Geostrategic competition in the Indo-Pacific calls for smarter development financing

Roland Rajah

A former Australian Department of Foreign Affairs (DFAT) official and Asian Development Bank senior economist has authored a report that warns Australia and the European Union (EU) must address the “long-standing” financing gap in infrastructure development in the Indo-Pacific.

Roland Rajah, who is now the Lowy Institute’s lead economist and Indo-Pacific Development Centre director, has cautioned that the overlapping crisis of climate change, the COVID-19 pandemic and war in Ukraine has worsened the financing gap for infrastructure development across south Asia, southeast Asia, and the Pacific Islands.

In a new report released by the Lowy Institute think tank on Wednesday, Rajah called for Australia’s international policy community and European governments to identify better ways of coordinating donor efforts for major infrastructure projects in the Indo-Pacific region.

This was essential in a region that was increasingly becoming a centre for geostrategic competition, he said, drawing interest from other international donor countries such as China, the United States, Japan and the United Kingdom.

“Given the financial firepower of European governments as major infrastructure development financiers in the region on a scale far outstripping that of Australia, the UK and the UK combined, [we] argue priority should be given to ensuring EU and its largest members are closely involved in regional coordination mechanisms aimed at financing joint infrastructure projects,” the report said.

Rajah’s research note also suggested Australia and the EU join forces to invest in project preparation, streamlining project standards, and pursue reforms to make more development finance accessible.

“[Australia and the EU] should invest substantially more in project preparation activities to expand the available pool of bankable projects, focus on ensuring ‘fit-for-purpose’ infrastructure standards to improve both the flow and competitiveness of their financing.

“[The nations should also] expand the scale of their financing efforts by committing greater public resources and making full use of the best available financing instruments and channels, including the multilateral development banks (MDBs),” the report said.

While Western governments were reestablished providers of official development finance, the report noted that investment in infrastructure had fallen away as a top priority. Most countries were opting instead to offer finance in the form of grants, and broader financing instruments such as loans, equity investments and guarantees.

Rajah noted the G7’s launch of a Partnership for Global Infrastructure and Investment last year, which set aside US$6 billion in financing, as well as notionally incorporating the EU Global Gateway that launched in December 2021 to target about US$320 billion in total mobilised investment.

“China’s rise as a major infrastructure development financier, and the launch of its Belt and Road Initiative (BRI) almost a decade ago has […] spurred concerns […] and other governments have sought to respond with their own enhanced infrastructure efforts,” the report said. “The share of Chinese global development finance directed to Indo-Pacific emerging market and developing economies (EMDEs) rose from about a fight in the years immediately preceding the BRI’s launch in late 2013 to more than a third by 2017. Of this, about three-quarters has been for economic infrastructure such as roads, ports, power stations, and telecom networks.”