LONDON, Sept 25 (Reuters Breakingviews) – Western countries have an opportunity to develop reliable infrastructure plans for developing countries. China’s $1 trillion Belt and Road Initiative is drowning in bad debt and may be on the verge of losing Italy, the only super-wealthy democracy participating. The People’s Republic also has its own financial problems, and it will be difficult to funnel more money into overseas investments.
The $600 billion plan launched by seven wealthy democracies announced some splashy plans, including railways and green energy. The Trans-African Corridor connects Zambia and Angola via the Democratic Republic of the Congo. and partnerships to help Indonesia, Vietnam, South Africa and Senegal transition from fossil fuels to renewable electricity.
These projects have a common geopolitical logic. Advanced democracies, led by the United States, want to improve relations with developing countries to prevent them from falling into China’s clutches as the world splits into competing camps.
Meanwhile, a green power project known as the Just Energy Transition Partnership could help fight climate change. If developing countries can avoid the carbon-intensive growth path followed by developed countries and China, the outlook for the planet will improve.
There may also be economic rationale for the G7 plan. Corridors can connect poor countries with new customers, allowing countries to use their resources more efficiently. And investment in infrastructure should help support growth.
US President Joe Biden is discussing the so-called “Partnership for Global Infrastructure and Investment (PGII)” of Western countries. At this month’s G20 summit in New Delhi, he announced a proposed corridor linking India, the Middle East and Europe, and promised more corridors to come.
But PGII still has a lot to prove. It has promised to raise $600 billion by the end of 2027, but the government has so far provided little cash. We also haven’t brought in much private capital yet. It is also unclear how poor countries will avoid being squeezed by additional debt and rampant corruption. Both flaws plague China’s Belt and Road.
where is the money?
There is one reason why the flow of funds is slow. PGII is considered superior to BRI by advocating high environmental, social and governance standards. So it took time to build a pipeline of high-quality projects, said Hung Tran, a fellow at the Atlantic Council think tank.
Investment could accelerate rapidly now that several mega-projects are planned. But advanced democracies are reluctant to open their wallets at a time when their finances are tight. Instead, governments want to encourage the private sector to provide large amounts of cash, for example by guaranteeing a portion of investors’ capital or by working with developing countries to improve local investment conditions. I believe.
If successful, this approach would further differentiate PGII from BRI, which receives most of its funding from Chinese state-owned banks. When the private sector takes the lead on projects, it not only reduces the need for public funding; Investors will also be keen to see how the numbers add up.
Private investment may even avoid the sovereign debt trap. After all, companies and investors often support private projects over state-run projects. Some of the cash also comes in the form of stock. Even debt financing does not need to be on the host government’s balance sheet if the project deteriorates.
The problem is that funding is proving difficult. Take Indonesia’s JETP, for example, which will mobilize $20 billion to support the transition from coal-fired power generation to renewable energy. The investment plan, which was due to be announced in August, has been postponed as Western countries negotiate over funding, with half of the money going to the private sector. And despite talk of how PGII is more transparent than Belt and Road, G7 countries have remained tight-lipped about how much money each country is putting into various projects.
To be fair, the G7 is stepping up efforts to involve the private sector. Last week, Treasury Secretary Janet Yellen and Secretary of State Antony Blinken hosted an investor forum in New York. The European Union has established a Business Advisory Group. These efforts are paralleling efforts to encourage the World Bank to collaborate more with the private sector.
turn rhetoric into reality
But despite the grand rhetoric about a new economic corridor between India and Europe, the only clear agreement consists of a 326-word memorandum of understanding. Saudi Arabia has apparently pledged $20 billion, although there is no hard information on how much it will cost, who will provide the funds, or how financiers will get a return on their investment.
Also, the project does not seem to involve much infrastructure construction in developing countries. India and Jordan will benefit from close links with large markets, but the bulk of the investment will likely go to the United Arab Emirates and Saudi Arabia, neither of which are poor countries.
Both partners have promised to develop an action plan within two months, but they may yet provide good answers to these questions. But until then, doubts about its feasibility will remain.
Meanwhile, China has not given up on the Belt and Road Initiative, which is flying the flag. President Xi Jinping plans to gather representatives from 110 countries, including Russian President Vladimir Putin, at the Belt and Road Forum in Beijing next month. China is also emphasizing themes such as green development and digital connectivity, marking a shift from its previous focus on coal-fired power plants.
It is good for developing countries to have two competing infrastructure initiatives competing for attention. But if Western countries want to match China in foreign investment in poor countries, they need to turn rhetoric into reality.
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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
Editing: Peter Thal Larsen, Katrina Hamlin
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