Investing in the Pan Amazon: How China’s investment operates

The increasing presence of Chinese companies in South America has become an issue of concern among social and political analysts. Security specialists argue they are a geopolitical threat to the interests of the United States and other Western nations, while supporting authoritarian governments that undermine democratic traditions.

Environmental advocates attest that companies from China are uninterested in sustainability and will maximise profits at the expense of biodiversity and ecosystem services. Nationalists view them with suspicion because they represent a new type of imperialism that will lead to a loss of strategic industries while creating dependency via so-called debt traps. Perhaps.

Chinese banks and businesses have brought much-needed investment to the region, and their presence has advanced investments in infrastructure that would not have occurred or would have taken another decade or longer to finalise.

Investment from China falls into two major categories: loans to finance infrastructure and direct foreign investment (DFI) by corporations that seek to own or operate a business. Loans are the predominant form of investment in Venezuela, Ecuador and Bolivia because their ‘socialist’ governments are averse to foreign entities owning the means of production within their countries. There are exceptions, particularly in the mineral sector of Ecuador. DFI is the preferred model in Brazil and Peru, where Chinese companies have initiated new ‘greenfield’ investments or acquired existing business and infrastructure assets.

Some, but not all, of this investment activity is occurring in the context of the ‘Belt and Road Initiative’ (BRI), a foreign policy and infrastructure development programme launched by the People’s Republic of China in 2013. The BRI is best known for suites of coordinated projects that extend across the Eurasian landmass, Southeast Asia, and into Africa. The Latin American component, which is more modest in scope, was announced at the Asian Pacific Economic Cooperation (APEC) summit in Lima in 2016. Subsequently, Bolivia, Ecuador, Guyana, Suriname, Peru and Venezuela all signed agreements formally entering the BRI initiative. Only Colombia, which has the smallest amount of Chinese investment, and Brazil, which has the largest, have declined to formally join the BRI. Nonetheless, both have bilateral agreements that facilitate trade and investment between their countries.

Most of the financial assistance to Latin America has been channelled through public ‘policy banks’ that are superficially similar to the multilateral institutions based in Washington, Caracas and Brussels: Their primary mission is to assist client countries in developing their infrastructure and economies, but as self-financed banks they must also earn a satisfactory return on their investment.

In the case of the China Development Bank and the Ex-Im Bank of China, these fundamental principles were modified between 2000 and 2015 as part of a deliberate strategy to secure supply chains for strategic commodities. After 2014, at least in Latin America, they became more pragmatic because of financial constraints in China, a surplus of commodities, and the weakened financial status of their clients.

The lending policies of Chinese institutions incorporate social and environmental standards that mimic those championed by the World Bank but, unlike the multilaterals, they are not subject to strict oversight by civil society. Chinese policy banks have a due diligence system, but their precautions against corruption and the rigour of their environmental reviews are significantly less thorough and, in some instances, may amount to window dressing. Consequently, Chinese banks and partner companies move quickly and in close coordination, which allows them to design, build and deliver a project in a fraction of the time required by a project financed by the multilateral agencies.

The total value of infrastructure investments by Chinese emtities is greater in value than those deployed by the multilateral banks when considered over the same period of time. That is a false comparison, however, because Chinese policy banks tend to narrowly focus on the extractive industries, energy and infrastructure, while the multilaterals also invest in health, education, governance and water and sewage systems. Moreover, this comparison also ignores the leveraged contributions by the private sector and national treasuries, which are usually three to ten times larger than the contribution of the multilaterals. Increasingly, finance from China, the multilaterals, and the private sector are joining together to finance projects that make good business sense.

Debt-Trap Countries

Most infrastructure lending is organized via the Chinese Development Bank (CDB) or the Export-Import Bank of China; Jointly, they invested approximately $US 5 billion in South America between 2000 and 2009, a number that doubled in 2010 and by 2020 totaled more than $US 53 billion. Approximately forty per cent of these loans were made to finance investments in the Pan Amazon, mainly in hydropower, electricity transmission and roads (Figure 2.25) The volume of loan transactions has trickled to a stop since 2016, while DFI continues, although at reduced values.

