The rise of the infrastructure giants

World Bank’s infrastructure hegemony challenged in Asia

20 June 2014

With massive infrastructure projects seeking funds, the World Bank is facing increased competition from new players in Asia, with China launching the Asian Infrastructure Investment Bank (AIIB) and the new Brazil, Russia, India, China, South Africa (BRICS) Bank (see Bulletin Feb 2014, Update 85) expected to be launched in July, largely focussing on infrastructure finance. But questions remain about potential negative social and environmental impacts, with none of the players adequately engaging with local communities.

As the World Bank develops a new Global Infrastructure Facility (GIF), a proposed platform for facilitating complex infrastructure projects (see Bulletin May 2014), further details have emerged on the planned BRICS Bank, officially called the New Development Bank. According to information leaked to news agency Reuters in late May the bank is likely to be agreed at the mid July BRICS summit in Brazil. With expected start-up capital of $50 billion ($10 billion in cash and $40 billion in guarantees) shared equally between the countries, the bank will aim to start lending in two years time. While the BRICS will hold the majority, other countries can buy $100,000 shares. It is hoped that the bank’s capital will double to $100 billion in five years. Borrowers are expected to benefit from lower costs and a presumed lack of interference in economic affairs.

One issue of contention slowing the negotiations was China’s unsuccessful attempt to gain a larger stake in the BRICS Bank by putting in more capital. While retaining its involvement in the BRICS Bank, China has also set the wheels in motion for AIIB, focusing on financial support to boost regional infrastructure. AIIB was first announced by Chinese president Xi Jinping before the Asia-Pacific Economic Cooperation meeting in Indonesia in October 2013. AIIB is expected to be funded by its members, also with initial capital of $50 billion, though it is expected that China will fund half. China’s finance minister, Lou Jiwei, told Xinhua news agency in early March that they are working towards an inter-governmental memorandum of understanding in the autumn. Media has questioned how the plans fit with the BRICS Bank, as well as with already established state-owned lenders, such as China Exim Bank. The Asian Development Bank (ADB) has officially welcomed the developments, noting that it is incapable of satisfying the estimated $8 trillion needed for infrastructure needs in the next decade.  However, according to the US ambassador to the ADB, Robert Orr, interviewed by news site Emerging Markets, the AIIB could be seen as a response to China’s inability to increase its influence in leading global and regional multilaterals, as well as a “political tool” to challenge the ADB.

For China, pursuing multiple inroads, all of which it seeks to strengthen, allows it to maximise the number of stakes it can coverJustin Fong, Moving Mountains

Justin Fong of China-based NGO Moving Mountains commented: “For China, the scenario at hand is how to align its positions – not work in competition – in forming a new BRICS Bank while at the same time being a major sitting member with increasing leadership roles in the World Bank and most other existing IFIs. At the same time, it is seeking to improve the positions of its own national finance institutions pursuing overseas investments. For China, pursuing multiple inroads, all of which it seeks to strengthen, allows it to maximise the number of stakes it can cover.” He also raised cautions on the BRICS Bank: “IFIs and China have all expressed that the BRICS Bank is a welcome addition, not a challenge, to the current funding landscape. This should raise alarm bells for those who might be hoping for major changes in the status quo.”

Nepal in the spotlight

In early June China invited Nepal to join AIIB as a founding member. While welcoming the gesture, according to Nepal government officials quoted in the Kathmandu Post, Nepal has proposed that there should be a grant element available, as well as flexibility on the aid conditions. The memorandum of understanding is expected to be signed by interested countries by end October.

The World Bank has also announced its intention to further increase its stake in the country’s hydropower sector, including pushing for the private sector to take a leading role with funding from the International Finance Corporation (IFC, the Bank’s private sector arm). The Bank’s involvement in the country’s infrastructure has been subject to civil society criticism, including a 2013 complaint to the Bank’s accountability mechanism, the Inspection Panel, regarding a power transmission line (see Observer Spring 2014, Winter 2013).

In mid May the Bank approved $84.6 million for the 37.6 MW Kabeli-A hydroelectric project. This includes a $40 million loan and $6 million grant from the International Development Association (IDA, the Bank’s low income country arm) and a $19.3 million loan from the IFC. According to the Bank’s country director, Johannes Zutt, the project “will demonstrate how public-private partnerships can help Nepal exploit its hydropower potential.” According to the IFC, social and environmental impacts of the project include “potential impacts on four affected communities … [including] individuals belonging to different groups recognised as indigenous”.

In December 2013 the IFC signed a joint development agreement with India-based GMR Energy on the 600 MW Upper Marsyangdi 2 hydropower project in Nepal. According to the GMR Energy chairman GBS Raju, the IFC will bring “its vast experience in financing large and complex infrastructure projects”. In March media reported that the IFC was again in talks with GMR Energy about acquiring a 10 per cent stake in the 900 MW Upper Karnali hydropower project. Some of the power supply is expected to go for export, with March media reports that Bangladesh has expressed an interest to buy 500 MW from Upper Marsyangdi 2 and Upper Karnali – the IFC is expected to help broker the deal. Ratan Bhandari, water resource activist of Nepal said the projects are opposed by local community and civil society organisations, water resources activists and experts, as well as political parties, including the move to hand over the project to an Indian company: “We have called on the government to cancel the unconstitutional implementation of Upper Karnali and Upper Marsyangdi 2.”

Problem projects: Pakistan, India

In early May, despite the US abstaining from voting, the Bank board approved a $125 million equity investment by the IFC in China Three Gorges South Asia Investment Limited (CSAIL), a renewable energy investment holding company aiming to develop large hydropower projects in Pakistan (see Bulletin Feb 2014). According to the US statement “CSAIL does not have well-developed systems for managing the [environmental] risks inherent in large energy sector projects, particularly in the hydro sector.” The news site PakTribune reported that the US had also threatened to abstain from voting on Bank support to the Dasu hydropower project (see Bulletin Feb 2014) due to “congressional constraints”, however, it was approved unanimously by the Bank’s board in early June.

Other Bank-funded projects have been harder to get off the ground with Bank funding. The Bank approved Pakistan’s 2015-2019 Country Partnership Strategy in early May, but failed to include funding for the 4,500 MW Diamer Bhasha Dam after Pakistan refused to secure a no objection certificate from India, which is required by the Bank due to its location in an area considered to be disputed territory. In January, the Indian 612 MW Luhri hydropower project was dropped by the Bank, amidst environmental and social concerns.