Asian Infrastructure Investment Bank

In June this year the Asian Infrastructure Investment Bank (AIIB) started its actual operations. The funding of the first projects are ensured now, and those who have been paying attention to the developments related to the organisation since its establishment, can have a more complete picture of the operations of the bank. This article focuses on the circumstances of the founding of the bank, its significance and its operations in the last six months.

Asia’s latest investment bank has been welcomed by many, but several countries have expressed criticism, rarely even aversion to it. The main reason is that many are afraid of Chinese dominance because strict compliance with international norms is not necessarily what the major initiator and contributor Asian country is famous for. The main fear of its American critics was China’s inability to operate a transparent system. The poor public administration of several countries in need of infrastructure in the region, which can lead to rampant corruption extremely easily, should be added, too. The organisation tried to counterbalance this by integrating the establishment of institutions in the supported projects, in cooperation with local governments.

Setting up AIIB

According to a report of the Asian Development Bank (ADB) from 2009, the development needs of  the Asian region would amount to $8 trillion by  2020, 68% of which would be used for creating new capacities, 51% for producing electricity, 29% for building roads and 13% for telecommunications.ⁱ

When setting up AIIB, China referred to this report saying the World Bank, with its fund of $220 billion, and ADB, with its $160 billion, existed, but they were not enough to address the needs of the most rapidly developing region. AIIB was established with this aim in October 2014 with a capital stock of $100 billion (50 billion of which is provided solely by China).ⁱⁱ

Even when summed up, this amount does not cover the abovementioned need of $8 trillion, but by providing loans to infrastructural investments AIIB will contribute to the fulfilment of needs to a significant extent.

Challenge of the American World Order?

In March 2015, the application deadline for AIIB permanent members was closed. The 57 founding members include 37 countries within the region (Asia-Pacific) and 20 countries outside the region, including such key allies of the United States as the United Kingdom, France, Germany and Italy, despite all (unofficial) lobbying.ⁱⁱⁱ It was only the USA and Japan which stayed away from AIIB (the application of North Korea was rejected, with reference to financial and budgetary transparency problems).

AIIB members^iv

If we examine the membership of AIIB in the light of the rivalry between American-Chinese diplomacy, we can remember April 2015, together with Lawrence Summers, as “the moment the United States lost its role as the underwriter of the global economic system”.^v

AIIB alone is not larger than and does not seem a real challenger of either the ADB or the World Bank. Its significance does not really lie in the value of its capital.  But from the viewpoint of building an alternative world order, its mere existence and its extensive, inclusive membership are remarkable.

It is a key element of the hegemonic theory that the hegemon (either on universal or regional level) can exercise its political, military and economic power and force the new rules on the international community through an established system of institutions. The situation of the USA and the period of “Pax Americana” originates from World War II. Although the United States has had an economic dominance from the 1870s, the control over naval bases and the world’s sea lanes was transferred to the United States in 1941, when the United Kingdom signed the Lend-Lease Act deal. The USA gained a global leading role on both economic and military levels. Afterwards, it shaped the economic order at the Bretton Woods Conference, which was based on the United States’ dominant position by setting up the International Monetary Fund and the World Bank, and under the Marshall Plan it assisted to reconstruct war-torn Europe (and turn it into a competent market outlet).^vi

However, the rise of China (in 2014 it surpassed the US economy on purchasing power parity) generates considerable tension in this system. In Beijing, China’s underrepresentation in the quota system of the World Bank is the source of increasing frustration (only the USA has veto power with 17% of votes , while China has only 4,87%) and the American Congress regularly blocks all reform attempts.

As for Japan-dominated ADB, China has only one-fifth of the American and Japanese votes.^vii Since it has significant inner drive and necessary resources, however, it is a logical consequence that China intends to establish an alternative institution of its own, not necessarily to overthrow the current system but to pressurise it, achieving better circumstances and a greater say.

The project named “One Belt, One Road”, or, more commonly, the New Silk Road and often compared to the Marshall Plan, is related to AIIB. It supports the development of the Asian region including the inner Chinese areas, from its accrued currency reserve of $3,8 trillion. The BRICS New Development Bank was set up with a fund of $100 billion for the same purpose. However, this will not be enough to ensure sufficient orders for the Chinese construction industry requiring vast investments, or even the steel industry alone. Based on the operation of the World Bank’s International Bank for Reconstruction and Development, AIIB could pay maximum 20 billion in the next five years, which does not even come close to the volume of Chinese capacities.

