Australia doubles down on Pacific infrastructure

Shifting more funds to infrastructure makes sense but implementation is the real test.

Roland Rajah,Riley Duke,Georgia Hammersley

6 February 20265 min read

The Australian government announced last week it would invest an additional $550 million in its infrastructure facility for the Pacific Islands. This is a welcome development and in line with a Lowy Institute policy brief we wrote last year.

As we noted then, the Australian Infrastructure Financing Facility for the Pacific (AIFFP) has been a gamechanger for Australia’s role in the Pacific. Before this, we estimate Australia was investing about $115 million a year in climate-resilient infrastructure. With the AIFFP and its $2 billion pipeline of projects approved thus far, we estimated that Australia will be providing around $270 million in annual investment.

The facility was however quickly running out of financing firepower. It still had about $2 billion in lending capacity. But it had largely exhausted its $1 billion allocation of grants. The ability to mix grants with loans is crucial to ensure overall AIFFP financing terms are concessional enough for fragile Pacific economies that cannot sustainably borrow at normal market rates. Pure grant financed projects are also needed, especially for climate adaptation in the most vulnerable countries.

The announcement itself came with few specifics, but AIFFP has confirmed to us that the increased funding will take the form of additional grants.

More grants will allow Australia to continue building out its pipeline of infrastructure projects in the Pacific without disruption. Given the AIFFP’s track record to date of a 1:1 ratio in loan-to-grant financing and assuming it is disbursed over ten years, this could result in up to $110 million in additional annual investment. Though Australia should aim to rely less on loans and more on grants, meaning the increase in financing would be lower than this.

For one, the AIFFP should do more pure grant financing for climate adaptation projects in the most vulnerable countries. Secondly, even Papua New Guinea and Fiji that have some capacity to borrow still likely require more concessional financing terms than what the AIFFP has historically provided. AIFFP lending terms are also generally more expensive than China’s or the multilateral development banks, making the facility more reliant on mixing in grants to be competitive. Finally, to the extent that Australia prioritises projects based on their “strategic” rather economic merit, this again is likely to necessitate more concessional financing.

Government officials in the Pacific might appreciate the technical support they receive but it is largely invisible to political elites and the public more broadly.

Even so, a $550 million infusion of grants will have a big impact. We estimate it should be enough to take total Australian investment in climate-resilient Pacific infrastructure to around $325–380 million annually. This would be around twice the $180 million China provided for all its infrastructure projects in 2023.

More grants for AIFFP will likely come from reduced spending elsewhere in the aid budget. As we argued last year, while it would be better to increase Australia’s aggregate aid spend, redirecting more to the AIFFP within a fixed total aid budget is still a good idea. Climate adaptation and traditional development spending in areas such as health, education and poverty reduction need to go hand in hand. And currently Pacific climate adaptation is woefully under-funded, with infrastructure the biggest funding gap.

It is also the case that, by our estimate, some 40-50% of Australia’s aid to the Pacific tends to be spent on technical assistance, mostly expatriate advisors. Hence, redirecting more aid to infrastructure does not necessarily mean less spending on health or education services, but rather less on technical advice and capacity building.

Advisors definitely play an important role. Better governance is arguably the holy grail of development. But improving governance is rarely about how many advisors are provided. Australia spends far more on this than other donors and it remains a longstanding source of concern over the effectiveness of the aid program.

Shifting from governance to infrastructure also makes diplomatic sense. Government officials in the Pacific might appreciate the technical support they receive but it is largely invisible to political elites and the public more broadly. In the soft power contest, providing advisors cannot compete with the tangibility of hard infrastructure investments. This is one reason why Australia finds itself battling with China for influence in the Pacific despite outspending China by almost seven-fold in total development support.

Still, a few important questions remain.

It is not clear what the focus of the additional funding will be. The AIFFP has tended to prioritise large scale projects in ports, airports and undersea cables. But there are many other important priorities that need funding such as community level capital works, ongoing infrastructure maintenance, and retrofitting existing assets for greater climate resilience.

The effectiveness of AIFFP investments will also ultimately depend on partner government policies, but it is not clear how Australia is trying to address this beyond providing technical assistance. In our policy brief we suggested linking AIFFP funding to the quality of partner government policies as a way of channelling investments to where they will be most effective and incentivising partner governments to undertake reforms that would improve the benefit and sustainability of AIFFP investments.

Most important is the issue of Australia’s capacity to deliver. Building infrastructure in the Pacific is hard. The last publicly released review in 2022 found the facility was performing well but raised questions about staffing and operating models. The AIFFP has since amassed around $2 billion in signed projects, most still under implementation. Delivery will be much harder than signing deals. Yet, more money also means having to develop more high-quality projects, which will become more difficult as the lowest hanging fruit has already been plucked.

Australia doubling down on Pacific infrastructure makes sense. With new funding in place, the next part is making sure Australia can deliver.

About the authors

Roland Rajah

Roland Rajah is Lead Economist and Director of the Indo-Pacific Development Centre at the Lowy Institute, focusing on economic development challenges across Southeast Asia, the Pacific Islands, and South Asia. His research spans macroeconomics, aid and development finance, geoeconomics, and regional integration.

Riley Duke

Riley Duke is a Research Fellow at the Lowy Institute and lead author of the Institute's Pacific Aid Map.

Georgia Hammersley

Georgia Hammersley was a Research Associate in the Lowy Institute’s Indo-Pacific Development Centre .

Topics

Aid & development Australia