Assessment of the Asian Infrastructure Investment Bank
The creation of the China-led Asian Infrastructure Investment Bank (AIIB) in 2016 – and the decision of Western donors, with the notable exceptions of the United States and Japan, to join it – seems somewhat remarkable from today’s point of view. Indeed, it represents one of the few recent examples of a response to Beijing’s rise that has emphasized collaboration rather than competition.
In the years that followed, China’s growing geo-economic footprint and the various countermeasures adopted by the United States and its allies, including in infrastructure, have seen economic cooperation between Beijing and the West fractured. This fracturing has been accelerated by the pandemic. But the AIIB resisted.
As stated earlier, the AIIB is only one part of China’s development engagement. Much of the (more opaque) funding associated with large-scale bilateral programs such as the Belt and Road Initiative (BRI) are usually implemented through Chinese banks and state-owned enterprises. With all of China development finance pledges estimated at around US$85 billion per year, its subscription to the capital of the AIIB ($29.7 billion over five years) represents only about 7% of Beijing’s total annual semi-concessional and non-concessional commitments.
But China is by far the largest contributor to the AIIB and therefore has the largest single vote share (26.58%), followed by India (7.59%), Russia (5.97%), Germany (4.15%) and South Korea (3.49%) (Figure 1). Australia (3.45%) has the sixth largest vote share. The AIIB has five Pacific members – the Cook Islands, Fiji, Samoa, Tonga and Vanuatu – plus Timor-Leste, with a total vote share of 0.82%. Papua New Guinea is a potential member.
Compared to its multilateral development bank (MDB) counterparts, the AIIB remains small in terms of approved loan portfolio (Chart 2), especially compared to the Asian Development Bank (AfDB) and the World Bank. But 2021 has been a record year for loans growth – with 50 new project approvals worth approximately US$9.6 billion – bringing the AIIB closer to its goal annual investment objective from 10 to 12 billion dollars.
While traditional infrastructure sectors (energy, transport, water) feature prominently in the AIIB’s portfolio, the COVID-19 crisis has seen the Bank develop loans both for public health (vaccine financing) and for direct budget support (“economic resilience/policy-based financing (PBF)”). The latter is co-financed under the conditions of the ADB or the World Bank. In March 2022, budget support was the AIIB’s second largest lending category, just below transport (Chart 3).
In terms of portfolio performance, the Bank established its first assessment and learning policy in 2021 and, although there is no stand-alone independent evaluation office, the policy establishes a direct reporting relationship with the AIIB’s Board of Directors. The AIIB has not yet developed a specific policy to ensure that its projects promote gender equality.
In terms of destinations, AIIB projects are heavily concentrated in large middle-income developing economies, with the Bank’s top five borrowers by value (as of March 2022) accounting for nearly two-thirds ($20 billion) of approved projects, specific to each country. (i.e. excluding “multi-country” loans). The remaining approved loans ($11 billion) are spread across 27 countries (Figure 4). AIIB operations in Russia and Belarus have been suspended and remain under scrutiny following the Prime’s invasion of Ukraine in February.
Besides being the second largest shareholder, India is the AIIB’s largest borrower by value, with US$8.1 billion (about 24% of the AIIB’s total portfolio) worth of projects. Officials described India’s support for the AIIB – as opposed to his distinct lack of enthusiasm for the BRI – as a choice between “connectivity through consultative processes or more unilateral decisions”.
China is the AIIB’s second largest borrower. In this sense, the AIIB represents a microcosm of China’s unique position as the world’s leading lender and sustainable borrower of international development finance – the AIIB provides China sovereign and non-sovereign loansjust as Beijing continues to both contribute to and borrow (non-concessional financing) from other MDBs, including the world Bank and the AfDB.
Given its non-concessional loan terms and the scarcity of high-return infrastructure projects, the AIIB has only three investments in the Pacific – two budget support loans to Fiji (co-financed by the AfDB) and one budget support loan to the Cook Islands (co-financed by New Zealand and the AfDB). The AIIB has established a grant-funded program Special Fund for Project Preparation and a more concessional”Special fund windowto increase lending to low-income members.
There have been multiple assessments in recent years of the extent to which the AIIB is living up to its founding mantra of “lean, clean and green”. It is certainly “thin” – while the AIIB’s loan portfolio is about a third the size of that of the AfDB, it has less than 10% of staff. The AIIB also has no representative offices in client countries. The Bank aims to increase its workforce to 800-900 by 2030, and has just announced the creation of its first overseas officein Abu Dhabi.
The AIIB has also attempted to streamline project preparation processes, the slowness of which has been one of the main reviews of established MDBs. In doing so, the Bank ended up relying heavily on existing co-financing projects developed by the AfDB and the world Bank. Unlike other MDBs, the AIIB has only one non-resident part-time employee board of directors. another important structural difference with other MDBs is that the AIIB does not have a formal replenishment of its capital fund; while this gives the Bank and its clients more autonomy, it limits the ability of shareholders to directly link financing to improved performance, management reforms and strategic direction.
The AIIB has clearer anti-corruption and transparency policies (“clean”) that China’s bilateral financing initiatives, which are among the the least transparent in the world. Like the AfDB and the World Bank, the AIIB uses international competitive bidding and maintains a list of deregistered companiesindividuals and entities that are excluded from bidding for AIIB projects, including dozens of Chinese entities.
However, recent assessments have raised concerns regarding the Bank’s approach to due diligence, the lack of independent monitoring of its environmental, social and accountability frameworks, and the Bank’s heavy reliance on its clients to monitor policies and standards. There is also the question of the role of the AIIB as the host institution of the China-led Multilateral Cooperation Center for Development Finance (MCDF), particularly the lack of clarity surrounding the latter’s role. relationship with the BRI.
It is against the last criterion, “green”, that the AIIB struggled the most. According to a civil society assessment published in 2021, for every dollar invested by the Bank in renewable energy, it spent almost twice as much on fossil fuel projects. Based on 2020 figures, the AIIB has been lowest ranked among all MDBs in terms of the proportion of its total portfolio (12%) invested in climate finance. And the Bank has yet to finalize a new energy sector strategy detailing how it plans to align its programs with the climate goals contained in the Paris Agreement. The Bank is committed to end of support for coal-related projects and aim for climate finance to represent 50% of its total project approvals by 2025.
With future prospects trilateral cooperation Appearing very thin, the AIIB represents one of the few remaining platforms for Australia to engage with China on regional development issues. It is an important function. But while support for the 2015 Abbott government decision to join the AIIB was bipartisan, it is unclear how Australia’s engagement with the AIIB will evolve in an era characterized by a skeptical attitude towards Chinadevelopment forays.
This research was undertaken with support from the Bill & Melinda Gates Foundation. Views represent those of the author only.