• Connecting the infrastructure diplomacy of Australia and Japan

Connecting the infrastructure diplomacy of Australia and Japan

By Jeffrey Wilson
May 15, 2020

Infrastructure has emerged as a new domain of strategic competition in the Indo-Pacific. Following the launch of China’s landmark Belt and Road Initiative (BRI) in 2013, many governments have announced rival programs to develop infrastructure projects. This new pattern of competitive infrastructure diplomacy has posed a vexing dilemma for both Japanese and Australian foreign policy. On one hand, these programs promise to build much-needed and connectivity-enhancing infrastructure across the region. But on the other, both governments also has significant concerns regarding China’s BRI, particularly in terms of governance and security externalities.

To respond to this challenge, Australia and Japan have both launched infrastructure initiatives in recent years. They also share common values – prioritising transparency, openness and quality – in promoting infrastructure. There is now an opportunity for Australia and Japan to link their respective efforts, and work together to advance their shared vision for an open and connected Indo-Pacific.

Australia, Japan and the Indo-Pacific infrastructure challenge

Cross-border infrastructure is the next frontier for economic integration in the Indo-Pacific. As several decades of policy liberalisation have driven down regulatory barriers to trade and investment, it is now physical links – road, rail, shipping, energy and telecommunications connections – which are the principal barrier to integration. Unfortunately, the Indo-Pacific is plagued by a range of ‘infrastructure gaps’, as governments have struggled to supply infrastructure at the pace and quality required by their high-speed growth. Estimates suggest that $1.7 trillion of new investment per year, every year, is required to close these gaps.

Yet infrastructure has also emerged as a source of geostrategic tension. This is principally due to China’s BRI, which promises to channel $1 trillion to connectivity projects through state-owned banks and industrial firms. Many regional governments have welcomed the BRI as an important step in closing their infrastructure gaps. However, concerns have also been raised over the impacts of China’s state-financed largesse. These include the governance of projects led by state-owned enterprises, the prospect of ‘debt-trap diplomacy’ in less-developed economies, and security risks facing critical infrastructure such as ports and telecommunications.

Japan has responded to these concern by launching its own infrastructure initiative. In 2015, Prime Minister Abe announced the Partnership for Quality Infrastructure (PQI). Launched in collaboration with the Asian Development, this initiative will provide $200 billion of investment capital for regional infrastructure projects by 2020. It also brokered the Ise-Shima Principles for Quality Infrastructure at the 2016 G7 Summit, which outline five principles for ensuring that infrastructure projects are efficient, socially and environmentally sustainable, and maximise local economic benefits. Importantly, the PQI not only aims to mobilise capital, but also leverage technical and policy expertise from around the region to ensure infrastructure is well-designed, fit-for-purpose, and governed in a transparent manner.

Australia has also launched a similar infrastructure initiative, albeit more narrowly focused on the Pacific Islands countries. In 2016, the Australia announced the Pacific Step-Up, a program of upgraded diplomatic engagement with Pacific governments. Given the major infrastructure needs of Pacific Island countries, infrastructure has featured centrally to this program. In 2019, Australia launched a $2 billion fund – the Australian Infrastructure Financing Facility for the Pacific (AIFFP) – to support infrastructure in the region, which will soon begin to fund projects. Its first major infrastructure project in the region is the Coral Sea Cable, a 4700 km subsea fibre option connection that will bring improved internet connectivity to Papua New Guinea and the Solomon Islands.

With both the Japanese and Australian government now active practitioners of infrastructure diplomacy, should they seek to align their respective efforts? The shared values, and complementary strengths, make a strong case for connecting their respective infrastructure initiatives.

Shared infrastructure values and objectives

A notable feature of the Japanese and Australian infrastructure initiatives is that they share a common set of values and objectives. One of the major risks in infrastructure diplomacy is that it can be “donor-needs-oriented” – designed to serve the political interests of the donor country, rather than be aligned to the economic and social requirements of the recipient. The history of overseas development assistance is littered with cases of white elephant infrastructure projects that arose because donors wanted to support a certain politically-important project, which later proved to be of limited utility for the host country.

As competition between different infrastructure diplomacy programs gathers pace, there is a serious risks this pattern will be repeated across the region.

