Finance will create new alliances across Asia – Financial Times

Finance will create new alliances across Asia – Financial Times

Asia must invest $26tn in infrastructure by 2030 if it wishes to resolve a serious shortage of roads, railways, ports, power stations and other basic facilities that threaten to hold back some of the world’s fastest growing economies.

The estimate of required spending, published this year by the Asian Development Bank (ADB), means that 45 countries across the region will need to double total annual spending on infrastructure to about $1.7tn to cope with rapid urbanisation and population growth.

Such a shortfall looks hard to bridge, but China’s burgeoning bilateral financing ambitions and a mix of competition and co-operation among multilateral development banks could help.

The clearest example of expanding co-operation among multilateral agencies came in April when the World Bank and the China-led Asian Infrastructure Investment Bank (AIIB) agreed to boost co-financing of projects alongside knowledge sharing, staff exchanges and analytical work.

Since the AIIB began business at the start of 2016, it has co-financed five projects with the World Bank.

But the decision to boost co-operation was significant because the AIIB has been seen largely as a rival of western-backed organisations such as the World Bank and the ADB. Deeper integration with the World Bank fits with the AIIB’s “vision of a new kind of internationalism”, Jin Liqun, president of the AIIB, said in a recent interview with the Financial Times.

Pooling resources would increase both organisations’ developmental footprint, diversify risk and entice the private sector to participate in building and operating infrastructure projects.

Although the AIIB so far represents a fairly minor presence in the development finance scene — having lent only $1.7bn last year — it has grand ambitions backed by a $100bn capital base to scale up its lending rapidly in coming years.

The US, the dominant force within the World Bank, initially opposed the AIIB’s establishment and has so far declined to join. Japan, the main backer of the ADB, has also rebuffed the AIIB’s invitations to join.

However, Takehiko Nakao, ADB president, told the Financial Timesthat the ADB and AIIB would seek to work together on projects. “People want to depict ADB and AIIB as rivals and Mr Jin and I as rivals. But actually we are friends, and ADB and AIIB can be partners,” said Mr Nakao.

“We’re already identifying projects for the first batch of AIIB loans. One of them should be co-financing between AIIB and ADB,” Mr Nakao added. The ADB made $27bn in total loan approvals in 2015, making it a key force in regional finance.

Nevertheless, the sense that Japan — if not the ADB itself — sees China as a rival in Asian developmental finance was underlined by a pledge Tokyo made in 2015 to provide $110bn in aid for infrastructure in the region.

Observers could not help but notice that the pledge, made by Shinzo Abe, the Japanese prime minister, was made on the day that AIIB members met in Singapore and the amount exceeded the $100bn capitalisation of the AIIB.

For the region, though, such competition could prove to be positive. Mr Abe’s promise represented a 30 per cent increase over Tokyo’s previous infrastructure funding.

Such amounts, however, pale next to the financial firepower of China’s bilateral lending giants, the China Development Bank (CDB) and the Import-Export Bank of China (Ex-Im Banks). The combined $684bn in loans outstanding from these institutions at the end of 2014 eclipsed that of all six western-backed multilateral lending organisations put together.

At times, however, the bilateral and politically driven nature of decision making at the two big Chinese development banks can create problems for co-operation with multilateral lenders. Usually, the CDB and Ex-Im Bank specify that projects they finance should be executed by Chinese contractors, meaning that competitive tenders are rare.

In a recent example of how deals can unravel, the ADB has said it might pull out of a credit line of up to $2.5bn that was earmarked for an $8bn Pakistan railway. A final decision is set to be made within a few weeks, an ADB spokesman says.

According to Pakistan officials, who declined to be identified, relying entirely on Chinese finance for the $8bn railway would speed the project up.

The railway from Karachi to Peshawar is part of China’s “One Belt One Road” (Obor) vision to construct infrastructure in some 64 countries between China and Europe.

In Pakistan alone, the China Pakistan Economic Corridor — a multi-faceted scheme to build roads, railways, power stations and other infrastructure under the auspices of Obor — is set to cost some $54bn. Other countries — such as Kazakhstan, Cambodia, Myanmar and Bangladesh — also stand to gain from significant inflows of finance under the Obor initiative.

But the size of the sums involved is raising some concerns, including from the IMF, about the debt-servicing capacity of recipient countries.

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