Risks for Australia

What success looks like

A foundational risk for Australia’s approach to infrastructure lies in not having a clear sense of why it focuses on infrastructure and what it means for any one investment to be a ‘success’ for the national interest. Different elements in Australian statecraft approach infrastructure with different motivations and objectives in mind. While none of these are necessarily more important than another, the potential effectiveness of any one project or program may be compromised by not having a clear-sighted understanding of precisely what Australia is looking to achieve. This is especially true, for instance, for investments that are primarily motivated by foreign policy and strategic considerations, which may run the risk of being less closely aligned with achieving human development outcomes.

Australia is understandably reluctant to explicitly label any of its infrastructure investments as strategically motivated – this would be counterproductive to the influence dividend they are designed to generate. However, couching projects or initiatives purely in developmental terms when there are clearly other considerations at play means that the full picture is not entirely clear – either for Australia or partner countries. Development outcomes are often easier to measure, whereas goals such as political influence or strategic denial are inherently more subjective.

The Australian Infrastructure Financing Facility for the Pacific (AIFFP) theory of change attempts to grapple with such mixed imperatives, listing one of its outcomes as “Australia is a partner of choice for financing infrastructure in the Pacific”, alongside meeting the Pacific’s development needs and increasing the region’s access to capital. This outcome is measured against three indicators: AIFFP’s market share in Pacific infrastructure; regard for AIFFP financing by partner governments and non-sovereign borrowers; and perception about AIFFP investments in the Pacific. This demonstrates a clear intent to generate foreign policy outcomes related to influence and reputation, alongside development outcomes.

The ongoing, broader risk for Australia lies in not having a full-spectrum framework that encompasses all relevant perspectives on infrastructure – development, diplomacy, defence, and domestic accountability – that provides clarity around why decisions are being made and what outcomes are being sought.

Australia’s limited resources for investing in infrastructure

While both Southeast Asia and the Pacific have substantial infrastructure needs, Australia’s resources to address such needs are inherently limited as a function of the size of its economy and competing demands on government expenditure. With limited resources for infrastructure, every investment – whether in a specific project or a policy level decision to focus on infrastructure rather than something else – generates an opportunity cost. Having many imperatives but only very limited resources also generates the risk of fragmenting investments in a way that limits their effectiveness. This, in turn, may undermine the trust-based relationships Australia seeks to consolidate.

This is especially the case for infrastructure spending drawn from Australia’s overseas development assistance (ODA). Given that Australia has any number of other regional priorities and the dividends of infrastructure often take longer to realise, there is a significant risk inherent in any infrastructure decision where resources, especially ODA, might have been better spent elsewhere.

Australia’s relatively shallow pockets compared to other sovereign financiers operating in the region also means that any attempt by Australia to compete fully with other wealthier actors is futile and could result in resources being thinly spread and investments being less effective. As such, Australia needs to constantly consider how its approach to infrastructure can be well-targeted, leverage Australia’s strengths and direct them towards areas identified by local governments that will contribute to the greatest impact.

To create a more active and well-targeted approach to investment in Australia’s neighbourhood, a blunt assessment of Australia’s capabilities is required. Financial resources are only one factor in a complex array of considerations that limit Australia’s ability to invest in infrastructure. Australia is increasingly recognising that while it does have an important role providing finance and, in some cases managing specific programs of infrastructure related works (especially in the Pacific), it also has advantages in playing more limited or niche roles in infrastructure management, oversight and/or delivery. These can include making partial contributions to projects managed by other partners (including MDBs), capacity-building at both the technical and policy levels, supporting partner countries plan and manage their own infrastructure projects, and using alternate financial instruments to shift the risk calculus of private sector investors. The August 2023 Development Finance Review makes this clear. Partnerships for Infrastructure (P4I) is an example of Australia focusing on its advantage in capacity building to make an effective contribution in a region where finance is more abundant and competitive.

