All eyes on the AIIB - plugging the infrastructure gap


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Summary: Recent weeks have seen a growing queue of countries signing up to the China-led Asian Infrastructure Investment Bank (AIIB). Despite public discouragement from the US, China has won over American allies not just in Asia with Singapore and Thailand but in Europe and Australia as well.

The UK was the first Western nation to sign up, followed swiftly by a host of other countries including France, Germany and Italy. Even Australia, where Prime Minister Tony Abbott previously sided with the US, has now joined the supporting ranks.

The US$ 100 billion multilateral bank is seen by many as an ‘Act East’ shift – a move away from US hegemony and the dominant IMF and World Bank. It started with just 21 Asian countries. It now has over 40 founding members, showing the growing influence of Asia in foreign policy from both a political and investment perspective. Singapore's Deputy Prime Minister has called the AIIB a "positive development” and essential in meeting the huge infrastructure needs in Asia. Many are also hoping that it will further boost Singapore’s reputation as an international business and finance hub, allowing local banks to join fund-raising activities organised by other members.

The 31 March was the last day for countries to sign up as founding members. The AIIB is now entering a new stage of development as its members agree on the bank’s structure, operational workings and who will be the main decision-makers.

When it comes to meeting Asia’s sizeable infrastructure investment needs, it is clear that access to funding is only part of the challenge. If the AIIB is to succeed, sound project fundamentals – including clear governance and regulation - are essential.

Concerns have already been raised about transparency and governance. Following the UK’s decision to join, the US National Security Council issued a statement about whether the AIIB would meet ‘the high standards’ of the World Bank and other regional development banks, particularly relating to governance and environmental and social safeguards. Japan has also said it ‘remains cautious’ for the same reasons.

The latest flurry of countries joining the AIIB should help ensure that these standards are met. On announcing its decision to join, the UK explicitly said that it ‘will play a key role in ensuring that the AIIB embodies the best standards in accountability, transparency and governance’. Germany, France and Italy declared in a joint statement that they will do the same, while Australia has stipulated that there should be an independent board and that no one country controls the bank.We can also expect to see hear more about which projects the AIIB will prioritise in the early stages, including a new direct rail link from Beijing to Baghdad and a number of road and port developments in Indonesia. Singapore will have the opportunity to get involved in a number infrastructure projects in ASEAN countries, providing new export opportunities for local construction, engineering and transportation companies. From an investor standpoint, it will be essential to show how these long-term projects, if structured well, can turn into stable, revenue-generating assets.

The AIIB is just one of a number of initiatives from China to meet the region’s significant infrastructure needs, signalling the growing strength of its ‘soft power’. It has also proposed a New Development Bank with its fellow BRICS partners and a Silk Road development fund to boost its connection with Central Asia.

Led by the two most populous countries in the world – China and India – the AIIB will undoubtedly be a huge player to watch in the coming months. All eyes will be watching (and in particular the US) to see whether it can meet its promises.

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