Excerpts from the Study on
The Proposed Business Model of AIIB
China’s role in global finance and its emergence as a dominant economic power nowadays is being felt all over the world and is a critical factor in re-shaping the Asia-Pacific region’s development.
Eighty percent of Chinese assistance in the Asia and the Pacific is in the form of concessional loans, mostly in the transport sector. In 2015, the Chinese Government kicked off several investments along its much-vaunted New Silk Road flooding these investments into countries in Central Asia and Africa. Over the third quarter of 2015 alone, 17 out of 19 Government loans were disbursed, constituting some 90% of China’s overseas lending during the period. China’s aid focus is distinctly in the productive sector, particularly in energy, transport and storage. In the Pacific, China is now the third largest aid provider, following Australia and the U.S. and is number one in Fiji, investing $332.96 million from 2006 to 2013.
Data also show that it is the third-largest shareholder in the World Bank (WB). And as such, makes it an important contributor to the International Development Association (IDA), the institution's fund for the poor, and the Global Infrastructure Facility (GIF), an international platform that facilitates the preparation and structuring of infrastructure public-private partnerships. In 2013, Chinese foreign aid was placed at $7.1 billion making it the world’s sixth largest bilateral donor, just after France.
China has already signed 12 free-trade agreements and plans to negotiate with 65 more countries along the Silk Route. Those already in place include Singapore, Pakistan, Chile, Peru, Costa Rica, Iceland, Switzerland, Hong Kong and Taiwan and a further eight are under negotiation with Japan, Korea, Australia, Sri Lanka, Norway, the Regional Comprehensive Economic Partnership (RCEP), the Association of Southeast Asian Nations (ASEAN, and the Gulf Cooperation Council (GCC). Cheung, Francis, Head of China-HK strategy, Lee, Alexious, Head of China Industrial Research for CLSA, an independent brokerage and investment group. 2015. “A Brilliant Plan One Belt One Road”.
But even before, China has already been a significant player in global infrastructure financing with support coming from its policy and commercial banks and other state-backed investment funds for outbound infrastructure investments. Through
Figure 1: Circle of influence: China is working with 60 nations to construct a
modern-day Silk Road – by land and sea (Map Courtesy of China Dialogue)
its “Going Out Strategy”, it has promoted Chinese companies to expand overseas, utilizing surplus foreign exchange and increase access to global markets, natural resources, and technology. Policy banks such as the China Development Bank and Export-Import Bank (Eximbank) have been major drivers of this strategy; which have been set up to support the policy objectives of the Government. China has established various investment funds in recent years such as the Silk Road Fund while injecting additional capital into its policy banks specifically to support overseas operations. Through the Belt Road Initiative (BRI), the country has even more renewed its support and commitment to outbound capitalization and investments.
What is in it for China and the Region?
With Asia’s economic growth in the past decade, this has likewise led to the growth of energy consumption and the required massive amount of investment towards infrastructure development. A number of sub-regional initiatives on oil, gas, coal, nuclear, and power transmissions are now being planned, either in the pipeline or are already being implemented. The region has seen significant increase in infrastructure investment between 2009 and 2013, accounting for more than 50% of the global increase in capital spending. But at the same time, it is said that in order to maintain these current levels of economic growth, Asia will need to spend approximately US$8 trillion. And to sustain this, it will be necessary to inject between US$800 billion and US$1.3 trillion annually into infrastructure projects between now and 2030. All these are needed in order to resolve its serious shortage of roads, railways, ports, power stations and other basic facilities that threaten to hold back some of the world’s fastest growing economies.
On the other hand, China aims to benefit economically and politically from these infrastructure projects and given its controlling interest in the Asian Infrastructure Bank (AIIB), is “conceived to be China’s instrument”, allowing it to generate and direct investments to strengthen such interests. But there is also the fact that there is now a domestic economic slowdown in the country characterized by lower demand for construction and industrial materials from other countries. For China, it is said to be taking steps to address the issue by actively encouraging companies to export excess capacity overseas (not to mention oversupply and overproduction).
China Encircles the World with its BRI Policy
With the search for domestic economic growth as the main motivation, BRI is said to be ultimately “a domestic policy with geo-strategic consequences” rather than a foreign policy. Beijing continues to provide domestic companies with the experience to become global brands. An interesting element of BRI is that it is said to be well integrated into China’s provincial government objectives; where all 31 Chinese provinces have indicated that they will actively participate. Two-thirds of these provinces have included it as a development priority and have featured it in their annual work plans for the coming years that include trade and bilateral investment targets. These provincial governments have committed to raising the “support level of credit” to help participating enterprises, offer training to local enterprises to apply for national funds, and provide further subsidy.
BRI is also viewed as China’s Marshall Plan with a long-term goal of gaining geopolitical pre-eminence and creating a new geostrategic landscape in the Eurasian continent. In this context, it is also deemed as an economic countermeasure to USA’s rebalancing in the Asia Pacific. At the same time it is pointed out that “with the expansion of the Eurasian transport infrastructure”, the Chinese Government is laying the foundations for a “new China-centered production networks” with Chinese companies moving production to Southeast Asia and opening up new trade routes, markets, and “sources of energy” that China needs to sustain its growth.
BRI’s potentials for trade links and economic opportunities
BRI could have a lasting impact if it contributes to enhanced trade links. It is said that the areas it covers include about 50 percent of the world’s GDP and roughly the same share of global trade. Reduced transport costs could increase trade flows and bring in the benefits of greater competition and efficiency through harmonized trading systems. Reduced tariffs and simplified customs administration would allow trade to flow seamlessly between countries including China.
