An Interview with RWR Advisory’s Andrew Davenport

Andrew Davenport offers a fantastic definition of the Belt and Road, explains how RWR Advisory goes about gathering data, and talks about the likely consequences of Beijing’s more strategically minded investments.

Belt and Road Monitor

 

I discovered RWR Advisory Group through their Belt and Road Monitor – a free, bi-weekly newsletter, and the most comprehensive source of Belt and Road news I’ve come across thus far. If you’re not already receiving the monitor, I’d certainly recommend signing up. I’d also highly recommend reading the below interview with Andrew Davenport, RWR’s Chief Operating Officer. You can read his biography here, but suffice to say that he knows his stuff. His security risk background shines through in this somewhat cool-headed assessment of the Belt and Road, but his ideas are a far cry from the anodyne boilerplate of so many “risk” vs. “opportunity” type papers on the Belt and Road.

Jacob Mardell: I wondered whether you could attempt a definition of the Belt and Road?

Andrew Davenport: My definition of the Belt and Road, is basically ‘China’s effort to translate global thirst for capital into economic, strategic, and diplomatic influence’.

JM: That’s a good one.

AD: And I think wherever that suits them, they’re inclined to label something Belt and Road. Wherever Beijing thinks its investment dollars can advance its strategic interests – economic, or security – there is a temptation there to wrap it into Belt and Road and have a big celebration over it. There may be some official numbers mentioned here and there, but even Beijing doesn’t appear to have a clear definition of “Belt and Road”.

JM: Could you maybe give us a brief introduction to RWR Advisory Group and the Belt and Road Monitor, an overview of your clients maybe?

AD: Well, most of our clients are in the government or policy space. The idea, when we went about this project some five years ago, was to provide an empirical, data-based resource to address what China is doing globally – in the economic and financial world.

Back then there was a lot of discussion in places like Washington D.C., about China’s pursuit of natural resources and the purchases they were making internationally, but there wasn’t really good data available to make sure that the conversation was based on reality. And so, to provide better open source intelligence on the topic, we set out to do our own research and to develop an authoritative, impartial account of what Chinese companies are doing around the world.

We’re not trying to highlight one industry over another and we don’t have a dollar threshold for what we include. We’re really trying to catch everything. That’s ambitious, because not everything is available in the public domain, so naturally you tend to be looking at the bigger deals, or at least the higher profile ones – those that make it to press releases and regulatory filings, for example.

But at the end of the day, what comes out of it, is a source of information that you can filter across any number of different topics, to really understand where China is operating, who they are operating with, and what they are doing.

JM: And how do you cope with that lack of information? There’s so much conflicting information, how do you do it, how do you put together such a comprehensive newsletter?

AD: Well, the Belt and Road Monitor is a derivative of Intel Trak, which is the online tool we’ve built with a user interface where you can sort through the information based on what you care about.

All the information is collected from public sources, press releases, specialty databases, newspapers, regulatory filings, websites. We also have internal language skills to translate foreign sources of information.

It’s really a daily process. Our biggest differentiator is that we have put a lot of labour into doing this and into doing it consistently, day in day out, which we have been doing for five or six years.

Getting off the ground we had to be somewhat constrained in what our initial objectives were. We started off focused only on state owned enterprises, and only on those top entities overseen by China’s State-owned Assets Supervision and Administration Commission, otherwise known as SASAC. So we started off with a targeted set of companies and a targeted time frame, and then built on that – once we had gained our sea legs, so to speak. If it doesn’t hit the public domain, however, there will be things we miss. But for the most part, these are not deals that anyone is looking to hide. We’re not searching for illicit activity, so… that helps us meet our objectives.

JM: I suppose these things, if they’re associated with the Belt and Road, they’re things that Beijing very much wants to publicise.

AD: Right, I mean Xi Jinping probably quite likes the publicity and the prestige that comes with the deals Chinese entities are carrying out overseas. For the most part, these are deals that they’re very proud of.

