Operationalizing the Indo-Pacific framework

Introduction


Be it China’s Belt and Road Initiative (BRI) or the Build Back Better World (B3W) initiative, geopolitical contestations are increasingly getting manifested through overseas assistance and infrastructure financing. The recently held Quad Tokyo summit too emphasized cooperation on infrastructure to ensure growth and development in the Indo-Pacific region and has accordingly pledged to invest USD 50 billion to boost regional connectivity. The threat of the Chinese century and unipolar Asia is prompting powers within Asia such as Japan, and India to collaborate with the US, and Australia to provide public goods like infrastructure in the Indo-Pacific region. As the world is gradually recovering from the COVID-19-induced shock, there seems a convergence of both geopolitical as well as the geoeconomics imperative to have a resilient, dependable, and sustainably financed critical infrastructure(s) in the post-Covid world. The reverberations of the same are being felt alike across the political and business circles. There is a vacuum as far as dependable critical infrastructure is concerned, making it a priority concern for the Indo-Pacific regional framework which is at the crossroads of politics and economics.


Getting the ‘Quad’ wheels to turn


Quad Joint Leaders’ Joint Statement too emphasized the need for the development of the inclusive and resilient Indo-Pacific framework in collaboration with like-minded partners. For the Indo-Pacific to have a serious heft, it needs to be complemented by a series of developmental and economic initiatives aimed at integrating the region. The Quad countries have demonstrated their willingness to collaborate on providing quality infrastructure in the region. In this regard, they have also set up a quad coordination group on infrastructure. This was launched as a part of the G7’s Build Back Better World (B3W) announcement. Quad infrastructure partnerships aim to collaborate with one another for delivering infrastructure by focusing on “digital connectivity, climate, health, health security, and gender equality infrastructure”. Notable initiatives like the Blue Dot Network initiative aimed at providing a certification framework for enabling countries to identify and pursue infrastructure investments that maximize the positive socio, economic, and environmental externality are already underway. The emphasis on “quality infrastructure” by the Quad countries is a veiled contrast to BRI often associated with unsustainable financing and debt trap. It is pertinent to note that Quad partnerships and collaborations have been careful in not limiting it to just military partnerships but developing it as an economic framework, something which the categorization/criticism of Quad as an ‘Asian NATO’ fails to capture.


Quality infrastructure and connectivity form the core of meaningful operationalization of any regional integration framework, and, to this effect, Quad countries have taken stride by establishing or strengthening the mandate of their overseas infrastructure finance wing. For instance, the US, in 2018, launched the International Development Finance Cooperation (DFC) worth USD 60 bn as a part of the Build Act, aimed at assisting US overseas infrastructure projects. DFC has already pledged investments worth USD 200 million ranging across 10 projects in Africa, Asia, and Latin America. n the other hand, Japan has launched the ‘Expanded Partnership for Quality Infrastructure’ aimed at investing USD 110 billion over the next five years towards quality infrastructure development in Asia. Australia too has injected AUD 1 billion to its infrastructure financing agency ‘Export Finance Australia’ for supporting overseas infrastructure projects in the pacific. Additionally, it has set up Australia Infrastructure Financing Facility (AIFFP) aimed at financing infra projects through loans and grants ranging up to AUD 3billion and AUD 5billion respectively. Similarly, the Government of India engages in overseas infrastructure financing through its EXIM (Export-Import Bank) by extending line of credits (LOCs) that enables the recipient countries to strengthen their physical and social infrastructure. As of 2021, India has extended LOCs worth USD 30.5 billion to 65 countries. In its extension of the line of credit, India prioritizes its immediate neighbourhood. Here, it is worth noting that regional connectivity in S.Asia is hampered by India’s domestic infrastructure deficiency as well, and investing in it has a positive spillover for the broader region. In this regard, India has established National Infrastructure Investment Fund (NIIF) to raise financial resources for funding domestic infrastructure projects. It is important to note that although India’s contribution to overseas assistance is less than 1%, it is a substantial contribution compared to high-income Quad countries like Australia (0.22%).




