by Henry Teitelbaum, Editor, P3Planet.com
In war, the way is to avoid what is strong, and strike at what is weak. – Sun Tzu, The Art of War
US opposition to China’s plan for a new pan-Asian infrastructure bank might some day be a case study for explaining why US efforts to contain China’s reach for regional power and influence failed.
The US and China have been locked in conflict on a range of issues for years. On the trade side, long-standing disputes simmer over access to markets, competition for resources, tariffs and the like. There is also conflict bordering on convert war over copyright theft and cyber-espionage, and in most instances the US is not winning.
Affront to US Leadership
The latest losing front to be opened by the US comes through its official opposition to China’s pitch to its neighbours for a new multilateral development bank. The proposed Asian Infrastructure Investment Bank (AIIB) is intended to help finance projects that address the Asia Pacific region’s public infrastructure deficit. But the very existence of such a bank, for which China has offered initial funding of $50 billion, is being treated by the US as an economic and geopolitical challenge, which it probably is as well.
According to The New York Times, US officials view the plan as an affront to America’s existing influence in regional economic development through the western-dominated institutions that it helped to create after World War II, namely the Asia Development Bank (ADB) and the World Bank. But they are even more concerned about the future “soft-power” influence that the Chinese could gain over long-time US allies in the region. The fear is that closer economic ties and greater reliance on China for services could drive a wedge between the US and its allies. The US officials have reportedly also raised concerns related to climate change, including long-standing objections to multilateral bank funding for coal-fired energy production facilities, which the Chinese seem to have fewer qualms about in projects which they fund.
New Delivery Model Needed
Arm twisting allies will only go so far, though, and the US is arguing its case against the AIIB from a position of weakness. For starters, the existing western-run institutions that help finance Asian development have been slow to respond to the region’s infrastructure needs, which are particularly acute in the areas of energy and transportation. These institutions are widely viewed as bureaucratic, often taking years to approve project loans. They are also vastly underfunded for the scale of what is needed in the region.
Asia’s infrastructure deficit is quickly widening, as growing trade links, wealth expansion and urbanization across the world’s fastest growing economic region require greater sustained public and private investment. The ADB estimated in 2009 that $8 trillion would be needed in infrastructure spending in Asia by 2020. To put that figure into context, according to a recent PwC report, the Asian market could represent 60% of global infrastructure spending by 2025.
Against this rising tide of demand and opportunity, the US has yet to produce a successful, or even a consistent approach to infrastructure procurement domestically that it could present as a model for delivering what is needed across Asia.
Gridlocked Policy At Home
The fact is that America’s own infrastructure needs have gone unmet for many years, and little is being done to address them. This is the case in the US even though ultra-low interest rates should make this the ideal time for public and/or private borrowers to finance the work that is needed. For the past five years running, President Barack Obama has called for the creation of a national infrastructure bank, which would ironically also be initially funded at $50 billion. And for five years, nothing has happened due to opposition from groups that can’t stand the idea of putting up any public money towards redeveloping America’s crumbling infrastructure.
At the state level, the picture is similarly muddled by political gridlock. Some states have moved forward with Public Private Partnerships (PPP) for transportation project delivery, using a model that harnesses the efficiency, competitiveness and profit motive of the private sector to bring innovation in the design of infrastructure projects. PPP, or P3 as it’s known in the US, also uses the private sector to arrange financing, deliver, operate and maintain the assets over a long period of time, typically 30 years or longer. In return, the builder receives long-term revenue streams paid out of user tolls or government-funded availability payments, either of which would be conditioned upon successful operation and maintenance of the assets. But the model is relatively new to the US, and its take-up has been patchy. Enabling legislation is technically in place in about 35 states, but there is ongoing debate even among these over who ultimately should be responsible for paying for usage.
Meanwhile, the condition of America’s aging transportation infrastructure continues to decline. The American Society of Civil Engineers, in its 2013 report card on US infrastructure gave the country an average grade of D+, and estimated that $3.6 trillion would be needed by 2020 to bring the country’s infrastructure up to an acceptable standard.
China Leading By Example
During this same time, the Chinese state has poured money into developing state-of-the-art high-speed rail, underground public transport, modern motorways, ports and airports across the country, as well as abroad. Even though these mega-projects often run roughshod over citizens’ rights, ignore environmental concerns and are hardly immune to corruption, the state-owned construction enterprises that carry out the work have established records for getting projects delivered. Viewed in this context, the initial funding that China is putting up to back its regional ambitions is a pitch for China to claim pre-eminence for its state-capitalism model for regional economic development.
If the best the US can now do is stand in the way of China’s efforts to help its neighbors develop the infrastructure that their economies need, it says a lot about America’s ability to continue in any kind of world leadership role.
In the end, it will be US multi-nationals that pay the price for America’s inability to put forth a credible new model for infrastructure development. American corporates may be sitting on their cash piles for a long time to come while they wait for federal and state governments to get serious about infrastructure. In the meantime, if all of Asia starts looking to the AIIB for their project funding, and big infrastructure contracts go to Chinese companies instead of US ones, it is they who will lose out.