Asia and the Pacific needs US$1.5 trillion of infrastructure spending each year if it’s to maintain economic growth, but currently it attracts little more than half that amount. Will the Asian Infrastructure Investment Bank fill the gap?
By Joseph Catanzaro
Inside the Beijing headquarters of the new multilateral development bank (MDB), there’s a jumble of letters and numbers scrawled on the glass wall of Yee Ean Pang’s office, an incidental cipher born of whiteboard marker and a hasty hand rather than intrigue and secret agendas.
Across Asia and beyond, this scribble is translating into jobs, power, clean water, communications, transport and rising living standards for millions of people.
Pang is the director general of investment operations for China’s new Asian Infrastructure Investment Bank (AIIB), and the messy notes on the glass partition of his office pertain to massive infrastructure projects and something more.
“The infrastructure gap in the market, particularly in Asia, is a huge gap to fill.”
Within the inner sanctum of the AIIB, there’s hope the writing is on the wall for a regional infrastructure shortfall that has long stymied growth, development and living standards.
There’s little doubt the cash being invested by the AIIB is timely. The rise of the new bank comes on the back of daunting forecasts for what the Asia-Pacific region will require for continued development.
A recent report released by the Asian Development Bank (ADB) found that infrastructure needs in developing Asia and the Pacific will exceed US$22.6 trillion through to 2030, or US$1.5 trillion per year, if the region is to maintain its growth momentum. That estimate rises to more than US$26 trillion, or US$1.7 trillion per year, if the projected impact and associated costs of climate change are taken into account.
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In human terms, the dearth of necessary infrastructure currently means that across the Asia-Pacific region there are still more than 400 million people lacking electricity, 300 million without access to safe drinking water, and about 1.5 billion lacking access to basic sanitation.
With the current annual level of infrastructure investment in the region sitting at about US$880 billion, there’s a financial chasm between what’s invested and what’s needed.
“The infrastructure gap in the market, particularly in Asia, is a huge gap to fill,” says Pang.
Filling it is the AIIB’s primary purpose he adds, and more than a year-and-a-half into operations, Pang believes that the bank has made a good start.
In its first 12 months, the AIIB invested US$1.7 billion, and it currently has 17 projects that are approved and on the go. The top five projects, in terms of the money invested, are US$600 million for the new Azerbaijan Trans-Anatolian Natural Gas Pipeline, US$329 million for a roads project in the Indian state of Gujarat, US$300 million for a hydropower project in Pakistan, US$265 million for a port in Oman, and US$216.5 million for a project that will upgrade Indonesian slums.
Ground has already been broken on the Azerbaijan Trans-Anatolian Pipeline and the Duqm Port Commercial Terminal in Oman.
“This infrastructure is essential to bring Asia to its next level of growth,” says Pang.
He believes that these are big-ticket, big-impact projects that will have immediate short-term as well as long-term benefits.
For example, the project in Gujarat, India, will see more than 15,000km of new roads connect 4000 villages and provide transport infrastructure to roughly 8 million people. Meanwhile, the Indonesian slum upgrades project will help the government raise living conditions for 9.7 million people, and an electricity infrastructure upgrade will bring power to about 12.5 million locals in rural Bangladesh.
And this is just the beginning, says Pang. He tells INTHEBLACK a further 12 proposed projects have already passed the concept paper review point.
“We’re going to meet our [US]$2.5 billion (investment target) this year,” he says.
A positive start
It’s a positive and promising start for the new MDB – the vision of China’s President Xi Jinping. Many observers hail the bank as the long-awaited catalyst that will shake up the US-led Bretton Woods regime of monetary management, which set up the International Monetary Fund (IMF) and, since 1944, has promoted the US dollar as the world’s reserve currency.
“If we had done things wrong, I’m sure the membership would not have accelerated so fast.” Yee Ean Pang, Asian Infrastructure Investment Bank
They suggest slow-moving reform at the IMF and World Bank has effectively blocked China from gaining voting share and influence commensurate with its clout as the world’s second-largest economy.
In December 2015, 57 nations signed on to become founding members of the AIIB. The UK and Australia signed on, despite US reservations.
More than 18 months on Pang says the organisation has continued to attract members and the total is expected to grow to 85 by the end of the year.
The ratings agencies have also given the AIIB top marks. In July, S&P Global Ratings assigned the AIIB its highest possible credit rating, the latest agency to do so after Fitch Ratings and Moody’s Investors Service also gave the bank full marks.
