Peer reviewed analysis from world leading experts

The AIIB will help fill the infrastructure finance gap

Reading Time: 4 mins

In Brief

The China-led Asian Infrastructure Investment Bank (AIIB) will serve to ease the looming liquidity drought in infrastructure financing. As the World Bank and the Asian Development Bank move toward concessional lending and knowledge sharing with low income countries, the AIIB is left with an important niche to fill.

Share

  • A
  • A
  • A

Share

  • A
  • A
  • A

Developing necessary infrastructure is a vital strategy if we are to realise global growth potential. From the early 2000s up to 2030, the world will have to invest US$57–67 trillion in infrastructure, such as roads, ports, power plants and water facilities. Infrastructure finance requirements in emerging market economies (EMEs) account for 37 per cent of this value. But Otaviano Canuto of the World Bank argues that this share should be considered a lower bound. The figure does not include ‘development goals’ and EMEs would need an additional US$1 trillion per year until 2020 just to keep pace with the demands of urbanisation, growth, climate change and global integration.

Investment in infrastructure is the most appropriate development policy for EMEs. The IMF found that the long-term fiscal multiplier for government investment in infrastructure is around US$1.6 for every US$1 of investment in developing countries, much higher than the multiplier that such investments generate in developed economies. This means that for developing countries investment in infrastructure is particularly effective in increasing national income.

Infrastructure also represents a class of assets that can play a stabilising role in the current volatile economic environment, which has been triggered by unconventional monetary policies in developed countries. Central banks’ current use of ultra-expansionary policies, such as low interest rates and quantitative easing, are unsustainable and are creating large risks. They have also proved unable to affect real-sector expenditure to the extent required.

Infrastructure investments are intrinsically defensive. Investments in infrastructure are less volatile than equities over the long term. This should appeal to pension funds, insurance companies and other long-term financial institutions.

But EMEs are still not using infrastructure investment as a financial tool. Even during economic boom periods, investments in capital were not sufficient to fill the infrastructure finance gap. Foreign direct investment into EMEs is still strong and can play a significant role in funding infrastructure investments. But long-term debt finance — fundamental to many projects — has not performed as well as it needs to.

The financial crisis and the ensuing global financial regulatory reform have caused banks to cut back from the infrastructure sector, reducing the availability of long-term financing. European banks used to play a significant role in financing infrastructure in EMEs. But the gap left by their withdrawal after the global financial crisis has not been filled by pension funds, insurers and mutual funds. The allocation of infrastructure debt in those portfolios is less than 1 per cent — far less than the 12 per cent previously supplied by banks.

In 2011 and 2012, net commercial lending by multilateral development banks was negative. The solution to the resulting liquidity drought in EMEs would be to allow the AIIB to serve as a financial outlet.

The main feature of the AIIB is private investment in infrastructure. The AIIB will handle project selection and preparation problems, and implementation risks. But if the AIIB wants to gain traction in markets, it will need sound economic rates of return and solutions to the challenges of financial intermediation.

The AIIB has the advantage of a global scope. It will invest in projects that upgrade connectivity among all Asia-Pacific economies. The time is right. APEC leaders are now committed to improving connectivity in the region and China needs far better, and more strategic, links to the region’s network.

The AIIB will give a new focus to the need to address the requirements of EME infrastructure investment. It will introduce a level of sustainability and stability in the future growth of the Asia Pacific, and will lower volatility in the global economy.

Miriam L. Campanella is Associate Professor at the University of Turin and ECIPE, Brussels.

4 responses to “The AIIB will help fill the infrastructure finance gap”

  1. AIIB should help fill the infrastructure finance gap, but whether it WILL effectively fill that gap still remains to be seen.

    China has had little experience running huge financial institutions well. It’s SOE banks are replete with non-performing loans, and its financial affairs talent is concentrated in multinational firms.

    I think the jury is still out whether China can find the talent and develop the culture to run an infrastructure investment bank with multilateral partners. I hope that China recruits a multinational grouping of people for bank management, risk analysis, and project feasibility studies. I hope that it has the business acumen to choose contractors wisely. But that remains to be seen. Running a multilateral financial institution is tough work.

    • I do agree with you that the AIIB’s big challenge is the bank’s governance and especially financial expertise. Yet, China has a good record of a muddling-through approach which makes it apt to shape cautious and exploratory steps. As an investment bank , AIIB is expected to firstly behave as a knowledge bank, with a great focus on evaluation and selection, while funding should only play to attract private investments. In this way the new bank will complement the existing international financial architecture, helping finance flowing where it is mostly needed.

      • The record of China is most decidedly mixed on its own infrastructure development and the governance issues, which from my point of view inform the organizational culture and mindset that the Chinese will bring to the bank.

        I am a great admirer of China’s transportation infrastructure. The roads and railroads actually go to places that need to be served and linked, and “roads and belts” can facilitate the movement of people and goods to and through China’s neighbors. The Kunming to Singapore link is realizable.

        In contrast the water way and dam construction record is far less laudable. Much more so than transportation the uprooting of people with unsuitable relocation sites is an altogether regular part of the devastation to be matched by the environmental damage wrought.

        Practically, I hope the AIIB helps finance more transportation infrastructure than dams. The Chinese can do the former much better.

        • Many thanks for your well documented descriptions of China’s infrastructure records. I share your concerns over the big impact that infrastructures could cause to the environment and communities. Yet, connectivity , the focus of the AIIB is of extraordinary relevance at the current stage of the globalization. I would compare it to the ancient Rome achievements. Romans are best known for excellent infrastructure expertise: connectivity was their primary focus and their great heritage to Europe and beyond. Should we be concerned if Chinese do the same? If learning by doing is the China’s pragmatic paradigm, I would hope that Chinese will surely gain knowledge how to make the water way and dam construction, as Romans did with the waterways system known as the Aqueducts.

Support Quality Analysis

Donate
The East Asia Forum office is based in Australia and EAF acknowledges the First Peoples of this land — in Canberra the Ngunnawal and Ngambri people — and recognises their continuous connection to culture, community and Country.

Article printed from East Asia Forum (https://www.eastasiaforum.org)

Copyright ©2024 East Asia Forum. All rights reserved.