China’s Infrastructure Bank: Can it Fly?

The past weeks have been filled with headlines on China’s year-old proposal for an Asian development bank, which has caught Asia’s imagination, especially with Indonesia signing on to the idea at the recent APEC meeting in Beijing.

So far, 21 countries have embraced the plan in which China has pledged US$50 billion and said another US$50 billion might be forthcoming. But there needs to be some caution. While the AIIB has been welcomed by developing countries, the response from Japan and the US has been strongly opposed, suggesting that the Asia Infrastructure Investment Bank, as it has been dubbed, might find it necessary to divert some of its energy to managing geopolitics. The two countries have set out to keep Australia and South Korea from joining.

Both the US and Japan have criticized the idea as a deliberate effort to undercut the World Bank and the Asian Development, Bank, which are dominated by the US and Japan. For better or worse, the China proposal has ended up in yet another manifestations of the rivalry between China and the US for primacy in Asia.

An even greater challenge could be finding ways to maintain the enthusiasm and interest of its members. The AIIB faces a Herculean task to improve infrastructure at the speed and scale that developing Asia needs, more so given the climate change imperative. It is estimated that Asia’s infrastructure needs will be as much as US$8 trillion through 2020. Decades of work by the Asian Development Bank and World Bank suggest successes will not come easily or quickly.

There is however reason for cautious optimism. The AIIB's political weight could temper political risk and tempt private capital to co-invest, leading to more infrastructure at lower cost. It may also benefit from China’s great experience in developing infrastructure at scale over the past two decades.

On the other hand, if the AIIB focuses on conventional infrastructure there is a risk of duplicating and perhaps crowding out commercial lending. Indeed, capital is probably not the key obstacle to improving conventional infrastructure like roads and rails in Asia.

The difficulty lies with politics, policy and regulation, which have held back opportunities and left many projects with more risk than investors can bear. Jakarta's stop-and-start efforts to build a comprehensive metro-rail system are an example of how opportunities are missed. On the other hand, mass transit in Singapore, Bangkok, Hong Kong and Shanghai illustrate what can be done when politics and policy align, sometimes aided by development banks.

Certainly multilateral development banks like the AIIB can make a valuable contribution. However, their efforts alone are unlikely to produce an impact at the speed and scale necessary to improve well-being, enhance economic performance, and ensure timely decarbonization.

Efforts by the development banks could however be enhanced and multiplied by a long-term complementary program of diplomacy, advocacy and training to help politics and planners attract greater interest from investors and developers while speeding up project development. That might, for example, be supported by a UN agency, such as the Sustainable Development Solutions Network, or an Asian institution.

Asia need not look only to far off developed countries for lessons and inspiration. Much can be gleaned from Hong Kong and Singapore. A concerted and consistent effort to support countries to develop capabilities for stable policy and clear plans guided by long-term vision would opening the door to far more private investment than any one multilateral bank can offer.

However, the AIIB could still make a substantial impact by focusing on the unconventional challenges posed by sustainability. Knowledge of the infrastructure necessary for sustainability is still limited among banks and governments. It is early days, with solutions for sustainability emerging and rapidly evolving as scientific understanding of environmental damage advances while technological innovation lowers costs and improves performance. That is a clear opportunity for the AIIB to provide leadership for intergenerational investments delivering infrastructure for sustainability.

The AIIB could help pioneer and replicate scalable approaches to financing infrastructure for sustainable development and resilient societies, such as clean power, energy efficiency, low-carbon transport, walkable cities, restored rivers and healthy ecosystems. In taking this track the AIIB may also be better placed to tap the growing market for green or climate bonds, which some buyers think face fewer risks from climate change.

By focusing on the infrastructure needed to secure sustainability the AIIB could realize several complementary benefits. One, to reduce duplication and crowding-out risks. Two, deliver sustainable financial returns and perhaps crowd-in private sector investment. Three, increase the pool of development-focused alternatives to US government bonds. Four, produce comprehensive benefits for well-being and society, for example reducing healthcare costs and improving the quality of life by cutting pollution.

In sum, given a sustainability mission, the AIIB could provide clear vision and inspiring leadership to help Asia secure sustainable prosperity, while generating healthy financial and social returns.

The author is an ecological economist currently serving as a senior consultant on strategy and policy in Singapore.