What the Asian Infrastructure Development Bank means for Asia and the world

Almost exactly a year ago, just prior to the Asia Pacific Economic Co-operation (APEC) hosted in Bali in October 2013, President Xi Jinping announced the proposal for the establishment of the Asian Infrastructure Investment Bank (AIIB). This was a major announcement which was unforeseen and unexpected particularly as no clear plans were outlined at the time.

Since the announcement however, Chinese officials have been very busy in encouraging other fellow Asian partners to be the initial founding partners of the AIIB.

To date, the Chinese Ministry of Finance has convinced over 22 Asian partners including the likes of Singapore and Bangladesh to confirm their participation as founding partners and contribute to the initial funding capital.

Other major partners such India, Qatar and Saudi Arabia have been very bullish about the prospects and the promise of the AIIB and have made very positive overtures publicly about their participation as founding members. Other South East Asia partners such as Thailand and Malaysia remain positive and other major partners such as South Korea and Australia are still studying the Chinese proposals.

 

The Asian Investment Infrastructure Bank

The role and rationale for the AIIB

The mandate of the AIIB, as a multilateral development institution, is to support the financing of infrastructure developments across Asia that supports economic growth and activity nationally and regionally.

Traditionally Asian nations have turned to the Asian Development Bank (ADB), the International Monetary Fund (IMF)  and the World Bank for financial support. However, the level of financial assistance, particularly from the World Bank and the IMF have dropped since the 2008 financial crisis.

The ADB is also being increasingly viewed as a bureaucratic entity which takes almost seven years to launch a project or initiative (from proposal to the approval of funding) which leads to significant delays due to red-tape.

These conditions do not support the urgent need for infrastructure investment by a number of Asian economies. The ADB estimates that Asia needs about US$8 trillion of physical infrastructure investment between 2012 and 2020. The OECD estimates that globally over US$50 trillion of infrastructure investment is required over the next two decades to support sustained economic activity.

The AIIB is expected to have an initial capital of between US$50 billion to US$100 billion with China contributing to half that amount. This will immediately create an entity that is stronger than the Asian Development Bank (which has a current capitalisation of about US$78 billion) and will be around half of the World Bank’s current capitalisation of between US$180 billion to US$200 billion.

 

Implications and impact for major Asian partners

The creation of the AIIB has a number of major implications for Asian economies. Growth prospects With depressed growth prospects – strong investment in infrastructure projects will support the creation of demand and improve production and consumption. The enhanced infrastructure will also support greater trade and economic expansion.

This is certainly the case for India which forecasted a need for approximately US$1 trillion to meet infrastructure requirements under its 12th five-year plan (from 2012 to 2017) but is struggling to meet the investment target. Participation in the AIIB will allow for India to raise greater capital and visibility for some of her public-private infrastructure initiatives. The rest of the South Asian subcontinent, including Sri Lanka, Bangladesh, Nepal and Pakistan have all either signed up with the AIIB or shown strong interest in the initiative. If India chooses to remain on the side lines, her influence across South Asia will further diminish. The AIIB will be a strong platform for India to take on a regional leadership role and be seen to be a partner for the region’s growth and success.

The AIIB will also certainly support a number of smaller Asian economies which have been unable to meet the stringent requirements or payment terms set out by the likes of the Asian Development Bank or the World Bank. This includes the likes of Nepal, Cambodia and Laos.

From a political perspective, the impact for Japan as a result of these developments is significant. The Asian Development Bank has traditionally been led by Japan (who along with the US share the majority voting rights in the ADB) which previously allowed Japan to exert her political and economic influence across Asia. The AIIB will certainly curtail Japan’s political influence across Asia and also strengthen China’s hand in the on-going disputes ranging from the South China Sea territorial issues to legacy World War II disputes.

South Korea on the other hand is trying to navigate its participation in the AIIB tenderly. On one side, Seoul has to please her largest trading partner, China, whom she is working closely with towards greater economic success. On the other side, Seoul’s traditional security partner, the US, remains a critical partner in South Korea’s regional defence strategy.

