Policy influencers and diplomats will have to find a way to market private investments in an appealing manner for all stakeholders involved.
Academics, analysts and politicians have long regarded the 21st century as the advent of an age dominated by the Asian continent. Envisaging the bounties to be reaped from its demographic dividend, economists have forecasted that Asian economies will be the source of more than half of the world’s GDP by 2050. The same economists caution, however, that this Asian century is not preordained and that there are a number of pitfalls that must be avoided to achieve the sustainable growth required to propel the continent to a new age of prosperity. Chief among the concerns is the lack of viable infrastructure across most of Asia. The Asian Development Bank estimates that funding of $1.5 trillion annually will be needed to meet infrastructure needs across developing parts of Asia, to meet growth estimates.
China, as it becomes a prominent geopolitical actor, has attempted to lead the charge to bridge this infrastructure funding gap. Not only has it spearheaded ambitious transnational projects such as the Belt and Road Initiative and the China Pakistan Economic Corridor, it has also expanded its reach to other regions. In 2015 alone, China accounted for $21 billion of financing flows for infrastructure projects in Africa — more than the United States, Europe and all international financial institutions combined.
This apparent generosity, however, has caused concern for a number of international and regional powers. Fearing the growing geopolitical influence wielded by the People’s Republic through its deft use of economic diplomacy, Australia, India, Japan, and the United States have attempted to create an informal grouping — the Indo-Pacific Alliance — to counter China’s increasing influence.
In their seeming haste to establish a counteracting power bloc, the leaders of the Indo-Pacific alliance seem to have overlooked the crucial point that has catalysed China’s success. The geopolitics of Asia currently, and certainly moving into the future, are predicated upon geo-economic heft. In order to act as a regional and international counterweight to the PRC, the Indo-Pacific alliance will have to increase its economic influence on the Asian continent. The Quad is at a disadvantage here — they do not have abundant sums of public sector money to spend as is the case, seemingly, with China. They can, however, attempt to leverage the sizeable amounts of private capital that is currently being managed by institutional investors within their nations.
The business case for infrastructure projects on the surface is solid. Institutional investors need long term, low-risk returns such as those generated from infrastructure projects. Yet, only 3% of the private capital managed by institutional investors is currently invested in infrastructure. There are a number of ancillary issues that deter asset managers from investing in large scale projects such as railways, roads and ports. These issues will need to be addressed by leaders within the Indo-Pacific in order to direct financing flows towards infrastructure projects in the developing parts of Asia that China is exerting it’s economic influence on. The first objection that institutional investors tend to have with infrastructure investments, especially in the developing world, is the propensity for governments to adhere to public private partnerships. While some level of government involvement is always needed for infrastructure projects in order to gain appropriate clearances and address issues such eminent domain, the aughts has proved that PPP’s are an inefficient financing vehicle. Private investments with appropriate public sector buy in can be more efficient in most cases than PPP’s. To find a way to overcome this obstacle, policy influencers and diplomats will have to find a way to market private investments in an appealing manner for all stakeholders involved. For the public sector, this can be marketed as a low-risk proposal as they will not have to commit public funds to infrastructure projects and are free to divert them towards other areas of need within their economies. The private sector, however, will need a more tangible benefit than the ethereal claim of increased efficiency.
Policy makers can attempt to incentivise institutional investors by dealing with two other major deterrents. The first thing policy makers can do is create a liquid market for the equity that a sponsor invests into a project. The infrastructure sector is largely illiquid — that is to say that the equity stake in a port in Goa cannot be easily bought or sold, without significant due diligence which can take anywhere from a month to a year. This is, of course, anathema to institutional investors — these funds manage money or provide life insurance for hundreds of thousands of people and like to have the ability to access significant portion of their funds at short notice. To address this, policy makers should encourage the use of a promising financing option such as infrastructure investment trusts (InvITs), that has done well in countries such as India, but has not yet been taken up by the mainstream financial community. InvITs, which were discussed at length during the Raisina 2018 roundtable India’s Infrastructure Challenges, would allay the concerns felt by institutional investors in the Indo-Pacific region and allow for private investment to flow at scale, providing alternatives to nations wary of China’s offers.
Additionally, Indo-Pacific policy makers should also consider capacity building. While the term has been used ad nauseam to describe weak governance or structural economic issues in the developing world, with regards to infrastructure it becomes a simple equation. To paraphrase some of Mr. Sujoy Bose’s (CEO of the National Infrastructure Investment Fund) remarks during the Raisina 2018 panel Capital Convergence — the problem that international investors have is finding enough counterparties that can absorb the large amounts of capital and actually allocate that capital in projects that meet the right criterion. If the Quad wishes to counteract China’s economic expansion in Asia, it must find a way to expand the number of counterparties in developing nations that can absorb large amounts of capital and disperse them in the right manner.
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Hosuk Lee-Makiyama Director European Centre for International Political Economy
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