Bridging Australia and Asia's infrastructure gap

The establishment of the Asia Infrastructure Investment Bank is a natural progression of Asia's role in financing global development. Australia must get on board with it early or risk being left behind.

The establishment of the Asia Infrastructure Investment Bank is a natural progression of Asia's growing role in global affairs. Once developed, the AIIB will fill a niche as a modern international financial institution created by, adapted to, and operating within Asia.

Australia is uniquely situated to contribute to the development of the AIIB. We must get on board early or risk being left behind. As one example, Hastings Funds Management's successful bid for Newcastle Port with the Chinese state-owned giant China Merchants is representative of the partnerships Australia should be looking to develop. In time such partnerships will reap rewards for both sides.

Some commentators bemoan the AIIB as a rival to other international lenders, such as the Asia Development Bank and the World Bank. But it is not. The AIIB is more than a Chinese regional power play. No doubt China's frustration at the United States' inability to pass IMF reform is one part of the story. More accurately, the AIIB represents the natural progression of China (and more broadly Asia's role) in financing global development. The AIIB is not a competitor to the other international lenders. It is in a different league, because it is created from within Asia and will operate by its own rules.

It is this different governance style that will set the AIIB apart. A bank with China sitting at the helm is unlikely to tie its lending to non-economic issues (such as human rights). Jin Liqun, head of the bank's preparatory group under China's Ministry of Finance said recently: "We have confidence that we can build a bank up to high international standards, and will do our best in project evaluation, environment protection, local culture conservation, promoting continuous economic growth and improving people's livelihoods". For better or worse, this will free up the bank to lend pragmatically and in the broad economic interests of the nations in the region.

But Asia's infrastructure gap, which McKinsey values at $8 trillion over the next decade, is about more than just unlocking finance. The AIIB must fund the right infrastructure projects.

A tendency for grandiosity and 'ribbon cutting', as is sometimes the practice in the region, could yet derail the bank. For example, there are suggestions the bank will start by building a modern day 'silk road' stretching from Beijing to Baghdad. Such plans are admirable but unrealistic. The Middle East is currently mired in security turmoil. Tying the work of the bank to such a plan may doom it to obsolescence before it can get started. Perhaps a link from Beijing to Berlin is more realistic.

The AIIB must be more than just a new income stream for well-connected executives of Chinese SOEs. The bank must be open-minded and non-parochial in its selection of worthy infrastructure projects. It must be open to contributions from other countries that have the capacity to help the bank on its initial steps toward good governance and social responsibility.

Australia has a potentially important role to play. Australia is a developed middle-power with strong institutions. It is also in the right time-zone. Moreover, Australia's current role as President of the G20 puts it at the forefront of global policy on economic growth and infrastructure investment. Prime Minister Tony Abbott, who wishes to be remembered as the "infrastructure Prime Minister", has stated that the G20 should aim for a 2 per cent growth target. Infrastructure investment must be a central pillar of that target.

Australia's leadership can start by getting the rhetoric right at the G20. There should be an emphasis on cooperation with the AIIB and the New Development Bank rather than competition (as the western media have tended to direct toward the AIIB).

But Australia's contribution can, and must, come from the private sector too. Australia has deep infrastructure expertise derived from the projects that supported the mining boom. This includes expertise in designing and managing PPPs and other project structures, as well as expertise in innovative project financing, project management, and engineering and construction services. Australia's banks are also well-governed.

By contrast, China's experience with overseas infrastructure investment has brought mixed results. Transplanting China's expertise into Laos, Myanmar and other Asian developing countries will not necessarily work. Australia can, and should, share its skills and experience through mutually beneficial joint ventures with companies from China and elsewhere in the region.

Australia confronts an important, but simple bargain. We need foreign investment to fuel our future infrastructure projects. One thing Australia can offer in exchange is expertise in areas relevant to the AIIB. Australia is uniquely situated to contribute to the development of the AIIB, and must get on board early or risk being left behind.

Edward Kus is a solicitor at an international law firm in Melbourne, Executive Director of the Australia-China Young Professionals Initiative, and a Fellow of the ACYPI Policy Unit.