The recently launched Partnership for Global Infrastructure and Investment (PGII) – a G7 initiative to mobilize $600 billion in loans and grants for sustainable, high-quality infrastructure projects in developing and emerging economies – aims to provide much-needed investment to achieve development goals Globalism . G7 leaders make no secret of their secondary motivation: to restore some of the influence that China’s advanced democracies have given over a decade of infrastructure investment through the Belt and Road Initiative (BRI). The level of funding pledged by PGII shows a serious commitment to address the infrastructure needs of low- and middle-income countries, and is likely to be on par with the level of the Belt and Road Initiative..
PGII is distinguished not only in terms of the amount of investment undertaken, but also in terms of quality. At the launch of the PGII, G7 leaders repeatedly stated their goal of supporting “quality infrastructure” projects, i.e., economically viable projects with transparent disclosures and low environmental, social and governance (ESG) risks. The implicit – and sometimes explicit – characterization in this PGII characterization is in sharp contrast to the BRI projects. The G7 is betting that such investments will be more attractive to host country governments than China can offer. Some previous Belt and Road Initiative projects have gained international attention with environmental risks, labor abuses, corruption scandals, public protests, and unsustainable debt burdens in recipient countries. By offering high-quality and transparent investment opportunities, the G7 countries hope to build soft power in low- and middle-income countries.
There is a second reason why high-quality infrastructure is a key component of PGII: high-quality, low-risk ESG projects are needed to attract private investors, which are central to the PGII financing model. G7 governments are not in a position to compete with China’s Belt and Road Initiative through public spending. Due to the rapid expansion of ESG mutual funds, institutional investors in the private sector – such as pension and insurance funds – have hundreds of billions of dollars available that can be invested in sustainable, low-risk investments. However, these institutional investors have difficulty identifying “bankable” sustainable infrastructure projects with acceptable levels of risk in developing countries.
To attract private sector investment, the governments of the United States, Australia and Japan are creating a quality infrastructure certification initiative called the Blue Dot Network (BDN). The BDN certification aims to provide a globally recognized certification – similar to the ‘Good Housekeeping Seal of Approval’ – for infrastructure projects with low ESG risks, high debt transparency, and sustainable economic returns. The G-7 relies on this certification of high- and low-risk Environmental, Environmental and Social Security (ESG) to provide the assurance that private investors need to be attracted to PGII’s public-private partnerships.
It is not only governments that want to create global standards to attract private sector financing. A group of financial institutions from the public and private sectors joined forces to develop another initiative, FAST-Infra (Ffor aacceleration ssustainable Tredemption-underStructural), which shares the goal of creating a global sustainable infrastructure label to eliminate the risks of investing in private sector infrastructure. The FAST-Infra Sustainable Infrastructure Label and BDN certification standards can and should reinforce each other in seeking to mobilize more private sector investment for high-quality sustainable infrastructure investments in developing and emerging economies.
So, what is the chance that PGII – by its high-quality standards and private investors – will attract developing and emerging economies into Western partnerships at the expense of its alliances with China? In other words, can the PGII rebuild Western soft power by overcoming the Belt and Road Initiative? Improbable. There are several factors that reduce direct competition.
First, while the price pledged by the PGII is impressively large, there are no assurances that G7 governments will be able to meet their commitments over a five-year period, particularly given the current political volatility in most of the G7 nations. Moreover, these governments have no real control over whether the private sector will actually invest its share – which makes up the majority of PGII pledges – or whether it will choose sustainable projects. In addition, the high-quality attributes that make projects attractive also restrict the number and breadth of projects that can meet PGII requirements. Finding an adequate supply of bankable projects without compromising standards is likely to depend on G7 investments in technical assistance and capacity development – something that is far from delivered.
Finally, even if the PGII initiative is able to mobilize the entirety of the $600 billion that has been pledged, that amount is unlikely to deter or displace Chinese investment. The infrastructure gap in developing countries is huge, amounting to tens of trillions of dollars. There are a lot of needs and space for both. Most borrowing countries are keen to have multiple options. Thus, PGII vs. BRI is a false dichotomy.
Ironically, if successful, PGII could achieve something potentially more beneficial than what was initially intended by its competition with BRI: the race to the top in high-quality infrastructure investments. While the Western narrative claims that Belt and Road Initiative investments are of low quality and cause a debt burden for unsustainable countries, the truth is that China has already begun to improve the quantity and quality of its infrastructure lending three years ago. In 2019, China drastically reduced its overseas infrastructure investment, especially backtracking on high-risk projects. That year at the BRI International Forum, President Xi Jinping reiterated his commitment to the “Green Belt and Road Initiative”. The drivers for this change were manifold, including internal economic pressures, diminishing foreign exchange reserves, and pressure from negative international publicity. The bottom line is that China could not continue to guarantee the high-risk loans that were financially and politically costly.
China is still in the early stages of reimagining version 2.0 of the Belt and Road Initiative. The International Green Alliance for the Belt and Road Initiative – a quasi-public entity partnering with international development and environment organizations – has issued a series of infrastructure investment guidelines starting in December 2020 known as the Green Development Guidelines (GDG), including an Environmental Classification System (“Traffic Light System”). ‘) which codes projects as green (beneficial), yellow (acceptable), or red (unacceptable) based on project characteristics and mitigation measures. These GDG standards are significantly lower than the Western standards followed by BDN and FAST-Infra. Most importantly, GDG focuses solely on environmental impacts, leaving social and governance risks unaddressed. However, their ultimate goals are complementary and possibly compatible.
So far, the Green Belt and Road Initiative remains mostly a paperback concept, although the central government and many ministries are gradually incorporating voluntary guidance to Chinese lenders promoting infrastructure projects that reduce climate, biodiversity and pollution impacts. For China to credibly demonstrate its newfound commitment to international environmental standards, it will need to publish proactive information about which of its projects have sought GDG oversight and how they scored. Currently, there is no way to track the number of BRI projects seeking classification according to GDG, or the number of BRI projects judged as green, yellow or red. There are also no requirements in the Guidelines for an independent auditor to verify claims from BRI developers. Decision making by the Belt and Road Initiative remains opaque, and there are no real-time statistics available to measure the actual change in the investment portfolio. (Of course government statistics still need to be verified – perhaps by organizations that currently collect information on China-funded projects such as AIDDATA or Boston University’s Center for Global Development Policy.
If the G7 countries take serious action to meet their PGII commitments while focusing on high-quality infrastructure projects and low environmental, social and corporate governance risks, China may respond by amplifying and improving its newly developed standards, as outlined in the GDG. As Guo Hai, a scholar at the Institute of Public Policy at South China University of Technology, recently noted, “…China’s economy has a history of needing outside powers to make reforms. Biden’s new plan may not be a bad thing for China.” [Belt and Road Initiative] or its domestic market.” This would be a race to the top that could benefit all parties.