China and the Group of Seven countries took aim at each other over ports, railways, roads and bridges last week. Meeting at Schloss Elmau in the Bavarian Alps, the G-7 leaders announced the Partnership for Global Infrastructure and Investment, with US$600 billion of commitments to fund infrastructure projects in the developing world.
U.S. Secretary of State Antony Blinken lauded the PGII as a “co-ordinated, high-standard and transparent approach” to building vital infrastructure. China immediately hit back by accusing the scheme of being driven by “geopolitical calculations” and an attempt to “smear and slander the Belt and Road Initiative.”
While China and the West engage in this sharp exchange of views, developing countries stand to benefit if a more competitive market for global infrastructure investment does actually emerge.
The gap between what developing countries need to spend on infrastructure and what they are spending is a decades-old tale of scarcity amid abundance. Estimates vary, but the World Bank reckons about US$2.6 trillion of investment is required each year until 2030 to achieve the Sustainable Development Goals and net-zero emissions by 2050 (although it also points out that the value of emerging markets projects available for investment today is only some US$1.2 trillion).
Delivering that amount of investment shouldn’t be an insurmountable task in a world with some US$100 trillion of professionally-managed assets and where the world’s 20 biggest banks hold assets of more than US$57 trillion. But the fact is that this money doesn’t make it to developing countries’ infrastructure in sufficient amounts because these projects are often considered too risky.
The Belt and Road Initiative has spurred the G-7 into action because it has succeeded where the West has too often failed: by actually mobilising huge volumes of funds for these projects. In 2020, RWR Advisory estimated that Chinese financial institutions’ total lending under the scheme since 2013 had been US$461 billion. That would make the BRI a huge source of global infrastructure investment.
Yet no single country or initiative can plug the world’s infrastructure gap. For all its scale, ambition and undoubted success in deploying capital, the BRI may not even be the biggest infrastructure investor in Asia. According to Fitch, there are some US$490 billion of Japanese-backed projects under construction or being planned in Asia, compared with about US$390 billion for China.
Next best thing
In an ideal world, this wouldn’t be a competition. Major economies would act collaboratively. They would pool their resources and expertise and use a common set of standards to deliver capital where it is needed. Since we don’t live in an ideal world, though, that kind of multilateralism is unlikely to happen any time soon. Competition is the next best thing.
A competitive dynamic can influence both sides positively. In principle, G-7 efforts to fund international infrastructure should encourage China to ensure that the projects it finances are financially sustainable.
Other developing countries do not want to experience the debt crises faced by Sri Lanka, Pakistan and now Laos, although more will sadly be engulfed as U.S. dollar liquidity becomes tighter. The fact that all three countries were significant recipients of Chinese lending doesn’t necessarily make BRI-related loans the cause of their problems, but it does makes it easier for critics to argue that they are.
The BRI should also continue to motivate the G-7. While the initiative’s lending volumes reportedly slowed last year, it continues to get cash out of the door. That is clearly a key consideration in developing countries themselves, and one that challenges the PGII’s backers to match their rhetoric about high standards and transparency with the delivery of cash to projects. While transparency matters, trying to enforce G-7 standards in developing country infrastructure projects seems counter-productive. We do not live in a perfect world.
If it fails to recognise this, the West risks giving the appearance that it is all talk and no action. China did not fail to point out that the PGII is already a rehash of the Build Back Better World Initiative announced at the previous G-7. “[T]he international community wants to see real money and projects that actually benefit people,” said Foreign Ministry spokesperson Zhao Lijian.
Quite so. But the BRI and PGII alike will have to grapple with the eternal problem of how to “crowd in” more private capital in order to make that kind of impact. The state-directed funds available from China and the G-7 are obviously massive, but perhaps not the US$2.6 trillion a year needed.
Attracting that private capital means making infrastructure projects “bankable” to a broad range of global lenders and investors. This in turn requires that they are commercially viable and that outside investors have strong legal protections under the terms of financing arrangements.
It will also make it critical that projects align with the climate goals of the Paris Agreement. Green finance may be going through a rough patch in 2022 – along with everything else – but that is not going to change the biggest global asset managers’ and banks’ plans to decarbonise their portfolios by mid-century.
Competition should help global infrastructure investment negotiate these dynamics better.
It should help to balance out potentially competing priorities, such as speed and delivery against robust standards; or a faster energy transition against a more just one.
It empowers recipient countries at a time when funding conditions are weak, but the need for climate-resilient infrastructure has never been so urgent. And it creates an incentive for China and the G-7 to find effective ways to involve private capital in infrastructure, which is the only way to close the infrastructure gap.
Most of the time, great power rivalries are rightly an acute cause of concern for other countries. Provided that today’s geopolitical tensions don’t overheat, though, the arms race for ports, bridges and railways has the potential to do a lot of good in an imperfect world.