Amid rising inflation and debt levels in emerging markets, G7 leaders pledged in June to raise $600bn in private and public funds over five years to finance infrastructure in developing countries and counterbalance the influence of China’s sweeping Belt and Road Initiative (BRI). The Partnership for Global Infrastructure and Investment (PGII) seeks to address many of the long-term global challenges related to climate change, energy and food security, ICT, health and gender equity.

Led by the US, which has pledged $200bn, or one-third of the total investment, the PGII is a rebranded, slimmed-down version of the G7’s Build Back Better World, announced at last year’s summit with the goal of narrowing the $40trn infrastructure gap in the developing world.

Counterbalancing Chinese influence

Although a sizeable investment package, the PGII is not expected to eclipse China’s investment under the BRI. Though exact figures are unknown – China does not disclose information on overseas lending – a study by the International Institute of Green Finance of the Central University of Finance and Economics in Beijing estimated that China invested $755bn in BRI projects between 2013 and June 2020.

Other analysts put total investment over $1trn – and perhaps higher if private partnerships involving Chinese companies are included. Global financial data company Refinitiv estimated that the combined value of BRI and other projects with Chinese involvement stood at $4.3trn as of September 2020.

However, annual investment under the BRI has slowed in recent years, from a peak of $125bn in 2015 to $60.5bn in 2020 and $59.5bn in 2021, according to a report from the Green Finance and Development Centre, suggesting that PGII investments could outpace the BRI going forwards if this trend continues.

At the geopolitical level, in addition to counterbalancing China’s influence in emerging markets, the PGII is being taken as a signal that the US and the G7 are attempting to chart a more sustainable future for the global economy.

It follows on the heels of the EU’s $300bn Global Gateway strategy, which was announced earlier this year and aims to build more sustainable energy, digital and transport links around the world, particularly in Africa. The US, for its part, launched the Indo-Pacific Economic Framework for Prosperity in May to bolster similar linkages in Asia.

Targeted sectors

It is still unclear exactly which projects each G7 member will fund, as only the US has announced its initial pledges. According to an official statement, US investment in PGII will be directed towards four areas: climate and energy, ICT, gender equity and health.

Of the 10 flagship projects the administration of US President Joseph Biden has announced, three target the global energy transition.

Some $2bn in public and private funds were designated to develop solar power in four provinces in Angola, which has pledged to generate 70% of its power from carbon-free sources by 2025, in line with the Paris Agreement.

Another $14m was earmarked to support nuclear power in Romania, including the front-end engineering and design study for the deployment of a first-of-its-kind small modular reactor plant. The US Agency for International Development (USAID), meanwhile, will deploy a $40m investment and a projected $2bn in financing to South-east Asia’s Smart Power Programme, which aims to decarbonise and strengthen the region’s power system.

Infrastructure investments in ICT are also notable, with the US pledging to raise $335m to bolster internet service providers and financial technology companies in Africa, Asia and Latin America, and another $600m to build the South-east Asia-Middle East-Western Europe 6 submarine telecommunications cable connecting Singapore to France through Egypt and the Horn of Africa.

In terms of gender equity and food, US commitments exhibit a preference for investing in funds that develop projects at the local level. USAID will provide $50m over five years to the World Bank’s public-private $200bn global Childcare Incentive Fund to implement childcare programmes to support women’s empowerment.

With a similar goal, the US International Development Finance Corporation (DFC) has pledged $25m to the Uhuru Growth Fund I-A to provide investment capital to small and medium-sized enterprises in West Africa.

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As part of the PGII, the DFC is also investing $30m in the Indian agri-tech venture capital firm Omnivore, which launched its third fund in April with the goal of raising $130m in 2023. The company is focused on developing sustainable and regenerative agriculture to address supply chain disruptions and environmental concerns, as OBG recently detailed.

Meanwhile, the flagship investment in health will see $320m directed towards the renovation and construction of health care infrastructure across Côte d’Ivoire, including more than 100 hospitals and clinics.                               

Debt and investment

The PGII carries greater importance in the context of rising US interest rates, which are deepening the financial challenges facing emerging markets.

Many emerging markets are struggling to meet debt payments, a significant portion of which are related to loans for BRI investments. According to the World Bank, emerging markets owe $35bn in debt-service payments to official and private sector creditors; more than 40% of the total is owed to China.

Last week, in a sign of concern about debt servicing by countries with BRI investments, China entered discussions with Zambia to restructure its debt, opening a path for IMF support. Zambia was the first country to default during the pandemic and owed more than $17bn in external debt as of the end of 2021.

Sri Lanka, for its part, owes China an estimated $6.5bn in debt payments, which includes service loans for the $1.4bn Chinese-built Colombo Port City project. Like Zambia, Sri Lanka is seeking help to restructure its debt and take out fresh loans from the IMF, but the IMF insists that it enter discussions with China first.

Amid uncertainties about how emerging markets can service Chinese and other external debt against the backdrop of global energy, food and health challenges, the PGII could prove to be a tool to jump-start investment in infrastructure projects that can unlock economic and human benefits.

By Oxford Business Group

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