CHINA RISING: AIIB seeks to tackle Asia’s $1.7trn infrastructure gap

CHINA RISING: AIIB seeks to tackle Asia’s $1.7trn infrastructure gap
By Clare Nuttall in Bucharest July 10, 2017

There’s an estimated “infrastructure gap” of up to $1.7trn per year in Asia, namely the difference between the amount being spent on infrastructure and the amount that’s needed to keep up with demand. The Beijing-based Asian Infrastructure Investment Bank (AIIB) was set up to address this need, by financing projects focused on connections across the continent and beyond, whilst also mobilising private sector finance.

Given that Asia has a rapidly growing population and economic growth rates that generally surpass those in developed western countries, the pressing need to step up investment into infrastructure is not surprising. Beijing has its own highly ambitious strategy in the infrastructure sphere, the Belt and Road Initiative, which envisages a network of land and sea routes between China and Europe. 

The AIIB’s launch in January 2016, a little more than two years after Chinese President Xi Jinping first announced plans for the New Silk Road and the Maritime Silk Road, has unsurprisingly has led to it being seen as the “Belt and Road bank”, but spokeswoman Laurel Ostfield says the AIIB’s mandate is broader than that, even though the bank is likely to invest into projects that fit with the Belt and Road strategy. 

“OBOR [One Belt, One Road] right now is really a high-level concept, and there is a distinction between what OBOR is trying to achieve and what the AIIB is here to do,” Ostfield tells bne IntelliNews. “There’s a natural overlap, and we are looking at cross-border connectivity, but the AIIB doesn’t have a mandate to deliver on specific OBOR projects.” She also stresses that the projects the bank will fund are those proposed by its member governments or the private sector, rather than being driven by Beijing’s agenda. 

The Eurasian region, which occupies the landmass between China and Europe, is a core part of the New Silk Road. Ostfield notes that the area of cross border connectivity is relevant to the region, which the bank sees as “a very critical link between China and Europe”. However, the investments the bank has made and is planning in Central Asia and the Caucasus are actually in a broad spectrum of areas. 

Within the region, the bank made its first investment into a road from the Tajik capital Dushanbe to the Uzbek border in June 2016, investing alongside the European Bank for Reconstruction and Development (EBRD). Six months later, it followed up by supporting the Trans-Anatolian Natural Gas Pipeline (Tanap) project, which will transport natural gas from Azerbaijan’s Shah Deniz 2 field across Turkey to Europe, this time investing with the World Bank.

There are four projects currently in the pipeline; a solar power project in Kazakhstan, the rehabilitation of the Nurek hydropower plant in Tajikistan, and two other projects in Georgia. “These projects aren’t fully approved yet but they are getting into the last stages which means there’s a good chance they will be funded,” Ostfield says. 

The planned investments in renewables fit with the AIIB’s other mission to invest into green and sustainable infrastructure — “we can’t build the infrastructure of 20-30 years ago,” says Ostfield. This encompasses investments in technologies such as wind and solar power, but also ensuring that all the bank’s investments are environmentally friendly and treat local populations with respect. 

Questions have, however, been raised about the development bank’s energy strategy, which leaves a substantial derogation for fossil fuel projects (such as the Tanap investment in Azerbaijan). This is understood to have caused a rift among its members, with major coal producers now pushing for its mandate to be extended to clean coal projects, despite a decision by other major lenders such as the Asian Development Bank, the World Bank and the EBRD not to directly finance coal-fired power plants.

By March 2017, the AIIB had invested a total of $2bn. The bank doesn’t have a specific target for how much money it plans to commit this year, but Ostfield anticipates it will put around $2.5bn to work. However, “we are more interested in quality than quantity, so we are not holding ourselves to this target just for sake of hitting it,” she stresses.

Indeed, the AIIB is still in the process of recruiting staff, “actively ramping up every department” at its office in Beijing, where by the end of 2016 people from 24 nations were working. 

Building a new development bank from scratch is no easy task, with the AIIB’s employees having to work out everything from its overall mission, to putting the “processes and procedures in place” and assessing individual projects, to the mundanities like ordering stationery. “Everything is being built from the ground up, which is why it’s a very exciting place to be and people come from all over the world to work here,” Ostfield says. 

Its launch also comes at a point where the international debate over globalism versus nationalism is heating up, with US President Donald Trump’s withdrawal from the international sphere – most recently with his decision to take the US out of the Paris climate change agreement – contrasting strongly with Xi’s push for the OBOR initiative, through which China is seeking to lock in countries from four continents to its global trading networks. China is increasingly putting itself on the world stage as a leading proponent of an international approach and globalism.

Commenting on this, Ostfield says that “multilateralism is alive and well”, pointing to the number of countries that have leapt to join the AIIB. “There are challenges in the world that no one government or organisation or company can fix on their own; it really will take a global response,” she argues. 

“The infrastructure gap in Asia is one of them. When you’re got such a large challenge it really takes all these parties coming to the table. The AIIB is working with governments, private financiers and other multilaterals that are already doing great work. It is taking all of us collaborating and cooperating to tackle the mountain in front of us.” 

A recent Asian Development Bank study estimates the infrastructure gap in developing Asia and the Pacific at $1.5trn per year, rising to $1.7trn if mitigation and adaptation costs are taken into account, adding up to more than $26trn by 2030. While other estimates are more conservative, Ostfield puts the figure in the $1.3trn-$1.7trn range, the gap is clearly a huge challenge for the region. 

“Asia’s population growth – there is a young and rapidly urbanising population – has created a massive need for new and improved infrastructure,” Ostfield says. “Looking at current investments and extrapolating where people are migrating to, how they are ageing, [researchers have] concluded that beyond what has already been invested there’s a gap of $1.3bn plus. That’s another reason why the AIIB was created when it was; it’s critical to help bring some fresh capital to the table to help address that gap.”

From the outset, the AIIB has been eager to cooperate with other development banks, co-financing many of the deals in its first year of operation. “[Other development banks] have been very important, especially at this stage of the bank’s growth. Co-financing with other multilaterals has been an incredible opportunity for us because they’ve got the staff and the experience. We have been able to draw from that experience, work closely with them and dip our toes into investing.”

The AIIB adopted the broad definition of Asia as used by the UN, which includes Oceania. However, the bank doesn't limit its membership to Asian states; it has members from every continent except Antarctica. In terms of investment, the AIIB can back projects outside its home continent, provided there is a clear benefit to Asia. “As membership grows and we have more non-regional members, we are scoping out what that means practically,” says Ostfield. 

In May, the bank approved seven new prospective members – three Asian countries plus Bolivia, Chile, Greece and Romania – bringing the total number of approved members to 77. The signs are that its membership base will continue to grow.

This is part of a series looking at the implications of China's growing interest in Central and Eastern Europe and Eurasia. 
 

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