Developing countries in the Indo-Pacific are in desperate need of hard and soft infrastructure to support their growing markets and populations. Building critical infrastructure in the region will be one of the most effective ways to generate economic growth and employment and offset some of the financial disruption caused by Covid-19. Even before the pandemic descended, the U.S. recognized the importance of closing the infrastructure gap and partnered with Australia and Japan to address this challenge.
“Building critical infrastructure in the Indo-Pacific region will be one of the most effective ways to generate economic growth and employment and offset some of the financial disruption caused by Covid-19.”
In 2018, the U.S., Australia, and Japan established the Trilateral Partnership for Infrastructure Investment in the Indo-Pacific (the Trilateral Partnership). The Trilateral Partnership aims to deliver infrastructure to the Indo-Pacific in a manner that upholds international best practices, reinforces developing countries’ agency, and strengthens liberal-democratic processes. Yet, this initiative has been slow to start. The first and only project under the Trilateral Partnership to date is a $20 million undersea fiber optic cable connecting Palau with the Indo-Pacific that commenced in October 2020.
A key priority of the Trilateral Partnership has been to forge a steady stream of public-private infrastructure partnerships using industry capital to bolster government financing. To this end, in 2019, Washington, Canberra, and Tokyo announced a new infrastructure certification scheme for industry and partner governments called the Blue Dot Network (BDN). While primarily a certification body, BDN recognition could help open the door to $60 billion in loans or equity via the U.S. International Development Finance Corporation. However, specific mechanisms for how this can be achieved in practice are unclear.
Despite holding a Steering Committee meeting in January 2020, the three countries have yet to agree on Blue Dot standards for businesses to benchmark against. As such, there are currently no BDN-certified projects, and no public-private partnerships have taken shape. It is clear that the Trilateral Partnership and BDN have thus far failed to change businesses risk calculus toward taking up government incentives for infrastructure projects in developing countries. For now, activities remain confined to government-to-government agreements, greatly reducing the initiative’s impact.
Undoubtedly, convincing the private sector to invest in infrastructure development in a developing country, as opposed to seizing an opportunity in an advanced market, is a difficult sell. Typically, industry can be deterred by high perceived or actual risk; lack of reliable information about the investment environment; high scoping costs with no guaranteed return; and the absence of a project pipeline that prioritizes commercial viability over developmental necessity. Indicatively, these factors are amplified in less-developed Pacific Island countries compared to Southeast Asia, but every country has a unique investment environment.
In attempting to bring the public and private sectors together to deliver infrastructure, it is key to acknowledge that the goals of each side are not the same. On the public side, governments support infrastructure projects to bolster economic growth, improve foreign relationships, and increase influence. On the other hand, the private sector fundamentally seeks commercial objectives from projects—core among them, a profitable return on investment. Businesses are seeking ease of access to the foreign market, confidence in the data underpinning the investment opportunity, and an accurate risk profile of the project, all leading to increased profitability for shareholders.
Figure 1: Private and Public Sector Interests in Infrastructure Development
What is needed to bridge the public-private divide is a mechanism, at arms-length from government, that can more astutely engage businesses on their terms. For instance, the Trilateral Partnership could establish an independently operated Indo-Pacific infrastructure program, based within an existing multilateral development framework. This program would assist in negotiating and balancing private and public objectives and provide the brokerage service that is currently lacking.
“What is needed to bridge the public-private divide is a mechanism, at arms-length from government, that can more astutely engage businesses on their terms.”
The Indo-Pacific infrastructure program would be physically operated by finance experts with support from multilateral development bank officials, industry executives, and project managers with experience in the Southeast Asian and Pacific markets. Staffing the office in this manner, rather than with government officials, is a potential solution recommended by Larry Greenwood who argues for the establishment of an infrastructure task force within the World Bank or Asian Development Bank staffed by bankers and asset managers.
This type of initiative could provide the private sector with information on predicted return on investment; risk profiles; the type, amount, and conditions of government support available tailored to each project; and facilitate partnerships with local enterprise. Being separate from government, it could also independently assess infrastructure requirements and create a commercial-centric infrastructure project pipeline.
“The U.S., Australia, and Japan can capitalize on this unique moment in the Indo-Pacific’s development, but they need to prioritize addressing the remaining barriers to public-private infrastructure partnerships.”
In addition, to prevent the BDN from falling into obscurity, some basic benchmarks must be set. Once the standards have been made clear to business, a BDN stamp of approval could include additional incentives such as fixed tariff legislation. If BDN certification came with the offer of a long-term fixed agreement from the recipient nation, this would alleviate some of the sovereign risk to businesses.
There are many ways the Trilateral Partnership and its initiatives could be reinvigorated, but it will require a new, independent body to provide much-needed brokerage and government agencies need to provide more specification around existing programming. The small and medium economies of Southeast Asia and the Pacific are looking to build critical infrastructure now to meet the demands of their economic and population growth—they will not wait. The U.S., Australia, and Japan can capitalize on this unique moment in the Indo-Pacific’s development, but they need to prioritize addressing the remaining barriers to public-private infrastructure partnerships.
Hayley Channer is the Senior Policy Fellow with the Perth USAsia Centre and a 2021 Fulbright Scholar. She previously worked for the Australian Department of Defence and advised the Minister for Defence.