The role of financial institutions in infrastructure development

Investing in and developing infrastructure typically improves people's livelihoods by helping them to lead a high quality and convenient life. It also acts as an important engine to drive integrated regional development, as well as promoting global economic recovery and sustainable growth.

The need for more infrastructure

In recent years, the world economy has entered into a period of adjustment marked by slowing growth. Governments in all countries are faced with the daunting task of advancing economic development in a sustainable manner. Both economic theory and practice demonstrate that infrastructure is key to promoting growth, creating jobs and enhancing productivity. Investment in modern and highly efficient infrastructure is paramount to future prosperity.

Jiang Jianqing

Based on a study by the International Monetary Fund, an increase of one percentage point of GDP in investment spending raises the level of output by about 0.4% in the same year and by 1.5% four years after the increase. In 2015, China saw its infrastructure investment in the first three quarters chalk up year-on-year growth of 18.1%. It accounted for 29% of China's total investment, up by 7.1% compared with the same period the year before and played a critical role in stabilising the economy.

In such a context, increasing targeted investments and accelerating infrastructure development has become an important policy tool in many economies. Advanced nations are launching a series of large-scale development projects to upgrade existing infrastructure and stimulate economic recovery; while emerging and developing economies have earmarked more investment in infrastructure to supercharge their industrialisation and urbanisation processes.

Strengthening infrastructure investment is important in promoting closer economic ties and regional economic integration to ensure ongoing regional development. The ongoing expansion of trade, people-to-people exchange and capital flows among neighbouring countries and regions increasingly requires greater infrastructure capacity. Huge infrastructure investment deficits are hindering regional connectivity and integration. The ASEAN-China Free Trade Area has made enhancing connectivity a priority and brought attention to the cooperation between China and the Association of Southeast Asian Nations (ASEAN). According to professional services firm KPMG, by 2030, global demand for infrastructure investment and development will reach $50 trillion. The next boom is on its way.

Infrastructure investment synergies

Funding gaps and technical issues inhibit infrastructure investment from reaching its full potential, despite the huge market demands. Therefore, when trying to solve investment problems, countries need to draw on one another's strengths and create synergies by expanding international cooperation.

China sees infrastructure development as an important component of its outbound investment and cooperation. Over the years, it has actively supported and participated in infrastructure development on a global scale. The Belt and Road initiative has placed infrastructure connectivity at its core. It aims to bring European and Asian economies closer and drive regional economic and social development, ultimately creating an economic belt that connects policies, roads, trades, currencies and people.

China boasts the largest infrastructure development capacity in the world. It holds top technological prowess in some industries and enjoys a shiny track record in power generation, particularly hydroprojects, as well as in industrial production. China supports and encourages its companies to work with other countries and regions on infrastructure projects on a mutually beneficial basis and to share expertise and experiences. Meanwhile, by giving out project-specific concessional loans, establishing special funds and proposing the founding of new financial institutions, China is actively promoting a new platform to bridge the financing gaps of international infrastructure projects in a bid to clear funding bottlenecks. For example, the Chinese government spearheaded the establishment of Brics New Development Bank and Asian Infrastructure Investment Bank (AIIB), each with a starting capital of $100 billion. China also contributed $40 billion to set up the Silk Road Fund with the aim of financing infrastructure projects along the Belt and Road.

Taking part

There are three ways China can participate in international infrastructure development:

• By tapping into its advantages in capital, technology and equipment, China could enter into bilateral cooperation with economies that are significantly short of funding for urgently needed infrastructure projects. China may provide technological assistance, capital and manpower to less-developed nations after in-depth research and careful local surveys. Take the China-Pakistan Economic Corridor as an example. The collaboration between the two countries focuses on the development of Gwadar Port, the energy sector, transportation infrastructure and industrial parks with highways, railways, oil and gas pathways and optical cables to be built along the economic corridor.
• China could form complementary and powerful cooperation with technologically and financially well-off economies to co-develop third-party markets. Countries and regions with advanced infrastructure can act as financing centers, R&D centers, trade hubs and technology suppliers and work together with China.
• China welcomes established companies from around the world to provide funding and technical support for its infrastructure development and upgrading. The pace of infrastructure development in different parts of China is uneven. Eastern China, which benefits from a much earlier infrastructure development known for its quality and speed, has to upgrade part of its existing facilities to sustain future economic development and meet people's daily needs. In central and western China, there is still a vast amount of land with great development potential that will fuel high infrastructure growth rate in years to come. At the same time, the Chinese government has always attached great importance to agriculture and less-developed rural areas. As such, companies around the world with capital, technology and proven track records will always find infrastructure investment opportunities in China.

Financial institutions can play a leading role

The early involvement of financial institutions is the first step towards infrastructure investment. Commercial financial institutions can play a leading role by making use of their advantages as partners in cross-border services.

• Financial institutions should lead by providing credit funds and comprehensive financial solutions for international infrastructure investment. For example, as a major Chinese bank, the Industrial and Commercial Bank of China (ICBC) has more than 400 overseas branches in 42 countries and regions. As of mid-2015, ICBC provided $200 billion of funding for equipment and international cooperation in production capacity, plus another $110 billion of financing to support Chinese companies ‘going abroad'. The bank now operates in more than 30 countries in Asia, Africa and Europe and serves industries ranging from power, transportation, oil and gas and mining, to telecommunications, machinery, industrial park construction and agriculture.
• Financial institutions should lead in information-sharing by utilising their overseas networks. Chinese multinational banks have gathered substantial amounts of management, client, government and market-related information through daily operations, and are able to resolve the issue of information asymmetry in international infrastructure investment and cooperation by bridging communication between upstream and downstream sectors as well as parties home and abroad. On the one hand, financial institutions can help companies identify market opportunities in international infrastructure investment and cooperation, evaluate risks, allocate resources and support companies in their decision makings. On the other hand, they can provide feasible financing solutions and consultation services to host countries in their infrastructure planning and development. By acting as effective information intermediaries, financial institutions help companies and host countries avoid unnecessary mistakes.
• Financial institutions should lead in cooperation with an open mindset for collaboration, innovation and communication. A diversified financing mechanism is necessary when resolving funding issues in infrastructure development. It requires extensive cooperation among commercial financial institutions, equity funds and multilateral international organisations so that information and resources can be exchanged, and earnings and risks can be shared.

Commercial financial institutions may collaborate with the AIIB and other multilateral development organisations in the following ways:

Guidance funds: Commercial financial institutions can work with multilateral development organisations to set up investment and financing funds, as well as industrial financing platforms. Both parties can contribute guidance funds to be used as funds-of-funds to attract international investment for infrastructure project development.

Financing method: Both parties can jointly support infrastructure development of a particular market using a combination of debt and equity financing. In this regard, the successful investment in a Pakistan power project by the Silk Road Fund set an example. In this project, the Silk Road Fund and World Bank's International Finance Corp (IFC) invested in China Three Gorges South Asia Investment under China Three Gorges Corporation to provide capital for the project. In addition, China Development Bank and IFC issued a project loan as a bank consortium under the coordination of Export-Import Bank of China.

Source of finance: Multilateral development organisations finance projects through bond issues, with commercial financial institutions able to purchase such bonds or underwrite bond issues to effectively reduce these organisations' financing costs.

Financing standards: Major Chinese multinational banks are increasingly internationalised. Over the years, they have accumulated concrete experience of overseas expansion and formulated financing standards, regulations, processes and methods for infrastructure projects, such as policies on environmental assessment, purchasing, credit rating and extension as well as borrower country sustainability evaluation and green loans. The AIIB and other multilateral development organisations may take this information as a reference and use it for their own purposes. Such bodies can implement high investment and financing standards by tapping into these resources.

Global infrastructure investment is embracing a new round of opportunities. Only by strengthening cooperation in all aspects can one effectively resolve the investment issues faced by many countries, significantly improve infrastructure quality, promote regional connectivity and integrated development, and spur economic growth. As China deepens its cooperation with other countries in infrastructure investment and construction, it will contribute to overall infrastructure development in the world. Chinese financial institutions including ICBC are willing to make full use of their advantages and actively participate in international infrastructure cooperation, to achieve common development and win-win results for all parties.