The establishment of AIIB stroke American dominance a heavy blow. However, there is room for argument whether it would mark the beginning of a new era or it would be the preparations for the emergence of a new hegemon.

AIIB Starts Operation

AIIB was heavily criticised when it was set up. Many argued that it was the hidden instrument of expanding China‘s interests, especially because it intended to support the development of infrastructure.  Others claimed that – following the Chinese pattern –  it would not be transparent or ignore all environmental standards.  However, as a consequence of the extensive membership of countries with a developed economy, China is not in the position to decide alone to whom it intends to provide loans. The actual start of the operations of the organisation may ease some worries at last.

After opening its doors for business on 16^th January, 2016, AIIB held its first annual meeting in Beijing, on 25-26^th June. It was operational for six months when the first loans were approved. AIIB’s president, Jin Liqun, has promised his bank will adhere to the highest international development standards. There is hope that AIIB – in contrast with several defects of fully Chinese-owned development banks – will aim at transparency and environmentalism.

In his speech at the opening ceremony for AIIB’s annual meeting, Chinese Vice-Premier Zhang Gaoli said they wished to connect the often less developed countries lying along One Belt, One Road and the opportunities of bank funding.  In terms of financing, they would establish a closer relationship with the private sector, since its involvement, as well as the application of various business models, are essential for developing high-quality infrastructure. Furthermore, AIIB would be active on both the demand and the supply side. The main aim will be that countries on different levels of the supply chain should have a share of the bank’s resources by benefiting from their characteristic features. He pointed out that China had assumed a considerable role in mitigating environmental damage, for example, as a supporter of the Paris Declaration or by setting up the South-South Cooperation Trust Fund, which promotes the environmental cooperation of developing and small countries.

According to the President’s report on operations, the volume of lending was in line with the business plan and there was a chance that it would exceed the $1.2 billion target. The organisation would be furthered strengthened by international consultants, with whom they were to meet in the autumn, and who would provide the expanding management with independent professional advice.^viii

During the two-day meeting, the management of AIIB made considerable progress to implement the projects launched as efficiently as possible. It had been raised earlier that AIIB could support less developed member countries in the costs of project preparation. For this purpose, they set up AIIB’s project preparation special fund, which China supported first with $50 million.^xix The fund is expected to be operational in autumn this year. The Chinese contribution is significant because it will further commit the countries receiving from the fund to support China’s leading role. However, it is still likely that other, richer member states will also offer additional contributions.

Outlook and Further Prospects

AIIB progresses in line with targets, and after co-funding has started we can say that the world’s development organisations regard the organisation including 46 members and 24 observers as a serious partner. Its appeal is well reflected by the fact that Financial Secretary of Hong Kong’s government, John Tsang was also present, confirming the application for membership of the special administrative region of China. In addition, a growing number of the major countries of the developed world is joining the Bank. The latest is Canada: on 31^st August, Minister of Finance Bill Morneau announced Canada’s application for membership in AIIB. Another major partner of the USA decided to strengthen the Chinese-led bank with its membership.

Thomas Maier, managing director for infrastructure of EBRD, which is partnering on Tajik projects, said it was the efficiency of the organisation that impressed him, and AIIB was a natural partner because they were willing and able to take risk, such as going into private public partnership structures. From the very beginning, member countries and partner institutions hoped that the bank will adhere to the conventional norms of development funding. As a response, AIIB pointed out its commitment to transparent operations. Another problem occurring at an early stage was that AIIB-funded projecst would leave environmental damage behind if international environmental norms were not adhered to. In this respect, we cannot see clearly now since most projects are in the initial stage, i.e. establishing institutions.

Even though the independency of AIIB was emphasised at the meeting, China’s role, as it had been expected, remained decisive. It will be an important question who will carry out implementations. The region is short of appropriate infrastructure, the Chinese construction industry, however, is on overload. For China the greatest challenge is to balance between its own needs and the expectations of the international membership. However, several members think a lot of work must be done to reach the standards of international regulations. The tasks of the management and the board of directors still have to be more precisely defined; in six month, a basic operational practice formed, but there is still a lot to be done in this respect. The same applies to the expansion of the committee’s membership. Up to date, 38 full-time employees work for the organisation, which is a very modest number, compared to the volumes of projects. They plan to be fully staffed by the end of 2018 with 500 employees.

The future operations of AIIB should be examined in the light of these necessary internal developments and its capability to adhere to international standards.  So far, expanding membership has counterbalanced the initial concerns about China regarding regulations and the development of the organisation. Several professionals have been hired by the bank, who have already proven their competence in other multilateral development institutions. Their expertise and the decisive action of member states together can ensure that the bank can take the place it deserves in the row of investment banks.

