Indo-Pacific developing economies are diverse, requiring a variety of infrastructure financing strategies. At the subregional level, South and Southeast Asia are home to many relatively large and dynamic emerging economies, whereas the Pacific is home to many of the world’s smallest and most fragile economies. Whereas infrastructure development in emerging Asian economies is very much about supporting economic growth and the global public benefits of decarbonisation, in the Pacific it is more about providing basic services and reducing vulnerability. Whereas private investors can be expected to play a meaningful infrastructure financing role in emerging Asia, this is unlikely in the Pacific where adaptation investments are critical but generally of little interest to private investors. Private investor interest in the Pacific more generally is limited, given the region’s structural impediments of remoteness, tiny markets, and vulnerability.
There is also considerable variation in the infrastructure financing capabilities of Australia, the EU, and other like-minded partners, despite these governments adhering to broadly similar infrastructure and development finance-related standards and principles.
Australia is a far smaller player, though it has been enhancing its infrastructure financing capabilities in important ways.
As a bloc, the EU is the world’s largest provider of official development assistance (ODA), collectively providing about €70 billion in ODA in 2021, or 43% of total global ODA. Collectively, “Team Europe” is also a major global infrastructure financier, with considerable and long-established capabilities through institutions such as the European Investment Bank and numerous bilateral development finance institutions wielding a wide range of financing instruments including grants, loans, guarantees, equity investment, and other modalities. The recently launched EU Global Gateway initiative looks to use these Team Europe capabilities to deliver a targeted €300 billion in mobilised infrastructure investment between 2021 and 2027 in the digital, climate, energy, and transport sectors as well as investments in health, education, and research systems.
Australia is a far smaller player, though it has been enhancing its infrastructure financing capabilities in important ways. Australia’s total ODA was just under US$3.5 billion in 2021, making it the thirteenth-largest bilateral aid donor in the OECD. Australia’s development efforts are focused on its immediate region in Southeast Asia and the Pacific Islands, especially the latter in recent years. In 2019, Australia broadened the infrastructure financing mandate of its export credit agency, Export Finance Australia (EFA), and provided it with AU$1 billion in additional callable capital, with its total capital base reaching AU$1.8 billion as of June 2020.
In 2021, EFA was empowered to make targeted equity investments, in addition to debt financing and guarantees.
Australia has also established a AU$4 billion infrastructure financing facility for the Pacific Islands and Timor-Leste, mostly consisting of bilateral loans.
Other like-minded donor governments have also expanded their infrastructure financing efforts. In 2016, Japan launched its Expanded Partnership for Quality Infrastructure, targeting US$200 billion in investments. In late 2021, the United Kingdom launched its Clean Green Initiative, targeting £3 billion in climate financing, as well as aiming for £8 billion a year in broader mobilised investment by 2025.
Under the Partnership for Global Infrastructure and Investment, the United States aims to mobilise US$200 billion by 2027 in investment targeted at climate change, energy security, and digital technology as well as gender equity and health security. In 2018, the United States also transformed its Overseas Private Investment Corporation into a new US International Development Finance Corporation with modernised capabilities and a doubling of its total portfolio funding ceiling to US$60 billion.
The EU, United Kingdom and United States have also each recently released Indo-Pacific strategies suggesting some intended pivot towards the region.
These initiatives share several common elements. First, there is an emphasis on “high” standards, especially with regard to transparency, economic viability, and environmental and social safeguards. Second, there is a strong focus on mobilising private sector investment to deliver the scale of financing required for both economic development and geostrategic purposes. New public resources to be deployed are unclear and in any case modest at most. Third, the Indo-Pacific is a key area of policy focus. Australia and Japan already concentrate their development finance on the region. The EU, United Kingdom and United States have also each recently released Indo-Pacific strategies suggesting some intended pivot towards the region.
These like-minded partners are also increasingly looking to better coordinate their bilateral efforts. At the strategic level, the G7 has formed the Partnership for Global Infrastructure and Investment. Australia and the EU have stated their desire to improve the complementarity and integration of their infrastructure financing endeavours. The EU and United States have made similar statements.
The EU and Japan have agreed a Sustainable Connectivity and Quality Infrastructure Partnership.
At a more project-focused level, Australia, Japan, and the United States have formed a trilateral partnership aimed at financing joint infrastructure projects in the Indo-Pacific.
Australia and the United Kingdom have formed a similar bilateral arrangement.
To identify practical recommendations for Australia, the EU, and other like-minded partners, it is useful to review several basic facts about infrastructure development finance in the Indo-Pacific. What exactly is the role of these various infrastructure development partners in the Indo-Pacific? And what is the track record in the Indo-Pacific in mobilising private infrastructure investment as a way of delivering the scale of investment both targeted and required?
Figure 2a shows the role of major Indo-Pacific bilateral infrastructure finance providers, including the EU, over the five years preceding the Covid-19 pandemic. Japan is far and away the leading provider of infrastructure development finance among OECD donors, providing more than 60% of all infrastructure development finance to the region from this group.
Less well appreciated is the significant role of Europe. Team Europe is collectively the second-largest infrastructure financier in the region among OECD donors.
