Wednesday, February 3, 2016

Asian Infrastructure Investment Bank (AIIB): Q & A

Q1. Do you think India's decision to put in $ 8 billion -- and become the  second largest shareholder after China -- makes sense?
 A1: As with any company the owned equity capital is not the same as paid up  capital. Thus $8bi is the risk capital committed by India. The amount put  into the account of AIIB will be much less. Being the second largest shareholder gives some influence in determining the nature & amount of loans to infrastructure projects of interest to India, both within India and in other countries which have an overlap of interests with us or similarity of  approach to infrastructure lending.
Q2. From a lay person's point of view -- why doesn't India spend the $ 8  billion on infrastructure projects at home? What would be the added benefit of putting this money in and accessing it through the bank's pool?
 A2: As indicated in A1, the actual money spent by us initially will be a fraction of $8bi committed. The nature of multinational banks is such that actual lending depends on borrowed funds, which are related both to the risk capital committed by all shareholders and the credibility of the institution in Global capital markets. Thus the funds available to the AIIB will be a multiple of the outlays. The loans we get will depend on the proportion of viable projects that are put up to the bank, ie potentially much more loans than the amount we put in equity.
 Q3. China is by far the biggest shareholder, with $ 29.7 billion (out of $ 100 billion capital). According to the voting structure, this will give them a strong say in most decisions (although their influence has been a little diluted in the negotiations process, as voting doesn't just reflect your shareholding but also takes into account your founding member status etc.) Is this unavoidable in a financial institution -- that the majority stakeholder dominates? Will this be a problem for India?
 A3: There is no better way to run a global institution than on basis of voting based on equity shares.  Just as the ADB is a Japanese run bank with US having a significant influence, the AIIB will be a Chinese run Bank. However, given the different relationship between US & Japan, our influence in the AIIB cannot match that of US in ADB. However, India's influence will
 depend on getting support for other share holders in pushing rules and procedures for lending that are seen as objective and rational, and enhance the credibility of AIIB on international debt markets where it will have to raise resources.
 Q4. The bank's officials in Beijing say it aims to position itself differently from the World Bank and ADB by focusing on infrastructure projects -- no poverty reduction/social welfare programs etc. Is this a good idea?
 A4: As the name says clearly this is a bank for infrastructure lending, where there is the greatest gap between needs-demand for loans and supply of loans. These are the sectors that require a lot more capital. This is something we had analysed and focussed, on in proposing the New Development Bank in 2012, when I was at the IMF. The World Bank has been unable to
 fulfill the demand for infrastructure loans as it DC shareholders didnt want to increase the authorized capital. Consequently, it has increasingly focussed on the soft sectors requires less capital investment and tried to substitute "knowledge" for even the lower capital needed.
 Q5. The process of putting out its environmental framework has been criticised -- that this was done in six weeks, that the documents were entirely in English, and that diverse views, ncluding of civil society groups in member countries, were not considered. The bank says the time period and framework meet international standards and follow the standards set by other multilateral banks. There is a fear that since China's shadow on this bank is rather large, it will follow China's (poor) standards when it comes to environment and human rights. Do you think this fear is well-founded?
 A5: China is likely to accept the national environmental standard prevalent in the country in which the project is located, rather than imposing any uniform standards.  To these national standards are below ADB or World Bank standards, the fear is justified.

Written (email) interview to Ananth Krishnan of India Today, Beijing on January 16, 2016.

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