Ecuador was an early recipient of Chinese investment, in part because it had difficulty attracting investment capital due to political instability and economic mismanagement, a predicament that become particularly acute in 2008 when the country defaulted on its international debt obligations.

President Rafael Correa, who was elected in 2007, aggravated the crisis by rejecting standard (neoliberal) advice to privatize state-owned infrastructure and energy assets; instead, he sought other sources of finance. The Export-Import Bank of China and the China Development Bank responded with loans that allowed the government to pursue the construction of several highways, modernize an oil refinery and expand hydropower. The loans were backed by future oil production and, eventually, revenues from a copper concession granted to a Chinese mining company.

Although Ecuador largely used credit to finance its economic expansion during the commodity boom, it did allow a limited amount of DFI in the extractive industries. In 2006, the China National Petroleum Company (CNPC) and Sinopec created a joint venture, incorporated as Andes Petroleum, which they used to purchase one of Ecuador’s most valuable infrastructure assets, the Oleoducto de Crudos Pesados (OCP), the pipeline between the Amazon and the Pacific coast, for $US 1.3 billion.

Outside the extractive industries, the largest loans were used for the construction of two hydropower facilities in the Andean foothills: Coca Coda Sinclair ($US 1.5 billion) and Paute/Sopladora ($US 487 million), both of which will be operated by Corporación Eléctrica del Ecuador (CELEC) an electrical utility company owned and operated by the Ecuadorian state.

A third complex is planned on the Santiago River that, presumably, will also be built by a Chinese company and financed by the Ex-Im Bank of China. The country has been unable to service its new debt obligations following the decline in the price of oil after 2015. Ecuador was forced to restructure its foreign debt in August 2020, which they undertook with the assistance of the International Monetary Fund (IMF) in coordination with their Chinese creditors. As usual, oil revenues are a guarantee of future payment.

In Bolivia, Chinese credit has financed approximately ten per cent of the highways built over the last two decades. Between 2007 and 2017, fifteen separate projects were awarded to contractors from China at a combined value $1.78 billion; however, the debt incurred for highway construction from Chinese banks over the same period totaled only $US 1.1 billion. Chinese construction companies were awarded all the contracts financed by the Ex-Im Bank, but several were successful in competing for contracts financed entirely by the Bolivian state.

Almost all of these roads are components of the IIRSA master plan and about two thirds are located within the Bolivian Amazon, including the Rurrenabaque – Riberalta corridor ($US 579 million) that connects the Andean highlands with the Department of the Pando and the Corridor Interoceanico.

In the electricity sector, Sinohydro is building the dam and power plant at Ivirizo ($US 632 million), and the China Three Gorges (CTG) corporation was awarded the contract to build the Rositas Dam near Santa Cruz ($1.3 billion). Both power plants will be operated by a state-owned domestic utility company (ENDE), which has a near-monopoly on generation and transmission.

The Rositas project was paralysed in 2019 because ENDE failed to conduct an environmental review that complied with the principles of Free Prior and Informed Consent (FPIC). Indigenous communities have filed a legal challenge to halt the project, at least temporarily, but the project has strong support across multiple social and economic groups.

Bolivia and China have engaged in an unusual infrastructure initiative in the form of a communications satellite, which was designed, built and launched by the Chinese space agency. Christened Tupac Katari -1, the satellite cost $US 300 million, of which 85 per cent was financed by the China Development Bank. The enterprise has been criticized as a white elephant because it has generated only $70 million in revenues since its launch in 2013.

Proponents argue the investment should not be evaluated solely on financial criteria, however, because it integrates remote Indigenous communities into the national community by providing them with cellular phone service and access to the internet. Overall, Bolivia’s foreign debt increased from $US 2.2 billion in 2007 to $US 11.3 billion in 2019, of which only about ten per cent is held by Chinese banks, an amount considerably less than either the IDB ($US 3.5 billion) and CAF ($US 2.9 billion); moreover, interest on the loans from China is concessionary, with interest rates of about 2.6 per cent compared to 3.3 to 23.6 per cent for the multilaterals.

