Evaluation and Management of Political Risks in China's BOT Projects

TLDR

China’s slowing growth has prompted increased infrastructure spending, creating opportunities for foreign investors but also raising concerns highlighted by the 1998 Guangdong International Trust collapse and subsequent uncertainty over government support. The study aims to identify and manage the unique political and force majeure risks in China’s BOT infrastructure projects. Using an international survey of BOT risk management, the paper analyzes political and force majeure risks and proposes mitigation measures. The survey ranks Chinese parties’ reliability and creditworthiness, legal changes, force majeure, approval delays, expropriation, and corruption as the top critical risks for BOT projects.

Abstract

The potential slowdown of the economic growth in China has led the government to increase spending in basic infrastructure such as roads, ports, and power generation facilities. There are opportunities in the infrastructure sectors for foreign investors. It is important however to identify and manage the unique or critical risks associated with investments in China's infrastructure projects. Such issues have received special attention with the closure of the Guangdong International Trust and Investment Corporation in 1998 and the subsequent confusion over government support and guarantees. This paper is based on the findings from an international survey on risk management of build-operate-transfer (BOT) projects in developing countries, with emphasis on infrastructure projects in China. It discusses specifically the criticality of the political and force majeure risks. Based on the survey, the following critical risks, in descending order of criticality, are identified: Chinese Parties' reliability and creditworthiness, change in law, force majeure, delay in approval, expropriation, and corruption. The measures for mitigating each of these risks are also discussed.