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AIIB

Paving the way

China-led infrastructure bank is at the center of efforts to fill the enormous funding gap for Asia’s development needs

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April 17-23, 2017
By ALFRED ROMANN
and DAVID HO
in Hong Kong
For China Daily Asia Weekly

When the Asian Infrastructure Investment Bank (AIIB) announced in late March that it had approved more than a quarter billion dollars in new loans, it crossed a significant threshold.

Including these new loans, the China-led, but clearly multilateral, development bank has now approved more than $2 billion in loans as it works to fill a huge gap in financing for infrastructure development in Asia. As Chinese President Xi Jinping said on Jan 17, 2016 when he formally launched the AIIB, the need for such funding is “absolutely enormous”.

In a report it released in February, the Asian Development Bank (ADB) estimated that the 45 developing economies in Asia need to invest around $26 trillion between now and 2030 just to maintain their growth momentum.

Zhuang Juzhong, deputy chief economist at the ADB, believes the establishment of the AIIB is great news for the region.

“Asia has huge infrastructure needs and a market that will grow and be better integrated with satisfying that need. Our estimate for investments needed in the region is at $1.7 trillion per year till 2030 for healthy, continued economic growth. Yet the region currently only has $881 billion of capital invested in infrastructure development, which is half of the estimated requirement,” Zhuang said.

“Even if we look at a shorter development period, the numbers still fall short,” he said. “For China to meet its infrastructure development goals from now till 2020, it requires $857 billion in capital investment. But it now only has an estimated $686 billion of capital for that. So having another multilateral development bank is good for providing the funds for infrastructure development, not just domestically but regionally.”

Given the importance of infrastructure and the wide definition the term covers, Zhuang points to the ADB report for a clearer picture of Asia’s infrastructure development needs. He said the two main areas to focus on are energy and transport.

“From the estimated $1.7 trillion annual total for healthy continued development, 53 percent is for developing the energy sector, while 32 percent is for improving transport. A focus on clean energy and greener transport systems would be an ideal goal in infrastructure development.

“To speed up development in the region, we need to develop stronger, bankable projects and encourage better public-private partnerships. In fact, these two factors often go hand in hand. Multilateral development banks can help with developing that,” Zhuang said.

By the end of March, just 15 months after its launch, the AIIB had lent out $2 billion.

Since its inception, the bank has received widespread international support. Countries like Australia, the United Kingdom, South Korea and the Philippines quickly jumped on board and became founding members, despite some behind-the-scenes pressure against it by the United States. The US government has since expressed official support for the bank, though has not made any move toward becoming a member.

Boys try to ride their bicycles through floods in Manila on Aug 13, 2016. The AIIB is considering funding for projects throughout the region, including flood management in the Philippine capital. Credit: AFP

In late March, the AIIB approved 13 new members, taking another major step toward redefining a multipolar world order that is increasingly focused on Asia. The AIIB also has agreements with the ADB, the World Bank, the European Bank for Reconstruction and Development, and the European Infrastructure Bank.

“The proposal to create the AIIB came from the Chinese government and it was the right proposal at the right time,” said Danny Alexander, the bank’s vice-president, speaking in Hong Kong last September. “Following the financial crisis, governments around the world have understood the importance of infrastructure investment to raise long-term economic productivity.

“The AIIB is a multinational financial institution created by 57 founding nations and is accountable to all of them,” Alexander said.

“We can invest in all parts of our region and, indeed, beyond the Asian region if there are projects that deliver tangible benefits for Asia.”

He said the Asian region will be fundamental to whether the world succeeds or fails in meeting the challenges of climate change.

“Infrastructure investments have a huge impact on the future patterns of economic development. So the decisions that are being made in the coming years about what to invest in and not to invest in will determine whether the region will be able to meet its growth aspirations while avoiding the catastrophic effects of climate change,” he said.

“The existing infrastructure gap in Asia offers the opportunity to build sustainable infrastructure from the start.”

