By Jackie Horne and Rashmi Kumar
The United States is shaking up its development finance model to issue a direct challenge to China’s use of economic power to underpin its growing ascendency on the world stage.
David Bohigian, executive vice-president of US development finance agency Overseas Private Investment Corp (OPIC), told GlobalMarkets that its expanded budget, remit and re-organisation would create the modern equivalent of the 20th century’s Marshall Plan, which financed Europe’s reconstruction after World War II.
“What’s revolutionary will be the private sector, development finance agencies and governments all working together on a scale the world has never seen,” he said. “It’s going to be all about leveraging private sector capital.”
The re-organisation will create the International Development Finance Corp (IDFC), with an expanded budget of $60bn, up from $29bn. Bohigian said private sector investment was typically catalysed on a 2:1 ratio, potentially unlocking tens of billions more dollars. The agency will also be able to invest in equity for the first time, enabling it to share a project’s risks and rewards.
More importantly, it has signed agreements with its Japanese and Australian peers and is negotiating one with India. Bohigian envisaged that once the IDFC was formally up and running in about a year, the agencies could create synergies by sharing their project pipelines and financing structures.
This is what developing countries have long craved. Speaking at the Institute of International Finance conference, former Nigerian finance minister Ngozi Okonjo-Iweala said the sector did not deliver because it was too fragmented, with scores of agencies all operating different templates.
Rather than criticise China’s Belt and Road Initiative (BRI) directly, Bohigian suggested five key factors countries needed to consider to ensure they were aware of a project’s “lifetime costs” rather than just its up-front ones. He listed these as: will the project erode sovereignty; does it meet world class environmental standards; will local labour be deployed to enhance a country’s skill set; is the procurement process transparent; and is the project being built to last?
He added that competition between agencies would be good for countries if they all operated within these parameters, adding that good projects created a halo effect, bringing in even more investment.
China’s vice-minister of finance, Zou Jiayi, countered that BRI was “different from the Marshall Plan”. She said: “It’s a development initiative based on market forces and mechanism in line with market rules.”
She emphasised that projects needed to be cost-effective and affordable for the countries in question. She also underlined that the Chinese government attached a lot of importance to debt sustainability. “We are the creditor and stakeholder so it’s our money,” she added.
Zou said the central government was improving BRI by strengthening its macro supervision of debt sustainability issues, while continuing to allow it to be financed in a “decentralised and commercial way” through lenders such as the state-owned China Development Bank.
Michael Ellam, global head of public sector banking at HSBC, said the US initiative could be driven by commercial as well as geopolitical goals. “Lots of emerging market cities are looking to take a ‘second mover advantage’ and leapfrog older technology, so it could mean financing smart city technology built by the US tech firms.”