In the six years since China’s President Xi Jinping announced the Belt and Road Initiative (BRI), USD 1 trillion has been invested in Asia, Africa, Europe, Latin America and the Middle East. However, it has not been without criticism, with some countries facing an increase in their sovereign debt as a result.
Dubbed the ‘modern Silk Road’, BRI aims to strengthen investment, trade and infrastructure links with China on a trans-continental scale.
There has, however, been reported negative economic effects around the financing of projects with Chinese loans, with a report published by the Centre for Global Development in March 2018 Examining the Debt Implications of the Belt and Road Initiative from a Policy Perspective finding that Djibouti led seven other countries significantly vulnerable to debt distresses.
Middle East & the Belt & Road Initiative
The Middle East has had an enduring trade relationship with China, surpassing USD 200 billion in 2017 and expected to increase to between USD 350 billion and 500 billion by 2020.
China relies on the Gulf Cooperation Council (GCC) for oil and imports aluminium and phosphate for energy supplies, while the GCC taps into China’s products and labour market.
The relationship, however, has not been without its disputes. May last year saw Unipec (China International United Petroleum & Chemicals), a subsidiary of Chinese oil and gas company Sinopec, threaten to cut 40% of oil imports from Saudi Arabia in a pricing dispute, showing that China is not afraid use its leverage as one of the leading oil importers.
China’s Supreme People’s Court (SPC) launched two international commercial courts in Shenzhen, Guangdong Province and Xi’an, Shaanxi Province in June last year, the sole purpose of which was to provide over 70 countries in the BRI with business dispute resolution legal services, according to state news agency Xinhua.
Projects, Projects, Projects
A report by Deloitte; Embracing the BRI ecosystem in 2018 estimated that the capital costs for BRI projects could be between USD 4 trillion to USD 8 trillion. Speaking to CDR, Richard Bell, a partner and head of the dispute resolution at Clyde & Co in Shanghai, explains that some of the larger projects under the BRI include Lusail City in Qatar, Jubail Industrial City in Saudi Arabia and the Faw Peninsula Port project in Iraq.
Charlotte Bijlani, a partner at Watson Farley & Williams in Dubai, adds that the largest current initiative she is aware of is “the international airport and rail network at Mubarak Al Kabeer Port in Kuwait”, which she says is being built as part of phase one of Kuwait’s USD 86 billion Silk City initiative.
China has not only invested in infrastructure, last year the Middle East was given a cash injection USD 106 million and USD 20 billion to revive economic growth in the region.
This led to Xi visiting the United Arab Emirates (UAE) for the first time in almost three decades, a trip which saw over 13 deals signed.
Not all are of the opinion that the BRI plays a major role in the Middle East, with Julian Bailey, a partner at White & Case in Doha, saying that “Middle Eastern countries, particularly those in the Gulf, are developing and have developed their infrastructure from their own funds”.
Whereas, he explains, it “seems that the BRI is probably more relevant to those countries who don’t necessarily have the means for large infrastructure projects, which is why participating in the BRI is presumably a boon of sorts”.
Disputes in the Middle East
As for the dispute resolution provisions included in the BRI contracts between the Middle East and China, Bijlani states that “for government or public projects, laws applicable in the Middle East may require arbitration to be seated in the Middle Eastern country”.
Certainly, for “Dubai public procurement projects that is the case. The Middle Eastern countries are more likely to be insistent on that particularly because of the importance of the seat to the enforceability of an arbitral award”.
For projects which do proceed, Bijlani says that they are continuing to see inadequate planning and expertise, while costs budgets and time constraints are simply unrealistic, which continues to fuel the high level of disputes, particularly arbitration, in the projects space.
“For mega projects, the sums involved can be significant and more often than not, government entities will allow an arbitration to run its course due to scrutiny about decision making from the likes of auditors.
If a BRI project is treated like any other, you can see the potential for political tensions between China and the Middle East if things do not go to plan,” she explains.
Bell states that where Chinese contractors are contracting with State Owned Entities (SOE), it is typically (although not always) the latter that dictates what the dispute resolution mechanism and governing law of the contract will be.
“This is particularly true where the project is the subject of a public bidding process where there may be competition from a number of bidders” and as such, an SOE will often insist that the contract be governed by local law with disputes being referred to arbitration before the local arbitral institution with the state capital as the seat of the arbitration.
In cases where the balance of power lies with the Chinese party, he says, the contract will typically provide for Chinese arbitration, such as the China International Economic and Trade Arbitration Commission, the Shanghai International Arbitration Centre or the Beijing Arbitration Commission, with the seat in Beijing or Shanghai and Chinese law as the governing law.
“Where the balance of bargaining power is more or less even, international arbitration before a recognised institution such as the ICC International Court of Arbitration, the London Court of International Arbitration or the American Arbitration Association may be chosen, with the seat and venue of the arbitration and the governing law subject to negotiation,” he notes.
Three major areas of risk for BRI projects in the Middle East, according to Bell, are security, politico-economic and legal risks.
For example, in Iraq increased security measures need to be undertaken to protect personnel. Elsewhere, politico-economic risks can arise where the state decides to reduce government spending in response to changes in the economic environment, such as the 2008 financial crisis or the 2014 fall in commodities prices.
“In the Middle East, it is not uncommon for governments to respond to these economic events by drastically cutting public spending to preserve cash reserves,” he says.
In turn, this can lead to projects being cancelled or reduced in scope, or payment claims being more carefully scrutinised.
Finally, legal risks can arise where the contractor simply has not appreciated the legal environment in which it is operating. “While Chinese contractors are becoming more sophisticated in their approach to due diligence and contract negotiation, many still assume that what works in China will work in the Middle East when in fact this is often not the case,” he adds.
Concluding, Bell says that “laws protecting local agents or joint venture partners, import and customs laws and regulations relating to licensing or other regulatory issues can pose traps for unwary contractors who have not done their homework properly”.