The Asian Infrastructure Investment Bank (AIIB) is identifying five emerging infrastructure trends that will shape Asia’s post-COVID-19 recovery that are based on the Bank’s experience and analysis over five years of operations. These trends reflect the need for the infrastructure sector to manage the short-term challenges of the pandemic and the global economic crisis, following which the sector must adjust to mid- to long-term drivers like demographic changes, climate change and the ongoing digital transformation.
On the eve of its fifth anniversary, AIIB has evaluated how the Bank should support its clients and members to navigate these trends to make infrastructure a key element in revitalizing the economy by generating short-term income, long-term growth and ensuring environmental sustainability.
AIIB President and Chair of the Board Jin Liqun notes important shifts in the makeup of the infrastructure development landscape.
“AIIB’s milestone arrives against the backdrop of increasingly uncertain and challenging economic conditions across the world,” said President Jin. “While taking stock of what we have done over the last five years, we keep our eyes firmly set on very concrete ways to refine our investment strategy, strengthen our responsiveness to the evolving needs of our members and position ourselves as a leading force pushing for new and often overlooked investment areas.”
Trend #1: Green Infrastructure—Coordinated, Cost-effective Multisector Resilience Planning
Addressing the current health crisis and providing immediate relief to affected businesses and workers are justifiably the main priorities. However, post-crisis recovery programs should not be carbon-dependent, which presents policymakers with an opportunity to align public policies more closely with climate objectives, thereby limiting the risk of locking-in carbon-intensive infrastructure. Stimulus packages can be designed to orient investment toward sectors and technologies that can accelerate the transition and improve resilience to future shocks from climate change. While the recent investment trends in green infrastructure have been promising, the actual volume of investment is still well below desired targets.
The COVID-19 pandemic has prompted the world to probe the linkage of the virus and other diseases with future ecocatastrophes. This necessitates ESG (environmental, social and governance) standards in all business activities. ESG is the next growth frontier in asset management, and the integration of sustainability factors in investment decisions will shape up behavior in global markets in a meaningful way. However, the continued shift to sustainable investing and its implementation will require leadership, a culture of innovation and effective engagement with all stakeholders.
Trend #2: Social Infrastructure Shown to be a Weak Link
One of the weak links on the global production chain that COVID-19 exposed is social infrastructure, which has suffered from chronic underinvestment in many countries at various income levels. The pandemic has revealed that a deficit in basic healthcare facilities is endemic to all countries, regardless of their development status. The 2020 Global Infrastructure Index shows that 48 percent of countries surveyed globally tend to favor greater investment in social infrastructure investment, compared with 32 percent that favor traditional economic infrastructure. The investment gap in health and education infrastructure has widened substantially during the last decade.
According to estimates from the Global Infrastructure Hub, transactions in social infrastructure fell from USD19 billion to less than USD3 billion in 2019. Given the limited public spending in social infrastructure and the challenges of a post-COVID-19 recovery, catalyzing private capital flows into public investment takes on more relevance and is absolutely necessary.
Trend #3: Asset Recycling or Privatization as a Path Forward
As the immediate health impacts of COVID-19 eventually recede, countries will have to deal with deep economic scarring from the pandemic, including widespread bankruptcies, increased unemployment and high debt levels.
Long-term investors would undoubtedly seek safe entry points into infrastructure investments, leaving economies with debt overhang and weak institutions finding it difficult to attract capital. Bringing down debt levels, improving regulations and increasing regulatory certainty will be critical. There would also be a premium for proven cash-generating assets. All these factors will be accentuated after the pandemic.
Governments under fiscal constraints would regard asset recycling or privatization as a path forward, which will be an opportunity for private investors. On the other hand, private companies may choose to exit some projects and shift to new investments promising better asset performance. The low-interest-rate environment will be supportive for companies to take advantage of such opportunities.
Multilateral development banks (MDBs) have an important role to play in this post-pandemic environment, given their ability to bring financiers together, ensure socioeconomic alignment of projects and provide counter-cyclical financing and protection against political risk. Flexibility and innovation would be key. MDBs should consider high-return and high-quality investments even outside their traditional scope and comfort zone. It is imperative that MDBs continue to work with the private sector to mobilize much needed investments to boost recovery and help reduce public debt.
Trend #4: Technology-Enabled Infrastructure—Shy of Illiquid and Underperforming Assets
Pockets of new technology use and innovation already exist for infrastructure, but the applications have been sluggish due to lack of awareness of industrial and infrastructure uses in many developing countries. For example, 64 percent of stakeholders in infrastructure cite lack of understanding as the main barrier to adopting appropriate technology. COVID-19 has however been a game changer by rapidly heightening awareness of the many and varied uses of technologies.
The biggest damper on infrastructure investors’ interest in infratech solutions is the fear of an illiquid asset that is likely underperforming. Infrastructure investors will necessarily decide whether to choose an investment project with promising technology or leave it to others, but this exposes them to the risk of being disrupted. Those that have adopted a proactive approach are taking different routes to capitalizing on infratech. Many have set up funds, corporate ventures, internal technology consulting arms or partnerships with technology companies to ensure better understanding and applications of technology.
Trend #5: Connectivity and Regional Cooperation—Mixed Years Ahead
Connectivity infrastructure will face challenges and will likely have some mixed years ahead. Airport infrastructure, for example, will not recover any time soon. The global supply chain has been basically resilient throughout the crisis. But supply chain infrastructure investment will continue to face uncertainty, given the trade and technology-related tensions as well as ongoing discussions on reshoring or nearshoring of activities.
Even with the uncertain trade backdrop, there will be “no-regret” investments. For example, improving existing port efficiency through automation and green upgrades will be more resilient to any future macroeconomic shocks. Investing in smarter road infrastructure, with greater digitalization and in preparation for an all-electric future, are also likely to pay off in the long run. There will also be a focus to make supply chains more resilient, which imply investments into warehouses or storage infrastructure. Finally, investing in digital connectivity will be important for economies to prepare for the post-pandemic future.
New Strategic Direction
AIIB’s recently released its 10-year Corporate Strategy that will provide an anchor for the Bank’s ambitions as it implements its mandate under changed circumstances. While reaffirming the foundational elements of the Bank, the corporate strategy sets out clear priorities and establishes ambitious targets on AIIB’s overall share of financing for climate action (50 percent by 2025), cross border connectivity (25-30 percent by 2030) and private sector operations (50 percent by 2030). Moving forward, the Bank’s next chapter includes expanding into social infrastructure and ramping up its investments in digital infrastructure as a timely response to the medium- to long-term needs of its clients in the post-COVID-19 era.
“As always, trend-savvy investors in infrastructure financing will need to remain flexible to navigate the turbulent times ahead if they wish to stay the course. The same is true for AIIB. We will continue to hone our skills and sharpen our investments to deliver products and services that are not only tailored to the clients’ immediate needs, but also with a view to long-term development impact,” said President Jin. “Our ultimate goal is to contribute to economic growth and social progress that is inclusive and sustainable.”
About AIIB
The Asian Infrastructure Investment Bank (AIIB) is a multilateral development bank whose mission is financing the Infrastructure for Tomorrow—infrastructure with sustainability at its core. We began operations in Beijing in January 2016 and have since grown to 103 approved members worldwide. We are capitalized at USD100 billion and Triple-A-rated by the major international credit rating agencies. Working with partners, AIIB meets clients’ needs by unlocking new capital and investing in infrastructure that is green, technology-enabled and promotes regional connectivity.
