China’s Belt and Road Investment in Africa and the Use of Offshore Finance

The “Belt and Road” initiative (BRI) is a trade and infrastructure development strategy instigated by the Chinese President Xi Jinping in 2013 to convert what was once known as the Silk Road to a modern trade and economic cooperation project spanning 71 countries. Primarily using bilateral loans distributed by state sponsored banks and credit funds, China pledged US$60 billion in 2015 to aid development in the African industrial, agricultural, energy and infrastructure sectors.[1] In May 2017, China further executed an economic and trade cooperation agreement with 30 countries including Kenya and Ethiopia at the first Belt and Road Forum.

It is impossible for China to fund the entire BRI and as such private investors play a major role in the initiative. A large portion of the current African BRI projects have been funded through public- private partnerships. There have also been numerous private equity funds set up to invest in BRI projects, including General Electric which pledged US$1billion to finance African infrastructure development in the power, healthcare and railway sectors.[2] Apart from direct investment into the BRI projects, other consequential bankable opportunities also become available to private investors. For example, an industrial park near Nairobi in Kenya is anticipated to be built by a private Chinese developer to benefit from the new rail links developed under the BRI. These Chinese investors are often assisted with reputable local partners to manage risks and operations locally.

Due to their international reputation as commercially accepted investment vehicles benefiting from stable legal systems based upon English common law, offshore entities, particularly BVI and Cayman SPVs, are the most effective platform to enable businesses to benefit from Africa’s BRI-supported economic development. A broad range of BVI and Cayman vehicles are suitable for investments in Africa depending on the business objectives of the investors. Joint venture vehicles can be set up by a combination of foreign investors, domestic African investors or a mix of foreign and domestic African investors. Depending on the specific capital and investment requirements of the business, other relevant vehicles include private equity funds, open-ended funds, permanent capital vehicles, and segregated portfolio companies.

Offshore vehicles are beneficial for private investors’ participations in the BRI. The major concerns that limit private funding are fund management transparency and the framework of the cross-border regulations. BVI and Cayman vehicles can tackle these concerns head-on as they are governed by progressive and flexible legislation and dispute resolution regimes that have evolved with a predominate focus to facilitate cross-border financing and investment transactions. These regulatory frameworks have been tried and tested channels for the flow of foreign direct investment (FDI). The skill set, expertise and professionalism occasioned by the deep pool of lawyers and service in both BVI and Cayman can also achieve transaction fluency in an efficient, rapid and cost effective manner.

Africa’s significant infrastructure gap continues to define the continent as the largest FDI hub in the world. On 28 June 2018, Afework Kassu, Ethiopia’s State Minister of Foreign Affairs commented that the BRI boosts Africa’s economic growth and development and is important in closing its annual infrastructure gap of US$95 billion.[3] It was forecast on 4 July 2018 by the Global Infrastructure Hub, a G20 Group initiative, that US$621 billion investment by 2030, and a total of US$2 trillion between 2018 and 2040 is necessary to meet the demands of Africa’s growing populations and economies.[4] It is estimated that if the current foreign investment trajectories continue, Africa will experience a 40 per cent shortfall in the necessary funding.[5] This latest forecast clearly underscores the importance of the BRI to the sustainability of Africa’s economies.

Since 2016, FDI into Africa has been experiencing an annual decline.[6] Although the US has traditionally been the largest FDI provider in Africa, in light of Trump’s “America First” strategy the global expectation is that the US will significantly reduce its foreign aid programs, at least in the short-term; the BRI has thus become the next most viable source of FDI.[7]

The BRI aims to aid Africa’s recovery from the commodity price collapse in 2014 and focus on economic sustainability, instead of short term high returns. This is important to Africa which is predicted to have 25 per cent of its population under 30 by 2050. Africa targets economic growth and stability through industrialisation, agriculture modernisation, infrastructure, financial services, poverty reduction and public health and welfare.[8] Forty per cent of current funds injected by China into Africa have been used for power generation and transmission, which is important to a continent where more than 600 million people have no access to electricity, whilst a further 30 per cent were used to modernise Africa’s transport infrastructure.

BRI contributions made to Africa have driven numerous cross-continental infrastructure projects including aviation, railways, high speed train network and aviation. The hotspots of China’s support in Africa are Egypt, Djibouti, Ethiopia, Angola, Zambia and Tanzania. Of all the African countries, Kenya’s involvement in the BRI is by far most significant as East Africa is BRI’s main focus in the continent.[9] One of the most noticeable outcomes of the BRI in 2017 is China’s US$6.3 billion credit in funds to East Africa to develop the Nairobi-Mombasa Railway in Kenya which will extend from Mombasa in Kenya to Rwanda via Uganda, and may potentially stretch to Burundi and DR Congo.[10] This would open previously less connected countries which are rich in agriculture and resources, such as Rwanda, to the rest of the world.

China has become Africa’s biggest trading partner since 2016. According to statistics from China Customs, although the China’s exports to Africa in January 2018 decreased by 4.7 per cent year on year to US$8.1billion, imports of Africa increased by an impressive 41.4 per cent year on year to US$8.8billion.[11] This is promoted through the infrastructures and trade developments under the BRI, which will inevitably accelerate the African economic development in the long run.

One of the major risks that BRI poses to Africa is the potential default risk of mushrooming repayments of loans; a precedent can be seen in Sri Lanka.[12] Between 2000 and 2015, China has lent a least US$95.5 billion to Africa, mainly for the purpose of financing Africa’s infrastructure gap.[13] Nonetheless, it is undisputable that the funds from BRI have been used to maximise Africa’s economic development and stability.

Going forward, there is no reason to think that China will change its trend of significant funding and investment in Africa in the foreseeable future. The BRI has clogged Africa’s historical problem of infrastructure deficit and prompted economic growth by inland-bound developments from the coasts of Africa. The business developments promoted by the BRI have also boosted the employment opportunities for locals as well as the competitiveness, technological development and productivity of Africa. The BRI has given developing countries, including the African countries, a voice in the global economy and created prosperity and employment opportunities.

Harneys has for many years worked together with the leading law firms in Africa (as well as law firms outside of Africa) advising on the offshore aspects of African investment transactions. Of the jurisdictions we advise on, BVI and Cayman vehicles are the most suitable investment routes in Africa focused transactions, as investors can benefit from the progressive, commercial focused and flexible legislation as well as credible and efficient exit strategies. Harneys is at the forefront of advising on the use of BVI or Cayman capital structures to achieve investor’s business objectives and our knowledge and experience extend well beyond the use of offshore as a conduit of FDI in Africa.

For more information please contact Greg Boyd, Raymond Ng or Paul Sephton.