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From next year, private companies involved in infrastructure projects in Asia might have another avenue for funds---the Asian Infrastructure Investment Bank (AIIB), launched by 21 countries, including China and India.
The bank, to be headquartered in Beijing, will have authorised capital of $100 billion, with expected initial paid-up capital of about $50 billion.
According to a joint study by the Asian Development Bank (ADB) and Asian Development Bank Institute, the infrastructure finance gap in Asia through the next decade will be about $8 trillion. For India, the Confederation of Indian Industry (CII) has pegged infrastructure financing needs at about $1 trillion for the five years beginning 2014-15.
So, is a $50-billion bank enough for finance Asia's infrastructure needs? "You have to start with something. The sum is enough for starting a journey," says Vinayak Chatterjee, chairman of Feedback Infra. He cites the case of existing multilateral institutions which, he says, have grown in time.
The ADB has subscribed capital of $162 billion, while the World Bank has $233 billion. ADB and the World Bank give loans for a host of purposes, not for infrastructure alone. Since 1986, ADB had lent India $31 billion (as of December 31, 2013) for needs in segments such as agriculture, education and power. About a third of this might have come to the power sector alone. There is little scope for private funding from, say, the World Bank, as its loans are primarily to sovereign entities, though it has a private-sector lending arm---International Finance Corporation. Analysts say it isn't easy to get equity funding from these institutions. "I hope unlike the present structure of existing multilateral institutions, there is a cell within AIIB to lend in equity," Chatterjee said.
He added half the infrastructure financing requirement of about $1 trillion in India in five years would be required by public-private-partnership (PPP) projects. As such, lending to the private sector in PPP projects is crucial for India.
Officials from Australia, Indonesia and South Korea skipped the launch of the AIIB on Friday, reportedly to show solidarity with the US-backed World Bank and the International Monetary Fund. Officials from Japan, which along with the US is the largest shareholder in ADB, were also absent.
So, will the AIIB sound the death knell for these institutions, at least in Asia? CII Director General Chandrajit Banerjee doesn't think so. Rather, the AIIB will complement other multilateral institutions, he says. "Speedy operationalisation of the AIIB will play a significant role in bridging the infrastructure deficit in Asia and complement other multilateral development banks, namely the World Bank and the ADB, to fund infrastructure projects in the region."
On Friday, Chinese President Xi Jinping had said, "I believe the setting up of the AIIB will be an enrichment of existing multilateral institutions. We have to learn from the World Bank and the ADB and other existing multilateral development institutions their good practices and useful experiences."
Chatterjee, however, said the AIIB would give competition to the World Bank-dominated system, "which is good for us".
New world order
Voting rights in the AIIB are to be decided after consultations between members over fixing benchmarks, expected to be combination of GDP (gross domestic production) and purchasing power parity (PPP). Based on these, China is expected to be the largest stakeholder, followed by India.
This will help facilitate a new economic order, at least in these institutions, following the US dilly-dallying in supporting quota reforms of the IMF. The reforms are possible if the US adjusts its share and increases its contribution to the IMF, but the US Congress is yet to approve the move. Currently, the US has 16.75 per cent of the total votes and 17.69 per cent of IMF's total quota. Since important decisions at the IMF need the approval of at least 85 per cent, a US nod is vital in such cases.
After the reforms are implemented, advanced economies' quota will fall from 60.5 per cent to 57.6 per cent and their voting share from 59.5 per cent to 55.2 per cent. On the other hand, developing and emerging market economies will see their quota rise from 39.5 per cent to 42.4 per cent and voting share from 40.5 per cent to 45.8 per cent.
As China is known to swarm the projects it funds with its own workers, there could be a worry over that country's dominance in the AIIB.
However, Chatterjee didn't read much into such worries, saying the institution was launched by 21 nations, not China alone.
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