Figure 2a: OECD infrastructure development finance in the Indo-Pacific (Annual average 2015–2019)
Constant 2020 USD billions
Source: Author’s calculations, OECD Creditor Reporting System, and Lowy Institute Pacific Aid Map
Even as individual financiers, Germany, France, and the EU institutions each provide far more infrastructure development finance in the region than do Australia, the United States, and the United Kingdom combined. Notably, these patterns generally hold across the three Indo-Pacific subregions, with the exception of Australia’s outsized role in the Pacific (Figure 2b).
Figure 2b: OECD infrastructure development finance by Indo-Pacific sub- regions (Annual average 2015–2019)
Constant 2020 USD billions
Source: Author’s calculations, OECD Creditor Reporting System, and Lowy Institute Pacific Aid Map
In terms of catalysing private investment, OECD governments have recently begun reporting estimates of the amounts mobilised by their activities through so-called “blended finance”, whereby public financing instruments are used to leverage-in private financing. Data limitations mean we can only observe the total amount mobilised by OECD bilateral donors as a group for Indo-Pacific infrastructure. Nonetheless, the picture is clear — mobilised private infrastructure financing has to date played a minor role in the Indo-Pacific (Figure 3a). On average during the five years preceding the Covid-19 pandemic, only about US$700 million a year of private infrastructure finance was mobilised by all OECD governments combined. Moreover, with the exception of India, the observed trend in mobilised amounts in the Indo-Pacific is no more promising. This is especially so in the Pacific, where mobilisation and private infrastructure investment more broadly play a particularly limited role due to the region’s difficult economic geography.
It is not for want of trying that private finance has played a minor role in financing infrastructure in developing economies. Hopes of translating “billions to trillions” by using public money to leverage-in far greater amounts of private financing have generally come nowhere close to delivering on their scale of ambition.
One problem is that the degree of leverage hoped for has always been unrealistic. Rather than multiples of ten or more, the amount of private infrastructure financing leveraged per dollar of public financing has generally been in the range of 0.8–1.8, and even this likely overestimates the true degree of additionality involved, since some of the private investment “leveraged” might have occurred anyway, even without blended finance support.
Figure 3a: Private infrastructure finance mobilised in Indo-Pacific by OECD donors
Constant 2020 USD billions
Source: Author’s calculations, OECD Creditor Reporting System
One might hope for a higher leverage ratio in the Indo-Pacific given the presence of many relatively large and more dynamic emerging economies. However, the reality appears similarly limited. The World Bank tracks private participation in infrastructure (PPI) investment in developing economies worldwide. Based on the PPI data, for bilateral blended finance in the Indo-Pacific by OECD members, a basic leverage calculation (i.e., private financing per dollar of bilateral financial support) indicates a ratio of 1.5 over the past decade. Predictably, the ratio in Southeast Asia and India has been higher, at 1.6 and 2.7 respectively, and much lower at 0.7 in the rest of South Asia. It is not possible to estimate a ratio for the Pacific due to data gaps. However, the number of projects is very small, with just US$400 million in identified PPI investment over the past decade in the Pacific, concentrated in information and communications technology and energy, with only a handful involving official bilateral or multilateral financing support.
Rather than the supply of finance, it is the supply of “bankable” projects for private investors that is often the binding constraint. This reflects a well-known litany of issues including poorly prepared projects as well as political and economic risks, corruption, problematic laws and regulations, investment restrictions, limited domestic implementation capacity, low incomes, small markets, and inadequate country knowledge among potential investors. All combine to limit the availability of bankable projects and undermine the perceived risk-adjusted returns for investors.
By contrast, OECD donors have seen much greater success in using public financing — i.e. official development finance — to lift their infrastructure contribution (Figure 3b). Since the 2008–09 global financial crisis, bilateral official development finance for infrastructure in the Indo-Pacific has risen more than three-fold in inflation-adjusted terms to around US$10 billion a year at present. Most of this increase reflects rising ODA from Japan as well as the rise of Korea as a significant international development financier. Significantly, further scale has also been achieved through a large simultaneous increase in financing from MDBs, principally the ADB and the World Bank, via capital increases and balance sheet reforms that have allowed both banks to greatly expand their activities, especially through non-concessional loans (which nonetheless remain much cheaper than market-based financing).
Figure 3b: Rising infrastructure investment through public sector funding
Constant 2020 USD billions
Source: Author’s calculations, OECD Creditor Reporting System
The reason public financing tends to be more successful in mobilising infrastructure investment is relatively straightforward. Infrastructure is predominantly the business of governments, either through ownership or regulation. Indeed, many of the reasons behind a lack of bankable projects for private investors reflect the very same reasons why public sector financing is often better placed to support infrastructure investment, including lower required rates of return, the need for subsidies to reflect public benefits, long investment horizons, and government ownership and/or heavy regulation for economic, social, and political reasons. In addition, much infrastructure investment cannot easily be projectised in a way conducive to private investment, such as small-scale public capital works (e.g., rural roads or urban walkways) and recurrent infrastructure maintenance spending. Hence, the World Bank estimates that 83% of infrastructure investment in developing economies is in public sector projects, while even for projects involving private participation, the public sector provides an estimated 55% of all financing.
These figures also understate the true role of the public sector in infrastructure investment, as they only capture projectised investments.