Part of our perspective on Belt and Road has to do with soft power, and trying to interpret the overlap between these business deals and China’s foreign policy and international security strategy. You know – they are able to translate the prestige of Belt and Road and the clamouring for Chinese investment capital into diplomatic and foreign policy chips, if you will. So most of the time these aren’t things that China’s trying to hide, they’re hoping that these deals will be celebrated, and that in the aggregate they can translate the hype, or sometimes the reality of Belt and Road and other investments, into greater influence around the world.

JM: Do you try and define the Belt and Road in your work?

AD: Well, we have struggled with this question, as others have…

Within our newsletter, the Belt and Road Monitor, for example, you’ll see two different approaches. In the statistics that we provide, we are sticking to the 66 or so countries that have basically been put forward by Beijing as official Belt and Road members, but on the other hand, when we’re listing transactions that we’ve identified as relevant to the Belt and Road, we will stretch into North America and South America, where we see China associating certain activities with the initiative.

Personally, I do think that this is something that will catch up with Beijing – the fact that they’re sort of unwilling to put a clear label on the Belt and Road. Eventually Belt and Road just becomes China’s foreign trade and investment, period. I have a clock counting down in my head to the moment the moon gets added to China’s Belt and Road.

JM: Well – space is there.

AD: Yep, space is there, Mars and the Moon too – they’ll soon be official destinations.

So it’s tricky.  But, it’s worth noting that we started compiling our research on Chinese business transactions abroad before the Belt and Road was even announced. Accordingly, when we started, our research had nothing to do with the Belt and Road. We were tracking this information because we wanted to understand better the connections between China’s international business activity and its foreign policy pursuits.

And then, sometime after we got started, the Belt and Road caught on. As we didn’t start out tethered to the Belt and Road idea, the research parameters for our IntelTrak tool were – and still are – global.  We’re looking at business activity everywhere. Although our Belt and Road Monitor newsletter focuses primarily on Belt and Road countries, our daily research is uncovering transactions on a global scale.  So we’re pretty well positioned. Whatever Belt and Road morphs into… We have the necessary resources to track it, because we started with a global point of view.

JM: I wondered whether you could talk about risk.

How do you envisage risks along the Belt and Road, and how do you think Beijing envisages these risks? When commentators talk about return on investment, are they being too myopic?

AD: I don’t think so. I think that if these deals are going down based on strategic priorities rather than economic sense, then there’s a good chance many of them are destined for failure…unless China is willing to subsidise them indefinitely. So I don’t think it’s myopic at all to be worried about the long term viability of Belt and Road projects.

Part of what we do is we track all the activity, and we have all the data, but we’re also doing analysis of deals that, to us, look strategically, rather than commercially, motivated.

And that’s a difficult thing to do. It can be subjective, but it can also be done fairly scientifically. You can look at other projects and look at what others paid in similar circumstances to try and figure out whether they make market sense.

There’s a lot of evidence that deals are going down on non-market terms. In certain of these cases, Beijing may very well be subsidising projects out of the goodness of their hearts, hoping that a railway or road might link them to markets they want to be in. But there’s also the possibility that – without strings –  these countries that have agreed to pay large debts back, will get into worse trouble than they were in before.

One of the big concerns is that countries like Laos will be unable to repay their debts and that whatever original collateral the debts put in place could become relevant and change hands.  In other words, in these instances, the hedges put in place can have a high probability of being triggered. As a result, China could take strategic assets – presumably those that the host country didn’t want to give away – as payment. I’ve heard in the case of Laos for example, that there are minerals and mines that collateralise the loans they took for the high-speed rail. And China seems to find that acceptable. I mean, most of the time you’re worried that whoever’s supposed to pay you back won’t, but there may be certain circumstances in which China is actually happy to have the collateral and may have indeed been planning for it.

JM: So from Beijing’s perspective, it’s worth sinking money into projects that may not have a traditional return on investment?

AD: I think there are managers at many of the banks and companies, who, if they had their druthers, would perhaps be thinking about return on investments, but I there’s also pressure from Beijing.

There’s direction that is decoupled from return on investment calculations. And I think that’s dangerous, from a foreign policy and security perspective.

