ALL AGAINST ONE

The United States and other members of the G7 promised to invest more than $40 trillion in developing economies to help them reduce the gap between the developed ones by 2035.

The ambitious initiative "to Build Back a Better World - B3W) was voiced in June at the G7 summit. The idea is to attract private capital to invest in the development of global infrastructure projects. Its initiators in the US do not hide that this is part of a wider initiative to counteract China on a variety of issues: from human rights violations to non-market practices that undermine fair competition.

The main competitor of B3W, rather its irreconcilable opponent will be the Chinese Belt and Road Initiative (BRI) launched by Chinese President Xi Jinping in 2013.

Unequal conditions

Criticism of BRI is growing annually with a growing outrageousness and direct discontent with the terms of credit issued by China. Beijing is increasingly accused of deliberately imposing economically unfavourable joint projects in developing countries through the "diplomacy of debt traps".

BRI has never declared itself as an initiative launched on equal conditions. Chinese financing most often depends on the involvement of its companies and the provision of Chinese goods and services. As a result, non-Chinese companies cannot take part in tenders and get involved in economic competition.

In 2018, the report of the Centre for Global Development stated that at least eight countries - the recipients of Chinese loans along the BRI route - were susceptible to high risk of debt crisis. In countries such as Djibouti, Laos, Maldives, Mongolia, Montenegro, Pakistan, Kyrgyzstan and Tajikistan, the ratio of debt to GDP exceeds 50%, with about 40% of this debt to China only.

For example, Chinese infrastructure investments in Pakistan worth of $62 billion has pushed the country to ask for financial assistance from IMF. Malaysia froze $22-billion worth Chinese projects referring to the overestimated cost of contracts. Sri Lanka was forced to give control of one of its seaports to China to avoid the debt crisis. If Montenegro is not able to return a Chinese loan of almost $1 billion taken under high 2% annual interest rate, it will face arbitration in Beijing and, according to the contract, may be forced to abandon control over the key infrastructure, which it is building with Chinese money...

Due to existing circumstances and growing discontent, Beijing seems to have recently revised some of its obligations. Last year, it suspended the payback of 77 developing countries.

Lack of transparency and official criteria for projects makes it difficult to accurately track the BRI contracts. But the general trend is obvious: in recent years, financing under BRI has been significantly reduced. This indicates the problems that Beijing is facing in the management of the initiative.

However, global needs for financing infrastructure projects grow annually, which gives the developed countries a chance to offer alternatives to BRI.

Failed interaction

In 2016, India and Japan initiated the Asian-African Growth Corridor, assuming the development of high-quality infrastructure for the implementation of projects in various fields, including health and pharmaceuticals, agriculture and processing of agricultural products, natural disasters and advanced training.

The EU seeks to expand its well-developed transport network. Its trans-European transport network (TEN-T) includes nine corridors, five of which go to the continental part of Eurasia and cover its marine periphery. These corridors complement the European-Mediterranean Partnership, Eastern Partnership and other agreements aimed at deepening political and economic ties with relevant regions. Initially, there was even an attempt to establish the interaction between TEN-T and the Chinese initiative BRI.

However, in 2018, the EU prepared a report criticising BRI for undermining the principles of free trade due to the lack of transparency when concluding contracts. Unhappy with the growing influence of China in Asia, Africa and Eastern Europe, the EU launched its own plan for the development of infrastructure in Asia.

In 2019, Japan and the EU announced the start of the Partnership for Sustainable Communications and High-quality Infrastructure project as an alternative to BRI. In the same year, the US, Australia and Japan launched the Blue Dot Network program at the 35th ASEAN Summit as a global assessment system and certification of infrastructure projects. The idea of Blue Dot Network is to help certify transparent and sustainable projects to facilitate investor search. China rightly views the program in opposition to its own BRI.

In March 2021, the EU and UN made a proposal to create a global alliance on the economic model based on a closed cycle and resource efficiency.

And finally, in June 2021, the G7 countries announced the launch of B3W based on the principles of the Blue Dot Network.

What about funding?

There is insufficient information as to how B3W funds will be distributed, and what types of loans G7 members are going to provide to the developing countries. However, the focus on private capital means that they will be firmly tied to market conditions, and profitability will be a key factor in funding.

According to the OECD report, the global annual demand for investments in transport, energy, water supply and telecommunications are estimated at $6.3 trillion. This means that until 2030, all countries will need $50 trillion to meet their needs for infrastructure development. The Asian Development Bank report states that in Asia, the infrastructure financing deficit is estimated at $26 trillion until 2030.

Key question: where to get money?

The developed countries involved in this project are also experiencing difficult times due to the ongoing global financial crisis, as well as the COVID-19 pandemic. Sometimes they themselves are looking for foreign, often Chinese, capital to update old or to develop new infrastructure.

As a result, they managed to mitigate the impact of the epidemic to their economies, but this does not mean that now they can attract capital to help others. For example, the UK had to cut its budget this year from 14 to 10 billion pounds "to combat poverty, overcome the climate crisis and improve the health of the world's population".

There are other problems, which the G7 countries are likely to face under the B3W program. First, will the countries and private companies be ready to provide loans in high-risk situations? For example, the EU did not show much interest in investing in the Greek port of Piraeus. After the futile attempts to find Western investors, Greece had to ask China for funding, hence joining the BRI project. The same situation was in Montenegro.

Secondly, can G7 compete with the loan conditions offered by China, given the political risk and credit ratings of potential borrowers? In addition, B3W projects may encounter additional obstacles associated with more stringent environmental standards, human rights, climate change, corruption and the rule of law. In this case, developing countries may well voluntarily prefer simplified funding from BRI, not affected by any kind of conditions.

Thirdly, Washington openly declares its intention to enter into strategic competition with Beijing, while other G7 countries are less interested in this. According to the New York Times, "during the Group of 7 meeting, European countries regarded China as a competitive partner, unlike the United States, which is hostile to China." This may lead to the emergence of difficult disagreements in B3W.

A difficult choice

Back in 2013, the world community accepted the Chinese BRI initiative with great enthusiasm. However, the attitude towards the project began to change later. By and large, these changes in attitude were a result of unfulfilled large expectations.

After the launch of BRI, many countries, including the developed ones, sought to attract Chinese capital to invest in their infrastructure. However, this enthusiasm, which lasted about five years, was then replaced by disappointment.

China was very active in distributing loans at the beginning stages of the project, but over time it became more selective, funding only those projects that had a strategic or economic interest for China.

As a result, many countries did not receive investments that they were hoping for, despite having a green light from Beijing earlier.

To avoid the trap, in which China put it itself, B3W organisers must be sure that they do not deceive expectations. B3W can have prestige as a high quality product. But it is equally necessary to develop some incentives for the developing countries that have to make a difficult choice - quick money from China or Western loans subject to the implementation of multiple conditions.