Reputational risks

Care needs to be taken to avoid the perception that decisions related to infrastructure investments are decided in Canberra and delivered with an eye towards Australia’s strategic calculations rather than stakeholder and local community requirements. While high-profile projects are very visible symbols of presence and commitment (for both donor and recipient nations), there are potential costs to bilateral relationships and to Australia’s reputation if projects are not developed through meaningful dialogue and collaboration with local actors or if they are not delivered effectively. Smaller scale projects, while less conspicuous, can also produce significant reputational dividends; sanitation systems, for instance. Moreover, projects that are seen to be initiated at a distance are often also less effective in achieving local engagement and/or producing positive outcomes.

Reputational risk can also result due to comparison to other development partners. This is not only a calculation made in relation to China’s emergence as a major infrastructure investor in the Pacific and Southeast Asia, but also compared to allies and other donor countries that may have more effective approaches to their own development assistance programs. This may make Australia’s approach and investment offerings less attractive.

Being a responsible investor requires an awareness of what is affordable and manageable for partner countries. The August 2023 International Development Policy and Development Finance Review make clear that “[t]raditional grant-based financing through the Official Development Assistance program will no longer be enough to meet the development needs of our partners”, meaning that loans and other forms of development finance instruments will be increasingly used by Australia.

However, with high levels of debt already existing in the region, especially the Pacific, Australia needs to be careful not to worsen debt sustainability problems. Australia’s new International Development Policy states that “[p]ublic debt in the Pacific is expected to almost double by 2025, compared to 2019.” With interest rates rising, loans offered by Australia (especially by the AIFFP) may become less attractive to the region. Rising rates make debt burdens more difficult to manage. Critically, debt limits the ability for states to use their revenue streams for their domestic priorities. As a result, there is no walking away from grant finance, and the need for public accountability that accompanies the use of grant finance, as a critically important mode for making financial investments in the region.

Competitiveness

Safeguards, due diligence and high-quality standards can be difficult issues for Australia to navigate and include within the requirements of infrastructure investment offerings. Recipient countries may prioritise funders that require less stringent processes and evaluation outputs. Lowering standards may lead to poorer quality outcomes, however these need to be balanced with pragmatic delivery expectations so Australia does not place conditions on their investments that are too onerous. Australia is sometimes seen as slow, under-resourced, too bureaucratic, and less inclined to accept partner countries’ priorities without reservation.

By comparison, for instance, Japan is regarded by some as more practical and realistic, working with governments to ask what they would like with lower expectations in return. While problems exist with China’s approach to infrastructure delivery, resulting in varying degrees of quality in its infrastructure contributions, Chinese infrastructure investments tend to be implemented and completed at a far greater pace than Australia’s. At the same time, however, a hallmark of Australia’s approach must be the upholding of standards. The challenge for Australia, then, is to avoid compromising on quality while being as flexible as possible to respond to local needs. The new International Development Policy recognises this tension:

Our partners have told us that local opportunities to engage in Australia’s development program are currently limited and that the transaction costs are too high. We will seek to reduce these barriers by increasing program flexibility while maintaining robust risk-management processes and compliance with all relevant legislative requirements.

For instance, the establishment of the Blue Dot Network in 2019 as a joint initiative of Australia, the United States and Japan was designed to assess and certify development infrastructure projects using metrics of financial transparency, project quality, environmental sustainability, and positive economic impacts. Yet often these criteria are of such a high standard that Australia’s own domestic infrastructure would not gain approval. This initiative may have been established with good intentions, but instead risks adding an unnecessary layer of complexity and bureaucracy to infrastructure investments and duplicating the role of other actors such as credit ratings agencies. It remains unclear whether the Blue Dot Network has delivered on its intent.

These challenges also extend to regulatory conditions and standards, which add a further layer of complexity to delivering infrastructure. These include strong requirements around codes and standards, environmental safeguarding and gender monitoring. These regulations can achieve positive outcomes, but can be difficult to explain to some local communities, especially when other donors may not have such regulations.

Australia’s domestic infrastructure priorities may create a shortage of skills required to spearhead infrastructure projects overseas. Added to this is the difficulty and cost in sending people overseas. Often the regions with the greatest infrastructure needs are the most remote and inaccessible.