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Tuesday, April 18, 2017, 15:17

Paving the way

By ALFRED ROMANN and DAVID HO

China-led infrastructure bank is at the center of efforts to fill the enormous funding gap for Asia’s development needs

Paving the way

When the Asian Infrastructure Investment Bank (AIIB) announced in late March that it had approved more than a quarter billion dollars in new loans, it crossed a significant threshold.

Including these new loans, the China-led, but clearly multilateral, development bank has now approved more than US$2 billion in loans as it works to fill a huge gap in financing for infrastructure development in Asia. As Chinese President Xi Jinping said on Jan 17, 2016 when he formally launched the AIIB, the need for such funding is “absolutely enormous”.

In a report it released in February, the Asian Development Bank (ADB) estimated that the 45 developing economies in Asia need to invest around US$26 trillion between now and 2030 just to maintain their growth momentum.

Zhuang Juzhong, deputy chief economist at the ADB, believes the establishment of the AIIB is great news for the region.

“Asia has huge infrastructure needs and a market that will grow and be better integrated with satisfying that need. Our estimate for investments needed in the region is at US$1.7 trillion per year till 2030 for healthy, continued economic growth. Yet the region currently only has US$881 billion of capital invested in infrastructure development, which is half of the estimated requirement,” Zhuang said.

“Even if we look at a shorter development period, the numbers still fall short,” he said. “For China to meet its infrastructure development goals from now till 2020, it requires US$857 billion in capital investment. But it now only has an estimated US$686 billion of capital for that. So having another multilateral development bank is good for providing the funds for infrastructure development, not just domestically but regionally.”

Paving the way
Two boys try to ride their bicycles through a flooded street in Manila on Aug 13, 2016, after heavy downpours overnight. The AIIB is considering funding for a series of projects throughout the region, including flood management in the Philippine capital.  (AFP)

AIIB: Bank's investments in Asia could help avoid effects of climate change

Given the importance of infrastructure and the wide definition the term covers, Zhuang points to the ADB report for a clearer picture of Asia’s infrastructure development needs. He said the two main areas to focus on are energy and transport.

“From the estimated US$1.7 trillion annual total for healthy continued development, 53 percent is for developing the energy sector, while 32 percent is for improving transport. A focus on clean energy and greener transport systems would be an ideal goal in infrastructure development.

26 trillion dollars amount developing Asian economies need to spend on infrastructure by 2030

“To speed up development in the region, we need to develop stronger, bankable projects and encourage better public-private partnerships. In fact, these two factors often go hand in hand. Multilateral development banks can help with developing that,” Zhuang said.

By the end of March, just 15 months after its launch, the AIIB had lent out US$2 billion.

Since its inception, the bank has received widespread international support. Countries like Australia, the United Kingdom, South Korea and the Philippines quickly jumped on board and became founding members, despite some behind-the-scenes pressure against it by the United States. The US government has since expressed official support for the bank, though has not made any move toward becoming a member.

In late March, the AIIB approved 13 new members, taking another major step toward redefining a multipolar world order that is increasingly focused on Asia. The AIIB also has agreements with the ADB, the World Bank, the European Bank for Reconstruction and Development, and the European Infrastructure Bank.

“The proposal to create the AIIB came from the Chinese government and it was the right proposal at the right time,” said Danny Alexander, the bank’s vice-president, speaking in Hong Kong last September. “Following the financial crisis, governments around the world have understood the importance of infrastructure investment to raise long-term economic productivity.

57 nations number of founding members of the AIIB

“The AIIB is a multinational financial institution created by 57 founding nations and is accountable to all of them,” Alexander said.

“We can invest in all parts of our region and, indeed, beyond the Asian region if there are projects that deliver tangible benefits for Asia.”

He said the Asian region will be fundamental to whether the world succeeds or fails in meeting the challenges of climate change.

“Infrastructure investments have a huge impact on the future patterns of economic development. So the decisions that are being made in the coming years about what to invest in and not to invest in will determine whether the region will be able to meet its growth aspirations while avoiding the catastrophic effects of climate change,” he said.

“The existing infrastructure gap in Asia offers the opportunity to build sustainable infrastructure from the start.”

By June 2016, the AIIB in its first six months of operation had agreed to loans for projects in Indonesia, Pakistan, Bangladesh and Tajikistan. It has since approved a number of other projects. On March 28, the AIIB announced it had approved three new loans worth US$285 million.

Two of the most recent loans went to Indonesia and were co-funded with the World Bank: US$125 million went to the Indonesia Dam Operational Improvement and Safety Project Phase II, while US$100 million was loaned to the Indonesia Regional Infrastructure Development Fund Project to support regional governments and address critical needs.

2 billion dollars value of loans approved by the AIIB to date

Another US$60 million loan, cofinanced with the ADB, went to the Bangladesh Natural Gas Infrastructure and Efficiency Improvement Project.

Going forward, the AIIB is considering a series of disparate projects, such as urban services, and roads and power generation in rural India, the rehabilitation of a hydropower plant in Tajikistan, and flood management in Manila.

The AIIB’s strategy of co-investing with other established multilateral development banks has helped offset any worries about potential social controversies and environmental violations.

Transparency, due diligence and thorough background investigations on its chosen projects served the AIIB well in its first year of operations, steering clear of mistakes with the aid of its cofinanciers’ more established procedures.

“Working with our established partners has definitely given us an edge with learning and also expedited the process of our involvement with the projects,” said Laurel Ostfield, the AIIB’s head of communications and development. “It’s an environment that allows everyone to benefit from our shared expertise and experience. But we are also considering some standalone projects.”

For example, the AIIB used its partner World Bank’s due diligence assessment for a US$600 million loan (part of a total expected cost of US$11.7 billion) for the construction of the Trans-Anatolian gas pipeline, which will connect Azerbaijan to Europe.

With representation from around 70 countries, the bank is visibly multinational. This has helped to ease some initial worries about the strategic interests of China in the AIIB as a founding member and major shareholder.

Despite its multilateral focus, there were early concerns that the bank might focus on promoting Chinese policies and economic interests or China’s broader agenda by acting as a boost for its Belt and Road Initiative.

Introduced by President Xi in 2013, the Belt and Road Initiative aims to increase connectivity along the ancient Silk Road routes, and this requires significant infrastructure spending. One example of an AIIB-financed project that benefits the initiative is a Pakistan motorway which forms part of the China-Pakistan Economic Corridor — a major part of the Belt and Road.

“The AIIB makes its funding decisions separately from any Chinese policy influence, but there may be some overlap, which works as a win-win situation for those involved in the initiative,” said Ostfield.

“Countries come to us with their project ideas. We make our involvement decisions based on the project’s financial viability, its sustainability and how it impacts the local community. We pay particular attention to a lean, clean and green approach to our choices,” she emphasized.

So far, the bank seems to be doing well, without any major controversies.

With around 10 projects in the pipeline, it might have to continue working with other multilateral development banks to pool resources and play catch-up with Asia’s increasingly demanding infrastructure needs.

 

 
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