By June 2016, the AIIB in its first six months of operation had agreed to loans for projects in Indonesia, Pakistan, Bangladesh and Tajikistan. It has since approved a number of other projects. On March 28, the AIIB announced it had approved three new loans worth $285 million.

Two of the most recent loans went to Indonesia and were co-funded with the World Bank: $125 million went to the Indonesia Dam Operational Improvement and Safety Project Phase II, while $100 million was loaned to the Indonesia Regional Infrastructure Development Fund Project to support regional governments and address critical needs.

Another $60 million loan, cofinanced with the ADB, went to the Bangladesh Natural Gas Infrastructure and Efficiency Improvement Project.

Going forward, the AIIB is considering a series of disparate projects, such as urban services, and roads and power generation in rural India, the rehabilitation of a hydropower plant in Tajikistan, and flood management in Manila.

The AIIB’s strategy of co-investing with other established multilateral development banks has helped offset any worries about potential social controversies and environmental violations.

Transparency, due diligence and thorough background investigations on its chosen projects served the AIIB well in its first year of operations, steering clear of mistakes with the aid of its cofinanciers’ more established procedures.

“Working with our established partners has definitely given us an edge with learning and also expedited the process of our involvement with the projects,” said Laurel Ostfield, the AIIB’s head of communications and development. “It’s an environment that allows everyone to benefit from our shared expertise and experience. But we are also considering some standalone projects.”

For example, the AIIB used its partner World Bank’s due diligence assessment for a $600 million loan (part of a total expected cost of $11.7 billion) for the construction of the Trans-Anatolian gas pipeline, which will connect Azerbaijan to Europe.

With representation from around 70 countries, the bank is visibly multinational. This has helped to ease some initial worries about the strategic interests of China in the AIIB as a founding member and major shareholder.

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Despite its multilateral focus, there were early concerns that the bank might focus on promoting Chinese policies and economic interests or China’s broader agenda by acting as a boost for its Belt and Road Initiative.

Introduced by President Xi in 2013, the Belt and Road Initiative aims to increase connectivity along the ancient Silk Road routes, and this requires significant infrastructure spending. One example of an AIIB-financed project that benefits the initiative is a Pakistan motorway which forms part of the China-Pakistan Economic Corridor — a major part of the Belt and Road.

“The AIIB makes its funding decisions separately from any Chinese policy influence, but there may be some overlap, which works as a win-win situation for those involved in the initiative,” said Ostfield.

“Countries come to us with their project ideas. We make our involvement decisions based on the project’s financial viability, its sustainability and how it impacts the local community. We pay particular attention to a lean, clean and green approach to our choices,” she emphasized.

So far, the bank seems to be doing well, without any major controversies.

With around 10 projects in the pipeline, it might have to continue working with other multilateral development banks to pool resources and play catch-up with Asia’s increasingly demanding infrastructure needs.

Charting a different path New multilateral development bank has learned from existing models and aims to be a modern, flexible catalyst for change

April 17-23, 2017
By ALFRED ROMANN and DAVID HO

Among the several recent initiatives China has spearheaded to stimulate the region’s economies, the 15-month-old Asian Infrastructure Investment Bank (AIIB) may, possibly, have the most impact on growth.

It is certainly one of the most multilateral new development initiatives, with a batch of new members approved just last month.

Although independent, the AIIB could provide a significant boost to another marquee Chinese initiative, the Belt and Road, which aims to strengthen infrastructure both on the westward land route of the historical Silk Road from China through Central Asia and also on the southerly maritime routes through Southeast Asia and on to South Asia, Africa and Europe.

The AIIB is a multilateral development bank that aims to improve economic and social development in the Asia-Pacific region. The bank was set up to achieve this through providing financial support in high-quality, financially viable and environmentally friendly projects that develop the region’s infrastructure.

“It is our goal to improve cross-border connectivity, sustainable infrastructure and private capital mobilization,” said Laurel Ostfield, head of communications and development at the AIIB.

