Managing Asia

Managing Asia

Is AIIB the answer to Asia’s infrastructure needs?

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Asia's ability to finance infrastructure projects has failed to keep pace with the region's booming needs, but market players are optimistic the Asian Infrastructure Investment Bank (AIIB) will help plug the gap.

"Infrastructure projects have been slow because they are not bankable due to high risks. Developers also have limited capacity to raise funds from the capital market. Due to this lack of financial support, many infrastructure projects can't proceed," Liew Mun Leong, chairman of urbanisation and infrastructure consultancy Surbana Jurong, told CNBC's "Managing Asia" as part of the special series "Asia Builders."

There's a pressing need for "something higher order than capital markets" to help fill the region's gaping funding gap, Liew added.

The $50 billion AIIB, which aims to support infrastructure development in lower- and middle-income Asian countries, received enthusiastic support from more than 50 nations. However, the U.S. and its ally Japan have stayed away from the Beijing-led economic outreach project that is seen as rivalling the U.S.-based World Bank, as well as the International Monetary Fund (IMF) and Asian Development Bank (ADB), which are led by Europe and Japan, respectively.

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As the competition to provide for Asia's infrastructure financing needs heats up, Japan unveiled a plan in May to provide $110 billion in aid, a move that will be great news for Asian economies in urgent need of new basic infrastructure to support their economic and social development.

According to figures provided by the ADB, the fast-growing region will need an estimated $8.22 trillion of infrastructure investment for the current decade, as the scale and diversity of demands magnify due to factors such as rapid urbanization.

Current international finance remains insufficient, according to statistics from research firm World Resources Institute. In the financial year ending 2014, the World Bank's overall spending on infrastructure was $24.2 billion, while the ADB's total spending across all sectors was only $21 billion.

Workers reinforce the roof of a house at the port area in Manila, the Philippines.
Noel Celis | AFP | Getty Images

As such, developers who attended the "Asia Builders" conference feel the AIIB will be able to lend a much-needed helping hand to countries such as Indonesia.

"We are lacking a lot of infrastructure, technology and also capital... There is a hiccup obviously, now that economic growth is around 5 percent," said S. D. Darmono, president director of Indonesian industrial estate developer Jababeka. "So, we need a lot of funding from overseas."

Jakarta is infamous for its traffic gridlock, which underscores the Southeast Asian country's infrastructural shortcomings. Additionally, the country is plagued by frequent power outages.

"Infrastructure is very much a public service, so the return is small and takes a long time. So this is when a public-private partnership should take place," Darmono told CNBC.

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To be sure, there are industry watchers who remain cautious on the AIIB's ability to ease the Asian infrastructure financing liquidity drought.

For the chief of Iskandar Regional Development Authority, the China-backed institution isn't the first of its kind and it's a brand new multilateral body that is, for now, untested.

"Definitely, initiatives such as this will be welcomed by most countries, but at the end of the day, it all depends on whether [it] meets the needs of Asia, where many countries are still in the developmental stage," said Ismail Ibrahim, chief executive of the Malaysian Federal Government statutory body.

— Reporting by Christine Tan | Written by See Kit Tang