The Impact of AIIB and NDB on Infrastructure Financing 

The advent of the Asian Infrastructure Investment Bank (AIIB) and of the New Development Bank (NDB) (or “BRICS Bank”) changed the landscape of international development. The new institutions have the potential to finance a significant share of infrastructure projects in Emerging Market and Developing Economies (EMDEs). They also have the potential to hasten the power transition from the United States and the West to China and the Rest. Their first year of operations offers insights on the extent to which they will be able to realize this potential.

What next

In the next few years, the AIIB and the NDB will have a small but growing ‘quantitative’ impact on infrastructure financing in EMDEs as they expand their portfolios of energy, transportation, and urban development projects, mostly in cooperation with other Multilateral Development Banks (MDBs). In the longer term, the AIIB is likely to have a bigger ‘qualitative’ impact, financing larger, riskier projects and investing in entire infrastructure networks. However, the AIIB and the NDB will reach financing capacity very gradually and most likely not before the second part of the next decade.

Impacts

  • The AIIB and the NDB will support the BRICS’ economic and foreign policy initiatives, such as ‘One Belt, One Road (OBOR)’;
  • The AIIB will help China diversify and increase the value of its international assets, including those of the Silk Road Fund;
  • The AIIB will open business opportunities for all infrastructure firms and the NDB will for BRICS-based companies;
  • Long-term investors will be able to access a wider range of bonds; some may be rated below AAA but will be higher yield;
  • The AIIB and the NDB will help achieve the 2030 Agenda for Sustainable Development and support global economic growth.

 Analysis

After one year of operation, the AIIB and the NDB remain in transition. Their membership, staffing, and operational priorities are developing.

The AIIB is in effect acting as a trust fund of traditional MDBs; the NDB as a credit cooperative for the BRICS. But the AIIB is on track to become an avatar of traditional MDBs, albeit one focused on infrastructure. The NDB is attempting an ambitious strategic shift towards the African continent.

 Composition and Governance

 

Financing capacity

Both the AIIB and the NDB have authorised capital of 100 billion dollars. All the AIIB capital is to be subscribed, with 20 billion dollars to be paid-in. Only 50% of the NDB capital is to be subscribed initially, with 10 billion dollars to be paid-in.

The outstanding operations of the MDBs financed on their own resources are capped at 100% of the (unimpaired) subscribed capital and reserves. The AIIB may decide to increase this limit to 250% of this total (China has a veto power). The equity operations of the AIIB are capped at the total (unimpaired) paid-in capital and reserves.

At full capacity, the infrastructure portfolios of the AIIB and the NDB can therefore exceed 100 billion dollars and 50 billion dollars respectively. The AIIB can increase this to more than 250 billion and the NDB to more than 100 billion.

A significant share of these operations will be financed by new money. China’s financial commitment to the AIIB does not come at the expense of its bilateral programs for infrastructure development.

These volumes of financing remain small compared to total needs. In 2015, the WBG estimated that financing requirements for basic infrastructure in EMDEs were 819 billion dollars per year until 2020 — 304 billion dollars in South Asia and 87 billion in East Asia Pacific (excluding China). Nonetheless, the AIIB and the NDB have the potential to provide a large share of MDB financing for infrastructure development.

Graphic: Financing Base and Total Lending Portfolio; Source: MDBs; All figures are in US$bn; *After OCR-ADF merger; ** As provided in Articles of Agreement

Ripple effect

Some of the impact of the new MDBs on infrastructure financing will be indirect. For instance, in 2016 Japan pledged to provide 200 billion dollars over five years via the ‘Expanded Partnership for Quality Infrastructure’, partly in response to the establishment of the AIIB.

Gradual deployment

The AIIB has committed 1.73 billion dollars for nine operations (nine more are under preparation); the NDB has committed 1.5 billion for seven operations (and intends to lend a further 2.5 billion this year). The pace of portfolio expansion will depend on three main factors:

  • Subscription payments, with the last installments due by 2020 (AIIB) and 2022 (NDB);
  • Recruitment process, with both institutions remaining understaffed (100 employees each; compared to more than 10,000 for the World Bank);
  • Capacity to generate projects, in particular with the provision of technical assistance, including via China’s 50 million dollar ‘Project Preparation fund’ for AIIB’s low-income members.

The AIIB and the NDB have relied on the support of other MDBs for project preparation. To date, 75% of the projects approved by the AIIB (and 100% of projects in the pipeline) are co-financed.

Operational scope and priorities

The geographic reach and sector coverage of the AIIB and the NDB are currently narrow but their scope is potentially very large.

Countries

The AIIB and the NDB can finance operations in all member countries regardless of their income levels. They can also invest in non-member countries (China at the AIIB and in most cases two founding members at the NDB can block such a decision).

But the MDBs’ 2016 documents, statements, and operations denote a focus on the sub-regions in which the main shareholders have the strongest interests. For the AIIB, they include countries along the OBOR axis. For the NDB, they include sub-Saharan Africa, where a first regional centre is being established.

Sectors

The AIIB’s and NDB’s Articles of Agreement provide for the financing of operations in ‘hard’ infrastructures as well as ‘productive sectors’ and ‘sustainable development’.

Their operational scope is currently more restricted, with an initial concentration on the energy sector. In 2016, energy operations represented 63% of the AIIB’s lending commitments and more than 55% of its project pipeline. The two other focus areas are transportation (25% commitments) and cities (12% commitments).

Energy strategy

The AIIB is preparing an energy strategy. The current draft builds on the international agenda. In particular, it mirrors the restrictions that the World Bank placed on operations in support of nuclear energy and, to some extent, of oil- and coal-fired plants.

The AIIB’s energy priorities are:

  • Rehabilitation and upgrade of existing generation stock and of power and gas networks;
  • ‘Low-risk’ greenfield power transmission and distribution projects;
  • Hydropower generation and non-conventional renewable energy (NCRE);
  • Gas-fired generation and related infrastructure.

The strategy provides for a significant share of operations, mostly demand-side energy efficiency and NCRE projects, to be co-financed with other MDBs.

Financing channels, policies and instruments

The AIIB’s financing practices compare with those of other MDBs. The NDB’s reflect the bilateral practices of the BRICS.

The AIIB’s and the NDB’s preferred instruments are loans, guarantees, and equity.

Standards

Both rely on the policies of member countries for the management of environmental and social (E&S) risks. Although less stringent than other MDBs, this approach converges with the World Bank’s new E&S framework.

Their procurement policies diverge though. The NDB’s restrict the procurement of goods and services to member countries only. The AIIB’s places no geographical restriction — and as such is more open than other MDBs’.

Partnerships

The AIIB and the NDB have engaged in collaboration with traditional MDBs for staff exchange and project co-financing, including the World Bank and the Asian Development Bank.

The NDB is also developing co-financing frameworks with the BRICS’ national development banks and financial intermediaries such as Industrial Credit and Investment Corporation of India, China Construction Bank Corporation, and Standard Bank of South Africa.

 

This is an electronic, unedited version of an article published in the Oxford Analytica Daily Brief

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