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Connecting the Blue Dots

Csis.org


February 26, 2020

The photo of planet Earth from distant space that Carl Sagan made famous—“the pale blue dot”—turned thirty this month. The popular astronomer might be flattered, or puzzled, to have inspired an effort today by the United States and two of its allies to promote high-quality global infrastructure: the Blue Dot Network (BDN). The initiative holds promise and should be encouraged, but it also raises nearly as many questions as the cosmos.

The BDN was announced by the United States, Japan, and Australia in November 2019 at the Indo-Pacific Business Forum in Thailand. Together, the three allies aim to certify infrastructure projects around the world that meet high standards of transparency, sustainability, and developmental impact. They seek to accomplish for “quality infrastructure” what Leadership in Energy and Environmental Design (LEED) has accomplished with energy efficiency in buildings or the Forest Stewardship Council has accomplished with certified logging. In doing so, they hope to give private investors the confidence to help meet the world’s pressing infrastructure needs—estimated at $94 trillion over the next two decades.

Cynics say the color choice in the initiative’s name was not an accident: a contrast to the red of China’s Belt and Road Initiative (BRI). Xi Jinping’s signature initiative promises trillions of dollars of Chinese spending on roads, ports, and digital connections around the world. The Trump administration has barely tried to hide its disdain for the Chinese initiative, critiquing everything from BRI’s non-transparent financing to Beijing’s geopolitical designs.

The United States and its allies cannot and should not go head-to-head with China over every project everywhere. Given fiscal and political constraints, Washington will never put the kind of public resources behind foreign infrastructure that Beijing can. But the United States also has unique strengths, including trillions of dollars of pension and insurance funds looking for the long-term returns that infrastructure investment can bring.

One ambitious goal is to develop infrastructure as an asset class underpinned by standard contracts. The BDN could provide a high-standard certification to give investors confidence and move one step closer to infrastructure becoming an asset class. Standard contracts, quality certification, and quality audits could help remove uncertainty and minimize risk for outside investors, making infrastructure in developing economies in Asia, Africa, and Latin America more attractive and unlocking private financial flows.

Moving toward that grand goal, however, will require overcoming a host of technical and operational challenges. For example, what criteria should guide the BDN certifications? There are natural places to start, including the Equator Principles, the G20 Principles for Quality Infrastructure Investment, and work by the Organisation for Economic Co-operation and Development (OECD). Among other things, these call for open procurement practices in which project costs are assessed over their entire life cycle, robust social and environmental safeguards, and ensuring that the debt taken on by recipient countries is sustainable. These principles are valuable but require further elaboration to standardize, create a checklist for an audit review, and apply in practice.

The certification process will not be cheap. It must be rigorous enough to persuade private sector investors to put their money into riskier places. Creating a complex, multidimensional “quality” standard will require a negotiation among engineers, builders, architects, procurement officials, financiers of projects, rating agencies, and perhaps other stakeholders. These stakeholders will bring their own views, and reaching agreement will require intensive discussions and negotiations, likely lasting a couple of years.

Nor will project certification necessarily end when projects break ground. Monitoring will be important to check that quality is maintained throughout a project’s lifecycle. A secretariat may be needed to do all this work—perhaps a private-sector-led membership organization like the one that oversees the LEED certification system for buildings. It will require a sizeable staff with appropriate technical expertise and adequate funding.

Another set of questions surrounds the inclusiveness of the BDN. The U.S. government says the Network will be open to other countries and that active efforts are underway to encourage European participation in particular. Will the latter have a say in the standards and certification? It is likely that Europeans will insist on high environmental standards—or even oppose the idea of certifying any coal-fired power projects, for example. This could set up a blue-versus-green dynamic that could bog down the effort.

Will China be invited to join? The BDN could rigorously test China’s commitment to upholding the G20 principles. Realistically, coordination challenges will limit participation initially. But holding the door open for broader participation in the future, including by China provided it meets and maintains the necessary standards, would strengthen the BDN. An open-network approach will find more takers, especially in the Indo-Pacific region, where countries as well as investors are loath to choose between the United States and China.

Offering incentives to developing countries will be key. A small number of internationally ambitious leaders might want the BDN certification for one or two signature projects but not for most. Will the government buyer in Papua New Guinea or Myanmar get a reduced lending rate? Will they be provided a guarantee that will extend the tenor of the loan by two years in the form of a guarantee from Western development finance institutions? Why should the buyer jump through these hoops to get BDN certified?

Finally, the new U.S. International Development Finance Corporation (DFC) does not yet have the tools and the human or financial resources it needs to do this important work. It will need help from larger U.S. agencies with technical staff, especially the State Department and the U.S. Agency for International Development, and very likely, more staff of its own. Funding—likely public funding—will be needed to take on the task of convening all of these stakeholders multiple times to help bring about an agreement and create a very detailed standard.

A challenge that extends beyond the BDN, and will undermine its implementation if not addressed, is the DFC’s ability to take equity in projects. Unfortunately, the Office of Management and Budget is scoring the DFC’s initial $150 million equity allocation like unrecoverable foreign aid rather than as a long-term investment that can generate a positive return and crowd in private investors. This accounting is unrealistic and greatly constrains what should be a powerful tool.

Ultimately, the most strategic response to the BRI isn’t to compete against it on China’s terms but to offer an appealing economic vision that reflects U.S. interests and values. To date, the Trump administration has relied mainly on adversarial tools of economic statecraft: tariffs, sanctions, and backing out of multilateral agreements like the Trans-Pacific Partnership and the Paris Agreement. The BDN is a welcome shift to a more positive approach: like Sagan’s photo, a bright spot amid a dark landscape. But it still contains many mysteries that need to be mapped.

Matthew P. Goodman is senior vice president and holds the Simon Chair in Political Economy at the Center for Strategic and International Studies in Washington, D.C. Daniel F. Runde is senior vice president, director of the Project on Prosperity and Development, and holds the William A. Schreyer Chair in Global Analysis at CSIS. Jonathan E. Hillman is senior fellow with the CSIS Simon Chair and director of the Reconnecting Asia Project.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2020 by the Center for Strategic and International Studies. All rights reserved.


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