Future Considerations for the Partnership on Global Infrastructure and Investment
This week, the G7 met in the Bavarian Alps at the Schloss Elmau Castle to discuss a wide variety of issues including Ukraine reconstruction, global economic recovery, climate and sustainability, bolstering democracy, and infrastructure investments. In an effort to address the infrastructure gap in the developing world, President Biden announced that the United States will mobilize $200 billion of investment in global infrastructure projects under its new strategy, the Partnership for Global Infrastructure and Investment (PGII). The overall investment goal from the G7 countries and the private sector will be $600 billion over the next five years. While the explicit goal of PGII is not to counter China’s Belt and Road Initiative (BRI), PGII does seek to provide an alternative to China’s estimated $1 trillion in hard infrastructure investment around the world in the last decade.
PGII is the repackaged version of the Build Back Better World (B3W) initiative that was announced at last year’s G7 summit. At first glance, PGII seems to be a scaling back of ambitions as B3W’s stated goal was to leverage $40 trillion in infrastructure investment by 2035. A lot has, however, changed in the last year—the war in Ukraine, higher energy prices, and overall global inflation will undoubtedly affect PGII’s priorities going forward. PGII’s four priority areas for investment (climate and energy security, digital connectivity, health systems and health security, and gender equality and equity) are essentially the same as B3W’s “pillars.” The clear differences are the inclusion of “energy security,” “health security,” and the change from digital technology to digital connectivity. The same principles that characterized B3W’s approach—values-driven, high standards, transparency, and private sector investment—also hold true for PGII’s approach.
As the CSIS Project on Prosperity and Development wrote in May 2022, one of the main concerns with B3W was that it was not clear whether hard infrastructure projects would be part of the investment portfolio. The brief recommended that the Biden administration consider doubling or tripling the number of infrastructure projects it invests in due to the clear demand from the developing world. It is promising to see the clearer commitment to hard infrastructure projects explicitly mentioned in the PGII announcement. A number of projects have already been announced as part of the PGII launch, including “U.S. companies taking the lead on a solar power project in Angola, a vaccine manufacturing facility in Senegal, a modular reactor in Romania, and a 1,000-mile submarine telecommunications cable that will connect Singapore to France through Egypt and the Horn of Africa.” These are good initial project examples, but if the United States and its G7 partners want to truly offer an alternative to BRI, they need to continue to emphasize hard infrastructure.
At the center of PGII is a different approach to financing infrastructure projects: using limited official finance to catalyze greater volumes of private capital. This stands in contrast to BRI, which provides financing largely via state-to-state channels creating unsustainable debt levels. There are three main barriers to private investment in infrastructure projects in developing countries and regions: (1) developing the project pipeline, (2) sovereign-level country risk, and (3) financial risks associated with projects. These three are not separate and influence each other. PGII should take steps to identify these at a country and project level and deploy U.S. government resources to mitigate them.
It is often stated that there is no shortage of capital but rather a shortage of bankable projects for investors to finance—this is true to an extent, but it remains somewhat untested. Infrastructure projects require pre-planning analysis before the investment stage to mitigate potential challenges around environmental, social, and governance concerns. The U.S. government should prioritize the provision of technical assistance to governments and other entities that would enable successful project preparation. Under Power Africa and other initiatives, such as the U.S. Trade and Development Agency (TDA), have provided significant support to do just that. Building on that success would help to develop a pipeline of bankable projects that PGII could then support through financing.
Perceptions of sovereign risk inhibit private investment by both internationally based investors and locally based financial institutions. Addressing this will require support for key regulatory and institutional reforms that impact the business and investment climate. Power Africa has been successful in power purchase agreements and pushing for better regulatory conditions for electrical utilities on a specific country level, e.g. reducing electricity costs via subsidies. These efforts have made Power Africa target countries more attractive for investors in the energy and electricity sectors. U.S. government agencies led by USAID and the Millennium Challenge Corporation (MCC) should provide additional support to improve the overall investment climate of more risky countries. USAID will play an important role in working with local partners, government ministries, and the private sector to promote better enabling environments that make it easier for foreign and local investors to invest.
In terms of mitigating financial risk, the U.S. government has significant financial instruments, including concessional finance, innovative financial tools, and guarantees, that it can use to help further mitigate financial risk associated with infrastructure projects in developing countries. These instruments can be used to make potential projects more attractive to more risk-averse investors. The approach of PGII is a gamble: it is premised on the idea that official finance can mitigate enough risk that private capital will feel more comfortable investing in identified projects. To date, this notion remains more promise than reality.
Recently, some experts have questioned whether the United States should even try to offer an alternative to BRI, arguing that the U.S. government got out of the infrastructure business years ago and there are better mechanisms (i.e., the multilateral development banks) to support infrastructure development. While there is some truth to this, it ignores the significant tools and instruments the U.S. government retains to support investment in infrastructure. Yes, it will require clear coordination amongst disparate agencies and it will require that the administration and Congress commit financial resources to support PGII.
It is worth remembering that something similar happened recently with the Power Africa initiative during the Obama administration. There is strong bipartisan support in Congress to counter China, and the Biden administration should take advantage of this moment. Communication and cooperation not only within the U.S. government but with other G7 partners and the private sector will be critical to the success of PGII. Proper and continued engagement with the private sector will theoretically lead to better PGII projects and greater capital to make progress on its ambitious priority areas. To that end, PGII will require a comprehensive, multi-stakeholder approach to not only provide developing countries with quality and resilient infrastructure, but to ensure that China is the alternative, not the default.
Conor M. Savoy is a senior fellow with the Project on Prosperity and Development at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Shannon McKeown is a research assistant with the CSIS Project on Prosperity and Development.
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