AIIB headquarters, Beijing, China (AIIB, Public domain)
The 2018 meeting of the Board of Governors of the AIIB, which was attended by the Polish delegation, provides a good opportunity to answer some important questions. First and foremost, is it possible for the bank to pursue investments in Poland, or in the region of Central and Southeast Europe (CSE) in the near future? Can Poland count on the bank’s financial support in the implementation of the currently planned large infrastructural investments, such as the Central Communication Port?
It’s worth recalling that the AIIB supports projects in the transportation, energy and telecommunications infrastructure, and possibly also projects relating to other areas of economic activity (such as agriculture, water supply, environmental protection, urban development or logistics), which are submitted and financed in their basic scope by public institutions (central or local government) or private institutions. This support can take the form of loans, guarantees, equity investments, as well as technical assistance.
The bank’s statutory objectives include, among others, promoting sustainable economic development, creating prosperity and developing infrastructure links in the region of Asia, as well as supporting regional cooperation and partnership. The priorities include sustainable infrastructure, connectivity within Asia and connections with other continents (cross-border connectivity), as well as the mobilization of private capital. All the projects financed or co-financed by the AIIB, whether in Asia or elsewhere, have to be connected with the implementation of the above-mentioned objectives and to be linked to the bank’s priorities. They should also be consistent with the sectoral strategies adopted by the bank. The problem is that so far, the AIIB’s Board of Directors has approved only two sectoral strategies — the bank’s involvement in the energy sector and the transportation.
Another issue are the eligibility rules and criteria for the projects to be co-financed by the AIIB. After over two years of functioning, the bank has developed a basic operational framework and a decision-making process for the selection of potential investments. The basic human resources and organizational activities allowing the analysis of submitted proposals have also been planned. As a result, every infrastructural project submitted to the bank is subjected to a detailed technical and economic analysis and checked for compliance with the environmental and social requirements. During this process, in addition to the verification of the project’s compliance with the bank’s objectives and thematic priorities, as well its sectoral strategies, the auditors also check whether it is in line with the given country’s infrastructural development plans, and analyze the proposed investment’s impact on the diversification of the AIIB’s portfolio. The project is also subjected to financial evaluation. Another important issue that is assessed, is the bank’s added value for the project, i.e. helping to close — thanks to the AIIB’s financial contribution — financing gaps, attracting additional capital, improving the technical quality of the project, reducing the level of risk, etc. The project’s added value for the bank is no less important. In this respect, the following questions are asked: is the project financially beneficial for the bank, will it strengthen AIIB’s position in a given sector, or does it increase the chances of cooperation with other multilateral development banks.
Of course, the key issue is the shape of the given project and its expected results. The bank conducts a detailed analysis of the project’s objectives (are they not excessively ambitious), the implementation schedule (is it realistic), or the applied technology. The audit also verifies the project’s compliance with the bank’s social and environmental standards (in this regard the AIIB is essentially guided by similar principles as other development banks, such as the World Bank), as well as the possible risks and the planned risk mitigation measures. The auditors thoroughly analyze the plans for the potential resettlement of people from the areas where the investment is to be implemented. Another issue which is examined is the project’s readiness for implementation, including the appropriate preparation of the investment in terms of the purchases of land, organization of the public procurement procedures, as well as the level of experience of the implementing institution. Finally, the bank assesses the durability, effectiveness and efficiency of the project: how long will the project’s results last, how will the investment costs compare to its benefits for the target audience, and whether there could be any side effects. All these issues are carefully evaluated as part of the due diligence process before the AIIB’s investment committee decides whether to forward the project to the Board of Directors for final approval.
