange revenue and create jobs in the borrowing countries. Loans should therefore focus on supporting infrastructure such as energy, trans- portation and telecommunication projects in the borrowing countries, as well as high-efficiency sectors such as manufacturing, processing and agriculture. Final- ly, a fourth explanation holds that Chinese banks are copying Japan’s earlier model of resource-backed concessional loans, first tested with India in the late 1950s and then with China in the late 1970s ([3]: 46–48; [12]: 18). As discussed above, the exchange of Chinese natural resources for Japanese technology and expertise was seen as a win-win strategic partnership by both sides. Neither side was too concerned about environmental or social impacts. These four explana- tions are not mutually exclusive, but instead reveal facets of a more complex understanding of Chinese interests and strategies in infrastructure lending.

Terms and Repayment Modalities, Oil-for-Loans

Of strategic importance are not only the specific countries and sectors that receive the loans, but also the repayment terms and conditions. One characteristic feature here are the infrastructure-for-resources loan arrangements. In such cases China extends credit lines for infrastructure in resource-rich developing countries. While seeking markets for its construction companies and materials, China aims at obtaining long-term supply contracts for oil or other natural resources. Before the global financial crisis, Chinese oil-backed loans were mainly confined to African countries, and were rare in South America with the exception of Venezu- ela. When the situation changed, the China Development Bank took the lead in the region and extended an estimated 45.6 bn US$ in loans between 2008 and 2011, to Brazil and other LAC countries. Although one might assume that resource- backed loans have to be repaid in kind (i.e., in oil shipments or other products), this is not the case. As Ana Christina Alves describes, oil-backed loans are guaranteed by the proceeds of oil sales which have to be deposited into the borrower’s account to guarantee repayment. What distinguishes Chinese oil- backed loans aside from lower interest rates and long-term repayment periods (sometimes) is that repayment is guaranteed by the sale of a certain amount of oil (usually set in barrels per day) to one of China’s national oil companies during the loan repayment period. The oil company then is required to deposit the payment in the borrower’s account at the Chinese lending institution which then is used to service the loan ([1]:101).

The following section will examine which different actors are involved in Chinese infrastructure loans and particularly in infrastructure-for-resources loans in LAC to better understand the underlying interests and institutional features of these transactions. As Ana Cristina Alves has argued, this loan arrangement is not so much the result of an overall cohesive master plan by the Chinese government, but can be understood better in terms of converging interests (see [1]:102). In addition, various institutional features of the recipient countries can affect the success of this loan instrument in different ways.

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Actors and Actor Constellations in China-LAC Infrastructure Cooperation

China’s 2008 policy paper on strengthening relations with LAC distinguishes between different levels such as government-to-government, business-to-business and people- to-people relations. This corresponds to the rhetoric of equal rank and equal rights of the respective partners. In practice, however, a complex and dynamic matrix of different Chinese and Latin American actors and interactions has arisen, which has thus far not been the object of sufficient research (cf. [2]: 15). This section will attempt to clarify this context with reference to Chinese infrastructure projects in LAC.

While Chinese companies were essentially invisible in physical terms in LAC until around 2009, there is currently a large and growing number of public, private and semi- private actors involved in China-LAC relations. On the Chinese side there are large state-owned enterprises that are well connected to the Chinese Communist Party (CCP), to Chinese banks and other Chinese institutions on a national level. There are also quasi-independent commercial entities, often backed by provincial-level officials. As the interests of Chinese and LAC actors become intertwined, at both state and private levels, it may be difficult to precisely differentiate among “Chinese”, “Latin American” and “Caribbean” interests. The governments of countries such as Venezuela and Ecuador have become increasingly dependent on Chinese capital and thus promote and defend Chinese investors in their countries. Guyana is a case where the political leadership itself has business interests in Chinese companies or projects. Other gov- ernments such as Mexico, Peru and Colombia want to attract Chinese capital but are caught in the midst of competing domestic interests that will either benefit or lose from such investments ([9]:9).

