The Asian infrastructure market and the new investment vehicle, the Asian Infrastructure Investment Bank (AIIB), present a potentially highly attractive opportunity for investors.
The Asian Development Bank (ADB) has estimated that Asia needs to invest $8 trillion in national – and $290 billion in regional – infrastructure before 2020 to sustain its growth trajectory. Ambitious projects underway include the development of a pan-Asian railroad – linking China to Myanmar, Thailand and Singapore with one line and to Thailand, Cambodia, Vietnam and Laos with another – and a Chinese-Indonesia joint venture to build a new Jakarta metro system and upgrade roads, rails and ports.
The AIIB is a Chinese-backed venture designed to exploit China’s financial resources and expertise acquired during their own rapid growth to improve regional infrastructure. The bank would be open to participation by other Asian governments and private investors, encouraging co-operation rather than competition with other sources of funding.
So far the signs look promising. Across Asia restrictions on foreign investment have eased, and an increasing number of infrastructure projects have been carried out under public-private partnerships (PPP) where the state provides half of financing for a specific investment project and foreign investors provide the other half.
Nevertheless, there are still significant risks for would-be investors. The political risk is two-fold: It is clear that the Chinese have a vested interest in the project, and improvement in regional infrastructure would help China’s trade and shore-up the growing shortfall in China’s historically cheap supply of labour from the countryside.
Moving supply chains out of the country would cut costs but would also provide China with an additional source of soft power, strengthening its economic role within the region. If these interests become paramount in the operations of the AIIB, it risks becoming merely another forum for traditional funding of Asian infrastructure projects from governments and domestic banks.
Historically, most foreign investors have been excluded from Asian infrastructure projects, and those who have participated have had to contend with complex legal and regulatory restrictions and occasional interference from local governments.
Many Asian governments are willing to improve the regulatory environment. Indonesia, for one, recently passed the Land Acquisition Law allowing the government to obtain civilian land for public works projects and compensating landowners for the property, which could jumpstart infrastructure investments. Despite the increase in PPPs that such legislative changes have encouraged, however, many government policies remain ill-defined.
Moreover, the mutual cooperation required to improve the region’s infrastructure will prove difficult to achieve if highly variegated levels of governance and transparency make some countries – such as the Republic of Korea or Japan – much more appealing destinations for foreign investors.
In addition to the political risks that investment in Asian infrastructure entails, most projects currently carry a high level of operational risk. As the recent garment industry crises in Cambodia and Bangladesh have highlighted, many Asian countries have lower levels of Health, Safety and Environment (HSE) standards than their Western counterparts. The financial and reputational damage investors could incur through involvement in projects proven to ignore HSE and labour standards is consequently higher. Additional obstacles include political pressures and environmental issues that could cause long project delays (as with the Hangzhou Bay Bridge Project) greatly reducing the return on investment.
ASEAN economies generally have little fiscal space for expansionary policies, but public financing accounts for 70 percent of infrastructure spending. Local governments will likely remain the key source of financing in the short-term, but they may be forced to turn to international lenders if infrastructure is to increase its capacity. To attract this investment, Asian governments will need to, “create globally comparable regimes around foreign ownership and investment, foreign currency exchange and taxation to boost investor’s confidence.”
