AIIB can play important role in Asia’s infrastructure development: Experts

AIIB can play important role in Asia’s infrastructure development: Experts

However, consultants have said some key areas that the bank needs to consider include its governance structure and identifying alternative sources of capital.

The proposed AIIB was initiated by China, and has the backing of 20 other economies, including Singapore. First announced on Oct 24, it will have an authorised capital of US$100 billion (S$125 billion), and will be formally set up at the end of 2015 to help fund infrastructure projects across the region.

Right now, the World Bank and ADB help to support such funding, focusing on poverty reduction. With the Asia Pacific region estimated to need about US$800 billion every year for the next 10 years in infrastructure investment , analysts said there is room for the AIIB to step in.

Last year, the ADB and World Bank collectively put in about US$45 billion towards funding projects, noted Richard Warburton, the Asia Head of Infrastructure, Industry and Utilities at Arcadis. “But relatively speaking, there is still a big gap. There are 360 million people in the region who do not have access to clean water, and about 160 million who do not have access to permanent power and basic social infrastructure,” he said.

ROLE OF PRIVATE SECTOR

Consultancy KPMG believes the AIIB needs to encourage the private sector to be more active in infrastructure investment and to find new sources of capital. Currently, the private sector only accounts for 10 to 15 per cent of such investments in Southeast Asia.

Said KPMG’s head of Power and Utilities for Asia Pacific, Sharad Somani: “Over the next three to five years, as Basel III requirements kick in, banks will obviously shy away from long-term debt. That will be a bit of an unfortunate situation for the region because while we have time, we have not developed alternative sources of capital.

“That is where I think the capital markets and institutional money will become very important, to be a catalyst now, so that they are ready when there is need.”

Three nations that are conspicuously unrepresented in the AIIB are Australia, South Korea and Indonesia. But consultants said they may eventually sign up as well. Said Harsha Basnayake, managing partner of Transaction Advisory Services (ASEAN) at EY: “When I look at the landscape and the infrastructure space, South Korea is a big player in infrastructure and Indonesia is a huge recipient of infrastructure needs. As a result, these countries will have to join in eventually.

“Given that there is a much broader participation, it just reflects that there are a lot of buy-ins, regardless of their political alliances that the countries would want to have. The economic aspect of this is huge.”

Mr Warburton noted: “China has over the last 20 years consistently invested more of their GDP in infrastructure growth, about 8 to 8.5 per cent against the developing world’s average of 2 to 4 per cent. The benefits are clear to see.”

“Once other countries see the positive impact the bank is having, I am sure we will see other countries coming in to join the bank well. There is a lot of talk about it being China’s bank, but there are 21 founding members of this bank. All would have a say and all would have an influence, so potentially, it is a more controlled way of spending that money in that region,” he added.

The AIIB is expected to be formally set up at the end of next year, with its headquarters in Beijing. As it begins to take shape, analysts said it will have to ensure that there is consistency in the way it structures projects and adopts best practices of other development banks.

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