Power plays in the Pacific

| August 26, 2018

As the most recent signatory to China’s ambitious Belt and Road Initiative (BRI), Papua New Guinea (PNG) is increasingly turning to Beijing for investment and aid funding instead of traditional partners like Australia.

Recognising China’s growing influence in Australia’s ‘part of the world’, Canberra has promised to compete with China’s infrastructure spending in the Pacific. But unless Australian policymakers understand what motivates Pacific countries like PNG to partner with China, any attempts to compete with China are unlikely to be successful.

The risks of Chinese investment are well known in PNG. Major Chinese investment projects in PNG have suffered severe structural defectsdelays and local controversy. Australian government officials further warn that Chinese investment in the Pacific may erode national sovereignty by drawing countries into unsustainable debt traps that China can later exploit as leverage.

Given the perceived risks of Chinese investment and the existence of alternative funding sources, PNG’s decision to sign onto the BRI may seem puzzling. Joining the BRI will only intensify Chinese investment in PNG, the value of which reached US$1.9 billion in 2017.

While this is a small figure compared to the approximately US$11.8 billion that Australia invested in PNG in the same year, viewed over the long run Australian investment in PNG is stagnating. In per capita terms, Australian aid to PNG today is just one-quarter of the level it was when Australia first started providing aid to PNG after its independence in 1975. Yet the Pacific’s needs for investment — and infrastructure investment in particular — are only growing.

When compared to other subregions of the Asia Pacific, the Pacific has the highest proportion of investment needs as a percentage of GDP at 9.1 per cent. In total, the Pacific needs US$46 billion in infrastructure financing over the 2016–30 period.

To fund these needs, PNG could seek a substantial loan from the International Monetary Fund or World Bank. Yet the strict financing requirements of these bodies, which may include a currency depreciation, are unlikely to be palatable to Port Moresby. China’s ‘no strings attached’ financing provides a politically soft alternative.

China has established a foothold in infrastructure development in PNG through its investment and aid activities. The latter are typically focussed more on significant infrastructure projects rather than the social development projects championed by Australian aid. Australia is devoting the largest portion of its 2018–19 Official Development Assistance to PNG to improving governance (38.3 per cent) while almost half that amount is earmarked for infrastructure development and trade (22.5 per cent).

While the quantity of Chinese finance in the Pacific is notable, its quality must be considered. In PNG, the effectiveness of Chinese projects depends on the Chinese and PNG actors involved, who may reverse engineerprojects to the detriment of a cohesive national investment or development strategy. This process involves Chinese contractors and PNG politicians or project representatives cooperating to develop aid programs that are then pitched to larger Chinese aid bodies as purely local initiatives.

On the PNG side, businesses and individuals have at times taken advantage of Chinese companies’ inexperience in the region. The Pacific Marine Industrial Zone (PMIZ) is one such example that saw former minister of the Department of Commerce and Industry Gabriel Kapris negotiate the original deal, before becoming the managing director of the company that won the majority of the PMIZ construction arrangements.

Joining the BRI has fundamentally changed the pattern of investment in PNG. Although far fewer in number, Chinese projects in the Pacific tend to be 10 times larger than those funded by Australia and New Zealand.

PNG is no exception. The first three BRI projects to be announced in PNG are cumulatively worth US$4.46 billion. The bulk of these funds is earmarked for a US$4.1 billion national road system, which is worth almost triple the value of the current largest development project in PNG, the US$1.4 billion Chinese-owned Ramu Nickel Cobalt Mine. In light of China’s challenges with the Ramu Nickel mine, the ability of Chinese investors and their PNG partners to successfully pull off even more ambitious projects under the BRI is uncertain.

More broadly, Chinese investment in PNG does not only affect the behaviour of Chinese and PNG stakeholders, but also the behaviour of other countries with strategic stakes in the region like Australia. In 2017, Canberra intervened to majority-fund a AU$136 million (US$98 million) undersea telecommunications cable from PNG and the Solomon islands to Australia due to security concerns regarding the previous contractor, Huawei.

Australia’s controversial announcement that the project would be funded using aid flows could radically reorient Australia’s aid priorities away from governance and towards infrastructure. If Australia continues to vie with China in this manner, competition over infrastructure projects in the Pacific — and in PNG in particular — is likely to reignite.

To date, Australia’s response to China’s rise in the Pacific has been largely reactive rather than proactive and has generated mixed results. Some Australian government officials’ criticisms of Chinese projects in the Pacific as ‘roads to nowhere’ and ‘useless buildings’ were met with significant backlash by Pacific leaders, who warned that the comments could ‘destroy’ Australia’s relationship with the Pacific.

A more promising strategy for Australia would be to look for opportunities for cooperation and to monitor controversial issues relating to Chinese investment in the region like Tonga’s struggle to repay its AU$160 million (US$116 million) loan to the Export–Import Bank of China.

Although PNG is only the second Pacific island country to sign onto the BRI after Timor-Leste, China’s presence in the Pacific is undoubtedly growing and here to stay. To regain its status as the Pacific’s ‘partner of choice’, Australia should shift the prime focus of its messaging in the Pacific from combatting Chinese influence to recognising an investment gap that Beijing has occupied in Canberra’s absence.

This article was published by the East Asia Forum.

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Sarah O’Dowd

Sarah O’Dowd is a research student in the College of Asia and the Pacific at the Australian National University.  She has written widely on topics of Asian political and economic developments.