Following Evan Ellis’ mode of distinguishing among distinct types of Chinese construction projects in LAC ([9]:48–85), there are three corresponding financing arrangements. These are projects associated with “gifts” from the PRC to local governments, projects paid for by Chinese investors, and projects paid for by Latin American governments. In addition, infrastructure-for-resources loans should be added as a further category. All four of these infrastructure financing arrangements go hand- in-hand with specific actor constellations.

(1) Infrastructure “gifts”. The earliest form of Chinese infrastructure projects in LAC in the late 1990s and early 2000s were “gifts” such as sport stadiums, roads and government buildings, undertaken primarily to convince those LAC governments that recognized Taiwan to change their position and acknowledge the One-China policy. Examples of this kind of “checkbook diplomacy” were an international convention center for the government of Guyana and venues for the 2007 Cricket World Cup in the Caribbean. Such projects were paid for by the PRC national government and carried out by Chinese companies and laborers. Under these circumstances the recipients had little leeway to demand that local contractors or laborers be employed in the project. These infrastructure gifts helped to facilitate other, larger projects paid for by some LAC governments via loans from Chinese banks. In 2008, after the election of (former chairman of the Kuomintang Party) Ma Ying-jeou as new president of the ROC, Taiwan ended the checkbook diplomacy competition with the PRC ([9]: 48–52).

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(2) Construction projects paid for by Chinese investors. A new trend is underway primarily in the Caribbean of construction projects being funded by Chinese investors, in cooperation with local counterparts. The funds come from Chinese banks or other sources of capital available through Chinese partners. These projects represent a new form of partnership between businesspeople and gov- ernment officials from the two regions. Funded by Chinese investors, these projects have been carried out nearly exclusively by Chinese companies and with Chinese workers. They are often hotel and resort complexes, with infrastructure projects rather being the exception. One such exception was a Jamaican north– south toll road built by China Harbour Engineering Company (with a contract for US$ 600 million in 2012) for which the investor should get its money back via a 50-year concession to operate the highway as a toll road ([9]:52f,56).

(3) Projects paid for by Latin American governments via Chinese loans. While infrastructure gifts and initiatives by private Chinese investors have played an important role in opening up the region to construction work, the most rapidly growing group of Chinese infrastructure projects in the region consists of projects paid for by Latin American governments and financed by loans from Chinese banks. Thus far, loan-financed projects have focused on roads, bridges, port infrastructure, and hydroelectric and thermoelectric facilities. Governments such as Venezuela, Ecuador, Argentina and Bolivia, which lack access to capital because of investor concerns and capital flight, are in urgent need of financing for infrastructure. Even if they can find the capital it is difficult for them to obtain the loans. “For the Chinese government, and Chinese construction firms, foreign project work is particularly attractive because it is typically paid for by an entity other than the Chinese state, while providing opportunities for Chinese workers and firms to diversify their skills and experiences by working in new contexts with new partners” ([9]: 58).

(4) Infrastructure-for-resources loans. These loan arrangements bring together the Chinese government, national oil corporations and state policy banks, espe- cially the China Development Bank (CDB) and the China EXIM Bank. Both banks support China’s policies at home and abroad. They offer loans to fund infrastructure, energy and mining. Despite their similarities as policy banks they appear to play different roles.

Within China the CDB is responsible for many of the vehicles for financing local governments, which channel enormous amounts of money into infrastruc- ture, real estate and urbanization projects throughout the country ([10]: 1; [28]). CDB supports China’s macro-policies as outlined in the 5-year plans, and focuses on sectors such as electric power, roads and railways, petroleum and petrochem- icals, coal, ports, telecommunications, agriculture and related industries.

