Unlocking private capital

Jin Liqun, president of the Asian Infrastructure Investment Bank, explores the most effective ways to fund vital infrastructure projects, while meeting environmental and social standards

Asia needs better connectivity within the region and better linkages outside the region to drive more trade and economic activity. In response to this need, the Asian Infrastructure Investment Bank has made investing in cross-border infrastructure one of its priorities.

Our recently released Asian Infrastructure Finance 2019 examined the economic drivers of infrastructure financing in Asia, specifically in eight large markets in the region. The report concluded that investing in cross-border infrastructure is still an attractive investment opportunity for the private sector, despite the near-term challenges.
We are at an inflection point

Geopolitical tensions, macroeconomic uncertainty and interest rate fluctuations have been contributing to a decline in the level of financings that have closed for infrastructure in Asia. This number was steadily increasing from 2014 to 2016, but started to decline in 2017 and continued its downward trend in 2018.

This is concerning for an organisation like ours, which prioritises investment in cross-border connectivity and the mobilisation of private capital to close these deals.

In the eight markets we looked at, there are uncertainties and legitimate concerns. But there are also solutions if we approach the problem in the right way. Multilateral development banks are here to help smooth over challenging times. At the same time, AIIB cannot afford to lose sight of the longer-term goals for the region.

We believe bottlenecks in infrastructure can only be effectively resolved through partnership and risk sharing. We want to encourage dialogue between the public and private sectors, so that government policies and private financiers’ objectives can be more closely aligned. This will help projects – particularly public-private partnerships – to secure funding and move forward.

These efforts will contribute to a higher standard and higher quality of projects in the pipeline. The Asian Infrastructure Finance report also found there is a flight to quality among private sector investors, who are all the more risk sensitive during this period of economic uncertainty.

This means high-quality projects that are fiscally sound and meet international standards will have the best chance of securing private sector funding because they generate inclusive growth and have fewer implementation issues.
International standards:

The key to success

Many guidelines, frameworks and principles have been created in recent years to promote sustainable and quality infrastructure investment. Some research suggests that there are 40 existing initiatives, with more under development.
Here AIIB and our partner multilateral development banks play a key role. We can support clients to improve their environmental, social and governance performance through financial instruments and capacity building.

We are also well positioned to encourage private sector investment in infrastructure, as well as to mobilise grant providers and other financiers.

However, standards and policies are only effective if they are implemented with proper monitoring and accountability. Otherwise, they collect dust on a shelf and help no one. To support proper implementation, we need to harness the complementary strengths of all relevant stakeholders, including infrastructure sponsors, investors, multilateral development banks, bilateral development financial institutions and the key stakeholders in recipient countries.
AIIB has actively been working with business associations, such as the China International Contractors Association, to provide training, workshops and knowledge-sharing activities for Chinese infrastructure investors. We also need to learn from them on good technical and engineering design to promote project cooperation. We believe this approach of sharing information is an important step towards improving standards across the board.

Another way in which AIIB is seeking to catalyse private investment in Asian infrastructure and promote high standards, is by creating the ESG Enhanced Managed Credit Portfolio. This $500 million portfolio aims to develop infrastructure as an asset class, broaden and deepen debt capital markets for infrastructure and promote the integration of environmental, social and governance principles in fixed income investments in emerging Asia.

If we are going to build a sustainable tomorrow, we need to unlock private capital for infrastructure investment and strengthen alignment on how environmental and social standards will be implemented in infrastructure development. We believe there is strong momentum working towards these goals, but we have only just begun. It will take a multilateral approach to drive the buy-in necessary for success.