25 October 2016
Jin Liqun, a former Chinese deputy finance minister and AIIB's first president, has said the bank needs to at least break even. Photo: CNSA
Jin Liqun, a former Chinese deputy finance minister and AIIB's first president, has said the bank needs to at least break even. Photo: CNSA

AIIB to offer loans on less restrictive terms than World Bank

China’s new international development bank will offer loans with fewer strings attached than the World Bank, Reuters reported, citing sources with knowledge of the matter.

The Asian Infrastructure Investment Bank (AIIB) will require projects to be legally transparent and protect social and environmental interests, but will not ask borrowers to privatize or deregulate businesses for loans, the sources said.

By not insisting on some free market economic policies recommended by the World Bank, the AIIB is likely to avoid criticism levelled against its rivals.

The World Bank and the Asian Development Bank (ADB) have been accused of imposing unreasonable demands on borrowers.

“Privatization will not become a conditionality for loans,” a source said.

“Deregulation is also not likely to be a condition. The AIIB will follow the local conditions of each country. It will not force others to do this and do that from the outside.”

A reduced focus on the free market could give the China-led bank greater freedom to run projects, said a banker at a development bank who declined to be named.

For example, development banks that finance a water treatment plant may require the price of treated water to be raised to recoup costs, even if local conditions are not conducive to higher prices.

The AIIB, on the other hand, could avoid hiking prices and rely instead on other sources of financing, such as government subsidies, to defray costs, the source said.

The bank, to which some 50 countries have signed up to join, also aims to have a simpler internal review and risk assessment system for projects compared with its peers to hold down costs and cut red tape, the sources said.

For one, the AIIB is not expected to delay some project approvals by months to allow all parties to do due diligence, a practice in place at other development banks, said another source.

The bank will also minimize expenditure by having only a handful of field offices and a staff strength of between 500 and 600, about a sixth of the size of the ADB and 5 percent of the World Bank, he said.

A successful AIIB that sets itself apart from the World Bank would be a diplomatic triumph for China, which opposes a global financial order it says is dominated by the United States and under-represented by developing nations.

Criticism of international development lending is not new, said Susan Engel, a professor at Australia’s University of Wollongong who has studied the impact on the World Bank of free market ideas often referred to as the Washington Consensus.

“It’s a religion — this commitment to the involvement of the private sector even in sectors where, in fact, their involvement is shown to do harm,” Engel said of the US-based lender.

The AIIB, with authorized capital of US$100 billion, would initially concentrate on securing its credit rating, implying a more cautious approach.

This means it will run like an investment bank, funding only commercially sound projects, working on public-private partnerships where feasible, and charging market interest rates that are likely to be higher than those charged by its peers.

“Jin has pitched it as a bank that needs to at least break even,” a source familiar with internal AIIB discussions said in reference to Jin Liqun, a former Chinese deputy finance minister and AIIB’s first president.

But down the road, the AIIB could offer concessionary loans and go beyond building ports and funding water, energy and transportation deals to financing policy projects such as health and education, three sources said.

It may also expand its remit to fund projects in Africa, where countries have lobbied the lender to work in their region, a source said.

To meet its year-end deadline of starting operations, the AIIB has hired a team of former ADB and World Bank bankers, and is drafting its operations manual by revising the ADB and World Bank versions, three sources said.

Although the ADB and the World Bank downplay any rivalry between them and the AIIB, bankers say the AIIB’s advent has prompted the two banks to review how they work, to the benefit of borrowers.

“The World Bank and the other development banks have become more risk-averse over time,” said David Dollar, a former director of World Bank China who has advised Beijing on the AIIB. “That tends to be make them slow and bureaucratic.”

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