The G-7’s infrastructure investment plan competes with rival Belt and Road

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LONDON – At the G-7 summit last weekend in Cornwall, England, leaders agreed on a new infrastructure investment partnership with a focus on “clean and green growth” in developing countries – a plan advocated by the rich democracies group hopes to create an alternative to China’s Belt and Road initiative.

The communiqué of the heads of state and government states that the G7 countries will “change one step” their approach to infrastructure financing. Experts say the partnership’s success lies in mobilizing private funding and ensuring high standards, but criticized the announcement for lack of details.

Chris Humphrey, a research fellow at the Overseas Development Institute think tank, said “It really is a critical moment” when it comes to the infrastructure gap in developing countries, which is estimated to be in excess of $ 40 trillion.

In addition to the social and economic needs for infrastructure and jobs, Humphrey indicated that the infrastructure now being put in place will “hold” patterns of energy use for the next 50 years. “If the G7 initiative can help make some of these projects more sustainable, I believe it has many potential benefits for our ability to get our climate path back on a more sustainable path,” he told Nikkei Asia.

The G-7 will set up a task force by autumn to come up with practical suggestions. Chancellor Angela Merkel told reporters she hoped the G-7 could present “concrete projects” at its next summit in 2022.

One of the main elements of the initiative is to promote an integrated approach between the public and private sectors to mobilize private capital.

Matthew Goodman, Senior Vice President for Economics at the Center for Strategic and International Studies in Washington, estimates that the combined private capital of the G-7 is tens of trillion dollars in retirement and insurance money and is the key to success the initiative is success.

“They are looking for long-term assets, and infrastructure is basically a good asset class because it generates long-term returns,” he said. The problem is that infrastructure is a difficult undertaking, especially in developing countries that have additional uncertainties and challenges.

For this reason, it will be important to identify bankable projects and help build capacity so that developing countries can better negotiate contracts. “It’s one of the things that reassures the big bucks that governments are backing and makes these projects more viable and more constitutional,” he said.

Government pledges through multilateral development banks and the provision of government guarantees are some of the elements Goodman will look for in drawing up these plans.

ODI’s Humphreys believes multilateral banks and bilateral agencies will play an important role because “they can help pool these assets in ways that make them more attractive to institutional investors.”

Chinese President Xi Jinping and his wife Peng Liyuan are waiting for leaders to attend a welcome banquet for the Belt and Road Forum in the Great Hall of the People in Beijing on April 26, 2019.

Already armed with global offices and technical expertise, they could bring stakeholders together to develop financial instruments or mechanisms for channeling private money. With some reforms, project preparation funding and targeted direct investment by institutions would also have a catalytic effect, said Humphreys.

He indicated that the G-7 could learn from the innovative approaches of the China-led Asian Infrastructure Investment Bank in this area.

The US is particularly interested in designing the G-7 plan as an alternative to China’s “Belt and Road” initiative, which was presented by Chinese President Xi Jinping in 2013 and which now includes over 100 member countries. It is estimated that tens of billions of dollars have been invested in trade routes and infrastructure, but allegations of “debt trap” diplomacy have accompanied the program.

The G-7 initiative is described in the communique as having a “value vision” and “strong standards”, aspects that they advocate as the unique selling point of the plan.

Jack Barrie and Patrick Schroder of the UK think tank Chatham House said: “Obviously, transparency and governance of investments are hugely important and should become a differentiator showing how things can be done differently than the Belt and Road Initiative.” The couple emphasized that the initiative must also be demand-driven and geared towards the goals of sustainable development.

Their concern is that, depending on how the value-based approach is implemented, international development efforts could become polarized, depending on whether recipient countries are democratic or not.

Rajiv Biswas, chief Asia Pacific economist at IHS Markit, said the initiative must also set very high standards in procurement processes and debt sustainability metrics. “These high standards for infrastructure projects should help the global capital markets mobilize larger private capital flows towards ever higher ESG benchmarks,” said Biswas.

It is too early to say whether the G7-led initiative will be a viable and effective alternative to the Belt and Road. While the US would like to frame this as part of its strategic competition with China, the UK and others have avoided this characterization and are focusing on sustainability efforts.

Goodman believes it “has the potential to be an alternative”. Citing estimates showing the BRI is in decline, he said the market is opening as developing countries seek funding and investment for infrastructure that “is done in a way that works for them”.

Others are not that optimistic.

“The G-7’s infrastructure plan looks disappointing, with few details and no actual money other than vague promises to raise capital from the private sector,” said James Crabtree, executive director of the International Institute for Strategic Studies’ Asia office.

“The US and others in the G7 now have a duty to develop their ideas into something substantial quickly, with serious money behind it, including the quad nations in Asia. Otherwise, China’s BRI will remain a dominant global infrastructure . ” Players for the foreseeable future. “



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