Many governments are struggling more than ever to fund their infrastructure needs, due to lingering fiscal burdens and higher interest rates. Public- private partnerships and investor placements focused on infrastructure projects have been increasingly sought as a way to fund infrastructure, but these arrangements carry their own challenges. As a result, official development assistance (ODA) remains the primary way for many developing countries to progress their infrastructure plans. More developed nations also increasingly look to ODA-style schemes, which sometimes involve a combination of lending and aid, and frequently include private sector partners.
In June, Japan became the latest to revamp its Development Cooperation Charter in a way that enables it to approach developing nations with offers of assistance, rather than waiting for requests. It is particularly keen on supporting clean energy and digital projects. But the nation that has by far the largest support portfolio is, of course, China.
The Belt and Road Initiative
China’s Belt and Road Initiative (BRI) was launched in 2013 and represents an extraordinary outreach and commitment to economic development. Over the last ten years, BRI has helped finance an estimated USD 1 trillion in a variety of projects around the globe. According to China’s latest white paper on BRI, marking its tenth anniversary, the initiative “has inspired more than 150 countries with the zeal to realise new dreams”.
China has been adept at expanding BRI from its initial focus on traditional heavy infrastructure such as roads and rail. It has signed numerous MoUs on digital development with its Belt and Road partners, built 5G base stations and data centres, promoted the digital transformation of ports and energy networks, laid international submarine cables and developed digital corridors.
There has also been increasing emphasis on greening the Belt and Road. In May 2023, China Eximbank and a dozen other financial institutions launched the Initiative for Supporting Belt and Road Energy Transition with Green Finance, aiming to strengthen support for green and low-carbon energy transition. By the end of 2022, more than 40 large global institutions had signed the Green Investment Principles for the Belt and Road.
‘Competition’ for BRI
For some years China went more or less unchallenged in this arena, but that is now beginning to change. The G7 launched its Partnership for Global Infrastructure and Investment (PGII) in June 2022 with a goal of supporting ‘quality infrastructure’ projects. The characteristics of these projects are economic viability, transparent disclosures and low ESG risks.
Roughly USD 600 billion in public and private funding through to 2027 is expected from the G7, with USD 200 billion pledged by the US, the nation which has done the most to bring PGII into being. PGII’s primary objective is now described as “narrowing the infrastructure gap in low- and middle-income countries to enable inclusive and sustainable growth and promote economic activity and prosperity.”
A PGII portfolio
PGII is already involved in a number of projects, including the Trans-African Corridor (aka the Lobito Corridor) and the new Zambia-Lobito rail line, which are intended to connect southern Democratic Republic of the Congo and northwestern Zambia to regional and global trade markets via the port of Lobito in Angola. A few of the schemes in the PGII portfolio are apparently pre-existing ones that have been rebranded. And rather as Belt and Road quickly became an umbrella term for any Chinese lending or investment, PGII appears to be absorbing other initiatives from its member nations. The UK’s Green Cities and Infrastructure Programme, for example, is now being described as part of its contribution to PGII.
Similarly, the EUR 300 billion that the EU’s Global Gateway initiative hopes to mobilise by 2027 now constitutes the EU element of PGII. (This is quite separate from any support that the EU budget provides to infrastructure projects in EU member states – Global Gateway projects are all outside the region and are chosen to “boost smart, clean and secure digital, energy and transport links and strengthen health, education and research systems across the world”.) The first Global Gateway deliverable was its Africa-Europe Investment Package, with EUR 150 billion in investments across Africa funded by bilateral aid, grants, loans and private funding. Investments have also been made in Latin America and the Caribbean, the Middle East and Asia Pacific.
IMEC
In what may be its biggest deal yet – one described by EU President Ursula von der Leyen as “the most ambitious project of our generation” – PGII is backing the proposed India-Middle East- Europe Economic Corridor (IMEC). This corridor would link India, Saudi Arabia, the United Arab Emirates, Jordan, Israel and the EU through shipping ports and rail routes. (In a reminder of the issues that can attend projects involving cross-border connectivity, Turkey’s President Erdoğan reportedly declared that “there can be no corridor without Turkey” and then pressed the case for an alternative route through Turkey and Iraq.) It is also intended to have a clean hydrogen pipeline and power and data cables.
IMEC was announced in September 2023 at the G20 summit in New Delhi, with an MoU signed by the EU, France, Germany, India, Italy, Saudi Arabia, the UAE and the US. Whether it continues as planned after the more recent terrible events in the Middle East remains to be seen.
Smaller, local solutions
Initiatives like BRI and PGII are at one extreme of infrastructure finance. At the other is a long playlist of financing options, into which projects for which access to finance is a challenge sometimes dip.
Some of these are location-specific attempts to mobilise local capital. As Alex Traube-Childs mentions, significant gains may be possible if such new sources of long-term domestic capital can be unlocked. In certain cases, they may be even more attractive for projects backed by municipalities or regional governments than they are for national government schemes. (Another advantage of such fundraising is that it is possible to reduce capital exports to more developed economies if attractive domestic investment opportunities can be created.) But where domestic capital markets are unsuitable or non-existent, it becomes much harder to structure such initiatives in a cost-effective way. Notably, transaction costs are likely to be large in relation to the funds raised and the size of the project.
Tokenisation
One potential solution which is of increasing interest to all parties is tokenisation – in other words, the creation of a bond or a share in a project as a blockchain-based security. By making the size of a minimum investment much smaller, tokenisation can open up new capital flows from retail investors. And its electronic format and integration with mobile devices can greatly reduce the costs of issue and subsequent management.
The World Bank has published a report noting that tokenisation “has the potential to transform infrastructure financing”, not least by democratising access to markets, increasing information flows and performance tracking, and ensuring fairness and security. (The bank itself issued its first blockchain-based bond as long ago as 2018.) But it also notes a number of obstacles to tokenisation, including significant legal and regulatory challenges.
While such obstacles can be real enough, the advantages of tokenisation are real too. Even in nations where traditional investment opportunities and systems may be limited, anyone can potentially become a micro-investor in a tokenised project. Kenya’s M-Akiba programme, for instance, raised funds for infrastructure finance through the issue of retail bonds which could be bought by anyone with a mobile phone, with coupon payments made through the same channel.
Solutions and partnerships
There are myriad other potential solutions to such financing problems, including blended finance, loans with longer maturities, innovative risk hedging and risk sharing mechanisms, local currency guarantees and other local currency structured products from development institutions, and the pooling and securitisation of smaller projects.
What such solutions all require – as do the many others not mentioned here – is a degree of partnership between borrowers and lenders (or guarantors, donors or other parties), with a shared understanding of both respective and common goals.
The World Bank has published a report noting that tokenisation “has the potential to transform infrastructure financing”, not least by democratising access to markets, increasing information flows and performance tracking, and ensuring fairness and security.
