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Infrastructure

Developing Asia spoiled for infrastructure choice

East Asia Forum

Author: Kevin Chen, NUS

Since its launch at the Group of Seven (G7) summit in June 2022, the Partnership for Global Infrastructure and Investment (PGII) has been met with both interest and scepticism. Infrastructure development has been a perennial bane for developing countries, whose ability to face challenges ranging from urbanisation to climate change is constrained by limited resources.

A worker stands at the construction site of East Coast Rail Link (ECRL), a Chinese-invested railway project part of Beijing's Belt and Road Initiative (BRI), in Bentong, Malaysia, 13 January, 2022 (Photo: Reuters/Hasnoor Hussain).

China’s Belt and Road Initiative (BRI) is estimated to have invested US$4 trillion in infrastructure projects worldwide from 2013–2020. Its funding was a welcome development — albeit one that was tinged by concerns over China’s rising influence. Western governments share these concerns and have since offered alternatives to the BRI. The PGII is arguably the most detailed of these initiatives, but there are many questions about its viability.

It is unclear whether plans to mobilise private capital to fund infrastructure will succeed. A history of unfulfilled efforts also means that Western infrastructure initiatives have a credibility problem. Yet the West still intends to compete with China on infrastructure development. Developing countries should harness this competition by using rival offers to demand higher standards from partners to meet their needs.

The PGII offers an interesting value proposition for developing economies. Compared to the BRI’s general focus on hard infrastructure, the PGII’s priority pillars include climate security, digital connectivity, gender equality and health security. These are areas in which Western companies may hold a comparative advantage over their Chinese counterparts, particularly in providing clean energy solutions. They also align better with development needs like those articulated in ASEAN’s call for better health systems, inclusive digital transformation and sustainable energy as part of the COVID-19 Comprehensive Recovery Framework in 2020.

The G7’s pledge to provide US$600 billion in infrastructure funding by mobilising private capital is notable as well. Insurance and pension funds are a relatively untapped source of funding for infrastructure projects and could help developing countries to close the infrastructure gap. The benefits of a US$40 million investment in Southeast Asian power networks, for example, would be magnified if the project could attain its goal of mobilising US$2 billion in private capital.

Concerns about the PGII’s viability are numerous. Its emphasis on gender equality may struggle to find roots in developing Asia. And despite the United States having a long history of mobilising private capital under the Overseas Private Investment Corporation, the risks associated with infrastructure projects have traditionally made them very unpopular with private investors.

Yet the PGII’s credibility problem is arguably more serious. This is not so much the result of geopolitics as it is the poor track record of non-Chinese infrastructure initiatives. With the exception of Japan’s Partnership for Quality Infrastructure, initiatives such as the European Union Connectivity Strategy for Europe and Asia and the EU–India Connectivity Partnership seem to have stagnated or been unceremoniously repackaged under new titles.

The difference in the visibility of the BRI and Western initiatives is also striking. China has dozens of noteworthy projects across Southeast Asia, from high-speed railways to hydropower plants, while most casual observers would be hard-pressed to name more than one Western project in the region.

There is no consensus on whether the PGII will succeed or fail. But despite unsurprisingly low expectations about the initiative, developing Asia should keep an eye on the PGII. The presence of two viable financing models will allow recipient countries to bargain for better deals.

Developing countries are said to prefer the looser requirements of BRI projects, but their governments have shown independent judgement in choosing non-Chinese infrastructure partners or renegotiating existing agreements. Vietnam and Indonesia have engaged Japan and China on separate railway projects, while leaders from the Philippines and Malaysia have pushed to renegotiate loan agreements with Beijing.

Meanwhile, Western governments are likely to ramp up criticism of the BRI regardless of what happens with the PGII, particularly over governance scandals and the rising indebtedness of countries such as Laos. China denies these claims but remains sensitive about its international image, taking steps to address some of its overseas investment practices as early as 2017.

During a BRI conference in 2019, Chinese President Xi Jinping pledged to rein in corruption and boost transparency around the BRI. He then publicly announced in September 2021 that China would ‘not build new coal-fired power projects abroad’. Loud complaints from developing economies about governance problems could compel Beijing to hasten its reform efforts, some of which remain unfulfilled.

Developing countries have a golden opportunity to take advantage of the rivalry between Western and non-Western initiatives. Even if they intend on rejecting Western proposals, recipient governments can use them as leverage to hold China to its reform promises. It will take deft leadership to avoid the temptation of the cheapest offer — but persevering could bring developing Asia one step closer to bridging its infrastructure gap in a sustainable fashion.

Kevin Chen is researcher at the Asia Competitiveness Institute, Lee Kuan Yew School of Public Policy, National University of Singapore.

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