Infrastructure and growth in Asia

Infrastructure and Growth in Asia: The Role of AIIB and EBRD - Sir Suma Chakrabarti

Delivered by: 

Sir Suma Chakrabarti, EBRD President

Venue: 

Beijing, China

Event: 

Visit to AIIB

AIIB has the potential to be a very important partner, says EBRD President

EBRD President calls for strong cooperation with AIIB

It gives me great pleasure to be back in Beijing and to join you today.

Visiting China is always an exciting experience.  But this trip, this year, is especially so.

2015 is proving to be a crucial year for multilateral development banks.  And for international development more generally.  For three main reasons:-

First, it has seen the birth of a major new infrastructure bank, the Asian Infrastructure Investment Bank.  The AIIB has the potential to be a very important partner of existing multilateral banks.

At the same time, it has been a year in which infrastructure – and its impact on growth and competitiveness - has risen to the top of the global agenda.

And, lastly, 2015 is the year in which the new Sustainable Development Goals are to be approved by the UN General Assembly, and the year in which COP 21 meets in Paris.  With sustainable infrastructure a critical topic for both gatherings.  

The AIIB and EBRD Working Together

Let me begin my remarks today by bidding a very warm – and very loud – welcome to the AIIB as it joins our family of multilateral development banks.

For many years the bank I have the honour to lead, the European Bank for Reconstruction and Development – the EBRD - was the youngest member of that family.

Set up in 1991, we were for a long time the ‘new kid on the block’.

Well, we are now approaching our 25th birthday.  So, still youthful but not as young as perhaps we once were!

We are convinced that the new kid on the block, the AIIB, has a fantastic future ahead of it. We are very keen to work together at the earliest possible opportunity.

We have many common shareholders.  And many countries where both of us will be operationally active.

The potential for synergy - and for making a real, lasting difference on the ground – is huge. And we are doing everything we can to realise that potential even now.

Behind the scenes, EBRD’s dialogue with our new AIIB colleagues is already intense and wide-ranging. We are talking to them about our strategies and policies.  About governance. About business models.  About procurement.  About evaluation. We are listening to their ideas and learning about their plans.

And we like what we have heard so far.

The Infrastructure Need and Ambition

So much for how we are working together already. What is the ambition for what we can achieve in concert later on?

Step back for a moment and I think we can clearly see a historic opportunity for us all here.

Just like the EBRD in the early 1990s, the Asian Infrastructure Investment Bank is ideally placed to exploit a particular moment of global economic change. A real turning point.

For the EBRD 25 years ago, that turning point was the opening up to democracy and market-based economics of the countries of eastern Europe and the former Soviet Union.  

It is still there in our name: ‘Reconstruction and Development’. Reconstruction and Development after the ravages inflicted by decades of rigid central planning.  Infrastructure is key to that reconstruction and development, that transition to a better economic future.

And you can sense what sort of turning point is upon us now in the AIIB’s name: ‘Infrastructure Investment’.

The AIIB’s challenge is to respond to and satisfy the acute demand for more and better infrastructure across Asia. 

Let me emphasise once again that the creation of the AIIB is a major opportunity. I would add, however, that it is also another wake-up call to those of us involved in development finance as it has been practised until now.

It is another reminder that the existing multilateral architecture has not been adapting fast enough to match the world’s needs.

And one area where it has been found particularly wanting is, yes, infrastructure. 

The Infrastructure Challenge

We at the EBRD have our own perspective on this. We see infrastructure as crucial for functioning markets.

No infrastructure means no logistics, no exchange of goods and services, no movement of labour. And that translates into no growth.

If small and medium sized enterprises are to flourish– and those are the sort of firms with which the EBRD works especially closely – quality infrastructure has to be in place.

And if it is not, it is up to us to help put it there.

This chimes with my own personal experience.  I began my career as a development economist working for an emerging market government, in Botswana, on infrastructure projects.

Later in my career, I helped to create budgeting rules for the UK government that prioritised increasing capital investment in infrastructure.

So I start with a prejudice in favour of infrastructure investment.   

Fortunately, this is one prejudice backed by evidence!

The IMF calculates that, in the right conditions, a 1 per cent increase in infrastructure investment as a share of GDP has a direct and lasting impact on output of 0.4 per cent in the same year and a 1.5 per cent increase after 4 years.

We know the demand is huge.  We project growth to be strong over the next decade in developing and emerging economies.

Infrastructure needs are likely to increase significantly. In the EBRD’s operating universe, which stretches from Morocco on the shores of the Atlantic to Mongolia not so very far from where we are today, we expect infrastructure needs to amount to $500 billion every year. 

That is why we are championing such major projects as the Almaty Ring Road, skirting Kazakhstan’s largest city. It is not just a huge feat of engineering. It is a public-private partnership, a PPP, the first of its kind in the whole of Central Asia. 

Another major infrastructure project we are helping finance is the Eurasia tunnel connecting Europe and Asia under the Bosphorus. The tunnel will ease congestion in a major city, Istanbul. But it does more than that too. It will also help link the road networks of two continents.

Two landmark infrastructure projects.  The EBRD has financed almost 600 infrastructure projects since our creation.  Roughly a fifth of all of our investments. 

