China-led AIIB Looks Toward Co-Financing Projects, At Least Initially

Early last year, when the United States’ Western European allies began eagerly signing up for China’s nascent Asian Infrastructure Investment Bank (AIIB) as founding members, it seemed as if Washington was confident that the AIIB would emerge as a poorly governed tool of Chinese geoeconomic statecraft, beholden to lower standards than the World Bank and the Asian Development Bank (ADB), the highly experienced international development banks. At the core of these concerns was a perception that the AIIB would be supplementary instead of complementary to existing development banks–both in terms of its governance and the projects it selected.

A year and a few weeks ago, the AIIB’s 57 founding members finalized its charter; in the final days of 2015, themembers ratified the bank’s Articles of Agreement. Finally, early in the new year, the AIIB opened its doors for business. Now, just over three months into its operations, the AIIB has decided on its first projects. As I’d briefly discussed in April, the AIIB’s first projects have demonstrated that concerns a year ago in Washington and Tokyo may have been overstated. For now, the bank appears to be pursuing a modest and complementary approach in selecting its projects.

One of the bank’s first confirmed projects, the construction of a 64 kilometer stretch of a highway in Pakistan, demonstrates this. The AIIB will partner with the ADB, as Reuters reported last week. “I am delighted to take a further step forward in our partnership with ADB,” AIIB President Jin Liqun said in a statement posted to the AIIB’s website. Per the memorandum of understanding between the two banks, the AIIB will work with the ADB to cooperate on the highway, which will connect Shorkot to Khanewal in Pakistan’s Punjab province. The AIIB is also separately planning on co-financing projects with the World Bank and, on Monday, formally announced another co-financed project, this time with the European Bank for Reconstruction and Development, to improve roads along the “Tajikistan section of the Central Asia Regional Economic Cooperation Corridor, [near the border with Uzbekistan].”

In the case of the Pakistan project, the ADB’s Nakao sought to swat aside any suggestion that the country was selected due to Pakistan’s generally close relationship to China. “We have so many projects in the list in many countries. It just happened that the Pakistan project was approved first because it could be done quickly,” Nakao said, addressing a press briefing. Last year, China announced a range of infrastructure investment projects worth $46 billion, known collectively as the China-Pakistan Economic Corridor (CPEC). The AIIB’s Articles of Agreement note that projects are evaluated by their economic merits and not according to the “the political character of the member concerned.”

Even though some headlines described the AIIB-ADB co-financing arrangement (which, also, by the way involves the United Kingdom’s Department for International Development) as an “odd couple,” this doesn’t appear to be panning out in reality. Sure–China midwifed the AIIB into existence and exercises effective veto power over the projects the bank can be involved in given the governance structure. And sure–Japan is the largest ADB shareholder and all ADB presidents have been Japanese. Given the poor bilateral state of affairs between Tokyo and Beijing, it may be tempting to see the ADB and AIIB as natural rivals, but it just isn’t so.

As the AIIB matures as an institution and looks to take on more projects, we may see its preferred operating methods change. Co-financing might make sense initially as a way to mitigate risk stemming from improper due diligence and evaluation, helping the well-capitalized bank, with $100 billion in assets, piggyback on existing projects that have been vetted by more experienced players in the international development finance world.

China, no doubt, cares deeply about expansive, reliable, and accessible infrastructure across the Asia-Pacific–particularly in the continental heartland to its west, where its One Belt, One Road project’s Silk Road Economic Belt lies. But nothing the AIIB has done so far or is looking to do in the near future suggests that the bank will bend to augment Beijing’s strategic whims at the expense of other states. For the ADB, China, and the recipients of funding under the bank’s first projects, including Pakistan, the AIIB’s proposition is strictly positive sum.

By ANKIT PANDA May 10, 2016 on The Diplomat

Read more here