Daily Times

The Asian Infrastructure Investment Bank (AIIB) was established in 2015 with 57 founding members on the proposal of China. The AIIB is a multilateral development bank (MDB) the avowed objective of which is to offer financing for infrastructure needs of Asia. Its membership comprises members of the World Bank and the Asian Development Bank. The AIIB’s subscribed capital is USD 100 billion, with 20% paid in and 80% callable.

China is the biggest contributor at USD 50 billion closely followed by India contributing USD 8.4 billion. China’s voting clout is disproportionately high at 28.7 % and unlike other MDB’s the gap between the first and second largest shareholder is substantially wide. The governance structure of AIIB has a distinction as compared to other MDB’s  as decision making rests with the regional countries especially China.

Chinese and Asian perspective on MDB’s

The perception in Asia is that the leadership of the World Bank, International Monetary Fund and Asian Development lacks transparency in policymaking and are strategically managed by an elite club.

Affluent countries not members

Japan’s position is that until AIIB conforms to international standards membership is premature. On the other hand Canada joined the AIIB taking the position that participating in AIIB policy formulation ensures adherence to international standards. Notably the United States is not an AIIB member perhaps due to the reason that the emergence of a Chinese led regional economic institution lessens its weight age in contrast to its influence in the World Bank and other MBD’s. One school of thought is for the Organization for Economic Cooperation and Development (OECD) countries to sponsor reforms and to spur MDB’s to lend as per need, decrease time involved in loan approval process, cut reporting requirements and soften conditionalities with potential political backlash.

AIIB Environmental and Social Framework

AIIB is conforming to internationally recognized social and environmental themes and AIIB’s Environmental and Social Framework  was approved in 2016 with significant commitments regarding transparency, information disclosure and public participation. Notable aberrations are AIIB’s lack of mandatory environmental or social impact assessments for projects despite affirming that its lending policywould follow international agreements on sustainable development such as the 2015 Paris Agreement on Climate Change.

China’s Energy Lending Portfolio apart from AIIB not environment friendly and high risk

In contrast to AIIB’s funding China’s national development banks lent as much to foreign governments for energy as all the major Western-backed MDB’s combined. In the period from 2007 to 2014 Chinese banks expanded the amount of energy financing offered enhancing to USD 117.5 billion dollars for other countries. Unfortunately Chinese development banks are involved with countries with higher country risk ratings that are risk prone to fluctuations in commodity prices and ensuing economic downturns in the developing world. China’s energy loans globally are focused on fossil fuel extraction and power generation especially coal. Chinese development banks have provided financing to the tune of USD 28 billion for coal based power plant lifetime of 30 years with a projected social cost to the environment extending upto USD 117 billion.

China’s long standing grievance is that it is not adequately represented in the economy of the world, despite averaging almost 10 percent GDP growth annually. Beijing has attempted to distance the AIIB from the OBOR initiative through co-financing arrangements for its initial loans

AIIB filling in the gap as MDB lending for infrastructure projects has declined over the past several decades.

The World Bank was unambiguously established to sustain infrastructure growth in pursuance to the economic reconstruction of Europe but by the mid eighties MDB’s changed their focus from infrastructure lendinginstead underscoring developing of an investment environment in developing countries as opposed to funding basic infrastructure. The capacity of MDB’s including existing ones such as the World Bank and regional MDB’s comprised of Brazil, Russia, India, China, and South Africa (BRICS) to adapt their operational policies and governance arrangements to a rapidly evolving economic and political context may spur competitive lending. According to data recorded by the OECD support for infrastructure projects was USD 60 billion in 2013 led by the World Bank contributing   USD 11.7 billion.

AIIB infrastructure funding serves Chinese influence

China’s long standing grievance is that it is not adequately representedin the economy of the world despite averaging almost 10% GDP growth annually. China has attempted to distance the AIIB from the One Belt, One Road (OBOR) initiative through co financing arrangements for its initial loans. China is delicately balancing the establishment of a MDB while pursuing China’s own economic and national security priorities aligned with OBOR. The AIIB’s projects overlap with the geographic spread of the OBOR initiative with certain initial projects being an essential component of China Pakistan Economic Corridor.

Chinese projects also excessively utilize Chinese construction companies and human resource inviting criticism that Chinese assistance is sabotaging efforts by Western democracies to achieve high standards of governance and rule of law in developing countries. Lending rates of MDB’s are lower and terms concessional as compared to commercial banks of other countries. Pakistan needs to play its cards intelligently and negotiate the best borrowing rates, terms and conditions with the MDB of its own choosing and by doing so would protect its sovereign economic interests for sustained development.

The author Razeen Ahmed has done his Bachelor of Science in Business and Management from the London School of Economics and Political Science and is involved in research in the areas offinance, energy and sustainable development. Nadir Mumtaz has reviewed the article

Published in Daily Times, March 24^th 2018.