The most important thing is that it’s recognised for what it is. Often this is state subsidised financing, for state owned enterprises, carrying out deals because they are in the strategic interests of Beijing, not in the commercial interests of their companies, and potentially not even in the commercial interests of the countries that are involved. Sri Lanka is a good example of this. The current leadership of Sri Lanka probably wishes that they didn’t have to give a 99 year lease on Hambantota to Beijing, but they had to, to pay off some of the debts that were racked up under the previous leadership.

JM: So do you read strategic intent into this “debt trap diplomacy”.

AD: I think… that there is strategic intent behind the Belt and Road.

I don’t mean to say, however, that they’ve abandoned the idea that this will provide some sort of macro level return on investment. I don’t think that they’re writing all of this investment off. There are business people, bankers, and professionals, that are hoping for the best when it comes to these projects being profitable and viable over the long term.

But… I think it’s all happening under an architecture that is designed more from a foreign policy, geopolitical, strategic point of view than an economic one. So there may be winners and losers in that big game. In certain countries I’m sure the Belt and Road will even have a salutary developmental effect. But there are going to be others… where there is an opposite effect. And this is worth understanding.

In the United States, Europe, we’re becoming a lot more attuned to the idea that it’s worth having processes to look at investments – to decide whether or not this is in the economic, national security interests of the recipient country. We’ve experienced controversy in this connection. To some, the establishment or strengthening of such mechanism may sound, at first, like the politicising of the markets.  Overall, however, there’s more and more agreement that this is a good idea – that before saying yes, the government should have a role in determining whether or not this is a strategic mistake.

But, that’s not happening in many other parts of the world. And that’s partly because a lot of these countries desperately need investment. We have to understand the impulse. If you’re a country that could really use a bridge, or a road, and you have a population not nearly as well off as those of other countries, you take money where it’s being offered. But it’s worth all of us understanding the ways in which this could go wrong.

JM: So, this is where commentators, I’m thinking in particular of the US-China Commission hearing, would suggest that the US, Europe, need to be offering alternatives. But, how feasible is this, is it at all possible?

AD: Right. Well, I think that there are competitive juices that the Belt and Road is stoking, in development programmes, in countries and multinational corporations, and this is probably a good thing.

This isn’t really my area of expertise, but I would imagine that places like the Asian Development Bank are wondering what they could have done differently, to address some of the issues that the Asian Infrastructure Investment Bank for example, is designed to treat. Clearly there is a feeling in certain parts of the world that the existing institutions haven’t stepped up to the plate, and that now China is filling that void.

There’s probably some truth in there somewhere. But, I also think that we should be careful not to permit China’s no-strings-attached approach to alter our way of thinking on what makes for prudent, responsible lending in the Belt and Road parts of the world.  Although many of the countries that are taking Chinese money are very happy to have, what’s interpreted to be, development aid with no strings attached, China hasn’t really paid the price – yet – for the risk they’ve taken on board in the course of these activities.

China has forgiven debt in Cameroon, they’ve written off debt in Zambia, they’re in a pretty frightening position in Venezuela. I think that we’re still in a window right now, where the comeuppance for some of these loans, without the terms and conditions that, say, the World Bank might have required, is still forthcoming. So the jury’s out. I don’t think it’s necessarily time to declare their model more successful than the conventional wisdom.

JM: So you’re basically talking about overstretch. You’re pretty sanguine about the threat of the Chinese model, you’re saying there’s less need for an “alternative”.

AD: Yeah, I think they’ve clearly tapped into something here, which is that a lot of countries around the world clearly feel ignored and neglected, but… I don’t think that means that their approach is wise, or will work… And I think it may in many cases make the problem worse. Over the next five years or more, we’re going to see more examples of bad debt coming out of China’s strategy.

JM: I just wanted to get in a question about security.

So, securitisation of the Belt and Road – how much is this a question of flag following trade, and how much is it a case of the PLA sort of expanding its footprint under the cover of the Belt and Road? And also, generally, in the future, how far will this footprint extend? I’m thinking in particular about the European periphery.