“If we had done things wrong, I’m sure the membership would not have accelerated so fast,” Pang says.
“The fact that the three credit rating agencies came in in strong support is testimony that this is an organisation that has strong governance; this is an organisation that does what it’s supposed to.
The make-up of the bank itself is also extremely international. The bank’s president Jin Liqun is Chinese and a former vice-president of the ADB, alternate executive director for China at the World Bank, and vice minister for China’s Ministry of Finance. However, the rest of the senior management are not from China, as is about three-quarters of the bank’s total staff.
Is this bank really that different?
“The issue of how do we raise more people out of poverty, how do we fundamentally bring a greater share of global wealth to all the world’s people, that’s a hugely important issue,” says Rob Koepp, director for The Economist Corporate Network.
“The AIIB, when it was announced, seemed to offer a solution; and now … the fears have not been justified, but … nor has the hope been anywhere close to realised.”
Koepp says the AIIB’s effectiveness cannot be gauged from its current track record, because the majority of approved projects are co-financed with the more established MDBs. In his view, AIIB has simply been piggybacking on the due diligence done by others, including the World Bank. It is, however, early days for the AIIB.
Of the 17 projects that the AIIB has approved to date, only five are standalone, the first among them an electricity distribution system upgrade in Bangladesh worth US$165 million.
“The idea was AIIB was supposed to be going out there, doing these big projects, and making note of how China was doing it differently with a different model. That’s how they would project soft power in a significant way,” Koepp says.
“Instead, if you look at the projects, they’re pretty tame. And [the AIIB is] secondary to the other multilateral banks. In a way they’ve been co-opted by the existing power structure and are really coming in as secondary players.”
Pang concedes that while the AIIB aims to be leaner and greener than the other MDBs, in some ways it is the same, in that it wants to continue to maintain the baseline of established best practice.
“The issue of … how do we fundamentally bring a greater share of global wealth to all the world’s people, that’s a hugely important issue.” Rob Koepp, The Economist Corporate Network
While the AIIB only has US$100 billion in capital – about two-thirds of what the ADB possesses and less than half the World Bank’s worth – it currently has about US$9 billion in paid-in capital and more liquid capital than the established players.
Pang says AIIB made a decision in its first year to use its readily available firepower to quickly fill existing gaps in project funding.
“It may appear that … the sovereign projects are co-financed,” he says. “That is not coincidental because in our first year there is already an existing infrastructure gap in the market, so we came and very quickly filled in the gaps that the MDBs themselves have.”
However he rejects the notion the AIIB has not shown its due diligence capabilities to date. “In our involvement in the projects that have been done by the respective MDBs, we have always been very active in insuring the governance aspect.”
In addition, the AIIB has not just selectively chosen to fund projects that are part of One Belt, One Road – China’s blueprint for a trade network that aims to better connect much of the world through a patchwork of new infrastructure and deals.
Despite this, Koepp says the AIIB has helped bolster China’s soft power and furthered its interests, because it is showing the world that it can be an integrated, global player.
“They [China] are being constructive,” he says. “They are putting up money and resources and trying to do things.”
The AIIB has had another, perhaps unintended, positive impact: it’s created competition. Koepp believes it’s no coincidence that ADB operations for Asia and the Pacific reached an all-time high of US$31.5 billion in 2016 – a 17 per cent increase on the previous year.
“I think the emergence of the AIIB has definitely encouraged the World Bank and the ADB to get in better shape,” he says.
“If only for the reasons of having another player on the field, it seems to have encouraged them to sharpen their game.”
“We’re not going to stop at this level; this level is not good enough. We’ll be doing more.” Yee Ean Pang, Asian Infrastructure Investment Bank
Charles Liu, economist and founder of private equity firm HAO Capital, is among those in China who still believe the AIIB will prove a unique force for change. Liu, who spent more than 15 years serving at the United Nations – principally as a negotiation secretary on economic matters and development projects in developing countries – says the AIIB just needs time to find its feet.
“I think the Chinese and the other participants are trying to work out what the internal standards of lending really should be, and how much social impact is taken into consideration. The Chinese [generally] argue social impact should mean alleviation of poverty, but there are others who argue social impact also means human rights and anti-corruption and so on.”
Pang says the identity of the AIIB is still emerging, but that its track record already shows it can and will succeed. He adds that it’s safe to bank on the AIIB taking the lead on more projects going forward.
“Please give us a little more time and we’ll have even more results,” he says. “We’re not going to stop at this level; this level is not good enough. We’ll be doing more.”
China's newest super export: global infrastructure