With nearly US$120 billion invested since 2005 and US$22.1 billion in 2014 alone, China is the biggest foreign investor in the Latin American region. China has developed its own infrastructure in a pace and scope unparalleled in human history. The country can bring a unique wealth of experience and know-how to help our region close its infrastructure gap.
Transforming this to a win-win-proposition by helping Chinese projects both flourish and have a positive development impact is an important goal of the IDB’s partnership with China.
But how to make projects successful and sustainable – financially, environmentally and socially? That is a challenge many investors and companies worldwide are struggling with. There is no uniform recipe for this, but our experience tells us there is at least one precondition that must not be neglected: taking safeguards seriously.
Since 2005, the combined value of Chinese investments and construction transactions around the world stands at US$1.1 trillion, according to the China Global Investment Tracker. More than $250 billion in overseas investment have failed. A report by the Beijing-based think tank Center for China and Globalization analyzed 120 cases of Chinese companies’ failed attempts to invest abroad. Political factors made up a quarter of the reasons, as reported by the Chinese newspaper Global Times. It’s fair to say that political, social and environmental problems are recognized as major business risks for Chinese overseas investments and are firmly on the table for further discussion and analysis.
We heard the alarm bells at the China-LAC Business Forum in Changsha in September 2014, where representatives from the Ministry of Environmental Protection, the Ministry of Commerce and the China International Contractors Association gathered with representatives from Chinese companies, investors and contractors. They said Chinese firms entering Latin America and the Caribbean face a web of local, regional, and national regulations as well as the expectation that they meet international standards. On top of this, companies must deal with a variety of commitments made by local partners and politicians. Navigating through these requirements, especially in circumstances where technical presence by government agencies is often lacking, can be an enormous headache. Most Chinese companies don’t have the benefit of decades of global business experience accumulated by other multinational firms.
To help fill in this gap, the IDB safeguards unit prepared a technical guidance on Good practices in environment, health and safety in Latin America and the Caribbean that was translated into Chinese. Our 6-hour launch event was hosted and organized by the China Development Bank at their impressive headquarters in Beijing. Some 70 representatives from Chinese companies attended, underscoring the growing importance of these topics to Chinese companies.
I was impressed with the speech by the representative of the Chinese Ministry of Commerce. He pointed to examples where Chinese projects in Latin America and the Caribbean have encountered difficulties, including suspensions. He noted that these setbacks, which often have grave financial consequences, are mostly caused by falling short on meeting environmental, health and social standards. And he concluded his speech with a passionate appeal to take safeguards seriously, to integrate them in the management system of the company and to make them a “matter of the heart” for upper management.
This also resonates very much with our experience in the safeguards work of IDB. Adhering to local laws and regulations is the bare minimum requirement. To actively reduce the political and social risks of a given project, there needs to be a stringent management system for environmental and social issues. This system actively involves all stakeholders, establishes functioning communication channels, monitors all complaints and grievances and makes sure that they are dealt with in due time. In short: a management system which ensures that all relevant concerns are taken seriously combined with a top management commitment to make the environmental and social sustainability of the project their top priority.
The clear endorsement of the Ministry of Commerce was not the only sign in the big shift in the perception of safeguards. Demand for the additional IDB training session held on Good Practices in Environment, Health and Safety in Latin America and the Caribbean was also high, with officials, think tanks and industry federations alike expressing their interest for more knowledge sharing opportunities on safeguards. And we must also acknowledge the advances by the new Asian Infrastructure Investment Bank to set up a pragmatic and well-designed safeguard policy in record time. All this shows that China has taken up this issue in a decisive, pragmatic and action-oriented manner.
To me it seems that this new urgency to adhere to international practices as well as international social and environmental standards is based on the realization that this is a crucial success factor for future Chinese overseas investments. As China started its investment ventures into overseas markets relatively recently, there has been a lot of learning by doing with a modest success rate in investments. This mixed outcome is now openly discussed in China and the search for ways to change it is in full swing.
Our previous outreach in China had been 15 month earlier, where environmental and social issues were further down on the list of priorities. It was fascinating to see this shift in mood and attention.