In 2013, Chinese President Xi Jingping launched the Belt & Road Initiative (BRI), a plan to spread the country’s market reach around the world by delivering infrastructure for developing, and in some cases developed nations.
Few would have predicted the level of its success: stretching from Rome to Jakarta out from the starting point in China, the BRI swept across the globe, pushing China’s influence far and wide.
Eight years later, the G7 announced its plan to do the same, in a move that looks to use the economic crisis caused by the Covid-19 pandemic to meet China head on. Fronted by US President Joe Biden’s administration, Build Back Better World (B3W) promised to rally the world’s democracies to “deliver for our people, meet the world’s biggest challenges, and demonstrate our shared values”.
However, soon after the announcement, B3W appeared to be kicked into the long grass through a combination of the administration’s domestic struggles to pass its own infrastructure bill and the foreign policy focus on Afghanistan.
At the COP 26 summit in Glasgow, though, European Commission President Ursula von der Leyen breathed life back into the plan. At a joint meeting with Biden and UK Prime Minister Boris Johnson, she put the issue back on the map. As well as B3W, the leaders discussed the UK’s Clean Green initiative and Europe’s Global Gateway concept.
As von der Leyen acknowledged, these different ideas are “not only complementary, but they even reinforce each other”. The hope is that the parties can work together to create something tangible from the ideas - something that is a more unified approach to supporting infrastructure development on the global stage. Von der Leyen added that all three nations “need to work with like-minded states, both in the context of G7 and G20. And we have to work with the private sector.”
According to one advisor, that last comment from the European Commission president had “PPP written all over it”.
Using the private sector will be a key part of any future investment programme, given the impacts of Covid-19. Indeed, using infrastructure as the spur to boost the economy, as well as increasing soft power by supporting other nations (and potentially creating new opportunities for domestic firms in new overseas markets) is a well-trodden path. This does have its risks, though.
“In the past, those projects haven’t been selected very carefully, such as on the basis that they are sustainable and resilient,” says one senior multilateral figure. “During a crisis it’s just about starting quickly.”
It’s why B3W is being looked at differently. One of the key points emphasised in its launch is the role of values and high standards, with B3W offering a “positive vision” of transparent and sustainable development, with the financing to match.
“That’s the foundation for this B3W: ‘let’s not make that same mistake again’,” explains the multilateral source. “If we’re going to spend money, let’s make sure it’s Build Back Better - it’s sustainable, resilient and inclusive.”
They add that while these things may not be too important to the receiving countries when the need for infrastructure and investment is so large, such requirements are to those leading the programme.
“What’s interesting about the West’s response is that it focuses on areas that are perceived as criticisms of BRI; and that’s about standards and transparency,” agrees Michael Pearson, partner at law firm Clifford Chance.
“Previously there was criticism of BRI from certain parts of the Western World, but that was criticism without an alternative. There are now alternative programmes, but the question is whether they are viable or not and whether they are in direct competition with BRI or intended to be complementary.” The viability of the programme will ultimately rest on its deliverability. With over $40trn in investment eyed by B3W, the need to leverage private sector capital and expertise will be vital.
A private plan
B3W makes no secret of its plan for financing: an ideological battle against the command economy of China, Biden wants to unleash a “market-driven private sector, paired with high standards and transparency in public funding”, adding that the markets are “crucial for long-run development effectiveness and sustainability”.
According to Biden the current funding and financing approaches are “inadequate”, meaning there is a need to “augment the development finance tools” to make them more effective. “The only way they’re going to be able to get that is by using the public sector money effectively as the primer, to take the more challenging tranche of risk, and then letting the private sector banks and funds come in and lend the rest,” says Jeremy Brittenden, partner at Hogan Lovells.
“People may ask why taxpayers should have to take that risk. But if we want to deliver this infrastructure, someone needs to take some leadership.”
Inevitably in that case, the onus will fall on the public sector to take that risk, otherwise the private sector will simply find other markets to play in.
With the promise to supercharge and change the development finance toolkit, the future of PPPs looks set to be put centre stage. However, to unlock its potential, those first, market-opening risky projects will need to be tackled.
“PPPs are complex undertakings even for developed economies. However, in more challenging economies, we still see an opportunity to develop programmes tailored to countries’ specific PPP needs,” says another leading multilateral figure. “We have been very present for the demonstration effect that is needed for PPPs to proceed.”
Alongside the need to take on risk is setting up the right environment for the PPP industry to carry the baton afterwards. Without the right legal and regulatory set-up, private capital will avoid emerging markets and Biden’s vision of a free market proliferation will stutter.
“We want to see scale, and for us to see scale there has to be the right reforms - that is where we are putting a lot of effort so that countries develop the policies, laws, regulations, institutions, and capacity needed to develop strong pipelines of projects,” they said. “So, the enabling environment has to be strong to build experience and momentum in the PPP programme and help implement projects in a sustainable and systematic way.
“The main issue we see is the lack of projects and lack of capacity. The challenge is having bankable, ready-to-invest projects.”
This sentiment is one that is reflected by the financial community, where the so-called ‘wall of capital’ ready to be deployed has been discussed for so long it has almost become a fable. But if bankable projects can emerge, the timing couldn’t be better.
In the developed markets, the level of investment that’s going into projects remains a slow trickle. As more private equity, sovereign wealth, and pension funds saturate the safe haven of established infrastructure markets, seasoned veterans are beginning to look further afield.
“Attractive yields are available across emerging markets and active pipelines are being established,” says one international financier. “That’s the story of a lot of investors - we’re looking to go slightly further afield, you’re naturally taking core++, whether that’s sector or jurisdiction.”
“We follow the programmes’ developments with interest,” says an investor, “but it’s got to move from a good idea to a real programme. Whoever the investor is, you need to have a good idea of what the pipeline is before spending too much time on it.”
While the mood is positive from the outset, there will be numerous hurdles to overcome, the higher potential yields don’t come free, and the role of the enabling environment of PPPs will be crucial.
“It’s more risky,” says the investor. “You typically need hard currency, [plus] you need to ensure that governments are committed to entering into long-term PPP concessions.”
One of the key advantages brought by B3W and Global Gateway is the unified nature of a programme, which reduces the risk involved in making that judgement call as an investor. Rather than PPPs being the global whack-a-mole that it is today, a concerted, state-backed network of projects could help strengthen the investment case of projects around the world.
“If you start having a massive state sponsor involved you can see how the risk can be reduced, or more palatable, to an investment panel,” says Lawrence Slade, chief executive of the Global Infrastructure Investor Association. “It brings an element of transparency and international recognition to the deal. This won’t be something that’s just happening in a select country, it’s a regional project that is designed to improve living conditions for a whole society.
“If you have the weight of the USA or EU behind that then it provides that extra element; while not a physical de-risking, it’s part of an official programme, it’s recognised and so actually investors are less exposed.”
To deliver programmes of this scale will take both private and public sectors, to join together fully - and the foundation of any good collaboration is clarity.
“People don’t engage the financial community early enough and understand the specific requirements of a responsible investor,” Slade argues. “Speak to us early: the financial community will be happy to invest time if they see it as a process to open up a market. So let’s all work together to open the market up and then we can compete like merry hell to see who wins the PPPs - but let’s all work together to establish this.”