Another battle of the acronyms hits the (belt and) road

Despite many people in shipping and ports being initially very excited at the prospect, the United States and other G7 countries have long shared concerns about China’s ambitious Belt and Road Initiative (BRI). Their reservations are many but principally concern project lending criteria and the debt it creates, environmental impacts and potential for soft power projection to harden very quickly.

As managing this behemoth has become increasingly challenging BRI has seen significant pull back in recent years according to the Centre for Strategic and International Studies. CSIS also believes BRI was never as big as sometimes portrayed, reaching into the hundreds of billions rather than trillions of dollars of expenditure.

A lack of transparency and the absence of official criteria for projects, makes it difficult to track the BRI with precision but the overall trend is clear; as the list of countries participating in the BRI has ballooned, the resources being made available to those countries have plummeted.

Sensing an opportunity, the leaders of the G7 countries held strategic discussions at their recent meeting to take ‘concrete actions’ to help meet the tremendous infrastructure need in low and middle-income countries.

At their June meeting, they announced ‘Build Back a Better World’ (B3W) billed as a values-driven, high-standard, and transparent infrastructure partnership led by major democracies to help narrow the $40+ trillion infrastructure need in the developing world.

B3W enshrines an argument that has long been circulating amongst analysts and then governments: the world needs a better alternative to BRI. Although alternatives exist, they have struggled to deliver tangible results. But for its part, the US has gradually realised the importance of offering positive alternatives.

However, western liberal economies face challenges that command economies do not. Who pays for progress?

As CSIS notes, global demands for infrastructure cannot be met by public capital alone. During 2015-19, G7 countries provided nearly $113 billion in official development assistance for foreign infrastructure projects. That support is fundamentally different from most of China’s BRI lending, which comes with higher interest rates and does not adhere to the Paris Club principles that promote fair and transparent treatment of borrowers.

While remaining steady as China’s BRI has declined, the G7’s combined assistance is only a fraction of what the developing world needs. Developing Asia alone will require $26 trillion in infrastructure investment through 2030, according to the Asian Development Bank.

The private sector is where this untapped financial firepower resides. Pension funds, mutual funds, insurance companies, and sovereign wealth funds are all looking for reliable, long-term returns. Wealth and money managers now handle over $110 trillion, more than 16 times the US federal budget in 2020.

But only a small fraction of this vast amount is invested in infrastructure, and developing economies, in particular, have appeared too risky for many investors. According to World Bank data, during 2015-19, private sector investors in G7 countries put roughly $22 billion toward infrastructure projects in developing countries.

For example, if G7 countries realised the International Finance Corporation’s mobilisation target of 80%, current levels of assistance would unlock more than $200 billion over five years.

The challenge is that too often, especially in emerging markets, potential rewards are not commensurate with perceived risks. CSIS lists environmental, social, health, and safety risks; inflation, foreign exchange, and other macroeconomic risks; idiosyncratic decision-making, contract disputes, weak rule of law and other legal and political risks.

Neither should the complexity of projects be discounted: there is an assortment of construction and operational risks. As a result of all of these challenges, there is a shortage of ‘bankable’ projects that can promise enough upside. Unlocking greater pools of US private capital will require innovative ways, including multilateral or direct insurance products to adjust the current risk-reward calculus.

The US and its partners need to invest in a system for developing a sustainable pipeline of bankable projects, CSIS argues. Sharing information and improving coordination between public and private sector stakeholders, as the G20’s Global Infrastructure Hub was created to do, is necessary but not sufficient. Preparing projects will require putting some public money on the table. In developing countries, project preparation expenses often approach five to 10 percent of the total project cost.

B3W could add urgency to announcing pilot projects, expand to include more European partners and allow them to focus on different functional and geographic areas in line with their capabilities and interests.

However B3W needs to resonate with leaders in developing countries. Many will be eager to expand their options, and the B3W brand could carry prestige as a high-quality effort. But leaders will be cautious about trade-offs that B3W projects might present: more public scrutiny, higher up-front costs, and longer timelines for project delivery. Competing against China’s approach, which often promises speed and low up-front costs, will require fashioning effective incentives.

However faced with the apparent fragility of the global supply chain and the need to reshape the global energy industry, the case for sustainable, long term infrastructure investment has rarely been stronger.