Though U.S. administrations have continuously railed against China’s Belt and Road Initiative (BRI), they have been very slow in offering a clear alternative to the quick contracts and massive financing offered by China to infrastructure projects globally. Recently, however, a proliferation of initiatives and partnerships have been introduced that aim to bring together partners and allies, leverage their respective tools and strengths, and convince the private sector to mobilize their own capital into developing economies. Though laudable, the United States—and the Biden administration in particular—will have to ensure a politically transition-proof strategy that is concerted, committed, focused, and continuous in order to provide the trillions of dollars in infrastructure funding needed in just the Indo-Pacific alone, as well as to future-proof these economies from debt sustainability, climate change, and labor and industry transformations.
Inducive economic tools and strategic investments are now key elements in engaging in economic security in the Indo-Pacific. The Indo-Pacific Economic Framework (IPEF), the G7’s Partnership for Global Infrastructure and Investment (PGI), the Quad, and the Trilateral Infrastructure Partnership (TIP), to name just a few, all feature efforts to target collaborative infrastructure financing, manifest tangible U.S. commitment to the region, and compete effectively with the BRI.
But the United States is contending with an actor that does not play by the rules. China can offer projects and products at attractive prices and speeds, directing its state-owned companies and banks to strategic markets. Though the BRI has had some initial successes in the race for infrastructure, the United States need not mimic the way China does business. Yet the United States does need to reform its own operations. The BRI’s ballooning debt and unhappy customers reveal why that approach is problematic, and those issues are pushing China to change how it invests. In contending with the challenge offered by China in infrastructure project investments globally, the United States must maintain standards and act with transparency, especially with taxpayer (or anyone’s) dollars.
Sustaining the continuity and efficacy of the infrastructure initiatives that the Biden administration has begun requires a change in mindset and the deployment of the tapestry of tools available in a coordinated and cohesive way.
Infrastructure requires patient capital and investing. The lifecycle of an infrastructure project can take years and does not follow the neat timelines of summits and high-level meetings that crave big announcements. Feasibility studies, permitting, due diligence, securing financing, and then getting the actual project started and completed all take a lot of time and money. There are ways to speed up the process, including ensuring transparency; lowering costs around undertaking environmental and social impact assessments in developing countries; and ensuring the host country has clear rules and regulations. Some of that work is already being done—working with IPEF signatories on tax and rule-of-law transparency and encouraging the Blue Dot Network that promotes high-quality standards in infrastructure—and the United States should double down on these efforts.
This leads to another aspect in need of attention: trade and market access. Though the pendulum on trade in the United States has swung against it, this—especially market access—is what Asian countries want, particularly IPEF signatories. Trade with market access can be provided to those that meet IPEF standards and thus encourage domestic regulatory and governance reforms. This is a more inducive carrot than providing capacity building for tax reform. IPEF’s Latin American counterpart, the Americas Partnership for Economic Prosperity (APEP), mirrors much of IPEF. Though it also does not offer market access, the United States has bilateral free trade agreements (FTAs) with 8 of the 11 APEP countries, making economic partnerships more holistic and durable. Although former president Trump has threatened to get rid of IPEF and could do the same with APEP, the FTAs will remain in place, thereby guaranteeing ongoing economic engagement. These agreements shape the framework for addressing developments in critical sectors, such as decarbonization and digital trade, but in order to be politically transition-proof, they will have to include more tangible carrots and durability.
Another obstacle to the U.S. initiatives involves debt sustainability, particularly as the majority of BRI recipient countries are in debt distress. Indebted countries do not want to take on hundreds of millions of dollars in additional debt financing, even with concessional lending or generous repayment terms. In order to address these debt sustainability issues and critical infrastructure needs, the United States will need to work with the Paris Club through various multilateral debt treatment initiatives and via blended financing opportunities.
Concerns about debt and debt sustainability also influence how the Export-Import Bank of the United States (EXIM) is able to build out its pipeline and be more competitive in the telecommunications, renewable energy, and semiconductor arenas. EXIM so far has come up short in maximizing its China and Transformational Exports Program (CTEP), partly hampered by statutory requirements to (1) ensure that loans will have a “reasonable assurance of repayment” and (2) maintain a 2 percent statutory default cap. For EXIM to be more competitive, take on greater risks, and not self-select out of deals, the default cap should be raised on critical industries, or at least on those projects that fall under the CTEP umbrella.
Cofinancing or collaborative financing is nice on paper but nearly impossible in practice. No host government or project lead wants to sign multiterm contracts with governments and multilateral financing agencies. There is also competition for a small number of viable projects. Overcoming this concern involves aligning due diligence practices and deploying single joint-term sheets to cut down on paperwork and bureaucracy. The United States and its partners should also find where they best fit along the project lifecycle. As noted above, infrastructure projects have multiple phases and angles, each of which could play to the different strengths of each player.
Mobilizing private sector capital has been, and will continue to be, a challenge. The U.S. government needs to more deeply engage with the private sector to determine what it would take for private actors to invest in strategic markets, instead of focusing solely on implementing policy it thinks will move that capital. Private sector financing already is being carried out in the energy transition space, most notably in Indonesia’s Just Energy Transition Partnership (JETP), with potential JETP programs extending to Vietnam and the Philippines. The partnership intends to mobilize an initial $20 billion in public and private financing over a three-to-five-year period using a mix of grants, concessional loans, market-rate loans, guarantees, and private investments. The JETP includes $10 billion in public sector pledges and a $126 million commitment from the U.S. International Development Finance Corporation to an Indonesian geothermal company. The signatories of the JETP also committed to help mobilize and facilitate $10 billion in private investments from an initial set of private financial institutions, including some of the world’s largest private banks. Since the launch, a total of approximately $281.6 million has been allocated as grants or technical assistance across roughly 40 programs, managed across five financial institutions and implemented by eight different executing agencies.
Even if a project, an initiative, or even a policy is a strategic imperative for the U.S. government, the same may not be true for the private sector. Some markets will still be too risky and the return on investment too unlikely for the private sector, which looks to ensure its investments are repaid and profitable. Working with the private sector, either locally or multinationally, on their needs in undertaking these projects is a critical step in shaping the correct tools to pursue infrastructure investments globally.
Pieces of the foundation for addressing critical infrastructure needs are there, but it will take sustained focus, leadership, and telling a good story to get it done.
Erin Murphy is deputy director and a senior fellow for emerging Asia economics with the Chair on India and Emerging Asia Economics at the Center for Strategic and International Studies in Washington, D.C.