How the new Silk Road will bring the world closer together

A new multilateral organisation, the Asian Infrastructure Investment Bank (AIIB) gathered up 57 founding members to sign a historic agreement. This is the first multilateral institution in which China will play a leadership role (ANZ's Chief Economist for Greater China Li-Gang Liu wrote an earlier article on the AIIB prior to the formal signing here.)

"If done properly the AIIB could offer a refreshing new approach for emerging Asia's infrastructure financing."
Will Rathvon, Global head of resources, energy and infrastructure | ANZ

The AIIB's next step comes at an opportune time where infrastructure financing and the political will for new infrastructure could come together (call me an optimist!).

The traffic clogging and air choking needs for infrastructure could lessen over the coming decade with new AIIB capital complimenting other development agencies.

This, combined with two other factors could set the stage for a self-reinforcing cycle:

• Favorable demographics in terms of working age people shifting populations and production platforms necessitating a greater priority to close the infrastructure gap; and
• Lower oil prices allowing specific countries to unwind fuel subsidies freeing up 2.5 per cent of GDP for infrastructure spending.
  
  

A BROAD VIEW

The AIIB is a broadly represented multinational financial institution, potentially competing with and complimenting the existing regional and global development agencies such as the World Bank and the Asian Development Bank.

In brief terms, the bank's purpose is to foster economic development, create wealth, and improve Asian infrastructure connectivity while promoting regional cooperation and partnerships by working closely with other multilateral and bilateral development institutions.

China has clearly stated the AIIB intends to provide financing for the infrastructure needs of Asia. This differentiates AIIB from other multinational development financing institutions.

The AIIB has a broad membership including China, Russia, Korea, Australia, Indonesia, India, UK, Germany, France, to name a few of the 57 prospective members. The bank will focus on emerging Asia's infrastructure which has attracted 37 members from Asia and Oceania.

With an authorised capital stock of $100 billion, this could be leveraged at least five-fold to bring more capital to the needs of Asia's infrastructure demand. Over time, the AIIB could possibly rival the World Bank.

Despite the world volatility today, the basic principles and drivers of growth and prosperity remain and will continue.

By 2050, the world's population is expected to grow by a third. Africa's population should double and within a generation India's population is set to overtake China. 2.5 billion people are expected to move to an urban environment. This growth requires more infrastructure development to provide for sustainable economies.

By 2020, the world will need $57 trillion for infrastructure development, with Asia representing the largest growth area over the coming years.

China's economy will grow more in the next 10 years than in the last 25 years. India's economy will almost double.

This will demand more iron ore (a key infrastructure building block), more oil and gas (the key ingredients for power and transport) and more copper which will remain as valuable through the 'silicon era' as it has been since the bronze era.

A LARGE NEED

There is a large need for infrastructure development in Asia. According to the World Economic Forum, emerging Asian economies' infrastructure quality score is below average.

In addition, the investment share of GDP has still not returned to pre-1997 levels in most ASEAN economies representing an infrastructure deficit of $US8 trillion through 2020.

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This includes roads and rail, sea and airports, power and water, and telecommunications. The Asia Pacific region will make up 60 per cent of the global infrastructure investment through 2025.

Emerging Asia could account for almost half of the world infrastructure investment indicating a major geographical shift of infrastructure spending from West to East in the foreseeable future.

The biggest risks in ASEAN from a lack of long-term investment in infrastructure include:

• About 600 million people still lack access to electricity; 360 million people lack safe drinking water, and 1.7 billion people lack access to basic sanitation. This means the formation of a middle-income class will be impeded.
• Manufacturing bases will continue to be impeded without quality, quantity, and reliability of basic industrial infrastructure such as power, pipeline and sea-based transport, and efficient roadways.
• Continued lack of regional connectivity due to poor cross-border infrastructure, which will impede economic integration.
  
  

As a China optimist, the AIIB is an institution whose time has come given China's economic rise, and will be a real positive for infrastructure for emerging Asia.

Beijing's vision of the new silk road, and the new maritime silk road will allow for more efficient trade corridors to better connecting China to markets and resources in and outside of Asia.

Since the AIIB is positioning itself as a multilateral-commercial bank rather than a pure development aid agency, they intend to have a faster speed to market by paying more attention to client needs.

If done right, the rise of the AIIB will offer a new and complimentary approach for Asia's infrastructure financing. There will be no need for global multilateral institutions competition.

A successful AIIB will indeed require a few key elements:

• Although China's largest single vote of 26.06 per cent provides a veto vote for all critical issues (requires 75 per cent vote to carry) they must use this fairly. Key decisions include votes on the capital base, board members and decisions that could be biased to the benefit of China.
• Ensuring AIIB has a diverse workforce representing its geographic presence.
• Establishing proper metrics which are transparent and measurable.
• Transparency around decision making and awarding of contracts and knowing “where the money goes".
  
  

If done properly the AIIB could offer a refreshing new approach for emerging Asia's infrastructure financing.

Will Rathvon is ANZ's Global head of resources, energy and infrastructure.