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Calls for concessional financing grow as G7 rolls out infrastructure plan

As the G7 works to launch a new infrastructure strategy and compete with China’s multi-trillion dollar Belt and Road Initiative (BRI) in the developing world, experts suggest the plan is overly reliant on non-concessional financing.

During a summit held in Germany this week, G7 nations launched the Partnership for Global Infrastructure and Investment (PGII) initiative and pledged US$600bn in private and public funds over the next five years towards emerging market infrastructure projects.

The US and EU nations are the largest backers of the project, pledging US$200bn and US$316bn respectively in grants, federal funds and private investment.

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The programme signals a renewed attempt to boost western involvement in infrastructure projects across developing nations, after its predecessor the Build Back Better World (B3W) strategy, which was announced last June and carried the same aims, stalled.

Taking on China’s multi-trillion dollar BRI programme is a core part of the PGII, as it was with the B3W, experts say. There is also a focus on supporting specific types of projects and growing business for western companies and exporters. The programme will target four key sectors, namely health, clean energy, gender equality and digital connectivity.

“I want to be clear: This isn’t aid or charity; it’s an investment that will deliver returns for everyone, including the American people and the people of all our nations. It’ll boost all of our economies,” US President Joe Biden said in a speech on June 27.

A memo from the White House suggests the country’s export credit agency (ECA) will play a key role in the new programme.

According to a policy brief, the US secretary of commerce will consult the chair of the Export-Import Bank of the United States (US Exim) and other agency heads, who together will develop and implement a strategy to “boost competitiveness” and promote the use of America-made equipment and services in international projects as part of the programme.

US Exim, USAID and the DFC will also be involved in crafting a strategy of using “embassy deal teams” that can identify potential priority infrastructure projects for the PGII and refer promising opportunities to relevant agencies.

Speaking this week, US Exim’s chair Reta Jo Lewis said PGII will offer developing countries a “positive alternative to the kinds of infrastructure financing that sell debt traps, exploit workers, and leave recipient nations in worse conditions”.

ECAs in fellow G7 countries are likewise preparing to support the new strategy in the coming years.

A spokesperson for UK Export Finance (UKEF) tells GTR the agency provided billions towards critical infrastructure projects such as hospitals, clean transport and renewable energy last year, while noting “there is much more to do in these critical areas”.

 

Concessional finance need?

Despite these expressions of intent, industry figures argue G7 governments need to rethink their approach if they are to offer affordable infrastructure financing for sovereign borrowers with strained balance sheets.

China has pumped trillions of dollars into a vast swathe of infrastructure projects such as roads, railways and airports globally over the past decade. But there are signs Beijing is scaling back its commitments in regions such as Africa.

At the Forum on China-Africa Cooperation (Focac) in late November, the country unveiled an action plan that included around US$40bn of commitments in the form of trade finance, commercial investments and a share of China’s Special Drawing Rights. This included little in the way of concessional loans, Beijing’s primary tool for financing infrastructure.

Drawing on data from China Exim and China Development Bank, the Center for Strategic and International Studies notes in a report that investment has “plummeted” since a high of 2016, when infrastructure spending topped US$50bn.

In 2019, both infrastructure investment and overall spending dipped below US$10bn for the first time since BRI’s launch, it says.

As Beijing’s appetite ostensibly dwindles, estimates put the infrastructure funding gap in the developing world at over US$40tn.

“The G7 announcement is pure rhetoric, more spin than substance,” says Gabriel Buck, managing director of boutique export finance consultancy GKB Ventures.

Buck argues the private sector is unlikely to back infrastructure expansion in low-income countries in sectors such as health, given investors are “generally looking for hard currency generating projects and typically seek around 25% returns per annum for developing market risk projects”.

“The [PGII] strategy shows they are hoping developing nations will be the solution to stimulate growth in their own countries. The developing market needs aid, grants and long-term concessional or near concessional finance to make these projects affordable,” he says.

Experts say traditional ECA support is often too expensive for low-income countries with sizeable levels of debt. But there are growing calls for these agencies to strike partnerships with other government departments and make financing accessible.

In May, the UK published a new strategy for international development which made reference to a new programme, known as the British Support for Infrastructure Projects (BSIP), which the government says will facilitate concessional loans to help foreign countries access “high quality and affordable” infrastructure finance.

The BSIP programme is expected to become operational during 2023 and will be managed by the Foreign, Commonwealth and Development Office, a UKEF spokesperson tells GTR.

“It is anticipated that BSIP finance could potentially be blended with support from UKEF, however, the financing arrangements will depend on the needs of the particular countries seeking BSIP support,” they add.

James O’Brien, a partner at law firm Baker McKenzie and member of US Exim’s Sub-Saharan Advisory Committee, likewise touts the amplified potential of US Exim partnering with other government financing agencies.

“When Exim financing is matched together with other pieces of US government finance, they very much can compete with the likes of China. One of the key parts of Biden’s policy directs Exim to work with DFC to provide financing for the projects, which is in a much better position to provide concessional financing than Exim.”

“There is no rule against them working together, it is just they customarily have not in the past. I think what Biden is saying is these agencies need to look at ways they can cooperate and compete with financing from rival countries.”

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Published 23 November 2022