China has become a significant financier of major infrastructure projects in Southeast Asia under the banner of its Belt and Road Initiative (BRI). This has prompted renewed interest in the sustainable infrastructure agenda in Southeast Asia from other major powers. In response, the United States, Japan, and Australia are actively seeking to coordinate their own revamped overseas infrastructure efforts as part of a trilateral arrangement aimed at upholding a free and open Indo-Pacific.
Though principally motivated by geostrategic concerns, such international policy efforts are also well-justified on economic grounds — given the persistence of Southeast Asia’s large infrastructure financing gap, low world interest rates, and concerns about structurally weak global economic growth. In addition, China’s approach to infrastructure poses clear risks to governance, as well as economic, environmental, and social sustainability in the region. Finally, at the time of writing, the COVID-19 virus has unleashed a global health and economic pandemic of enormous proportions. Policymakers are currently focused on containing the health and economic damage of the virus. However, as the priority shifts to the post-crisis recovery, this inevitably will see focus return to the sustainable infrastructure agenda — with Southeast Asian governments looking for willing partners to assist.
The current approach of the trilateral partners, however, is likely to fall short in its ambition to provide a credible response to China’s BRI. The present emphasis on mobilizing more private capital for infrastructure development cannot deliver the kind of dividends needed to compete with the scale of China’s BRI. Nor is an emphasis on high infrastructure standards likely to deter Southeast Asian governments from taking on Chinese projects as long as China continues to be perceived as offering faster, less risk-averse, and more responsive support compared to alternatives available from traditional partners.
This policy brief makes several practical recommendations that would allow the trilateral partners to compete more effectively with China while simultaneously promoting more sustainable development outcomes. This includes increasing efforts to expand the pool of bankable projects and providing technical assistance to help Southeast Asian governments to better manage any BRI projects they might take on — particularly via the multilateral development banks, which can act as politically neutral technical arbiters. Meanwhile, the trilateral partners need to improve the competitiveness of their own infrastructure approaches to be more streamlined, less risk-averse, and more fit-for-purpose. This could be a useful part of the agenda for the new Blue Dot Network. More ambition is also needed. Contrary to the assumption that it impossible to match China’s financing scale, estimates presented in this policy brief suggest that the gap is not that large — implying the trilateral partners can indeed keep pace if they are willing to direct adequate budgetary resources to the task. Finally, Australia is currently the only trilateral partner without access to the full range of development financing instruments and should consider options for addressing this gap in its capabilities.