Western rival to Belt and Road has much to prove

LONDON, Sept 25 (Reuters Breakingviews) – Western countries have a window of opportunity to come up with a credible infrastructure plan for the developing world. China’s $1 trillion Belt and Road Initiative is drowning in bad debts and may be about to lose Italy, the only big rich democracy which is a member. The People’s Republic has its own financial problems too, meaning it will struggle to pour more money into overseas investments.

The $600 billion plan launched by the Group of Seven wealthy democracies has announced some splashy schemes involving railways and green energy: an economic “corridor” linking India to Europe via the Arabian peninsula; a trans-African corridor connecting Zambia to Angola via the Democratic Republic of Congo; and partnerships to help Indonesia, Vietnam, South Africa and Senegal make the transition from fossil fuels to renewable power.

These projects have a common geopolitical logic. The advanced democracies, led by the United States, want to improve relationships with developing countries to prevent them from falling into China’s arms as the world increasingly splits into competing camps.

Meanwhile, the green power projects – known as Just Energy Transition Partnerships – could help the battle against climate change. If developing countries avoid the carbon-intensive path to growth taken by the developed world and China, the outlook for the planet will be better.

The G7 scheme could have an economic rationale too. Corridors can connect poorer countries with new customers, allowing them to exploit their resources more efficiently. And investing in infrastructure should help underpin growth.

U.S. President Joe Biden has been talking up the West’s so-called Partnership for Global Infrastructure and Investment (PGII). He unveiled a proposed corridor linking India, the Middle East and Europe at this month’s Group of Twenty summit in New Delhi – and pledged there would be more corridors to come.

Yet PGII still has much to prove. It has promised to marshall $600 billion by the end of 2027, but governments have so far provided little hard cash. Nor have they yet pulled in much private capital. It’s also unclear how poor countries will avoid being crushed by extra debt or plagued with corruption. Both defects have plagued China’s BRI.

WHERE’S THE MONEY?

There’s one good reason the money has been slow to flow. PGII is supposed to be better than the BRI by insisting on high environmental, social and governance standards. It has therefore taken time to build up a pipeline of quality projects, says Hung Tran, a fellow at the Atlantic Council think tank.

Now that some mega-projects have been lined up, investment could pick up rapidly. But advanced democracies are reluctant to open their wallets at a time when public finances are stretched. Instead, governments hope to incentivise the private sector to provide a lot of the cash – for example by guaranteeing a part of investors’ capital, and by working with developing countries to improve local conditions for investment.

If successful, this approach would further distinguish PGII from the BRI, which has sourced most of its funding from Chinese state-controlled banks. If the private sector takes the lead on projects, it won’t just reduce the need for public money. Investors will also be keen to make sure the numbers add up.

Private investment could even avoid sovereign debt traps. After all, companies and investors will often back private rather than state-run projects. Some of the cash will also be in the form of equity. Even debt funding need not appear on the balance sheets of host governments if projects turn sour.

The snag is that it is proving hard to nail down the financing. Take the Indonesian JETP, which is supposed to mobilise $20 billion to help the country switch from coal-fired power to renewable energy. An investment plan, due to be published in August, has been delayed as Western countries haggle over funding, half of which is earmarked for the private sector. And for all the talk about how the PGII would be more transparent than the BRI, the G7 countries are being coy about how much each nation is putting behind the various projects.

To be fair, the G7 is stepping up efforts to involve the private sector. Last week U.S. Treasury Secretary Janet Yellen and Secretary of State Antony Blinken hosted an investor forum in New York. The European Union has created a business advisory group. These initiatives are running in parallel with efforts to get the World Bank to cooperate more with the private sector.

TURNING RHETORIC INTO REALITY

Yet for all the grand rhetoric about the new economic corridor between India and Europe, the only clear agreement consists of a 326-word memorandum of understanding. There is no hard information about what it will cost, who will provide the funds or how financiers will earn a return on their investment – though Saudi Arabia has apparently committed $20 billion.

The project also doesn’t seem to involve building much infrastructure in developing countries. Although India and Jordan will benefit from closer connections to large markets, most of the investment will probably go into the United Arab Emirates and Saudi Arabia, neither of which are poor nations.

The partners, which have promised to develop an action plan within two months, may yet provide good answers to these questions. But until then, there will be doubts about its viability.

Meanwhile, though the BRI is flagging, China isn’t giving up on it. President Xi Jinping will next month gather representatives of 110 nations, including Russian President Vladimir Putin, for a Belt and Road forum in Beijing. China is also emphasising topics such as green development and digital connectivity, marking a shift from the earlier focus on coal-fired power plants.

For developing countries, it is good to have two rival infrastructure initiatives competing for their attention. But if the West wants to rival China on overseas investment in poorer countries, it needs to turn rhetoric into reality.

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