The EXIM Bank seeks to facilitate trade with the aim of helping Chinese companies obtain investment opportunities abroad. Its main tools are the provi- sion of export credits to Chinese firms, loans for overseas construction and investment projects, and concessional loans to foreign governments ([10]:2). Only the EXIM Bank has a mandate to provide concessional loans with low interest rates ([1]: 101). As to whether concessional loans constitute Chinese foreign aid, the new white paper [19] has clarified that the “principals of concessional loans are raised by the China EXIM Bank on the financial market” and “the difference

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between the concessional interest rates and the benchmark interest rates of the People’s Bank of China is subsidized by the government’s budget.” This means that only the differences in interest are covered by the Chinese government and therefore count as foreign aid [30]. This could be seen as equivalent to official development aid (ODA). But most of the Chinese EXIM Bank’s oil-backed loans are provided on a commercial basis. In contrast to the EXIM Bank, the credit lines of the China Development Bank offer exclusively market-based interest rates ([1]: 101). It should therefore come as no surprise that the CDB is much more strongly represented than the EXIM Bank in LAC.

Despite their close cooperation in using oil-backed loans abroad, the Chinese state at various levels, the national oil companies and the state banks each may have different agendas, and their profit concerns may not always go hand-in-hand with national interests. With oil prices controlled by the state in China, the oil companies might possibly rather be concerned with lower profit margins in shipping the oil back to China (this may change with lower oil prices on the world market). In addition, different interests may be held by government entities such as the Ministry of Commerce, Ministry of Foreign Affairs and Ministry of Finance, and there may also be friction between ministries and banking institutions ([1]: 102).

With the majority of expansion coming from projects financed by loans, Chinese banks have found an effective business model allowing them to expand rapidly in the region, particularly with governments that have isolated themselves from traditional capital markets, such as Argentina, or with smaller governments in the Caribbean that lack access to capital for other reasons ([9]:84/85). At the same time, the new Chinese presence in the region has triggered sociopolitical dynamics that extend from worker unrest and reactions to Chinese projects on the part of competitors, local communities, environmental activists and other groups on the one hand, to criminal acts and violence against Chinese employees on the other. Nor does the position of the established Chinese diaspora in LAC remain untouched by these developments. It is seen as a part of China, and depending on how the image of China turns out, the Chinese state may be faced with the dilemma of how to respond—particularly given its maxim of “non- interference” ([9]:10).

If one compares the Chinese infrastructure projects in LAC with the Japanese infrastructure investments in China in the 1980s and 1990s, a clear parallel emerges in the interplay of the need for raw materials, the need for capital, and the investment in infrastructure; and a reasonable assumption would be that that China has learned from its own experiences in this regard and is now transferring them to its relations with other countries, primarily developing and newly developed coun- tries thus far. There are, however, considerable differences here, especially in the respective constellations of actors and development agendas. Besides, Japanese aid to China was seen as war compensation. In the case of the Japanese infrastructure loans to China, these were a purely bilateral relationship, whereas China is dealing with different countries and different political regimes in LAC which have only come together a few years ago (2011) in the CELAC. In addition, Japan saw itself as embedded in the ODA/DAC system of the OECD, whereas China sees itself in a “South-South” framework in its new role as a provider of “win-win” infrastructure loans.

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Environmental and Social Risks and Emerging Risk Management in China-LAC Infrastructure Cooperation

The risks that accompany infrastructure projects are perceived and defined differently by different groups of actors. Whereas investors, entrepreneurs, banks and borrowers focus predominately on the financial and economic risks, and engineers look mainly at the technical risks, the environmental and social risks are articulated primarily by environmental agencies, NGOs and the affected local communities. The broad spec- trum (and associated consequences) of possible definitions of “social risk” can be seen in documents such as the “Guidelines (Interim Measures) on the Evaluation of Social Stability Risks in Major Investment Projects”, which were published by the Chinese State Council in November 2012 around the time of Xi Jinping’s ascension to office, but did not receive much public attention. These guidelines categorize major invest- ment projects largely by the probability of associated mass social protest into A, B and C. In other words, social risks are seen here as risks that could threaten the projects, not as risks that the projects themselves could pose to local populations. While these two approaches can overlap, their perspectives and aims in evaluating social risks are completely different. The former approach takes a top down perspective, or of “seeing like a state” in the sense of James Scott [29]; the latter approach is that of a social assessment (or social impact assessment) which follows an inclusive path and attempts both to minimize the negative effects of projects and to develop strategies that extend their benefits particularly to vulnerable groups. The two approaches require different types of expertise, different training for practitioners, and different policy instruments and networks, und thus ultimately also yield very different results (see [17]).