Important specific criteria
Another issue is the geographic scope of the bank’s operations. The above-mentioned criteria apply to all potential investments of the AIIB, both within Asia and outside. The Asian continent has enormous needs in terms of the construction of new infrastructure and modernization of the existing one. The Asian Development Bank estimates, that developing countries in Asia need investments worth USD1.7 trillion per year until 2030 (while the current level of financing is less than USD900bn annually). Due to the above reasons and the bank’s aforementioned objectives and priorities, the AIIB’s involvement outside of the Asian continent is conditioned upon the fulfillment of specific criteria approved by the AIIB’s Board of Directors in the relevant strategy at the beginning of 2018. In accordance with this document, projects located outside of Asia have to bring benefits to that region, that is, to promote economic development and prosperity and improve infrastructural connections in Asia. Moreover, these benefits should be „significant”. The strategy states, that investments have to meet at least one of the following criteria:
- They must aim to promote trade and transport or energy connections with Asia;
- They must concern global public goods, and in particular investments in renewable energy sources;
- They must be carried out within the territory of a country which — in the opinion of the Board of Directors — is geographically close to Asia and is closely economically integrated with Asia.
The strategy adopted by the Board of Directors also sets out the maximum financial share of extra-regional investments measured in relation to the bank’s entire financing in a given year and the two preceding years. This limit is currently set at 15 per cent but may be increased in the future.
Apart from the above factors and criteria of purely formal nature, the decisions regarding AIIB’s financial involvement, for example, in the CSE, may also be influenced by other factors, and especially by the opinion of the bank’s president and the Board of Directors, which is responsible for approving the key projects, including all non-Asian investments. Although the AIIB’s current president Jin Liqun is quite open to extra-regional investment, 9 out of the 12 members of the Board of Directors represent Asian countries. They primarily care about the bank’s investments in their own region. Another important factor could also be the level of affluence of the individual member states and the limited propensity of the Board of Directors to finance projects in high income countries such as Poland (according to World Bank’s classification).
Competition from Africa and Latin America
For these reasons in the coming years AIIB’s involvement outside of Asia will constitute only a marginal part of the bank’s operational activities. Even if in the near future the AIIB transitions into a truly global infrastructural bank, this does not necessarily mean that there will be more opportunities for the financing of projects in our country or region. The likely accession to the AIIB of much poorer African or Latin American countries could result in even greater competition for the financing of „non-Asian” projects.
Therefore, for the time being, the chances for AIIB’s investments in Poland seem to be rather slim. Even if Poland managed to persuade the bank’s authorities to pursue such investments, then — taking into account the potential costs of the infrastructure projects planned in Poland and the amounts of co-financing granted by the AIIB to date — the bank’s involvement would be rather complementary in nature. It would possibly involve, for example, closing the gaps in the investment project’s financing, or helping in attracting private capital. Nevertheless, it is worth analyzing the key infrastructural projects planned in Poland (not only in the field of transportation) in view of the above-mentioned criteria and factors. Any proposal that Poland could possibly submit to the AIIB for consideration, should be a well-prepared project carrying obvious benefits for that institution (entry into a new region, profits from the employed capital, expansion of knowledge, as well as the opportunity to acquire valuable experience and new contacts) and — which would probably be the most difficult to ensure — for Asia. At the same time, Poland should consider whether the potential support from the AIIB would be financially beneficial, comparing the bank’s offer with other available sources of financing for the domestic infrastructure investments. One of the advantages of an investment carried out by the AIIB could be, for example, the relatively short duration of the decision-making process. The bank says that one of its strengths lies in the fact that it processes project applications faster than other development banks.
At the same time, as part of Poland’s activity within the AIIB it should be actively supporting transport and energy investments, which—– even if they are not located in Poland — connect Europe and Asia, constituting an important element of the future network of connections within Eurasia. While promoting the development of trans-European networks in the Eastern Partnership countries — using EU funding — Poland could simultaneously support the expansion of these lines using AIIB’s funds, for example, in the countries of Central Asia, ensuring their connection with China and the rest of Asia. It’s also worth taking a closer look at the infrastructural problems (mainly relating to transport and energy infrastructure) of the South Caucasus region, especially in the context of an even greater involvement of AIIB’s funds in this region and with a view towards ensuring the energy security of European countries.
Meanwhile, the bank’s involvement in Polish immediate vicinity could also benefit entrepreneurs who are interested in increasing the scale of their foreign operations. Polish business entities have extensive experience and are well-recognized on the markets of CSE and Central Asia. They could therefore successfully compete with companies from other countries in the tenders for the implementation of the bank’s projects.
Paweł Bagiński, PhD, is an economic advisor at the International Department of Poland’s central bank, NBP.
The article expresses the personal views of the author.