Need to leverage the private sector


The prioritization of infrastructure by the Quad grouping in their summits is a welcome step and makes both geopolitical and geoeconomic sense. As per the estimates of the Asian Development Bank (ADB), the infrastructure needs in the Asia-Pacific (read Indo-Pacific) region is slated to be around 26 trillion USD i.e. 1.7 trillion USD annually, a significant requirement compared to the current per annum investment of 881 billion USD. Thereby, making infra financing a ripe zone for geopolitical contestations in the region. Given the quantum of investment, there is a need to actively engage the private sector for the realization of the infrastructure push. In this regard, Quad countries have initiated frameworks to rope in private capital. For instance, the US Chamber of commerce in collaboration with its India and Japan chapter has launched the trilateral forum aimed at engaging the private sector for infrastructure projects. Similarly in 2018, the US, Australia, and Japan launched the trilateral partnership for infrastructure investment in the Indo-Pacific. Apart from delivering quality infrastructure reflective of international best practices, a major objective of these forums is to bring in private partnerships for these infrastructural projects. Notwithstanding the aforementioned initiatives, Quad countries' infrastructure outreach is still in the catching-up stage compared to the Belt and Road Initiative. Quad countries' success in terms of delivering large-scale infrastructural projects vis-a-vis BRI has been largely limited. In fact, it hasn’t been able to galvanize the private sector in a manner that was anticipated. This could be attributed to the inability of the Quad grouping/ frameworks to address business risks that overseas infrastructure financing entails for the private sector. Contrary to the government whose end result is tilted more towards political outcomes such as influence/goodwill, the private sector’s calculus is tilted towards the return on investment that could be derived from financing a particular project. As per the Participation in Infrastructure (PPI) report 2021 , private participation in infrastructure financing is uneven and regions like South Asia, the Middle East and North Africa (MENA), and Sub-Saharan Africa have witnessed a decline in PPI compared to other regions like East Asia and the Pacific, Europe and Central Asia (ECA), Latin America and the Caribbean.



Source: PPI, 2021.


The report further notes that notwithstanding the signs of recovery in private commitments to the infrastructure visible in its increase in 2021 vis-a-vis 2020, it remained low compared to the average commitment of the last five years. Investment Commitments in Infrastructure Projects with Private Participation in Low- and Middle-Income Countries, 2012-2021 is given below (Table 2).



Source: PPI, 2021.


Factors like an inept regulatory framework of the recipient country, unreliability of the projected risk profile of the project, and sovereign risk- a situation where the government of the recipient country unilaterally changes the terms of the contract etc; adversely affect the firm's interest without much recourse, thereby, deterring private participation in overseas infrastructure financing. Therefore, the majority of private-sector capital doesn’t get invested in the low-income economies that have an urgent need for infrastructural investment.


Recommendations


Effective operationalization of the Indo-Pacific framework requires the private sector to work in sync with the Government initiative. Hitherto, that has been a far cry. To fine-tune the same, Quad countries should address the risk associated with overseas infrastructure financing by eliminating information asymmetry. It is suggested to establish an entity/platform that provides services like risk profiling of the project, probable range of return on investment, expected support from the government, a primer on the regulatory framework of the recipient countries, and credible local organizations for possible collaborations. Blue Dot Network (BDN) launched in 2019, aimed at certifying quality projects in accordance with the international standards could be used for this purpose. This would enable the private sector to assess the viability of these projects in an objective manner. However, to this date BDN hasn’t certified a single project, therefore it is imperative to operationalize it at the earliest.

Quad countries can establish a joint advisory council with members from the government and private sector esp. from trade and industry associations. This body could perform functions like providing technical inputs regarding the identification of any infrastructure project, preparatory survey to assess the viability of the project, criteria for selection of local partners etc.


With the overall official development assistance of Quad countries, including that of high-income countries like the US, Japan, and Australia remaining quite low (around 0.2% of Gross National Income) compared to China; they could jointly think of establishing an Indo-Pacific infrastructure bank along the lines of AIIB or establishing a branch/wing in existing bodies like the World Bank for financing greenfield infrastructure projects in the low-income countries at a sustainable interest rate.

Lastly, the frequent usage of coercive tools of statecraft like sanctions by the US adds to the complexity for the private sector and impedes their participation as well as the regional connectivity initiatives of partner countries. Chabahar port in Iran is the case in point. Thus, the US needs to be cognizant of the interests of partners while implementing sanctions.


As the race for providing infrastructure heats up, countries in the Indo-Pacific would certainly want a quality, sustainable, and affordable infrastructure financing alternative, so as to resist excess dependency on China. This diversification strategy was quite evident in the recently announced Indo-Pacific economic framework, where 11 out of the 13 founding members (except India and the US) are also part of the China-led economic grouping Regional Comprehensive Economic Partnership (RCEP). In fact, there is a growing appreciation of the fact that the world today is far more economically interconnected and ideologically fluid, underlining the importance of the economic co-optation of member states for the successful operationalization of any geopolitical framework, and for that leveraging the private sector, given its capital, expertise, and efficiency becomes crucial.


Paras Ratna is a PhD researcher at the National University of Singapore.

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