In response to the increase of Chinese loans for environmentally and socially sensitive infrastructure projects such as dams, roads and railways in LAC, three main concerns have been raised: (1) Chinese firms might transfer a lax domestic adherence to environmental regulations abroad; (2) projects already rejected by international finan- cial institutions may in fact be funded; and (3) compliance to domestic and international environmental regulations may be eroded ([13]: 3f). We will now look at these concerns in more detail.

(1) The concern that Chinese firms’ lax adherence to environmental regulations domestically might be transferred to LAC countries is legitimate to the extent that Chinese companies have shown themselves to be inventive in circumventing practical application of the body of environmental legislation that China has now developed. It remains to be seen to what extent the “Guidelines of the Ministry of Commerce and the Ministry of Environmental Protection of the PRC on Envi- ronmental Protection in Foreign Investment and Cooperation” of 18 February 2013 can counter this unfortunate tendency. In these guidelines, Chinese compa- nies are called upon to prevent environmental risks and to pursue an agenda of sustainable development in the host countries (article 1). Among other things, this means that companies “should respect the religious beliefs, cultural traditions and national customs of community residents of the host country, safeguard legitimate rights and interests of laborers, offer training, employment and reemployment opportunities to residents in the surrounding areas (…)” (article 3). In addition, they are expected to “develop a low-carbon and green economy and implement

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sustainable development strategies, so as to attain a “win-win” situation of corporate self-interest and environmental protection” (article 4). Prior to the actual construction, companies should do environmental monitoring and evaluation for the proposed site, monitor main pollutants (article 11), make management plans for hazardous wastes (article 13) and contingency plans for potential environmen- tal accidents (article 14), and establish communication and dialogue mechanisms for their environmental (and) social responsibilities.” In addition to these guide- lines designed specifically for foreign investments and cooperation, reference is also made to the entry into force of China’s revised and more rigorous Environ- mental Protection Law in January 2015, which addresses questions of environ- mental governance, now includes matters of environmental information disclosure and public participation, and provides for stricter penalties for irresponsible treatment of the environment.

(2) A second concern raised by environmental advocacy organizations is that Chinese banks might finance projects with strong and adverse environmental and social effects on local communities. Even if projects have not been previously rejected by IFIs, any large infrastructure intervention in an environmentally and socially sensitive setting may be cause for concern. Recently, two mega-projects with financing from Chinese sources have made headlines in the international press. One is the construction of a channel through Nicaragua to connect the Pacific and Atlantic oceans, which has already led to some initial protests. Another example is the intercontinental railway through Brazil and Peru which will also connect the Pacific and Atlantic coasts and which is also to be built with Chinese loans. This project was named a strategic area of China-LAC cooperation at the first China- CELAC Forum in Beijing in January 2015.4 But critics are concerned, because the project would bring large-scale deforestation and disruption to indigenous com- munities living in voluntary isolation in this area [26].

(3) Environmental activists are concerned that individual LAC governments might be so interested in large-scale loans from China that they would be willing to compromise their countries’ environmental legislation. It is therefore important in precisely these countries that Chinese banks have suitable guidelines as cred- itors—in keeping with international standards—for protecting the environment and social standards, and also take adherence into account in order to prevent harm to local communities ([13]: 4,5), or even better, to achieve positive effects for them.

