Anyone familiar with the shorthand ‘PPP’ knows it as Public Private Partnerships. But there is another combination of Ps that is coming to define Western governments’ investment strategies in the Indo-Pacific: Patient, Patriotic, Private.
Facing tight fiscal circumstances and tough choices about where to allocate overseas development assistance, policymakers in Canberra, Washington and Tokyo are getting creative with project financing and delivery.
Announced on the sidelines of the ASEAN Summit in Bangkok, the joint US-Australia-Japan Blue Dot Network sets out to meet critical infrastructure needs in Southeast Asia and the Pacific with a multi-stakeholder, rules-based approach. With this and other bilateral measures, governments are looking to ‘patient’ private capital – often from superannuation or pension funds with vast reserves of assets under management – to deploy in infrastructure projects that are as much about nation-building as they are about cultivating good-will and influence with neighbours in the region. In many instances, this is seen as topping up shrinking aid budgets.
Underlying all of this, of course, is the fact that the South Pacific, which Australia has long considered to be its sphere of influence, is contested terrain. As Dr Lavina Lee points out in her United States Studies Centre report, this fact was not lost on the authors of Australia’s 2017 Foreign Policy White Paper. China’s investment in Southeast Asian infrastructure projects as part of its Belt and Road Initiative (BRI) stands at US $255 billion, a figure bested only by Japan at US $367 billion. Moreover, it has quadrupled its total trade with Pacific Island nations since 2007, dwarfing that of Australia and the US by a large margin. Although characterised as “payday loan diplomacy” by US Ambassador to Australia AB Culvahouse, there is no denying how attractive a prospect this investment is to small countries with few alternatives and genuine needs.
But is it realistic to expect the private sector to come to the rescue?
When urging private actors to step up, governments should temper their expectations. Growing awareness by governments of the deep pools of capital available have not been matched by clear-sightedness about the real limits to how these can be deployed. Reticence from institutional investors often comes back to concerns about sovereign risk, corruption, unenforceable contracts and ease of access to talent in emerging markets in the Indo-Pacific. And as private fund managers are at pains to point out, their fiduciary duty to members takes precedence over advancing the geopolitical aims of the country from which they hail.
Unless Western governments are prepared to do more to smooth the way as guarantor on projects in riskier regional jurisdictions, profit preservation will trump patriotism, especially if business cannot rely on certainty or a rules-based environment. Moreover, nearly half of all APAC countries have non-investment grade credit ratings that, while stable, present a risk to private investors that is hard to justify without a higher expected return on investment.
At the same time, Australia’s strategy of trying to out-spend China in the realm of BRI is unsustainable. A case in point was the Turnbull government’s decision to funding two-thirds of the cost of the Solomon Islands and PNG undersea telecommunications cables, a $130 million outlay that left DFAT scrambling for funds to execute the decision. That the Solomon Islands has become the latest Pacific nation to sign up to BRI – just one month after ending diplomatic ties with Taiwan – shows that Australia cannot hope to out-compete China in the influence stakes with dollars and pipelines alone.
Nor can the West compete on standards. The widely held industry perspective is that China is prepared to undercut Western investors in areas like governance, debt sustainability and corruption standards, making it harder to compete for contracts. While the solution should not involve lowering the bar, there is scope to try to simplify project standards, especially on environmental issues.
Like Australia, the United States does not always play to its strengths. More recently, when the US has engaged in the region, it has done so with predominantly military tools, rather than using its comparative advantage against strategic competitors like China in areas such as cultural soft power, innovation, education, job creation and skill-building programs, diplomatic statecraft and multilateral economic tools.
A focus on financing can only go so far. By playing to their other strengths, governments like Australia’s and the United States’ can mitigate risk for companies that otherwise might invest in much-needed projects in strategically important countries.
Beyond calling for public-private partnerships to invest in regional infrastructure, a constructive role for governments would involve combining high-level commercial advocacy with efforts to educate neighbouring investment attraction agencies about how to become a lower-risk bet for private investors. Doing so would go a long way towards bridging the gap between commercial and strategic priorities in the Indo-Pacific.
Freya Zemek is the International Trade and Economy Fellow for Young Australians in International Affairs.