What AIIB means for Asean connectivity

In 2009, the Asian Development Bank (ADB) forecast that from 2010 to 2020, Asia would need US$8 trillion in national infrastructure. The discussion on connectivity in Asia has continued since then, but it was China that seized the moment with its proposal in 2013 for the Asian Infrastructure Investment Bank (AIIB).

Thereafter, last October, 21 member countries entered into a memorandum of understanding and, subsequently, another 36 countries expressed their interest in joining the development bank. More recently, on June 29 this year, 50 countries signed the Articles of Agreement and the remaining seven have yet to receive domestic approval. The capital base of AIIB was announced as US$100 billion (S$135 billion), with the Chinese stake at US$29.78 billion.

With the AIIB launched within four years of the adoption of the Master Plan of Asean Connectivity (MPAC), policymakers of South-east Asia are beginning to wonder how this new source of funding can be deployed to resolve some of Asean's financing needs.

In 2010, Asean adopted its MPAC that strove to integrate 10 South-east Asian nations with over 600 million people and a combined GDP of US$2.3 trillion. The MPAC identified 15 priority projects, including the Asean Highway Network, the Singapore-Kunming Rail Link, the Asean Broadband Corridor and the National Single Windows. However, project funding became an issue. Although Asean countries have established an Asean Infrastructure Fund of US$485.2 million and promoted a public-private partnership mode of financing, developing bankable projects that have regional impact has remained a challenge.

Can the China-led AIIB support the Asean Connectivity masterplan? This is a pertinent question, given that China is one of Asean's dialogue partners and is said to be contributing to the region's development and prosperity, including the Asean integration. There are three factors Asean members must keep in mind to draw AIIB funding.

A traffic bottleneck due to road construction in Jakarta. The project pipeline of AIIB is likely to have a more pan-Asian view. Given this, Asean members should develop projects that have more regional benefits. PHOTO: AGENCE FRANCE-PRESSE

First, it should be noted that AIIB is conceptualised as an Asian bank, rather than an Asean one. Its membership ranges from countries in Asia to Europe and beyond. The bank is part of a Chinese grand scheme of "One Belt, One Road", whose core objective is to encourage Chinese firms to venture into emerging economies that already have trade and investment linkages with China.

In addition, AIIB seems to be a broader initiative by China, driven by the growing role of Asian countries in the global economy. Hence, the project pipeline of AIIB is likely to have a more pan-Asian view. Given this, Asean members should develop projects that have more regional benefits and could complement the other existing infrastructure in Asia.

The second aspect is for Asean members to maintain Chinese interest in the region. Since 2009, China has remained Asean's largest trading partner. The two-way trade between Asean and China reached US$350 billion in 2013, accounting for 14 per cent of Asean's total trade. It is expected to increase

to hit US$500 billion by this year end. This growth in trade is attributed to integration of Asean economies into the China-centric production networks.

The phenomenon got a boost with the Asean-China Free Trade Area, signed in 2000, that included initiatives on liberalisation, facilitation and promises to develop seamless transport infrastructure.

China's interest in MPAC will, thus, depend on how far the infrastructure projects can contribute to Asean economies' linkage to China. One such project that can be easily identified is the Singapore-Kunming Rail Link, spanning 7,000km and connecting China (the city of Kunming) and seven Asean countries - Singapore, Malaysia, Thailand, Vietnam, Cambodia Laos and Myanmar.

Although the interest of AIIB and that of China may not be synonymous, the former will contribute to the latter's enhancement of soft power. The choice of Beijing as the bank's headquarters portrays such Chinese behaviour. Moreover, as China has 26.06 per cent of the voting rights, it receives effective veto power, especially when any major decision taken by the bank is said to require the support of at least 75 per cent of the total votes.

Finally, a crucial factor determining the extent of AIIB financing is the capacity of Asean countries to work together and advocate in a single voice for cross-border infrastructure project funding. It is well-documented that the 10 Asean countries are different from each other not only in terms of their economic structure and per capita income but also in terms of their infrastructure availability and quality.

This provokes the countries to compete, rather than to cooperate, with each other with regard to attracting infrastructure funding. The issue gets pronounced as China carries bilateral economic relations with individual Asean members. However, the attitude of competition is not likely to benefit Asean. As most of the MPAC projects do not belong to one but multiple countries, Asean members should advocate in a single voice the importance of infrastructure that has regional benefits. Hence, a consensus among Asean countries is necessary so that they can have a united front when negotiating with the Chinese-led multilateral AIIB.

That said, while China may have grabbed the limelight in relation to regional connectivity, it is yet not clear whether small Asean economies will gain from such initiatives. Indeed, there has been criticism against the existing multilateral banks. But it is also not apparent that an alternative system of China-driven AIIB is Asean's solution to gaps in regional infrastructure financing. Only time will tell how far AIIB can support the implementation of the MPAC projects, and thus mitigate some woes of the Asean countries.

• The writer is an Iseas Fellow and Lead Researcher (Economic Affairs) at the Asean Studies Centre, Iseas.

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A version of this article appeared in the print edition of The Straits Times on July 16, 2015, with the headline What AIIB means for Asean connectivity. Subscribe