Importantly, both the Australian and Japanese governments have been highly sensitive to this risk. Their infrastructure initiatives are underpinned by a series of values that are designed to ensure the projects they support are configured to recipient demand, not donor supply. Five principles underpin the design of their respective programs:

1. Fit-for-purpose: Projects should be designed and executed in a way that maximises their life-cycle contribution to meeting local needs.
2. Transparent: All arrangements regarding infrastructure projects – including specifications, financing packages and construction contracting – should be made transparent wherever commercial considerations allow.
3. Secure: Infrastructure should be design to be resilient to future risks, such as natural disasters, terrorism or cyber attacks.
4. Sustainable: Project design must incorporate social and environmental considerations, and community inclusiveness should be mainstreamed throughout project life cycle.
5. Cooperative: Infrastructure cooperation between multiple donor countries – potentially through coordinated pipeline planning, and/or joint ventures – should be prioritised.

These principles constitute a shared “philosophy” for infrastructure support, which demarcates Japanese and Australian efforts with respect to other major donors.
Complementary strengths in infrastructure promotion

There are also opportunities for Japan and Australia to support each other’s infrastructure efforts. These arise from the complementarities between their strengths in infrastructure provision, with each specialising in certain areas that could amplify those of the other.

Japan possesses a significant number of established agencies with demonstrated competence in delivering infrastructure projects. These include:

• Japan International Cooperation Agency (JICA), its aid agency
• Japan Bank for International Cooperation (JBIC), its development bank
• Nippon Export and Investment Insurance (NEXI), its export credit agency
• The Asian Development Bank (ADB), a longstanding multilateral development bank. While headquartered in Manila, Japan is the ADB’s largest donor and source of technical expertise

Japan also has the capacity to make major capital contributions to infrastructure projects. It committed $14 billion of official development assistance (ODA) in 2018, making it the world’s fourth largest aid donor and the largest in Asia. Its infrastructure-specific PQI program has also committed $200 billion for infrastructure spending by 2020.

As a considerably smaller economy, Australia has fewer financial and institutional resources for regional infrastructure promotion than Japan. (For example, its 2018 ODA allocation was $3 billion). However, it also possess several strengths that complement Japan’s capabilities:

• The established Australian Aid (formerly AusAID) program, with deep in-country expertise and presence in the countries of Southeast Asia and the Pacific.
• Longstanding diplomatic relationships with and experience in the Pacific Island countries. These are especially strong in Melanesia (Vanuatu, Solomon Islands, Fiji, and Papua New Guinea), which complements Japan’s Pacific presence focused on Micronesia.
• Host of the Global Infrastructure Hub, a G20 initiative to share best-practice information on infrastructure planning
• Membership of (and a Director’s position at) the newly-established Asian Infrastructure Investment Bank, the first development bank dedicated solely to infrastructure projects

Both countries also participate in the Blue Dot Network, a recently-established trilateral initiative between Australia, Japan and the US to independently certify infrastructure projects that meet certain economic and social sustainability standards.

Activating an Australia-Japan infrastructure partnership

Given their shared values and complementarities, it is surprising that there is little in the way of infrastructure cooperation between Australia and Japan. The only concrete cooperative mechanism is an information-sharing MoU, signed between NEXI and Export Finance Australia (EFA) in November 2018. This is a good first step, as it allows information sharing between the two national export credit agencies when considering regional infrastructure projects for finance.

However, will it is a good first step, it should not be the last. To fully realise the countries’ shared objectives, and exploit synergies between their respective programs, deeper and more substantive infrastructure cooperation is required. Practical further steps could include:

• Establishing direct mechanisms between the national aid programs (Australian Aid and JICA), similar to the NEXI-EFA MoU. This will enable information sharing in aid program delivery as well as financial contributions.
• Collaborative efforts in project preparation activities, which help recipient countries develop businesses cases and conduct feasibility studies that allows proposed projects to become “bankable”.
• Launching of joint infrastructure projects, which leverage the donor’s respective strengths. A recent example is the ADB supported Port Vila Urban Development Project, which includes complementary technical contributions from Australian Aid, JICA and the New Zealand aid program.

Deepening Japan-Australia cooperation would be a ‘force multiplier’, that improves the effectiveness of both countries’ efforts to promote quality infrastructure. It would also help them realise a broader shared ambition for a ‘Free and Open’ Indo-Pacific region.

Dr Jeffrey Wilson is the Research Director at the Perth USAsia Centre.

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