BRI financing concern raised at UK’s Islamic finance conferences

Two UK-based academics point out that a common source of funding for BRI-linked infrastructure projects, including the ECRL, so far seems to be borrowings


The potential detrimental impact of financing the massive infrastructure projects connected to the Belt and Road Initiative (BRI) surfaced at two Islamic finance conferences in the UK in the recent months. Among others, the East Coast Rail Link (ECRL) project had also came into sharp focus.

Two UK-based academics had pointed out that a common source of funding for BRI-linked infrastructure projects, including the ECRL, so far seemed to be borrowings.

“The concern here is whether BRI is promoting a credit-led growth initiative, which is feared to build up another global credit crisis. Crisis will be triggered when the borrowing entities fail to fulfil their financial obligations especially in the case of non-performing projects,” said Dr Marizah Minhat (left) and Dr Nazam Dzolkarnaini, both from UK’s Edinburgh Napier University, in an email to The Malaysian Reserve.

Marizah is the assistant director at the university’s International Centre for Management and Governance Research, while Nazam is the associate professor in accounting and finance at its business school.

Speaking at the Sustainable Silk Roads Conference held in Edinburgh in October 2017, Marizah had warned that using conventional debt to finance the BRI, formerly known as One Belt One Road, could contribute further to unsustainable debt burden.

“While one may argue, US$900 billion (RM3.64 trillion) total investment required for the BRI may not be material enough to shake the financial world, I fear that amount could be well underestimated,” she then told the conference.

Nazam said he had echoed the same concerns when at the Ethical Finance and Governance in Emerging Markets Conference 2018 (EFGEMC18) held in Edinburgh in May, which featured BRI as a key theme.

The ECRL, along with the Multi-Product Pipeline (MPP) and Trans-Sabah Gas Pipeline (TSGP), saw its services and operation works suspended by the Ministry of Finance on July 3, 2018, as announced by Finance Minister Lim Guan Eng.

The MPP and TSGP projects, with a total construction cost of RM9.4 billion, were awarded to China Petroleum Pipeline Bureau on Nov 1, 2016.

Under the previous administration, the ECRL rail line spanning 688.3km from Port Klang to Pengkalan Kubor, Kelantan, was said to have an estimated cost of around RM55 billion. However, Lim said the true cost of the ECRL was expected to reach RM81 billion, including land acquisition cost and loan interest during the construction period.

The minister had also said last week that the project cost did not include operating deficit — which cannot yet be determined — and that the project would only become financially and economically feasible if there was a drastic price reduction of the project by China Communications Construction Co Ltd, the parent of ECRL contractor China Communications Construction (ECRL) Sdn Bhd.

Role of Islamic Finance

Islamic capital has been bandied about as one of the components of China’s BRI, which was unveiled by China’s President Xi Jinping in 2013.

In the email, Marizah and Nazam said a “genuine concern” about the risk of recurring credit crisis has motivated a research project that explored other sources of funding, especially the prospect of Islamic finance contribution, to spur the growth of BRI-linked projects in an ethical and sustainable manner.

They noted that Islamic finance is suitable because BRI has garnered participation from many countries of Islamic origin such as Central Asian republics, Iran, Turkey, Indonesia, Malaysia and Middle Eastern countries.

They said a pioneering research project on “Islamic Finance and BRI”, led by them, was introduced at EFGEMC18.

“Though the project, which is a work in progress, explores the prospect of Islamic finance to be a potentially sustainable funding source for BRI, it also raises some practical issues associated with this alternative finance,” they said. They have proposed that risk-sharing financing, as promoted through Islamic finance lens, can be adopted to promote partnerships or joint ownerships of BRI-linked projects as opposed to debt-financing that tends to impose high costs on poor borrowing nations.

Sukuk for BRI Projects

They noted that it was revealed that only 15% of the ECRL’s project costs in Malaysia were intended to be financed by sukuk.

“Sukuk have been the financial instrument of choice in the realm of Islamic capital markets to finance capital-intensive infrastructure projects. The prospect of sukuk market to grow with BRI-linked projects is plausible if the Islamic origin countries along the belt and road demand the use of Islamic financing contracts to build local infrastructures in support of BRI,” they said.

However, they argued that the element of risk-sharing does not necessarily materialise in the reality of Islamic finance.

“The gap between the theory and practice of sukuk is no longer a secret to learned academics and practitioners. Sukuk as practised are often regarded as contentious instruments from critical perspective.

“In principle, sukuk are distinguishable from the conventional debt, whereby the Accounting and Auditing Organisation of Islamic Financial Institutions defines sukuk as investment instruments rather than debt instruments. Nevertheless, in practice, sukuk are often treated and accounted akin to debt instruments in balance sheets. This is so despite no mention of lending/borrowing with interest in sukuk prospectuses,” they said.

Although financing BRI-linked projects with sukuk may be desirable in Islamic origin countries, they said camouflaging debt with sukuk as practised today will hardly reduce global exposure to credit risk.

“Islamic financing instruments will not be able to make a real difference until they are treated and accounted as genuine risk-sharing instruments to the extent that credit risk is no longer relevant,” they said in the email.