But looking closely into the plan that is taking in every conceivable goal from improving distributed supply chains to developing trade services, to possibilities of increasing food security for the countries participating in the project, it remains to be “gran” and a statement of ambitions that could likely favor pet projects and bureaucratic leaders along the route.
Perceived Challenges on Governance and Accountability and CSO Concerns
The BRI vision and plan makes it clear that “infrastructure development” projects and investments are seldom politically neutral, and not necessarily economically beneficial. As far as direct economic gains go, the long-term benefits might not merit the shorter term political, economic and environmental factors and vulnerabilities. This is especially the case for fragile and conflict-affected countries where many of them have weak or absent systems of governance. Too single-minded economic and investment-driven decision-making is less concerned with the “externalities” related to the use of natural resources, inclusive growth, and impacts to societies and communities. “Channeling additional resources without attention to complex and ever-shifting political dynamics could add further risks and serve to reinforce powerful interests. Supporting development progress in such complex and high-risk environments requires that any bank or private support adopts a politically informed approach to engagement”.
If BRI continues to have large-scale outpouring of capital, enterprises, and building of large infrastructure projects as it promises, then consequences are clear and eminent. According to OXFAM data, large-scale infrastructure is one of the main causes of forced displacement globally. Dams have caused between 40-80 million people world-wide to lose their homes who depend on their land or on access to natural resources for their living. Displacement literally means losing their ability to support their families, grow crops, fish and continue their cultural and social practices. Environmental impacts on livelihoods are potentially the most devastating especially among vulnerable communities across borders.
The actual roll-out of the plan is going to depend on factors related to country conditions and investment interest. Consequently, the absence of clear cut plans, mechanisms for implementation and formal agreement procedures could lead to more issues and problems that may not necessarily favor beneficiary countries, in particular those fragile and conflict countries.
Risks have been identified and measures will have to be implemented to significantly improve the situation through a kind of a unified environmental and social requirements and criteria for all project investments made in BRI countries. With this, it is vital for domestic and international policies to reinforce each other in monitoring and ensuring that the BRI project will lead to sustainable development.
Emerging Engagement Strategy for Civil Society Organizations
Build on experiences in order to engage and influence AIIB and gain traction in its advocacy work and likewise on its existing knowledge, experiences, contacts, and action groups;
It is time to direct our lobby work towards our respective country leaders;
Understand the functioning of private investors and companies as well as financial intermediaries;
Learn about and document the “language and mechanisms” for finance, trade and investments;
Further “harmonize” actions on global, national and local levels;
Set up, identify and build “new” alliances;
Engage banks and push for their operational guidelines and “disclosure criteria” to explicitly include non-financial risks, environmental, social, and human rights risks during pre-approval, approval and actual operation of proposed projects.
* Luz Julieta Ligthart is the Policy Coordinator on AIIB, NGO Forum on ADB
** You may download the full research here.
 Stephen, Monica. International Alert. October 2014. Fragile Reforms: World Bank and Asian Development Bank Financing in fragile and conflict-affected situations.
 ADB/ADB Institute. 2009, Infrastructure for a Seamless Asia, Ortigas, MM.
 World Economic Forum and PwC. 2012, ‘Strategic Infrastructure: Steps to prioritize and deliver infrastructure effectively and efficiently’.
 From the Author’s view, this notion of AIIB becoming an instrument of China remains contentious given that no evidence has proven this nor have any investigations been conducted to support this. It is vital though, to identify these project sites as these will be where advocacy actions will be most needed.
 Goh, B and Qing, K.G. Sept 2015. China’s One Belt, One Road looks to take contruction binge offshore, Reuters.
 Based on the article by Tom Hancock, Financial Times, May 4, 2017.
 The “Marshall Plan” or European Recovery Program aimed to help in the recovery of European economy after the end of the WWII and was a short-term program (1947-1951). Similarly, the Chinese OBOR proposal attempts to attain a win-win situation for China and participating countries.
See more at: http://www.chinausfocus.com/finance-economy/china-advances-its-one-belt-one-road-strategy /#sthash.ufZjOEGm.dpuf.
 There are existing Agreements where China is not included such as the Trans-Pacific Partnership (TPP) countries, the Transatlantic Trade and Investment Partnership and the EU-Japan agreement that show comprehensive liberalization agenda and have the potential to increase trading costs. Recently, US has dropped out from TPP.
 These loans are extended on terms substantially more generous than market loans. The concessionality is achieved either through interest rates below those available on the market or by grace periods, or a combination of these. Concessional loans typically have long grace periods.
 These data were included in a report by Asia Foundation for its forum that brought together leading Chinese researchers and policy makers with international development experts for China’s Overseas Development Policy in a World “Beyond Aid,” the latest in its Asian Approaches to Development Cooperation dialogue series as reported by Mulakala, Anthea. June 17, 2015.
 Launched by China in 2013, known as “One Belt, One Road” (OBOR) with the aim to connect major Eurasian economies through infrastructure, trade and investment. It contains two international trade connections: the land-based "Silk Road Economic Belt" and oceangoing "Maritime Silk Road”. It is now more popularly known as the Belt and Road Initiative (BRI).
 2015. “Multilateral organizations to promote effective ways of member nations working together”.
Written by Ms. Luz Rio Ligthart, NGO Forum on ADB's AIIB Policy Coordinator