“Compared to other multilateral development banks, our focus is quite a niche — infrastructure development in Asia. The AIIB is a way for developing countries to have a launching platform and a stronger say in directing attention, capital and expertise toward the region.”

The AIIB began as a proposal by China in 2013 before being formally established in 2015. The bank started operations in January 2016 with $100 billion in capital, divided into shares that have a value of $100,000. The starting capital is equivalent to two-thirds of the capital that the Asian Development Bank (ADB) has, and about half that of the World Bank.

With 57 signatories at its establishment, the original founding members comprise 37 regional members and 20 non-regional members.

The China-led and China-backed development bank approved 13 new members in late March, bringing the total approved member count to 70.

“I am very proud that the AIIB now has members from almost every continent, and we anticipate further applications being considered by our board of governors later this year,” said Jin Liqun, the bank’s president.

China is currently the biggest shareholder in the institution. But the AIIB expects to welcome more prospective members throughout the year. Although still short of the World Bank’s 189 member countries, it already has more than the 67 members that make up the ADB, which was founded in December 1966.

Despite keen interest from many other countries and institutes, the initial reception to the AIIB was reportedly frosty from the United States, with questions being raised about the strategic interests of China’s involvement.

Cars pass by banners in Beijing advertising the opening ceremony of the AIIB on Jan 15, 2016. The bank started with 57 members but that number has since increased to 70. Credit: Hu Qingming / ImagineChina

However, the US was taken aback when the United Kingdom, a key ally, announced its decision to join as a founding member, followed by other European countries.

The US government has since changed its official tune, especially after the International Monetary Fund (IMF), the ADB and the World Bank also expressed support for the new lender. The US and Japan have yet to apply for AIIB membership.

A recent report by the Manila-based ADB estimates that the region requires $26 trillion of infrastructure investment by 2030.

“There is a huge need for the funding and development of infrastructure in Asia. Our aim is to promote better market integration and close the socioeconomic gap across the region through better infrastructure, be it transport systems or energy sources,” said Ostfield.

The bank was established also partly in response to the discrepancy in the size of China’s economy versus its voting power in other multilateral development institutions. The Japanese have a stronghold in the ADB, while the US has a sizable dominance in the World Bank and IMF, which are both based in Washington, DC.

The establishment of the AIIB allows developing nations like China, India and Brazil to have more voting power within a multilateral development bank. For years, China has been calling for more attention from the World Bank on infrastructure and growth.

With the AIIB, China and its allies now have more control and resources to direct toward infrastructure development in the region.

“We have a strong base of both regional and non-regional members that also ensure this is a truly cooperative outfit that works toward global benefits through regional development,” said Ostfield.

Some say that the AIIB is a necessity, and a sign of the shift occurring in the global world order. More and more, Asian countries such as China and India are flexing their growing economic muscle and expanding their reach. So the AIIB may be just what these emerging economies need, even if it makes the traditional superpowers a little uncomfortable.

The AIIB, along with other multilateral development banks like the ADB, is also encouraging the integration of public-private partnerships.

“We want to encourage and facilitate more public-private partnerships in the Asian region to develop more sustainable infrastructure. But they have to have strong social and environmental benefits, as we select the projects we fund very carefully,” said Ostfield.

Since starting operations, the Beijing-based financial institution has invested in 12 projects with a total commitment of $2 billion. The bank far exceeded its 2016 lending target of $1.2 billion, extending over $1.7 billion in loans last year. And last month the bank announced an additional three loans totaling $285 million in Indonesia and Bangladesh.

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Previous countries that have received funding for infrastructure development include Pakistan, Azerbaijan, Myanmar and Tajikistan.

With a number of already established multilateral development banks, how will the AIIB differentiate itself and where does it stand on the global platform?

“We have learned from the model of other multilateral development banks. But as a fresh face with a specialized focus, we differentiate ourselves by being modern, nimble and flexible in our dealings,” Ostfield said.

“We are a 21st century bank for the current times. We want to be a catalyst for positive change and growth in the region and the world.”

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