ASEAN (Association of Southeast Asian Nations) has certainly shown significant support for the AIIB. Indeed Singapore was one of the early founding members of the AIIB as they have a clear stated policy of working with China from the inside rather than remaining out on the side lines looking in. Other major ASEAN economies such as Thailand, Malaysia and Indonesia are likely to sign up to the AIIB to exert greater influence in the way the bank is run and managed which will in turn support their own investment and growth plans. However, there will be concerns, particularly from Philippines and Vietnam, which in recent times have had strong and sharp exchanges with China over the South China Sea islands. Their concern will be that should China take a greater role in economic influencing and funding, it will strengthen China’s hand and erode Vietnam and Philippines’ support in their respective claims in the South China Sea.

Asia has always traditionally had strong savings, currently estimated to be worth over US$3.99 trillion. This supply of savings can meet some of the immediate infrastructure requirements across Asia but there is a mismatch in channelling these savings towards the financing of the infrastructure projects. The AIIB can help resolve this funding gap moving forward.

 

Problems with Uncle Sam?

The US government has not hidden their opposition to the establishment of the AIIB.

Their biggest concerns are around how China will use the AIIB to further project her economic and political dominance across the region. It also gives greater clout to other major Asian partners such as South Korea and India whilst diminishing the influence of the United States’ traditional Asian partner, Japan (who leads the ADB as highlighted above). This does alter the geopolitical realities in the region and softens the US hegemony in the region.

Some of the other concerns highlighted by the US government is that the new bank will not have adequate and robust safeguards in areas such as environmental protection, human rights and a transparent procurement process which will undermine the need for good governance across the region. Indeed, if the AIIB fails to have strong safeguards, it will exacerbate the challenges of corruption, lack of accountability and proper due diligence which have remained endemic problems across Asia (and also around the world). However, it is likely that the AIIB will operate to very high and rigorous global standards when assessing and evaluating projects.

However, it must be noted that China has made it clear from the outset, and also recently at the Boao Forum for Asia, that they welcome the participation of the US and other European Union partners in the AIIB. This will provide an opportunity for non-Asian partners to support the bank and ensure that AIIB’s governance and strategy is in line with global standards.

The US should use this as an opportunity to partake in the region’s continued growth and stability. US participation in the AIIB (which will be subject to lengthy Congressional debates) will certainly do more to support US foreign policy of a safer and prosperous world rather than the current position of dissuading potential partners from participating in the AIIB.

 

The future

The AIIB will need to create strong and close collaborative partnerships with the likes of the World Bank and the ADB so that they are not working to cross purposes. Encouragingly, the World Bank have announced their wish to work closely with the AIIB when they launched the Global Infrastructure Fund (GIF) earlier in October 2014. Similarly, the ADB have also announced their intentions to work closely with the AIIB.

The AIIB will also need to create a viable and sustainable business model which channels funding appropriately towards infrastructure investment.

Recently, the BRICS Bank or the New Development Bank was set up by Brazil, Russia, India, China and South Africa. The BRICS Bank is headquartered in Shanghai and the Presidency is maintained by India for the initial five years. However, the funding from this BRICS bank is only available to the BRICS nations and not to the rest of Asia. The AIIB helps to alleviate this issue.

The AIIB can potentially create a platform that generates economic ties and greater unity across Asia. It provides a strong and credible opportunity for major Asian rivals to become partners towards growth and development. Initiatives such as these will help to provide resolution to tricky issues that always emerge between partners and friends.

 

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The World Bank’s latest restructure – what it means

The facts:

  • Over 10,000 people in around 100 locations around the world work for the World Bank;
  • The current president is Jim Yong Kim;
  • The Bank lends US$30 billion a year to support a wide range of activities from infrastructure loans, poverty alleviation, health grants, capacity building and ensuring inclusive growth;
  • It is financed by 188 members countries. 

What’s happening:

  • A reorganisation is planned and approved  – the 5th in 16 years. (Others were in 1997, 2001, 2007, 2010);
  • Latest restructuring approved by the governors of the World Bank and the IMF – in the annual meeting of the two bodies that arose from the Bretton Woods Conference. Kim also obtained the mandate when the World Bank / IMF meetings concluded on the 13th of October (where the Bank’s interim poverty target was set at bringing the number of people in ‘absolute poverty’ down to 9% by 2020;  
  • The current restructure will undo the earlier reorganisation undertaken in 1997;
  • Along with the restructure – there has also been a US$400 million budget cut. (to be phased over 3 years – and marks an 8% cut from the current $5 billion annual expenses); 
  • Full proposal for restructure found on this link (Click here)

What the new restructure means:

  • There will be 14 Global Practices – across the bank’s different projects and funds:
  • The 14 Global Practices include:
    1. Agriculture
    2. Education
    3. Energy and Extractive Industries
    4. Finance and Markets
    5. Health, Nutrition and Population
    6. Macroeconomics and Fiscal Management
    7. Poverty
    8. Social Protection and Labour
    9. Trade and Competitiveness
    10. Transport and Infrastructure
    11. Urban Rural and Social Development
    12. Environment and Natural Resources
    13. Water
    14. Governance
  • There will also be thematic areas such as gender, climate change, global employment, conflict and violence, public private partnerships (PPPs) which will be considered;
  • There will be greater centralisation (leading to less power to current country/regional based centres of influences);
  • A reshuffling of senior officers has begun – Sri Mulyani (previously Finance Minister of Indonesia) is now the bank’s COO;
  • Sanjay Pradhan (anti-graft expert) is now the VP for “change, knowledge and learning”;
  • Layoffs should be expected.  For example, each Global Practice will have one global director who will replace four regional heads and the vice president in a speciality area, which will potentially eliminate four senior jobs per expertise;
  • Reorganised bank would focus on working in partnership with the private sector;
  • The culture to shift towards greater tolerance towards a higher-risk / higher reward partnership (which potentially may include more controversial projects and possible moral hazards.)  
  • “If you have a spectacular failure, the only thing that I would be disappointed about is if we didn’t ensure we learned from that failure.” – Kim

The impacts:

  • In 1997, J. Wolfensohn (then President of the Bank) convinced Bank shareholders that a massive decentralisation, which would get development specialists out of Washington into the field, was the way forward. It was felt that being close to the markets would mean that the markets will benefit from the expertise of specialists who will be based in-market.
  • However, Kim wants a contrary approach. He wishes to close a large number of World Bank Group field offices and bring markets based staff of its four arms (International Bank for Reconstruction and Development, International Finance Corporate (IFC), International Development Agency, and Multilateral Investment Guarantee Agency (MIGA)) centrally;
  • Kim feels that the World Bank will become more efficient and effective through consolidating control of its far-flung operations back in Washington and also improve synergy between its four arms (listed above);
  • Kim feels that the World Bank (due to its current structure and bureaucracy) will become a series of regional banks rather than a world bank and fears that the World Bank could “become less than the sum of our parts,” and this in part was a driver for the process of re-centralisation;
  • Kim also wants the WB to coordinate the activities of other regional development institutions – though there are doubts where another layer of coordination going to help improve efficiency;
  • Kim wants the WB to be a “solutions bank” whereas previously J Wolfensohn wanted the WB to be a “knowledge bank” – the difference is not necessarily understood by many.

The questions that remain:

  • Should the World Bank restructure or downsize and let regional developmental agencies such as the ADB (both Asian Development Bank and the African Development Bank), the European Bank for Reconstruction take over some of its roles? The BRICS also recently set up the BRICS Development Bank – for financing infrastructure required for development. The BRICS DB will also be closer to the market and may be more responsive, reactive and attuned to the needs of developing nations. How will the Bank match this level of immediacy?
  • Furthermore, the Bank also feels it can help coordinate across the different regional development agencies (such as the ADB, etc) – but how receptive will they be to the Bank’s interference?
  • Furthermore, there are still hugely capital intensive projects that still need large tranches of low-cost funding and it may be likely that developing nations will turn to regional development agencies and bodies for funding rather than the World Bank where there remains a perception that the terms and policies of funding are dictated by developed/larger nations. How will the World Bank overcome this challenge?
  • Advocates for downsizing argue that since the incidence of global poverty has reduced in the last few decades (particularly India and China) and eligibility of these countries to get low cost financing from the WB has decreased significantly as a result.
  • Will the bank be focussed too much internally during the transition and not enough on developmental and capacity building programmes?
  • Should the bank also focus more on other development needs such as Anti Money Laundering and the Combating the Finance of Terrorism (AML/CFT), human trafficking, narcotics, climate change , and other issues that occur outside a single country context?

Economic updates from Myanmar: Brief impressions

IMG00465-20110811-1107

Always good to be back in Yangon. So many developments and changes in such a short span of time. I always enjoy coming to Myanmar. I am always treated to the very best of Burmese hospitality and the resilience and entrepreneurial qualities of the Myanmarese continue leaving a deep impression on me.