Bolivia continues to service its debt, but financial analysts consider Bolivia to have reached a plateau in its ability to service any additional non-concessional debt. Chinese banks have made no new loans to Bolivian entities since 2018, and the two largest loans announced in 2016 (Rositas, $US 990 million) and 2017 (the El Mutun mine, $470 million) have not been executed due to bureaucratic delays.

The most heavily indebted country in Latin America is Venezuela. Between 2000 and 2014, the country reportedly borrowed $US 50 billion from Chinese entities to finance multiple components of the national economy, including the hydropower facilities on the Caroni river and industrial mines in Bolivar state. Most of the loans were to be repaid via direct oil shipments, but declining production and low prices caused Venezuela to default in 2014, an outcome that followed several years of cosmetic debt roll-overs. Even investment in iron ore and bauxite mines of the Guyana highlands has failed to provide any type of cash flow or produced the mineral commodities that guaranteed debt payment. The debt was restructured in 2020 with a ‘grace period’ provided for $US 19 billion.

Both Venezuela and Ecuador could be considered to be caught in a ‘debt trap’. The inability to repay loans has led to a loss of sovereign control over a strategic asset. In both countries, the state-owned oil companies now export almost all of their production to China to service past debt. Consequently, both countries are forfeiting potential revenues in an improving global market. Nonetheless, China has not benefited from these failed business ventures and, rather than acquire assets via bankruptcy proceedings, the policy banks of China have written off bad loans. The debt trapped everybody.

The Domain of Direct Foreign Investment

The flow of capital into the private sector and PPPs was similar to the loan portfolios: Investment started in the early 2000s, with a surge in 2010 followed by more moderate flows thereafter. Unlike loans, however, the flow has not stopped, as companies continue to acquire or establish companies with good cash flow and growth potential. Several sectors stand out. The most obvious examples are companies operating in the agricultural and the extractive industries, whose business models align with China’s need for basic commodities (see Chapters 3 and 6). Investment in infrastructure is different, because it isn’t built on a supply chain that extends back to China; instead, companies export engineering expertise to build and operate highways, railroads, airports, dams and electrical power systems.

Peru has welcomed significant quantities of DFI and completely avoided the debt trap that afflicts its neighbors (Figure 2.25). Approximately $US 15 billion has been invested in the polymetallic mines of the High Andes and another $US 3.5 billion in oil and gas. The China Three Gorge (GTC) company owns the largest portfolio of infrastructure assets. It made its first investments in Peru via a joint venture in 2016 with a Portuguese energy firm at the San Gaban-III hydropower facility on the Rio Inambari ($US 185 million). This was followed by the acquisition of the Chaglla dam and power station on the Rio Huallaga in 2018, as part of a deal forced on the beleaguered Peruvian subsidiary of Oderbrecht ($US 1.4 billion).

The largest acquisition (to date) was GTC’s purchase of Luz Del Sur ($US 3.6 billion), which it acquired from a US-based energy company in 2020. Among Luz Del Sur’s assets are the electrical distribution system of Lima and the Santa Teresa dams under construction on the Urubamba River near Cuzco ($US 600 million). The Chinese company is the largest diversified electrical utility in Peru.

A more controversial investment is Sinohydro’s participation in the consortium (Sociedad Concesionaria Hidrovía Amazónica SA – COHIDRO), which was awarded the contract to administer Peru’s Hidrovía Amazónica in 2017. Presumably, Sinohydro is providing technical expertise and financial capital ($100 million), while their Peruvian partners manage the administrative and legal process regulated by OSITRAN. The controversy surrounding the project stems from accusations the consortium manipulated the bidding process and claims by Indigenous federations that they were not adequately or legally consulted during the environmental review.

