Regional power sector to benefit from China-led Asian Infrastructure Investment Bank

Coal-fired power plants are prime beneficiaries.

According to BMI Research, the AIIB improves the funding outlook for the Asian infrastructure sector, particularly for the power sector where there remains significant bottlenecks in the form of low electrification rates and poor quality of supply. The AIIB will also play a fundamental role in advancing China's global infrastructure investment strategy - through the OBOR initiative. We note that the standard of governance and transparency at the bank will be a pertinent issue once the bank begins lending.

The China-led USD100bn Asian Infrastructure Investment Bank (AIIB) began formal operations on January 16 2016, with plans to agree its first set of loans by the end of the year, funding infrastructure projects both in and outside of Asia. The multilateral financial institution is made up from 57 founding members, 37 come from Asia and Oceania, while the remaining 20 originate from Europe, Latin America, Africa and the Middle East.

As mentioned, the establishment of the AIIB will help to improve the funding outlook for the Asian infrastructure sector and plug the financing deficit. The Asian Development Bank (ADB) has estimated that between 2010 and 2020, countries in the Asia region will require investment of USD800bn in infrastructure construction annually. We note that the power sector is likely to be a particular area of focus for the AIIB, given the numerous bottlenecks in the region's power sector, in terms of low electrification rates, poor quality of supply and underdeveloped regulatory frameworks.

Here's more from BMI Research:

Power consumption per capita remains below the global average and power shortages continue to negatively impact select countries across the region, including India, Cambodia, Pakistan and Indonesia.

The coal-fired power segment could be one key beneficiary of the AIIB. The financing environment for the global coal power sector is deteriorating significantly, as multilaterals and private financial institutions restrict funding lines to coal power plants; for example, the World Bank, European Investment Bank (EIB), the Export-Import Bank of the US, the European Bank for Reconstruction and Development (EBRD) and OECD. However, the AIIB has not openly acknowledged its stance on coal funding and, given the importance of coal in Asia's power mix (roughly 60% share - BMI 2016 forecast) and the sizeable coal project pipeline across the region, we believe the AIIB stands to become an important source of financing for the coal sector.

This is particularly the case for the less developed countries who view coal as an important component of their energy mix, for example, Pakistan, Bangladesh and Myanmar. In fact, the Chinese President Xi Jinping announced in January 2016 that there would be an extra USD50mn fund available for infrastructure projects in less-developed countries.

 

China's central role in the AIIB has caused some concern in terms of the standard of governance and transparency at the bank. This issue has become even more pertinent given the ongoing slowdown in China's economy, as questions over whether AIIB loans will be used to fund projects which will favour China's economic outlook mount. Beijing has traditionally been very willing to provide financial assistance through entities such as the Export-Import Bank of China to regions in need of infrastructure investment (such as Sub-Saharan Africa), which have typically led to Chinese state-owned enterprises benefiting from construction or operation contracts. The perceived dominance of Chinese companies in winning infrastructure contracts on the back of these loans has lead to accusations of a bypassing of bidding processes, resulting in anti-Chinese sentiment in many regions.