Projects Launched The board of directors have approved the first four loans supporting Asian investments of a value of $509 million. The organisation’s distinguished aim is to improve the lives of millions living in the region. In order to do so, they will spend $1.2 billion on supporting various projects, granting a $165 million loan for a Power Distribution System Upgrade and Expansion Project in Bangladesh. In the project, 2.5 million service connections will be provided to rural consumers, contributing to the social and economic development of the region for the benefit of 12.5 million people; providing a $216.5 million loan for a National Slum Upgrading Project in Indonesia, expected to be co-financed with the World Bank. The Indonesian government plans to develop the infrastructure of the urban slums in central and eastern parts of the country. The loan partly covers expanding the capacity of responsible ministries, and partly building infrastructure. The improved living conditions and services will impact 9.7 million inhabitants of 154 cities; granting a $100 million loan to finance the Shorkot-Khanewal Section of National Motorway M-4 in Pakistan, co-financed with the Asian Development Bank (ADB) and the United Kingdom’s Department for International Development (DFID). The missing 64-km long section of the motorway in Punjab province will connect Islamabad, Faisalabad and Multan, creating the complete north-south four-lane motorway crossing the country from the economic centre of Torkham, Afghanistan to the port of Karachi. ADB will provide the project with another $100 million, and, as lead co-financier, will also administer the loans. The United Kingdom’s DFID also committed to a $34 million grant for the project, which will also be administered by ADB; providing a $27.5 million loan for the Dushanbe-Uzbekistan Border Road Improvement Project in Tajikistan, co-financed with the European Bank for Reconstruction and Development (EBRD). The project is dedicated to promote mobility in the 5-km long section of the Central Asia Regional Economic Cooperation Corridor, connecting the Tajik capital and the Uzbek border. The main funding partner, EBRD will also provide the project with a $27.5 million loan. Two other projects are expected to be approved in September: the investment aiming at strengthening the transmission network of Tamil Nadu in South India, and the Tarbela 5 hydropower extension in Pakistan. This latter one may also be co-financed with the World Bank.

1. AIIB’s Board of Directors Approves $509 M Financing for its First 4 Projects:Power, Transport and Urban Investments span South, Southeast and Central Asia. Asian Infrastructure Investment Bank. http://euweb.aiib.org/html/2016/NEWS_0624/120.html [2016. 08. 03.]
2. AIIB gathers for inaugural annual meeting. In: Financial Times. 2016. június 24. http://www.ft.com/cms/s/0/828ff06c-39e7-11e6-a780-b48ed7b6126f.html#axzz4GBGzwswK [2016. 08. 03.]
3. China-Backed AIIB Seeks Cooperation and New Members. In: Fortune. 2016. június 26. http://fortune.com/2016/06/25/aiib-china-new-members/ [2016. 08.03.]
4. http://en.wikipedia.org/wiki/Asian_Infrastructure_Investment_Bank#/media/File:AIIBMap.svg (2015.05.11.)
5. MarkFleming-Williams: China’s New Investment Bank: a Premature Prophecy. Stratfor, 2015. április 22. https://www.stratfor.com/weekly/chinas-new-investment-bank-premature-prophecy (2015.05.11.)
6. Ibid.; Matura Tamás: Új fejezet a globális hatalmi játszmában – magyar részvétellel. Kitekintő, 2015. április 8. http://kitekinto.hu/kelet-azsia/2015/04/08/uj_fejezet_a_globalis_hatalmi_jatszmaban_-_magyar_reszvetellel/#.VVGuDfntmko (2015.05.11.)
7. Matura Tamás: Új fejezet a globális hatalmi játszmában – magyar részvétellel. Kitekintő, 2015. április 8. http://kitekinto.hu/kelet-azsia/2015/04/08/uj_fejezet_a_globalis_hatalmi_jatszmaban_-_magyar_reszvetellel/#.VVGuDfntmko (2015.05.11.)
8. President’s Report to the Board of Governors -2016 Annual Meeting of the Board of Governors Asian Infrastructure Investment Bank http://euweb.aiib.org/html/2016/NEWS_0625/122.html (2015.07.11.)
9. AIIB’s Board of Directors establish a Project Preparation Special Fund: China provides initial $50 million start-up contribution. http://euweb.aiib.org/html/2016/NEWS_0625/124.html (2015.07.11.)