AIIB: New global player under scrutiny

Strict observance of environmental, social and human rights standards should be guaranteed for every investment project. Photo: Building site in Jakarta, Indonesia.
Article as analysis
“The AIIB can contribute significantly to (…) promoting sustainable economic development in Asia”, the Swiss Government stated in August 2015 justifying Switzerland's involvement in the AIIB. Time for an interim appraisal.

1. What led to the creation of the AIIB?

China's under-representation in the western-dominated Bretton Woods institutions (International Monetary Fund and World Bank) as well as that of Japan in the Asian Development Bank may have prompted Beijing to set up the Asian Infrastructure Investment Bank (AIIB). It is just as probable that Beijing views having its own development bank as a more expedient way of exerting its influence than a unilateral approach based on sheer economic might.

The establishment of the AIIB was a diplomatic triumph for Beijing. The USA under President Obama had urged the European countries and Japan not to join the AIIB. But the first European country to join the AIIB in March 2015 was none other than the USA's closest ally, the United Kingdom. It was followed in short order by Germany, Switzerland and other European countries. That put paid to a unified G7 position. Meanwhile, AIIB membership has grown to 56 States and others have applied for membership.

With initial capital of USD 100 billion, the AIIB was launched in January 2016 at China's initiative and is clearly financially weaker than China's own financial institutions. The China Export-Import Bank, for example, grants annual credits in multiples of this amount. Even more significant is the symbolic and geo-strategic value of the AIIB as it places Beijing at head of a multilateral financial institution for the first time. China can now pursue a brand of multilateralism for which Beijing sets the rules.

2. What is the role of the non-regional member countries?

The European States give as their rationale for joining the AIIB a desire to positively influence the institution from the very beginning and to promote the best environmental and social standards. How successful they will be over the medium-to-long term is yet to be seen. For the time being, the AIIB is displaying an openness to dialogue with international civil society that accords with the expectations of western governments. This will no doubt satisfy Saatchi & Saatchi, the international public relations firm tasked with looking after the AIIB image.

European membership has no doubt been instrumental in the decision by the three leading international rating agencies to grant the much coveted triple-A credit rating to the AIIB in the summer of 2017. This places the AIIB at the top of the credit rating, thus enabling it to secure funds on international capital markets on favourable terms and expand its future loan portfolios. This is remarkable in that none of the three biggest member States (China, India and Russia) has a triple-A rating for its public finances. But what is the position as regards other risks such as governance and environmental and social impacts, which rating agencies must also consider? In this respect they are on thin ice, as the AIIB has not yet been in business long enough to offer up the relevant picture.

So far the AIIB has been involved mainly in co-funding projects that meet the standards of the lead financial institution. AIIB risks will only become clear with the future development of its own separate portfolio.

3. What is the meaning of the AIIB motto “Lean, Green & Clean"?

The AIIB purports to be a new kind of bank for the 21st century, which uses limited human resources (lean) to finance environment-friendly projects (green) and tolerates no corruption (clean). Part of being lean means not having a supervisory board with a permanent location. This is intended to cut red tape, but also means that supervision is kept at bay. The 12-person board includes two European representatives, but the board's powers have so far not been clearly laid out. It is therefore not clear how much leeway the AIIB president will have for independently approving loans and policy guidelines in the future.

The AIIB wants to keep its staff complement small and to approve projects much more quickly than other development banks. But it is precisely infrastructure investments that often lead to forced resettlements and pose various environmental and social risks. It is yet to be seen just how few staff members under “pressure to be efficient” it will take to assess and monitor project quality.

4. How should we rate AIIB climate and general environmental standards?

The AIIB published its climate strategy in June 2017. It makes reference to the Paris Climate Agreement, the UN 2030 Agenda for Sustainable Development and the UN Sustainable Energy for All initiative. However commendable we may find this as well as the at least provisional exclusion of nuclear power, the failure to rule out the funding of oil and coal projects as well as major dams is no less problematic. The AIIB stresses that it will be guided by the needs of its borrowers.

The AIIB's environmental and social standards are set out in the Environmental & Social Framework (ESF). The ESF is flexible and contains major loopholes. For example, borrowers are expected to fulfil the Bank's conditions “in a manner and timeframe deemed acceptable to the Bank”. What is acceptable to the Bank is not spelled out. Moreover, the ESF can be replaced by client standards – in other words by the often very weak environmental and social standards of countries wishing to take out a loan.

Two central pillars that must form part of climate strategy and environmental policy are still missing to date: guidelines on public access to project information and on a complaints mechanism. Both are understood to be under preparation. The very topics of public access to information, freedom of speech and of assembly are politically sensitive in China and in many borrowing countries where the activities of NGO are often suppressed and criminalized.

The AIIB cannot be viewed as divorced from China's economic and geopolitical interests. Its activities need to be closely monitored by member countries and by civil society.

Author Korinna Horta handles the topic of international financial institutions at the German NGO urgewald e.V.


Switzerland and the AIIB

mh. Switzerland is a member of the Asian Infrastructure Investment Bank (AIIB) as well as Vice-Chair of the voting group that comprises Denmark, Iceland, Norway, Poland, Sweden, the United Kingdom and Switzerland. So far it has funded its contributions to the Bank from the development cooperation budget.

This questionable use of development funds caused heated debates in the Swiss Parliament. Several parliamentarians criticized membership of the AIIB as strictly serving the purposes of foreign economic relations with China. The Federal Council retorted that the AIIB will contribute to sustainable development in Asia, “which is home to the greatest number of the world's poor and very poor” and besides was a meaningful addition to the existing multilateral development banks.

So far, these assertions do not seem to be coming true. To date, most of the support provided by the AIIB has been going to projects in Egypt or Oman. Asian countries with high poverty rates play a marginal role in the Bank's portfolio. Besides, the AIIB is working hand-in-hand with the World Bank Group in these cases, in other words, certainly not in addition to other banks.