Asian Infrastructure Investment Bank goes live

Two years after China unveiled plans for the establishment of the AIIB, it is now operational. But when will the new bank begin to make a difference in infrastructure projects? Two years after China unveiled plans for a new regional lending institution, the Asian Infrastructure Investment Bank, or AIIB, is now operational, with an inaugural board of directors meeting held in mid-January. But don’t expect this $100 billion development bank will make a major splash early on.  “The AIIB certainly has the potential to make a difference,” said Julian Vella, the Asia Pacific regional leader for KPMG’s global infrastructure practice. But “these are pretty early days,” he added. “The bank is still in its formative stages.” Few would argue that most of Asia suffers immensely from woefully inadequate infrastructure; just try to navigate the streets of Jakarta, ship containers into Mumbai or flip on a light switch in Yangon, Myanmar. The Asian Development Bank three years back published a lengthy and widely quoted study in which it estimated Asia, outside the developed countries of Singapore Japan and South Korea, would require more than $8 trillion in infrastructure investment this decade.  The Need for Infrastructure in SEA While China has spent heavily on infrastructure, some would say recklessly, most other countries in the region are falling further behind. Indonesia alone will need to spend some $450 billion getting its energy and transportation needs up to speed, according to the ADB. Southeast Asia’s biggest country recently announced it needed to add a staggering 35 gigawatts of power over the next ten years. The ADB, the World Bank’s International Finance Corp. and other multilateral institutions aren’t nearly enough. The ADB, for example, in 2014 approved loans totaling $23 billion, but disbursed just $10 billion. Last year, the ADB trumpeted a 40% increase in annual infrastructure loans to $18 billion, but that works out to less than one-twentieth of total needs.  What’s more, in most Asian countries, public private partnership, or PPP structured infrastructure investments have been a major disappointment, with few successful efforts. While some believe that will improve, others remain skeptical. “I don’t see PPP as being very credible,” said Haider Khan, an economics professor at the University of Denver’s Josef Korbel School of International Studies. “I think it will become irrelevant.” There’s a paradox, however, in funding infrastructure. Despite ever-larger needs, the number of strictly bankable infrastructure projects remains limited. “Project financing in Southeast Asia is a pretty difficult thing to do,” said Vella.

Bankable Projects Capital per se may not be the problem. Many institutional investors both inside and outside the region say they’re ready to invest, if only there was a bigger pipeline of projects that stand a good chance of making a decent return with a predictable revenue stream. That, in turn, would both free up and create capital to fund other infrastructure projects and softer efforts like education and health.  “One of the big issues is a lack of bankable projects,” said Matthew Bubb, managing partner Asia for the law firm Ashurst. “There’s capital waiting to be deployed.” Bubb cites rail projects: “One of the big challenges for rail, whether it be LRT or high speed is how to make it financially viable.” In order to expand that project pipeline, countries must do a better job of everything from developing the rule of law and strengthening dispute resolution to ending obstructionist and corrupt bureaucracies and cutting uneconomic subsidies. “The challenge is not so much the fact that [the AIBB] can bring $100 billion to the table, but finding the projects and the way they can participate around the region,” said Vella. “The role of AIIB should not be just supporting and investing in infrastructure projects, but capacity building.”  So, some fear that the AIIB could compete for the same projects as the ADB, World Bank or private lenders. “You don’t want all the agencies fighting over a small pool,” said Bubb. US: A Case of Insecurity? To date, 57 countries have signed up as inaugural members of AIIB, with an initial paid up capital of $50 billion. The roster includes Australia, Britain, France and Germany, as well as most Asian nations. The US and Japan are notable holdouts and Washington has lobbied heavily to thwart membership. While criticism has been couched in concerns about lending criteria or questioning the need for another development bank, the implication was that the Beijing-based AIIB would foster China’s soft power projection in the region.  In an opinion piece criticizing Washington’s opposition, Nobel Prize winning economist Joseph Stiglitz called it “another case of America’s insecurity about its global influence trumping its idealistic rhetoric.” Japan is worried as well. China, for example, in late September won a hard-fought $5 billion contract to build a 140-kilometer high-speed rail linking Jakarta with Bandung, after the Chinese national CRRC Corp. offered a loan that didn’t require Indonesian government guarantees.  In May, the Japanese government increased its infrastructure-lending program to $110 billion over five years in what many interpret as a direct response to the creation of the AIIB.  Some see the new development institution as an extension of China’s highly controversial One Belt-One Road initiative, which pours money into infrastructure projects that serve to heighten Chinese trade along a new Silk Road. But the new bank is at least masked in multilateralism. China has provided 30% of the initial funds and holds 26% of voting rights. Jin Liqun, a former Chinese vice minister of finance who has also worked with the Asian Development Bank and China’s sovereign wealth fund, is the bank’s first president. While he acknowledges a political dimension to the bank, Haider, for one, doesn’t equate the AIIB with China’s power projection. But he added that the new institution underscores a shift in capital formation toward Asia, one that has the support of most in the region. “They welcome capital but on their own terms,” he said.  The AIIB Difference Some lending practices at the AIIB will differ from the ADB and other multilateral institutions. The new bank, for example, can finance coal-fired power plants, which others now forbid. It won’t require borrowers to privatize or deregulate as a condition for loans, as does the World Bank. Supporters believe the AIIB can disburse loans faster than other multilateral institutions. In its initial stages, however, the AIIB is likely to take a far more cautious approach. The bank has already indicated it may just give sovereign loans and let the government recipients finance the actual projects. Or, it may cooperate with the ADB and co-invest.  Further on, AIIB will take a more active role, many predict. That will necessitate more capital. Given the size of regional infrastructure needs, the bank’s “initial capitalization of $100 billion is not adequate,” said Khan. Khan believes that AIIB will expand its capital base within the next five years and sees global investors helping in that effort.  “Once AIIB becomes credible, the organization can float its own bonds, even if the US and Japan don’t join.”