Thursday 15 Nov 2018 | 18:55 | SYDNEY
Thursday 15 Nov 2018 | 18:55 | SYDNEY

An emerging Indo-Pacific infrastructure strategy

Bangkok traffic at night (Photo: kerolic/Flickr)

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COMMENTS

3 August 2018 14:30

The reaction to this week’s announcement by US Secretary of State Mike Pompeo of a US$113 million infrastructure fund is that it was more than a tad underwhelming.

When set against potentially upwards of US$1 trillion in financing for China’s Belt and Road Initiative (BRI) – to which the new US fund is a thinly veiled response – that certainly seems the case. Yet the outlines of an Indo-Pacific infrastructure strategy that looks potentially more promising can also be seen. 
 

A four-pronged strategy

First, it’s important to note that the US$113 million isn’t aimed at financing new infrastructure projects. Instead, it appears primarily intended to provide technical support to help governments develop and manage their own investments, particularly by attracting private capital. Viewed in this light, it is a more substantive amount, although still not a lot once spread across numerous countries.

Second, this is only the first step. A more significant next step is the BUILD Act, which is currently working its way through Congress. This would revamp the existing Overseas Private Investment Corporation into a new International Development Finance Corporation with modernised financing capabilities, including a doubling of its contingent liability ceiling to US$60 billion. 

Even a modest amount of new funding is welcome given the region’s infrastructure financing needs.

Third, a new trilateral framework is being established between the US, Australia, and Japan. Whether additional funds might come from Australia and Japan is not yet clear, although the latter did move earlier in 2016 to earmark US$200 billion over five years for its “quality infrastructure” initiative.

Fourth is an emphasis on “high standards” (or similar euphemisms) aimed at distinguishing its appeal compared to Beijing’s offering, which Washington paints as lower quality, self-serving, and a potential debt trap. High standards, by contrast, is intended to mean better built projects, transparency, competitive tendering, strong environmental and social safeguards, and, most importantly, economic sustainability.

Hence, the outlines of a four-pronged strategy appear to be emerging, consisting of a modest increase in funding, mobilising private capital, cooperation among financiers, and an emphasis on high standards.
 

A preliminary assessment

Even a modest amount of new funding is welcome, given the region’s infrastructure financing needs to 2030 are as high as US$26 trillion. The focus on mobilising private capital also makes plenty of sense, as official capital could never plug the gap and there is plenty of market interest. 

All this, however, is much easier said than done. The World Bank and Asian Development Bank have been doing this for years with limited success, at least at the kind of scale required, and in more difficult environments.

The problem is the limited pool of “bankable” projects. Critically, the main blockages lie in the recipient countries themselves – including pernicious problems of land acquisition, non-economic cost recovery, inept and corrupt bureaucracies and state-owned firms, poor project selection, and legal and regulatory frameworks that deter private participation.

Providing technical support can help, as most developing countries’ governments lack the expertise required across many areas. But deeper political and institutional problems are rarely easily overcome.

This leads to one clear difficulty in seeking to compete with BRI – bankability is much less constraining for China as it has been willing to take on much higher risks. Partly this is because it has at times misread the potential problems of working in many countries. This may eventually see it tighten its approach. Even so, as long as China retains a higher risk tolerance than other potential financiers, it will continue to find plenty of willing takers. 

The focus on “high standards” presents similar issues. For Western donors, this means good-quality investments. But for developing country governments, it usually means excruciatingly slow approvals, interference in domestic policies, preferred projects that go unfinanced, and, often, less overall investment.

China, on the other hand, is seen as faster, less burdensome, and more responsive. Even an emphasis by the trilateral partners on debt sustainability, while sensible and necessary, will do little to deter governments unperturbed about their own fiscal profligacy from seeking alternative financing options.
 

Of good development and good geopolitics

A race to the bottom is undesirable. The emphasis should instead be on encouraging China to converge over time towards something that looks more like existing global practices.

China, for its part, seems interested in doing this anyway. For instance, it has set up the Asian Infrastructure Investment Bank, its own International Development Cooperation Agency, and funded an International Monetary Fund facility to help governments receiving Chinese money better assess debt sustainability risks.

The trilateral framework could encourage this direction by setting a clear basis for potential cooperation with China (and others), where a commitment to broadly similar standards can be made.

But the trilateral partners should also not ignore serious shortcomings in their own existing approaches, which not only limit their impact but also make it harder to compete with Chinese finance. 

China’s willingness to engage in difficult environments should not simply be dismissed as uneconomic, but rather taken as a challenge to think harder about how to better support fragile states and least developed countries. External assistance here is most costly and difficult, but also greatly needed for both developmental and security reasons. 

Similarly, slow and burdensome processes need an overhaul, particularly at the World Bank and ADB which deliver the bulk of infrastructure development finance (including substantial co-financing from the trilateral partners). Much of this could potentially be greatly streamlined in ways that either retain the quality of the projects financed or achieve a better balance between managing risks and delivering results. 

A final area for reflection is the amount of financing itself. It is frequently said that it is impossible to compete with the scale of Chinese finance. Leaving aside much uncertainty about how large that is, the trilateral partners have plenty of firepower they are not using. All three only commit about 0.2% of their gross national income to official development assistance, compared to an average 0.5% among Western European countries. 

In Australia’s case, consideration might also be given to using bilateral loans (as Japan already does and the US seems to be moving towards) rather than only    providing grant financing. This would greatly magnify the amount of resources available. It makes particular sense for infrastructure projects, where financial returns should be expected.

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