A few observations from Myanmar on the economic front:

  • Hotels – When I first used to come to Myanmar – I was paying about US$70 for a good room at well-known hotels like the Traders, Chatrium or Park Royal. Room rates now start at US$200 for any of these hotels! And they are all running at above 95% occupancy rates!

 

  • Traffic – The cost of car ownership has gone down dramatically. In the past, to purchase a car required a permit which cost an exorbitant amount (for instance, it used to cost about US$350,000 to buy a Toyota Land Cruiser). However the permit system has changed and now you can purchase any cars manufactured from 2007 onwards. The cost of a Toyota Land Cruiser is now about US$25,000. This has led to newer cars on the roads, but more pertinently, the number of the cars have increased dramatically with no corresponding increase in the roads and traffic infrastructure, leading to snarling traffic jams which were previously unheard of before.

 

  • Capital market development – It is expected that Myanmar will have a stock exchange by 2015. This development is being supported by the Tokyo Stock Exchange and Daiwa Securities Group. This will lead to significant demand for qualified professionals in the finance sector to support the stock exchange and capital market development. Myanmar previously set up a Myanmar Securities Exchange – back in 1996 but trading volumes were extremely low and there was little or no technical or IT infrastructure available for an efficient and effective functioning capital market. However this new development will be significant given the resource and technical assistance provided by the Japanese. With development and effective governance, we can expect the Myanmar Stock Exchange to rival Malaysia’s BURSA, Indonesia’s IDX and Singapore’s exchange by 2030.

 

  • Currency exchange rate – Up until last year, the Myanmar Central Bank had fixed the exchange rate at 6 kyats to the US Dollar. However, the black market rate at the time was about 700 to 800 kyats to the dollar. The Myanmar Central Bank has now implemented a managed floating system – where the official rate is around 850 kyats to the dollar. This has been a signficant development in helping with the modernisation of the Burmese economy and one that will support further investment into the country.

 

  • Adoption of International Financial Reporting Standards – Myanmar has now formally adopted IFRS and have converted them in their entirety to the Myanmar Financial Reporting Standards. This has been instrumental in providing greater clarity and transparency to financial statements being prepared in the country. This will drive further investment into the country as investors have a better view of the financial positions and performance of the firms they are investing in or keen on acquiring.

 

  • Passing of the Investment Law – Myanmar also passed the Foreign Investment Law in November 2012. Some provisions in the law allow for overseas firms to fully own ventures and offers tax breaks and lengthy land leases, amongst other things. However, the bye-laws and regulations to support the Foreign Investment Law have not yet been passed and are still being deliberated by the Myanmar Parliament. However, under the law, details of bye-laws and regulations should come out within 3 months of the law being passed in Parliament so we should expect further developments by March 2013.

 

  • Tax reforms – The government has also announced a slew of tax law and regulatory changes. There is a plan to widen the tax base but also to make it easier for local residents to calculate the tax. The tax-exempt status will also change for citizens at the lower end of the income spectrum. A progressive tax system is in place and is likely to continue.

 

  • Increased foreign investment and donor funding – Myanmar has also benefited from the increased inward investment into the country from multinational firms. Of the accounting firms, PwC, EY and KPMG all have presence now in Myanmar. Coca-Cola has entered into a JV agreement with a local partner. Other MNCs are also increasing their branding and presence in the country. The Asian Development Bank (ADB) and the World Bank (WB) have also approved loans and grants to support Myanmar’s continued economic and social development.

 

  • ASEAN Economic Community (AEC) – There is also a strong support by the Myanmar government and businesses to support the AEC 2015 vision of greater economic integration by all of the members of ASEAN. This requires further development in terms of capacity and capability – and one that will benefit a broad section of the Myanmarese.

 

Exciting times for Myanmar. However, the key thing to address will be to ensure that the economic progress is one that benefits a broad base of the Myanmar population and not one that only serves to widen the income gap between the top earners and the rest of the country. Ignoring the potential consequences of this will only set back Myanmar’s development down the road. It will also be important to ensure that there is continued focus on education and social development. Environmental sustainability also remains crucial. It is easy to ignore the impact of industrial and economic development on the natural environemnt but doing so will again lead to severe consequences for Myanmar in the long run.

However, that said, I am confident that in the years to come, Myanmar will again take leadership within South East Asia both economically and politically like they did back in the day up to the 1960s!