Cooperate or Compete to Advance Sustainable Infrastructure? The G7's Alternative to the Belt and Road

One of the major outcomes of the recently concluded G7 talks was the rebranding and relaunch of an American-led investment plan to counter China’s Belt and Road Initiative (BRI). The Partnership for Global Infrastructure and Investment (PGII), as it is now known, was initially announced as the Build Back Better World initiative at the G7’s 2021 summit.

In its initial phase, which will span the next five years, PGII aims to inject USD 600 billion into infrastructure projects in middle and low-income countries. So far, the US has already made an announcement of USD 200 billion, while the EU has signaled a commitment of EUR 300 billion. Commitments from partner countries like Canada and the UK should follow in the coming months. Unlike some other development initiatives, G7 countries have indicated that the PGII is neither aid nor philanthropy but rather an investment program that will create wins for everyone.

According to a White House fact sheet, four priority areas have now been identified, namely: climate action, information and communication technology, gender equality and equity, and health systems and safety.

The chart below shows the objectives of the PGII are aligned with the UN sustainable development goals (SDGs), just as most parts of the BRI albeit at varying levels.

The sustainable infrastructure investment gap

Investment needs to be mobilized at scale and deployed efficiently to close the infrastructure gaps in low- and middle-income countries, as well as advancing the global SDGs. A December 2021 report of the Inter-American Development Bank showed that by 2030, about USD 2.2 trillion worth of investments will be needed in water, sanitation, energy, transportation, and telecommunications infrastructure to achieve the SGDs in Latin America and the Caribbean. In Africa, the African Development Bank has estimated that the continent needs an average of USD 1.4 trillion by 2030 to fulfill its climate action commitments, not counting other development areas. Taken globally, the IEA projects that reaching the SDGs and remaining on a net-zero path require annual investments of USD 2.6 trillion through 2030.

Although the estimates and their underlying assumptions vary, the central theme that has emerged from policy discussions is that infrastructure planning and investments should incorporate sustainability considerations. Environmental and social dimensions need to be factored in over the short and long term to ensure that the resulting projects create lasting benefits for people and the planet.

Failing to do so often leads to lock-in of undesirable consequences over decades due to the long-life span of such assets, costly remediation, or even stranding of assets and an exacerbation of the public debt burden. This is a major reason why China’s BRI has come under a lot of criticism. As the chart below indicates, more than 70% of BRI energy engagements between 2013 and 2021 involved fossil fuels, notably coal, the largest single contributor to global greenhouse gas warming.

Even though these projects have helped in expanding modern energy access in many of the host countries, they no doubt will set those nations back in terms of domestic air pollution and increased vulnerability to the transition risks of climate change. It has been reported that even after committing to the Paris Agreement in 2015, China proceeded to invest in at least six African countries with no existing coal-related infrastructure.

?China’s BRI, an infrastructure program in transition

There is however a paradox. China accounts for over 70% of all coal plants projects worldwide, but it is also the country responsible for the largest energy transition investment over the last decade, at least domestically. In 2021 alone, it was responsible for more than USD 200 billion in energy transition investment according to BNEF and the Business Council for Sustainable Energy. This contrast can be partly explained by China’s uptake of renewable energy thanks to technological advancements and falling costs, as well as its push to develop a positive image as a climate champion.

In response to criticisms of the emissions-intense nature of BRI investments and other harmful impacts, China launched the Belt and Road Initiative International Green Development Coalition after the second BRI forum in April 2019. International agencies such as WWF International, the World Resources Institute, and the International Institute for Sustainable Development work alongside Chinese counterparts across ten thematic areas, notably: improvement of environmental quality and green cities, green technology, innovation, and corporate social responsibility, etc.

A remarkable thing is that China has started taking concrete actions to make the BRI greener. Even before President Xi Jinping’s September 2021 announcement to make an end to new overseas coal investment, there were already signs of a lower appetite for coal plants. BRI renewable energy investments (including large hydro plants) exceeded investments in coal plants for the first time in 2020. By 2021 China had approved the cancelation of 12.8 GW (15 plants) of preapproved coal projects under the BRI, including a 350-MW coal-fired thermal power plant in Bangladesh. Back in March 2022, China’s National Development and Reform Commission released new guidelines to boost the greenness of the BRI. Among others, the guidelines call for an end to new coal, carbon capture upgrades, and energy conservation for existing coal facilities. An analysis conducted by CREA estimates that almost 37 GW (32 plants) of overseas Chinese-backed coal projects in the pre-construction phase may be potentially blocked by the new guidelines, while 30 GW (36 plants) of projects under construction may be reexamined based on the new guidelines.

?Compete or cooperate to advance sustainable infrastructure?

The geopolitical tussle for influence notwithstanding, in my view, the G7 will do well to follow a path of cooperation if advancing international sustainability standards in global infrastructure is an objective of this so-called alternative to the #BRI or the “Green” BRI, eventually. Sustainable infrastructure will often have global/transboundary spillover benefits (e.g., mitigating global warming) even though for the most part those benefits are localized because of the physical nature of hard infrastructure. Host countries should be encouraged and supported to adopt common sustainability thresholds that fit their contexts and simultaneously contribute to global goals.

Apart from the minimum environmental and social safeguards systems used by international development banks, frameworks such as the “Common Ground Taxonomy”?of the EU and China could be a model for a trilateral dialogue between recipients of infrastructure investments and countries seeking to invest. This approach will be well in the spirit of SDG 17, partnership for the goals.

Having established this, a “healthy competition” and talks of alternatives may then play out in terms of providing access to low-cost capital that allows low- and middle-income countries to achieve their sustainable aspirations without a debt overhang. On one hand, the G7’s PGII proposes limited public finance to maximize private capital inflows, while on the other China’s BRI is largely powered by state financing for mostly state-owned enterprises.

The G7 should thus focus on ways to support healthy project pipeline development, mechanisms to boost export credit guarantees, and implementation of reforms to address sovereign/country risks for financiers.

Another area the G7 should consider real competition is the efficiency of delivering on financial commitments. As opposed to G7 countries, notably the US, China has proven records of speed in mobilizing and disbursing financing to recipient countries. This will continue to be an important factor as the window for making crucial investments shrinks and lifelines become urgent.

Next Steps for the PGII

The United States is taking a whole-of-government approach to ensure harmonious coordination with the host of government departments and agencies that will be involved in the delivery of the PGII. A Special Presidential Coordinator for the PGII will be appointed to manage the whole-of-government strategy. The Special Presidential Coordinator will also be charged with expanding the PGII beyond the G7 to attract more resources, as well as engaging multilateral development banks to promote high-quality infrastructure investment in low- and middle-income countries.

Within the next 6 months, the Assistant to the President (of the United States) for National Security Affairs will submit a report with recommendations to the government on measures to boost the competitiveness of the United States in international infrastructure development and to improve cooperation on international infrastructure across relevant agencies.

In the EU, a similar Team EU Approach has been set up to coordinate efforts of EU development and financial institutions, such as the European Investment Bank. There is also a proposal to establish a European Export Credit Facility to boost the leverage of export credit arrangements of member states.

Projects like the Just Transition Partnership for retiring coal plants in South Africa have already received support from the PGII, while several other projects are in the pipeline. Observers will be closely watching to see to what extent the PGII will be a true alternative to the BRI for sustainable infrastructure in the developing world.

Note: Opinions expressed here are solely mine and are not intended to represent the positions of my past, current, or future employer(s).