The numbers would be even bigger if I included EBRD’s energy sector investments. For example, the EBRD is involved in a landmark cross-border electricity transmission project, CASA-1000. It will send hydro-generated power from Tajikistan and the Kyrgyz Republic to Afghanistan and Pakistan. CASA stands for ‘Central Asia-South Asia’.  

I didn’t choose these three examples at random, of course.

Yes, each of them provides a snapshot of what we are up to in the more than 30 countries where we invest. But Kazakhstan, Turkey, Tajikistan and the Kyrgyz Republic are not just EBRD countries. They’re AIIB countries as well.  Just four of the many countries where we will overlap.

Our shared ambition should be for the EBRD and AIIB, joined by the other multilateral banks, to work together, co-financing where we can, to close the ‘infrastructure gap’.

We in the EBRD will be ready to present AIIB with several projects next year ripe for immediate co-financing. 

And we know traditional modes of infrastructure financing will not do the job.  By some estimates the global gap between investments needs and investment flows is as high as US$ 1 trillion every year. That’s an enormous sum.  

Alone, the public sector will not be equal to the task. Only one tenth of that gap can be covered directly by IFIs.

We desperately need to mobilise more private capital. Hence my mentioning the PPP project in Kazakhstan.

Last week the EBRD hosted PPP Days 2015, a two-day event which gathered together the public and private sectors and MDBs from the hole world at our London headquarters.

It asked what I think is the question we should all be asking ourselves: ‘what would it take to double the right private investment in infrastructure in emerging markets?’

Well, a few answers are emerging. PPPs need clear legal frameworks, deals should be bankable, risk fairly divided between the public and private sectors and returns for private investors should be balanced and reasonable.

Given that the majority of PPP contracts will be renegotiated at some point, contracts should contain clear procedures for handling disputes.

And, emerging markets must learn the valuable lessons learned over the last 20 years in more mature ones.  They can’t afford to spend the next two decades on the same learning curve.

This is precisely the sort of area where the EBRD and AIIB can do great things together.

The Sustainable Challenge

This leads me on to the third reason for us all to feel excitement.  But also to recognise the importance of this special moment.  And our responsibility towards the future. 

If we look at infrastructure again, it is clear that what counts is not just the amount of investment in it or where that investment comes. What matters is the quality of that infrastructure as well.

By quality of infrastructure, I mean the energy and emission intensity, the resource efficiency of the investments EBRD and AIIB countries will make over the next decade.

Together, they will determine the level of the world’s emissions for a period much longer than the next ten years.  And hence our ability to mitigate the climate challenge for generations to come.

Infrastructure choices will also determine economies’ resource intensity and energy security and their dependence on fossil fuels – long term.

It is vitally important that all this new infrastructure we will be funding together is built by technologies that reduce emissions and resource use. To do that would be good for our climate.  And actually good for growth.

Happily, there are many encouraging signs that the technologies are out there.  That they are getting cheaper.  That there is more and more appetite for using them.  And that they can deliver real growth.

Many influential countries have had a major rethink on where they stand on green investments and are now going all out to encourage them.

And the way we measure the costs and benefits of green investments, particularly in the long term, is also evolving.  And evolving very much in their favour.

Given our long track record of working with the private sector, you won’t be surprised to hear that we see its role in building our sustainable future as pivotal.

We need to unlock new markets and create a competitive environment for alternative technologies on a level playing field with existing fossil-fuel based ones.

Any shift to a sustainable economy will be centred on the transformation of markets, changes in entrepreneurial behaviour, on new products and new skills.

And it will require huge amounts of investment in the right sort of infrastructure.

We welcome the fact that sustainable infrastructure, energy efficiency and climate change are emerging as key themes in the discussions defining the Sustainable Development Goals to be adopted this autumn.

Those themes have always been what the EBRD is about.

We hear the cries to fully utilise MDBs’ balance sheets to help support those same SDGs.

That is exactly what we are trying to do.

Yes, more than a third of our total investments last year were in the sphere of sustainable resources. But we want to do more. To invest more. And to make investing in a low-carbon future part of our very identity.  

Many of our shareholders are challenging us to do even more for the green economy.  We are determined to contribute to the ‘Agenda of Solutions’ at COP 21 by doing just that.

Conclusion

Let me finish where I began.  Let me share with you a few final thoughts about the AIIB and what we multilateral development banks can do together.

We’re delighted to hear that the AIIB is going to be ‘lean, clean and green’.

It’s a snappy formula which trips off the tongue. I wish we had thought of it ourselves.

Lean for efficiency, in the AIIB’s governance structure as well as elsewhere.

Clean in its ethics and integrity.

Green thanks to its environmental and social credentials.

These are values that any new – or indeed existing – organisation should aspire to.

And the fact that they have been articulated in this way bodes well for the AIIB’s future.

We and the AIIB will not just be neighbours. We’ll be investing in infrastructure for a sustainable tomorrow – in the same countries - , working often, I hope, on the same projects.  

Addressing common global and regional challenges is one of the EBRD’s three strategic priorities for the next few years.

Where better to make common cause then in the area of climate change - and to start by collaborating on investment in sustainable infrastructure?

We at the EBRD already have considerable experience of cooperating with other MDBs on different continents. We know that, together, by focussing on what each of us does best, we can be far more than the sum of our parts.

We look forward to a long and fruitful partnership with the AIIB.  In the shared cause of economic transition and development.