The Asian Infrastructure Investment Bank (AIIB) is a multilateral development bank whose objective is to provide finance for sustainable infrastructure projects. By prioritising sustainable infrastructure and key productive sectors, it aims to open up new capital investments, advanced technologies, and effective measures to better connect Asia with the rest of the globe. The AIIB is mandated to concentrate its investment in the sectors of green infrastructure, connectivity and regional cooperation, technology-enabled infrastructure, and private capital mobilisation, contributing towards the fulfillment of the Paris Agreement and the Sustainable Development Goals. In 2020, the AIIB approved $10 billion worth of financing for a total of 45 projects, of which $2.9 billion was for infrastructure projects across various sectors including energy, transport, water, urban infrastructure, and information and communication technology (ICT).

Sector focus

One of the most pressing global issues of the present century is climate change. Although there is a global push to finance green infrastructure to significantly reduce global emission levels, current investment levels are far below targeted levels. Under green infrastructure, the AIIB has made a range of investments in projects improving local environmental conditions while also providing for sectors such as renewable energy, low-carbon public transportation, water and waste management, and effective pollution control mechanism. As of December 31, 2020, a total of 22 projects had been approved in the energy sector. The AIIB has set an ambitious target of committing 50 per cent of its overall financing towards climate finance by 2025. Infrastructure connectivity is indispensable for improving regional cooperation and stimulating economic growth. However, as indicated by enormous connectivity gaps within and between Asian economies, it is one of the most neglected and underserved sectors. The AIIB aims to fund projects that develop core infrastructure connectivity and accelerate cross-border connectivity among Asian economies that are presently not linked. The AIIB had approved 18 projects in the transportation sector as of December 31, 2020. It has targeted 25-30 per cent of its entire financing approvals towards cross-border connectivity projects by 2030.

The pandemic has hastened the transition to digital technology, but it has also revealed significant urban-rural disparities in terms of digitisation opportunities within the Asian nations. The AIIB’s other focus lies on developing and financing technology- and digital-enabled infrastructure, which includes artificial intelligence, big data, 5G network, internet of things, and other engineering and scientific technologies such as battery storage, robotics, drones, and 3D printing. By December 31, 2020, the AIIB had financed five projects in the ICT sector.

The fiscal potential of governments and the financing capacity of multilateral development banks is insufficient to meet the enormous financing requirements of infrastructure projects. The banking sector provides most of the private finance, leaving the significant Asian institutional investor pool underutilised. The AIIB is making concerted efforts to maximise private capital mobilisation through project transactions. This is being done through financial intermediaries and by making adequate investments that contribute to the development of capital markets and promote infrastructure as an asset class.

Key investments

The AIIB has approved a power distribution strengthening project in Indonesia to increase access to quality power services in East Java and Bali. In January 2021, a total of $310 million has been allocated to the project. The project will catalyse the implementation of Indonesia’s 10-year electricity business plan known as Rencana Usaha Penyediaan Tenaga Listrik (RUPTL), extending over the period 2019 to 2028, in East Java and Bali. It will support the state utility company Perusahaan Listrik Negara’s (PLN) current initiative to expand electricity distribution through infrastructure development, which is in line with the RUPTL’s aims and targets for the region.

The AIIB provided funding worth $54 million to the Singapore: Infrastructure Private Capital Mobilisation Platform in July 2019. In May 2021, it also approved financing worth $80 million for Singapore: Asia Infrastructure Securitisation Programme, to accelerate private capital mobilisation. The capital mobilisation programme’s objective is to promote infrastructure as an asset class by creating investible debt instruments in Asia’s infrastructure sector. The fundamental goal of the initiative is to develop debt instruments that are backed by infrastructure loan assets that can be offered to institutional investors. This would also provide a new source of institutional capital for infrastructure projects that could offset the inability of banks to fund long-term projects.

As part of its connectivity initiatives, the AIIB has undertaken the National Road 13 Improvement and Maintenance Project in Lao People’s Democratic Republic (PDR). The objective of this project is to improve the condition, safety and climate resilience of roads using an output- and performance-based road contract model. The project will expand the 19 km highly traffic-congested area close to the capital city of Vientiane from a two-lane to a four-lane road as well as strengthen the 39 km section of the two-lane road from Songpeuay market to Phonhong with cemented concrete pavements. The AIIB approved funding worth $40 million In April 2019 for the project. In October 2020, the AIIB allocated an additional $30 million for the improvement of section 3 of the project, which is the south segment of National Road 13. This move is expected to promote Lao PDR’s socio-economic development and enhance its connectivity with Thailand, Vietnam and China.

Other investments

The multilateral development bank is working on the development of a multifunctional satellite that will provide much-needed broadband internet connectivity to more than 45 million people in Indonesia’s underdeveloped regions. In collaboration with the International Finance Corporation, it has provided a $100 million loan to the Vietnam Prosperity Joint Stock Commercial Bank to help it augment its working capital and continue its trade-related lending programme to private sector firms, including small- and medium-sized enterprises affected by Covid-19. In July 2019, it approved funding worth $75 million for the installation of approximately 2,000 kms of metro and regional fibre optic network in Cambodia. The project is expected to broaden the coverage of telecom services within large cities, as well as in suburban and rural areas by expanding the network across the country.

The way forward

The rapid pace of urbanisation is going to expand the demand for urban infrastructure. The demographic transition will also have a substantial impact on public services and social infrastructure. Digital infrastructure and technological advancements are becoming more central to the economic growth of a nation, and hence driving the demand for efficient digital infrastructure. These megatrends are expected to put enormous strain on the public infrastructure in the Southeast Asian (SEA) economies. SEA economies need to develop ways to meet their ever-increasing infrastructure needs.  Financial institutions such as commercial banks have been the traditional loan providers for infrastructure sector projects across the SEA economies. Given the limited lending capacity of banks, alternative sources of capital and initiatives focusing on speeding up private capital mobilisation are critical to the success of SEA economies.