As can be seen from these concerns, in addition to the domestic environmental, social and cultural safeguard policies of LAC countries themselves, both national and provincial, the environmental and social protection guidelines of Chinese banks, including how these guidelines are communicated and adhered to on the ground, are of paramount importance. The two Chinese banks most heavily involved in LAC loans are the CDB and the EXIM Bank. Both support Chinese government policy objectives through their lending in China and abroad, but they take different

4 A trilateral memorandum of understanding has already been signed by Peru’s Ministry of Transport and Communications, Brazil’s Ministry of Transport and the Chinese National Development and Reform Com- mission (NDRC).

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approaches toward environmental and social safeguard policies. Kevin Gallagher has compiled the environmental guidelines of the CDB and the EXIM Bank and those of some IFIs. He lists and compares ten commonly accepted environmental and social guidelines (see Table 3).

This table shows that in comparison to other banks the CDB’s guidelines lack processes for public consultation with communities affected by the project, as well as a grievance mechanism and an independent monitoring and review mechanism (the latter two also lacking at the IADB and China EXIM Bank). But precisely these are areas of special importance for addressing public concerns and insuring transparency throughout the project cycle. The environmental and social safeguard guidelines of the China EXIM Bank compare somewhat more favorably, because they specify both “public consultation with communities affected by the project” and “establishing covenants linked to compliance”. However, one very key difference among the guide- lines of the different banks has not been addressed by Gallagher, namely that some of these guidelines refer solely to environment safeguard policies, whereas others also refer explicitly to social safeguard policies. The CDB guidelines refer only to environ- mental preservation, whereas the China EXIM Bank has combined guidelines on “Environmental and Social Impact Assessment of Loan Projects”. Together with the EXIM Bank’s procedures for public consultation and for establishing covenants linked to compliance (lacking at the CDB), it is clear that very extensive differences can arise from these guidelines in practice (assuming they are adhered to).

The legal framework conditions for environmental and social safeguard policies in the banking sector were fundamentally strengthened by the “Green Credit Guidelines” [25] issued by the China Banking Regulatory Commission in February of 2012, which require Chinese banks to ensure that their overseas projects follow international norms

Table 3 Comparison of environmental and social guidelines from the World Bank, Inter American Devel- opment Bank, China Development Bank, and China EXIM Bank

Environmental and social guidelines World Bank

IADB CDB China EXIM Bank

Ex-ante environmental impact assessment (EIA) X X X X

Project review of EIA X X X X

Industry-specific social and environmental standards X – – –

Ensure compliance with host country environmental laws and regulations

X X Xa Xa

Ensure compliance with international environmental laws and regulations

X – – –

Public consultation with communities affected by the project X X – X

Grievance mechanism X – – –

Independent monitoring and review X – – –

Establishing covenants linked to compliance X X – X

Ex-post EIA – – X X

Source: Compiled from Gallagher et al. [12]: table 10, p.24 and table 11, p.25 a CDB and China EXIM Bank require that companies meet Chinese or international standards if the host country’s environmental standards are inadequate

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and support a low-carbon and recycling economy and protect against environmental and social risks (related to energy consumption, pollution, land, health, safety, human resettlement, ecological protection, climate change etc.), and also to improve their own environmental and social performance, as well as to establish environmental and social risk management systems (articles 3–5). Article 21 of the Green Credit Guidelines explicitly states that “Banking institutions shall strengthen the environmental and social risk management for overseas projects to which credit will be granted and make sure project sponsors abide by applicable laws and regulations on environmental protection, land, health, safety etc. of the country or jurisdiction where the project is located. The banking institutions shall promise in public that appropriate international practices or international norms will be followed as far as such overseas projects are concerned, so as to ensure alignment with good international practices”.

With their inclusion of an environmental and social risk management system the Green Credit Guidelines seem to be quite a progressive banking regulation, but it is no easy task to ensure compliance. Regardless of whether the borrower is a Chinese company or a Latin American government, there will always be the questions of how to deal with local regulations and authorities, and of whether there are policy instru- ments and policy networks, or whether these need to be created or strengthened, with sufficient motivating power to turn the Green Credit Guidelines into effective instru- ments (see [5]). In contrast to the routines followed by IFIs, Chinese banks still lack transparency in the application of environmental and social standards to overseas infrastructure projects. Not only is it necessary to inform and consult early on with people potentially affected by projects, but it would also be necessary to inform the Chinese public at home about the ecological and social footprints of their country’s “Going out” policy.

