EXECUTIVE SUMMARY

China is the largest bilateral creditor to low- and middle-income countries (LMICs) presently. China’s lending mainly targets infrastructure, transport, energy, and mining sectors in developing countries that are of strategic importance to the Chinese government. Sub-Saharan Africa and South Asia have observed the most substantial increases in borrowing. Chinese financing to LMICs is facilitated through state entities, offering concessional and non-concessional loans, with a significant portion of lending cloaked in confidentiality. These agreements often contain extensive default and cancellation clauses and are marked by collateralized transactions, which, while reducing lender risk, pose substantial challenges for borrowers, including increased risk of debt distress and complications in debt restructuring. Recent studies have highlighted the heightened risks and complexities associated with collateralized sovereign borrowing, emphasizing the need for transparency and proper disclosure to mitigate potential risks. Despite being one of the world's largest bilateral creditors, China is not a member of the Paris Club, an informal group of official creditors focused on finding coordinated solutions to debtor countries' payment difficulties; instead, China opts for direct, often less transparent, bilateral negotiations for debt restructuring and relief, incorporating strategies such as extended loan maturities, interest rate adjustments, debt-for-resource and debt-for-equity swaps, while more recently also endorsing the G20's Common Framework for coordinated debt treatments.

The policy paper provides an overview of various projects financed by China, categorizing them based on the modalities of goods for infrastructure and services for infrastructure, further explored in Annex 1 with comprehensive technical and operational details. It highlights the "Angola mode" or oil-for-infrastructure model, a goods-for-infrastructure transaction where infrastructure construction is compensated by goods exports in a subsequent period. This model, exemplified by the Sino-Angolan joint venture, has historically deemed being beneficial until recent debt treatments surfaced post-2020. On the services side, projects like the Laos-China Railway, the Addis Ababa–Djibouti Railway, and Sri Lanka Hambantota port showcase complex agreements where infrastructure services are expected to generate foreign exchange cash flow for debt repayments. These case studies reveal a pattern of collateralized transactions, often with offtake guarantees and asset pledges, facing debt distresses followed by debt treatments. The lessons drawn from case studies emphasize the importance of sound institutional and legal frameworks for risk management, highlighting problematic collateralization impacts and the necessity for borrower countries to enhance internal and external governance structures to ensure project success and financial integrity.

Additionally, the geopolitical implications of sidelining Western involvement in favor of Chinese investment, the potential for increased Chinese influence, and control over critical Georgian infrastructure pose risks to Georgia's national security and economic independence. The project's profitability remains uncertain, given the speculative nature of projected trade flows with Europe and concerns over whether the Anaklia port can attract sufficient cargo volumes. The financing of the Georgian government's share, possibly through pension funds or loans from Chinese companies, introduces the risk of debt distress, reminiscent of Sri Lanka's Hambantota port. These challenges necessitate a careful evaluation of the project's strategic viability and financial sustainability, drawing from extensive unfavorable international experience in similar projects. drawing from extensive unfavorable international experience in similar projects. Will Georgia's objective of creating a major transit hub be undermined by the dangers of debt distress like in other countries, or can the country successfully manage these complexities to ensure a prosperous future for the Anaklia port? This analysis explores the potential risks that could be associated with Chinese investments in a critical infrastructural project, drawing on global lending practices discussed earlier.

For the Anaklia Deep Sea Port project in Georgia to achieve its full potential and ensure beneficial outcomes, a comprehensive approach to risk management and project governance is essential. The Georgian government and relevant stakeholders should prioritize sound institutional and legal frameworks. This includes conducting exhaustive reviews of contractual terms to ensure they align with domestic laws and international obligations, and closely aligning commercial agreements with legal requirements with a view of safeguarding country’s critical assets.

To mitigate the risk of corruption and self-dealing practices, it is paramount to promote transparency and accountability throughout the entire process. Ensuring that every aspect of the project aligns with Georgia's broader debt strategy and macroeconomic policies will be crucial for its success. Additionally, enabling supervisory and back-office teams to have immediate and comprehensive access to review and contribute to negotiations as they happen, will ensure a more inclusive and informed decision-making process.

To support these structural and procedural reforms, the Georgian government must also focus on capacity building within key areas. Strengthening the expertise and resources available in legal, debt management, fiscal risk management, and public investment management is critical. This effort should aim at developing in-house capabilities that can provide the technical know-how required for the execution and ongoing management of the Anaklia port project. By implementing these recommendations, Georgia can better manage the complexities of the Anaklia Deep Sea Port project, ensuring it serves as a catalyst for economic growth while safeguarding national interests.