AD: Right. I don’t see any geographic boundary to China’s Belt and Road objectives generally. They’re in the Caribbean, they’re quite active in South America, Canada – CCCC is trying to buy Aecon – there’s seeking investment in countries along the Arctic circle.   So, geographically, the intent at least, is to have Belt and Road serve as a vehicle to project influence globally. In my opinion, it seems a fairly safe bet, when things start going wrong, that they’ll have to scale it back…in a slightly pessimistic scenario of course.

But from the point of view of security, I think that the priority, where China feels most confident, is in their economic ability to project power, through their investment capital and state-owned enterprises. So I think the first step forward from a geostrategic point of view is the economic one. But then there’s also the need to protect the companies and the people, the investments that they’re propagating around the world. As such, I believe there will be some expansion of China’s military positioning that follows up the Belt and Road, assuming it succeeds in planting roots in these different parts of the world.

I think they feel the need, the way many previous powers have, to protect their investments and their relationships. But I think, in terms of which leg is moving first, it’s the economic and financial leg.

JM: Even in the Indian Ocean? On the Maritime Silk Road?

AD: You’re right to ask that question. In the nearer abroad it may be different – I think that’s a good point. There are probably more conventional military objectives that may be wagging the dog, I mean, certainly, investments in deep water ports – there are scenarios in which the security community in Beijing would have a voice, in terms of where they might prefer to have influence.

So for example, all this investment in the China Pakistan Economic Corridor – there may be economic reasons for it, but the China-Pakistan relationship has for decades been rooted in security considerations, and so the fact that a major economic project emerged there – linking Western China to Gwadar port – I don’t think is coincidence.

These things co-exist. I mean, I don’t want to give the impression that one is trumping the other completely. To give Beijing credit, they have the ability to intertwine these things better than many countries around the world – i.e., mixing security and economic considerations into one coherent foreign policy strategy.  I don’t think this is necessarily a bad thing. But which of these two core objectives comes first is a difficult question to answer. I do think you’re right to look at the Maritime Silk Road and the PLA’s interests in ports as potential examples of military considerations laying the groundwork for economic policy and foreign investment, rather than vice versa. There’s a good chance that this in what happened in Djibouti, when economic investment paved the way for China opening the military base .

JM: Just one more quick question if I may – you often see analyses of the Belt and Road summing up things in terms of risks and opportunities. And it always seems to me that the opportunity side of things always comes up light.

So, realistically, what kind of opportunities are there for European, American companies along the Belt and Road?

AD: Well I think there are shorter term gains. It doesn’t surprise me that companies, banks, want a piece of the money that is flowing into these projects.

The primary risk is being put on those who are taking out debt to fund the projects. For example, a number of the railroad projects are supposed to be paid back with revenue from people riding those tracks. I don’t know whether a European or American construction company is going to be worried about whether or not the railroad is profitable.

So if you’re just a middle man of sorts, financially, and you can find a way to derive profit from deal signings, your risk exposure isn’t nearly as high as that of the local countries involved. That would be my first reaction.

JM: But are there opportunities?

AD: I think there is opportunity. Clearly, there are profits to be had for banks and companies getting involved. The risk associated with Belt and Road, however, is more long term. Other than certain reputational problems… including on issues such as, corruption, environmental issues, etc. – there are long term financial considerations.

JM: But if there is so much domination already by Chinese companies. That CSIS study for example, that found, what is it, 75% of contracts awarded to Chinese companies, is there any room for European companies?

AD: Well, I was looking at this the other day, and my recollection is that it’s maybe as high as 89% of contracts that are going to Chinese companies…

Is there hope? You know, I think the amount of money moving is too big for these companies and banks to ignore.

There will also be increasing pressure to include non-Chinese companies in these projects. So, probably China will start having to dole out greater percentages to foreign owned companies and banks.

I don’t think this kind of percentage is sustainable. Beijing probably even realises that. If this perception of the Belt and Road sinks in – that it’s really only about employing Chinese workers and exporting excess capacity – that’s clearly not a formula for success.

JM: Okay, well lots of my talks about the Belt and Road have ended on pessimistic notes, so it’s nice to have a conversation ending on an optimistic one!

AD: A touch of optimism there at the end I guess!

 

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