To better assess further chances of putting these various and promising guidelines into practice in the context of China-LAC infrastructure cooperation, we will now examine the extent to which environmental and social compatibility of joint infrastruc- ture projects in LAC are the object of the “China-Latin American and Caribbean Countries Cooperation Plan (2015–2019)” published in January 2015, and the extent to which infrastructure cooperation between China and LAC is understood in terms of economic growth or in terms of a development paradigm oriented toward sustainability. This cooperation plan identifies infrastructure development as one of the areas for promoting cooperation in transportation, ports, roads, warehouse facilities, business logistics, information and communication technologies, broadband, radio and TV, agriculture, energy and power, and housing and urban development. To foster infra- structure cooperation between China and LAC, plans call for good use of the China- LAC Special Loan for Infrastructure and for inaugurating a China-LAC Infrastructure Forum (III,8; IV,1). On the international level, the cooperation plan seeks to strengthen joint efforts by China and LAC in UN organizations and to intensify joint work in drafting the Post-2015 Development Agenda. In this context it also seeks to “strengthen dialogue and consultation on sustainable development” (II,3), albeit without specific reference to the key term “South-South” cooperation. This term does occur in the cooperation plan, but its only concrete reference is to cooperation on climate change (XII,1). Overall, the plan mentions a wide range of fields of cooperation, but does not display a clear overall vision of sustainable South-South cooperation, nor does it address adequate attention to cooperation with groups and organizations of civil

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society. With regard to the above-discussed environmental and social safeguard guide- lines, it would therefore be especially important for the planned China-LAC Infrastruc- ture Forum and/or the LAC-China Infrastructure Funds (IV,1) to stipulate Technical Assistance projects with the aim of capacity-building for environmental and social risk assessment and risk management systems, in order to operationalize and implement environmental and social guidelines more effectively in practice within the framework of China-LAC infrastructure cooperation.

Conclusion: An Emerging but Fragile Agenda of Sustainable Development in China-LAC Cooperation

As can be seen from China’s development experience of focusing on infrastructure, and from China’s infrastructure investment in LAC, many of these projects are accompa- nied by environmental and social risks for communities in the project areas. While there is already a body of knowledge about the main social and environmental risks of such investments, the specific mixture and dynamics of these risk factors may differ for each project and at each stage thereof. As a consequence, projects with major environmental and social impact will require profound social and environmental analysis, monitoring and evaluation throughout their entire cycles.

Chinese government agencies have already developed a set of environmental and social safeguard policies for infrastructure investments both inside and outside the country. But enforcement mechanisms for effectively implementing these guidelines are not yet in place—either inside China or with respect to Chinese infrastructure investments in LAC countries. Some authors such as Denise Leung and Zhao Yingzhen suggest that “China’s rapid economic growth and global influence offer it an opportu- nity to become the new global leader in environmental and social performance” ([21]: 23). If this somewhat over-optimistic statement should be more than merely wishful thinking, then more effective social and environmental policies on infrastructure investment in LAC would be needed on both the lending and borrowing sides, including EIAs, SIAs, grievance mechanisms and effective mechanisms for public participation. Last but not least, more micro-level research is needed on the dynamics of social and environmental impact in the project areas, on the complex relations and negotiations between project stakeholders, on the role of local and transnational civil society, and on the potential and limitations of extending project benefits to poor and vulnerable people in the project areas.

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Bettina Gransow is Professor of Chinese Studies at Freie Universität Berlin, Germany, where she teaches at the Institute of East Asian Studies and the Otto Suhr Institute of Political Science. Her research interests include social dimensions of infrastructure investment, China’s South-South relations, internal migration (voluntary and involuntary), sustainable urbanization and mega-city development.

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