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What to expect from the first five years of the Asian Infrastructure Investment Bank

FOCUS: The task ahead of the Asian Infrastructure Investment Bank (AIIB) is considerable, as Asia has a massive 'infrastructure gap'. The bank estimates it will be responsible for spending amounting to 60% of the world's total infrastructure spending by 2025.16 Nov 2015

To celebrate Out-Law's 15th birthday we are looking ahead to the big changes facing business in the next five years. Read more and follow our celebrations on Out-Law and on Twitter.

The AIIB was launched in Beijing in 2014, with the aim of boosting investment in infrastructure in Asia. The bank was established formally by the 52 member countries signing the Articles of Agreement in June 2015 and will be operational by the end of this year.

The Asia Development Bank believes that US$8 trillion needs to be spent between 2010 and 2020, while other estimates suggest that by 2025 the region will need to spend US$5 trillion annually.

The AIIB has an authorised capital to $100 billion and, at the time of writing, it has an initial subscribed capital of US$50 billion. Thus, the AIIB will not be able to bridge the region's infrastructure gap on its own.  

I believe we will see the bank working towards its goals using strategies for the short term as well as the longer-term. In the short term, the AIIB is likely to provide funding in much the same way as other multilateral development banks (MDBs) or credit agencies, by making sovereign loans to countries for investment in infrastructure projects.

The injection of loans from the AIIB will boost the capacity for the construction of major infrastructure projects in the region and create momentum in the market. If it chooses the right, high-profile and successful projects in its first few years, the AIIB will demonstrate to the market that infrastructure in the Asia-Pacific region can be delivered successfully and with strong, stable and long-term returns on investment. This will be an important aspect of increasing the confidence of private investors looking at infrastructure in the region.

In the longer term, the AIIB will likely seek to harness this confidence by working with the private sector. I expect to see the AIIB turn to project financing structures such as public-private partnerships (PPP) between the bank and private entities, to share the investment, the risk-taking and the returns. In this respect, it is likely that the AIIB will seek to unlock the potential investors amongst the sovereign wealth funds, pension funds and other institutional investors who are looking for long-term and stable returns.

The AIIB is better placed to fulfil this role than are the ADB or the World Bank, because it lacks their obligations on 'poverty alleviation' and can go after more bankable projects. This difference between the AIIB and the other MDBs may open the way for the AIIB to collaborate with them as they all seek to work together to achieve their respective aims.  

Taking a broad view across the region, perhaps the answer to opening up private investment in the infrastructure sector will be about understanding risk and reducing it so that private investors feel confident and secure. The role for the AIIB in the longer term, therefore, might be to take a lead in 'de-risking' projects to make them more attractive in the market.

Given the size and diversity of the Asia-Pacific region, the risks will vary from country-to-country and sector-to-sector. The AIIB will have to be very highly attuned to the specific projects, markets and countries that it goes into, and play a different role in each depending on the sources of private finance that it seeks to attract.

For example, one important source of finance in the future may prove to be the bond market.  The bond market is likely to have concerns in relation to the risks of default caused by construction delays, which in turn lead to delays to the start of an infrastructure asset generating revenue in its operational phase. The AIIB could structure projects so as to relieve that concern to meet any such delay to revenue or to a shortfall in demand.

Projects in the least developed countries are likely need the most de-risking. This is where there might be opportunities for greater collaboration with the ADB and the World Bank, alongside private investors. It might be appropriate for the ADB and the World Bank to loan the funds in order to address the riskier elements of projects with a view to their poverty alleviation role, while further funding is provided by the AIIB and private sector. The AIIB can play a leading role in getting all these different bodies to work effectively together.

As well as fulfilling its financial role, the AIIB could also play a part in shaping policy in the region to open up markets to sources of private investment.  It could encourage countries in the region to lift restrictions on foreign ownership of infrastructure, to unbundle infrastructure markets and to introduce the regulatory framework needed for the implementation of PPP and other project financing structures.

In summary, I expect the AIIB in its early stages to adopt a 'traditional' role in making loans directly to governments across the region for infrastructure investment. It is hoped that, in a few years, the AIIB can take on an even greater leadership role, acting as a broker and facilitator to attract private investment into infrastructure in the Asia-Pacific region, while of course still acting as a lender itself.

There can be no doubt that the solution to the challenge of Asia-Pacific's infrastructure needs is a mix of MDB and private investment. That is far more likely to succeed when those different elements work together rather than in isolation, and the AIIB will likely take a leading role in making that happen.

Beijing-based Sam Boyling is an infrastructure expert at Pinsent Masons, the law firm behind Out-Law.com.

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