Research proposal
Title:
Credit Strength and Project Finance Costs: The Role of Chinese EPC and O&M Contractors in South Africa’s Infrastructure Sector
1. Introduction
The financing of infrastructure projects in emerging markets relies heavily on risk assessments of project counterparties, notably Engineering, Procurement and Construction (EPC) and Operations & Maintenance (O&M) contractors. South Africa’s infrastructure landscape has seen a significant influx of Chinese EPC and O&M firms, which has impacted the structure and pricing of project finance deals. This study aims to explore how the credit profiles of Chinese contractors influence funding costs compared to local firms, with a focus on South African banks and the local branches of international banks.
2. Background and Context
South Africa’s infrastructure development needs are substantial, with project finance playing a pivotal role in mobilising private sector capital. The involvement of Chinese EPC and O&M contractors—backed by large balance sheets and state support—has introduced new dynamics into credit risk assessment and pricing models. Local banks and international branches may perceive Chinese contractors as credit-strong, potentially reducing construction and operational risks, thereby enabling better financing terms. However, empirical evidence on this relationship remains scarce.
3. Research Aim and Objectives
Aim:
To evaluate the impact of Chinese EPC and O&M contractors’ credit strength on project finance costs in South Africa as assessed by local and local-international banks.
Objectives:
- To analyse credit risk assessment differences between Chinese and local contractors.
- To assess how contractor identity affects debt pricing and deal structuring.
- To investigate implications for risk allocation and syndication among lenders.
4. Literature Review
Project finance is structured around risk allocation, with EPC contractors central to managing construction risk (Gatti, 2018; Esty, 2004). Chinese EPCs’ rapid growth globally, backed by state financing and guarantees, alters conventional credit risk profiles (Brautigam, 2020; Chen et al., 2021). South African banks’ risk-weighting models and Basel-aligned credit frameworks influence how contractor creditworthiness translates into pricing and security demands (Baker McKenzie, 2022). Despite growing anecdotal evidence, there is a lack of detailed analysis focused on the South African context.
5. Research Questions
- How do South African banks assess the creditworthiness of Chinese EPC and O&M contractors relative to local firms?
- Does the involvement of Chinese contractors result in more favourable financing terms?
- How does contractor identity influence risk-sharing and credit enhancement requirements?
- What are the implications for project bankability and syndication appetite?
6. Methodology
A mixed-methods approach will be adopted:
- Case Study Analysis: Comparing 6–8 infrastructure projects in South Africa (Chinese vs. local contractors), examining pricing, tenors, contingencies, and syndication structures.
- Semi-Structured Interviews: Engaging credit officers and project finance experts from local banks (Standard Bank, ABSA, DBSA) and local branches of international banks (ICBCSA, HSBC).
- Data Sources: Public disclosures, industry reports, redacted deal summaries, and interview transcripts.
Ethical approval will be sought, with anonymisation and confidentiality ensured.
7. Ethical Considerations
Participation is voluntary with informed consent. Data confidentiality and anonymity will be strictly maintained. The research will comply with LSE ethical guidelines and university ethics board requirements.
8. Expected Contribution
This study addresses a critical knowledge gap by linking Chinese EPC/O&M contractor credit profiles with project finance pricing in South Africa. It will provide actionable insights for banks, sponsors, and policymakers on optimising risk allocation and financing structures.
9. Timeline
MonthActivity1Literature review and proposal finalisation2Ethics approval and interview scheduling3–4Data collection and interviews5Data analysis and initial write-up6Final draft, review, and submission
10. References
Baker McKenzie. (2022). Global EPC Risk Allocation Trends.
Brautigam, D. (2020). The Dragon’s Gift: The Real Story of China in Africa. Oxford University Press.
Chen, Y., et al. (2021). Chinese Infrastructure Delivery in Africa: From State-Owned Giants to Hybrid Models. SAIIA.
Esty, B. (2004). Modern Project Finance: A Casebook. Wiley.
Gatti, S. (2018). Project Finance in Theory and Practice. Academic Press.
IJGlobal. (2023). Deal Database and Sectoral Trends Report.