In Brazil, Chinese companies have invested more than $US 60 billion since 2005; this is the country’s largest and most diversified investment portfolio in South America. It includes businesses that specialize in commercial real estate, finance, transportation, telecommunications, agriculture and minerals. As in Peru, a large portion of investment capital has been allocated toward minerals, including loans to Brazil’s very large mining sector (> $US 5 billion) and a combination of loans and joint ventures with Petrobras (> $US 16 billion). Brazil’s importance to China’s food supply is reflected in investments made by COFCO, China’s state-owned commodity trader (> $US 3.2 billion).

As large as these investments are, they are smaller than the combined acquisitions of CTG and State Grid Corporation of China (SGCC) in the generation, transmission and distribution of electrical energy ($US 23 billion). The vast majority of these investments are located in extra Amazonian Brazil, except for minority interest by GTC in two hydropower facilities in Amapá: Santo Antônio do Jari ($US 250 million) and Cachoeira Caldeirão ($US 130 million). The only large investments in the Brazilian Amazon is SGCC’s controlling interest (51 per cent) in ultra-high voltage transmission lines between Belo Monte and Southeast Brazil: BMTE-I to Rio de Janeiro (> $US 2 billion) and BMTE-II to Estreito, Minas Gerais (> $US 2.8 billion).

State Grid’s partners in the BMTE projects are Electronorte (24.5 per cent) and Furnas (24.5 per cent), both of which are subsidiaries of Electrobras, which is being [partially] privatized by the Brazilian government. At the corporate level, the government intends to reduce state ownership from 62 to 45 per cent by offering shares (common stock) in public equity markets. Internally, management is also downsizing the company by selling subsidiaries and joint ventures. The semi-privatization via the stock market is not likely to attract Chinese investors, but they are most certainly interested in acquiring individual assets in distribution, transmission and generating.

The presence of CTG and SGCC in the Brazilian Amazon is not extensive, but that could change if they acquired assets from Electrobras or from a private sector investor, such as those that operate the hydropower plants on the Madeira and Tocantins rivers. Conceivably, they could lead a greenfield investment if regulators (or the Brazilian Congress) open up hydropower development within the Legal Amazon.

There is less uncertainty about the role of Chinese companies in the development of railroads. In 2019, the governor of Pará signed an agreement with the China Communication Construction Company (CCCCSA) that committed both parties to initiating construction on the first stage of Ferrovía Paraense by the end of 2021.

Although the COVID crisis has undoubtedly delayed its implementation, the world’s largest construction company will soon bring its hyper-efficient engineering systems to the construction of that railroad. Finance for the R$ 15 billion ($US 2.7 billion) project is available via the China – Brazil Fund, an investment vehicle created in 2017 that has been capitalized by the China-Latin American Production Fund ($15 billion) and BNDES ($US 5 billion). Chinese construction companies with expertise in rail can be expected to participate in the public auctions for the Ferrograu and FICO railroads.

The activities of Chinese investors in Guyana and Suriname have historically reflected the size of their economy and, in general, could be characterized as overseas development assistance. Between 2000 and 2014, Chania’s policy banks provided $US 350 million to Suriname and $US 309 million to Guyana. Most of these resources were allocated to road ‘rehabilitation’ and electricity power systems.

The discovery of the offshore oil field has led to an upsurge in direct investment. In Guyana, that includes a $950-million contribution to a joint venture between the Chinese National Oil Company (CNOC) and Exxon, a luxury hotel, improved port facilities, and, reportedly, paving the IIRSA-sponsored Letham–Georgetown highway. Less likely is the renewal of the Amalia Falls hydropower project, which was the object of a potential $US 850 million loan in 2009, co-financed by the IDB and China Development Bank. The Amelia Falls project was removed from the development pipeline in 2015 due to concerns over its financial viability.

In Suriname, oil discoveries lag those in Guyana, but geologists are confident of future production, and CNOC will participate. In the meantime, the country has contracted a Chinese engineering company to modernize its international airport.

“A Perfect Storm in the Amazon” is a book by Timothy Killeen and contains the author’s viewpoints and analysis. The second edition was published by The White Horse in 2021, under the terms of a Creative Commons license (CC BY 4.0 license).

Read the other excerpted portions of chapter 2 here: