China-led investment crucial for growth

European bank chief sees more room for collaboration in multinational development

China-led infrastructure investment vehicles will be a crucial partner for existing multinational development banks in accelerating global economic growth, says Mattia Romani, managing director for country and sector economics at the European Bank for Reconstruction and Development.

Multinational development banks can greatly help newly created investment vehicles linked to China-led outbound infrastructure, but they can also learn about efficiency and sustainable investment methods from their Chinese partners, Romani says.

China-led outbound infrastructure investment vehicles are mainly related to the country's Belt and Road initiative, which President Xi Jinping proposed in 2013 with a view to promoting infrastructure investment, trade and growth, and increasing global connectivity.

To achieve this integration, China has already allocated funds totaling about $100 billion, consisting of $40 billion for the Central Asia-focused Silk Road Fund, $50 billion for a new Asian Infrastructure Investment Bank and $10 billion to the BRICS-led New Development Bank.

According to an estimate by Standard Chartered Bank, official funding for infrastructure from the AIIB, the New Development Bank, the Silk Road Fund and China's state banks may total $1 trillion over the next 10 years.

A research paper in 2012 that Romani co-authored estimates that between $800 billion and $900 billion is spent on infrastructure in developing countries each year. To meet the development requirements of emerging economies for infrastructure, that figure will need to more than double by 2020.

Romani says the high amount of investment required globally means the addition of China-led investment vehicles will leave plenty of room to explore investment opportunities, and there are two areas in which these organizations have great expertise from which multinational development banks can learn.

The first is China's expertise in infrastructure building, and the second is expertise in investing in sustainable infrastructure.

"Very few cities have had the experience that China has had, particularly with an eye on environmental sustainability," Romani says.

"China has prioritized the issue of sustainability, taken a fresh look on infrastructure, and laid out the foundations for a green economy. China has a desire to play a global role in the fight against climate change, demonstrated through policies such as the establishment of carbon markets, which are very promising."

In September, President Xi announced the launch of a nationwide emissions trading program in 2017. The program, expected to be the world's largest emissions trading platform, will cover the power, iron and steel, chemicals, cement, paper and nonferrous metals sectors.

China's National Development and Reform Commission has done a lot of preparatory work to launch the nationwide program. From January last year it set a procedure requiring entities emitting 13,000 metric tons of carbon dioxide equivalent or consuming more than 5,000 tons in 2010 to report their carbon emissions annually.

China has also pledged to cap its emissions by 2030 and reduce carbon intensity by 60 to 65 percent from 2005 levels by the same year.

"China has tested firsthand the huge environmental and social consequences of environmental degradation, which is another reason China has prioritized its thinking about the future of economic growth and investment," Romani says.

The European Bank for Reconstruction and Development, founded in 1991, is a multilateral investment bank that initially focused on countries in the former Eastern bloc. Over time it has expanded to support development in 30 countries, from Central Europe to Central Asia.

Last month, China expressed interest in becoming a member of bank, in an attempt to further participate in funding infrastructure and other investments in Europe.

China's application will lead to further discussions by both sides and eventually may lead to a vote by shareholders of the European bank before it can be approved. The bank's existing shareholders are 64 advanced and developing nations.

Romani says China's interest is welcome, and he sees many benefits from having China joining the European Bank for Reconstruction and Development formally.

"Mostly because of the experience they have, which we can easily benefit from. We'll look into opportunities for knowledge sharing, because a lot of the experience in infrastructure investment in China is recent and untapped."

As well as helping one another, the room for co-investment between the European Bank for Reconstruction and Development and other institutions relating to the Belt and Road Initiative is immense, Romani says.

In particular, the two parties could work together on the preparation of and early investment in projects, as well as mobilizing their resources to work with governments on aligning investment standards and policies.

For example, tariffs of cross-border trade and investments could be further eliminated, information and data on investment opportunities could be made more freely available for the private sector, and legal paperwork could be standardized for investors to better understand and assess the profitability of cross-border infrastructure projects, he says.

Romani also identified three key lessons that multinational development banks can give to their Chinese partners: to attract more Chinese-sector investment, to structure investments in a method that allows private-sector investors to better judge their risk return profiles, and to back efficient and sustainable projects.

First, due to the large scale of infrastructure investment needed, multinational development banks need to focus on attracting private investment into infrastructure projects they support, as opposed to investing a lot of the money themselves.

At the moment, about 90 percent of the world's infrastructure investments are made through public budgets. Although public-private partnerships are considered a good way of encouraging private investment, this type of investment is still limited. In a country like the United Kingdom, which leads the world on PPP-type projects, only 15 percent of the country's infrastructure investment is channeled through the private sector.

Against this background, it is important for multinational development banks to help reduce the risks of infrastructure projects to a minimum, making projects attractive to private investors. This could be done by making the cost of a project's loans cheaper, and by government collaboration to align policies and for multinational development banks to help reduce the complexity of legal paperwork for cross-border investments, Romani says.

Second, it is important for multinational development banks to back projects that have long-term sustainability and environmental credentials.

"The type of infrastructure we lay out over the next decade will determine the sustainability of the next decade, especially the emissions intensity and consequences for climate change. For example, how much water is used, how much land is used, and what mode of transport infrastructure we are facilitating. All these need to be answered."

He says investing in long-term sustainable projects may cost slightly more at the outset, but over the long term it makes economic sense as energy conservation will bring down the overall project costs, and it is important for multinational development banks s to emphasize these benefits to the private sector.

Third, Romani says, multinational development banks should lead on structuring the financing element of infrastructure investment in a way that its risk return profiles are in line with that of private and institutional investors.

"The fundamental thing for institutional investors is that the funding needs to be standardized to what they are used to investing in. The level of guarantee and security is sufficiently strong to allow them to participate."

For example, if a multinational development bank steps in as the first investor in a project, it could use its high credit rating to bring down the overall cost of finance, making it more commercially profitable for private sector investors, he says.

cecily.liu@mail.chinadailyuk.com

(China Daily European Weekly 11/06/2015 page23)