Road to nowhere: why the G7 answer to China's BRI is likely to run off the rails
The US-led version of China's $4.2 trillion Belt and Road Initiative (BRI) was announced at the G7 in Cornwall in June. Called Build Back Better World (B3W) the G7 strategic counter to China's BRI aims to aims to catalyse funding for infrastructure in the developing world from the private sector.
However, experts believe B3W will likely face the same challenges as the BRI and are sceptical about its ability to attract a lot of private capital.
"There’s no reason to think B3W will be more successful in attracting private investment than BRI,” Jeremy Lawson, chief economist and head of the Aberdeen Standard Investments Research Institute, told AsianInvestor.
“I can’t see institutional investors including it as a vital part of their regional strategies,” he said.
According to a statement by the White House, B3W is an affirmative plan to help tackle the $40 trillion-plus infrastructure gap that the US government estimates is faced by low- and middle-income economies.
Its target areas will be climate, health security, digital technology, and gender equality. Like the BRI, B3W seeks to mobilise private sector capital towards greenfield infrastructure development projects that are deemed risky by institutional investors.
“Even when it is up and running, my guess is that we're going to be talking in the tens of billions rather than the tens of trillions, not enough to move the dial,” Lawson said.
Questions remain to be answered around B3W's terms and mechanisms for attracting private capital.
It is also unclear how it will differ from – and whether it will complement or compete with -- lending programmes and initiatives of multilateral development organisations such as the International Finance Corporation (IFC) and World Bank.
In terms of which locations B3W will target, Lawson believes they are likely to be those that have been recipients, or are potential recipients, of BRI – often in strategically important areas.
“Southeast Asia is a good candidate,” he said. “As well as having important infrastructure needs, many countries in the region have become increasingly correlated with the Chinese business cycle through trade and investment channels,” he said.
“And [they are important] particularly with the US sitting outside the Trans-Pacific Partnership.”
Paul Sandhu, head multi-asset quant solutions for Asia Pacific at BNP Paribas Asset Management, highlights cash burn as one of the inherent risks.
“This will be no small effort, and the amount of funds allocated will need to be meaningful to make it a success,” he said. However, he sees B3W opportunities for investors in energy transition and in companies that have adapted to post-pandemic styles of working.
BRI CRITICISMS
According to Refinitiv, BRI, and projects with Chinese involvement, amount to $4.2 trillion as of September 2020.
The top sectors are transportation, power and water, real estate, and oil and gas. Russia, Saudi Arabia, Egypt and Indonesia are top destinations for BRI capital, and notable projects include the Jakarta-Bandung high-speed rail project and the Power of Siberia gas pipeline from the Russian Arctic to China.
But its success in bringing in institutional investor capital dollars has been limited, with most funding coming from Chinese state-owned banks and enterprises such as the Asian Infrastructure Investment Bank (AIIB) and Silk Road Fund.
Another criticism of BRI is that China is now the world’s largest creditor to developing countries, according to the Institute of International Finance.
Set up in direct answer to some of the criticisms of BRI – notably opacity, debt-trapping and the sometimes questionable feasibility of projects – B3W has been keen to stress its “values-driven” principles and “high standards and transparency”.
It also suggests certain pre-conditions, such as democratic values, will be imposed on recipient nations.
"We’ve seen the Chinese government demonstrate a lack of transparency, poor environmental and labour standards, and a course of approach that’s left many countries worse off. But until now, we haven’t offered a positive alternative [to the BRI] that reflects our values, our standards, and our way of doing business,” said a senior US official.
Lawson, however, does not think institutional investors will be reassured by the US’s rhetoric.
"BRI and B3W are both partly political initiatives so I don't really think that the struggles that China has had to crowd in private investment from the host country [will be unique to] to China as such."
Besides an awareness that B3W is politically motivated, Markus Schomer, managing director and chief economist at PineBridge Investments, believes investors will be concerned with the lack of financial commitment backing the initiative.
He also believes executing B3W successfully will depend on know-how and technology, some of which may itself be dependent on China.
“If the G7 initiative helps mobilise the financing to execute projects in a way that they use local labour and local firms, B3W may end up to be a successful initiative. Yet, I believe China will continue to expand its own interests and infrastructure investments,” he said.