by Gary Sands
A two-day summit to unveil what China is portraying as the infrastructure project of the century concluded on May 15. The $1 trillion initiative is designed to vastly expand free trade in Africa, Asia and Europe. Realization of the plan will depend in part on the effectiveness of a newly minted development mechanism, known as the Asian Infrastructure Investment Bank (AIIB).
The summit, held outside the Chinese capital Beijing, celebrated the launch of China’s Belt and Road infrastructure vision. It brought together 30 world leaders, including Chinese President Xi Jinping, who expressed hope the project would promote growth and a new world order.
“It is our hope that via the Belt and Road initiative, we will unleash new economic forces for global growth, build new platforms for global development, and rebalance economic globalization,” Xi told summit attendees on May 15.
The financing needed to realize Belt and Road plans presents lots of challenges. Beijing will be looking to the AIIB, which began operations only in January 2016, to be a Belt and Road catalyst, including providing financing for projects in Central Asia.
Fifty-seven states are participating in the AIIB. China is the largest provider of start-up capital for the bank, injecting almost $30 billion, or roughly 32 percent of the bank’s overall funds. Beijing also controls almost 28 percent of the bank’s voting shares. Other major donors include India, which controls 8 percent of voting shares, and Russia, which has a 6 percent stake.
The United States and European Union have not joined the AIIB, but are closely monitoring its development. American and European finance officials have voiced concerns about potential overlap with existing institutions, including the World Bank, International Finance Corporation (IFC), European Bank for Reconstruction and Development (EBRD) and Asian Development Bank (ADB). Western officials have also wondered publicly whether the AIIB will adopt best practices in such areas as transparent procurement, environmental and social safeguards, and good governance.
Regional experts believe the reluctance of the United States, EU and others to give Beijing more of a say in the operations of existing financial institutions was a significant factor in prompting China to push for the creation of the AIIB.
The AIIB’s stated aims are to invest in and attract other long-term financing for transportation, telecom and energy projects throughout Asia. To date, the AIIB has approved loans worth US$1.73 billion to support 13 projects in eight countries, including the former Soviet states of Azerbaijan and Tajikistan.
Tajikistan stands to benefit from a project to improve roads, including a route connecting Tajikistan and neighboring Uzbekistan. In June 2016, the AIIB approved a direct loan for $27.5 million, alongside $62.5 million from the EBRD, for an upgrade of a key 5-kilometer section of the motorway.
Beijing also shares a border with Tajikistan, and has in recent years extended credits to Dushanbe for roads, tunnels and power infrastructure. The AIIB-financed highway project stands to improve China’s access to Central Asian markets, allowing for a freer flow of Chinese-made goods and products.
The AIIB’s participation in the overall financing is small, a factor that will limit any geopolitical influence from Beijing. Nonetheless, the project could create a template for further road and highway projects throughout the region.
In Azerbaijan, the AIIB has invested $600 million in the $8.6 billion Trans-Anatolian Natural Gas Pipeline (TANAP) project, a key component in the Southern Gas Corridor. Once complete, the pipeline is expected to transport natural gas extracted from the Shah Deniz 2 field across Turkey and on to Europe, thus improving “the energy supply security of Turkey and South Eastern Europe.”
While China will not benefit directly from TANAP, the project could again create a blueprint for project financing and implementation that could be replicated for future initiatives involving pipeline construction to connect the Caspian Basin to China.
With its proposed capitalization of $100 billion, and an initial target of $4-5 billion in annual lending, the AIIB is a relatively small player in comparison to China’s largest policy lenders, China Development Bank and the Export-Import Bank of China. Nevertheless, the AIIB has an important role to play in the Belt and Road project. Beijing is keen to gain geopolitical and geoeconomic influence through the creation of additional institutions, including the AIIB, the New Development Bank and the Silk Road Fund.