01Jul2022

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Tag: Renewable Energy

Research Commentaries

NRC0002 – Nepal’s Leverage as a Founding Member of AIIB

Nepal’s Leverage as a Founding Member of AIIB

Nirnaya Bhatta

Synopsis

Following the decision in May 2019 to co-finance $90 million in the Upper Trisuli I Hydropower Project, the Asian Infrastructure Investment Bank (AIIB) started its official engagements with Nepal. The country has found yet another avenue to seek loans to fund its infrastructural financing needs. Despite much excitement about Nepal being a founding member of AIIB, how effectively it will be able to leverage the new China-led Multilateral Development Bank (MDB) to finance its massive infrastructure needs is up for discussion. This depends on concerted efforts put in to understand the newly-formed MDB by the recipient countries such as Nepal that hold minuscule voting rights in the institution. To that end, this commentary will identify Nepal’s place in AIIB, its governance structure, other approved projects, shareholder and voting powers, its collaboration with other major MDBs, Nepal’s shares and voting rights, and the recently approved project for Nepal.

Introduction

Nepal enjoys the status of being one of the founding members of the Asian Infrastructure Investment Bank (AIIB), which it does not with any other Multilateral Development Banks (MDBs) that have engaged with the country for many decades. Although, by the virtue of merely being a founding member of the newly-formed MDB hardly amounts to anything substantial unless Nepali policymakers closely acquaint themselves with it – especially on operational and administrative issues. It is laudable that over the years Nepali policymakers and political leaders have intensified efforts in wooing donors and investors, but it is also equally critical to understand them- their motivations, development philosophies, and the nature of engagement with other recipient nations.

The AIIB’s Board of Directors approved a loan of up to $90 million for the 216-megawatt Upper Trisuli 1 Hydropower Project. The project is expected to cost $647.4 million, and the rest of it will be co-financed by Asian Development Bank (ADB), International Finance Corporation (IFC) and a Korean Consortium. Given that AIIB has made multiple lending in its member countries (see Annex III), it is reasonable to believe that there is more scope in terms of future financing beyond the Upper Trisuli 1 Hydropower Project. Plus, investments in Nepal’s hydropower project is almost always desirable, given that the poor performance of the energy sector is widely recognized as a major constraint to economic growth.

The Asian Infrastructure Investment Bank

The AIIB was launched in October 2014 and boasted 97 approved members in April 2019. The AIIB owes its origins to the demand emanating from Asia’s massive infrastructure gap on the one hand, and the steady economic and political clout wielded by the People’s Republic of China (PRC). As a China-initiated MDB, the AIIB symbolises China’s increased ambition and role in the global affairs – especially those pertaining to the infrastructure development. To the surprise of many, European countries including the UK, Germany, France and Italy became members of the institution. Their decision may have been informed as they foresaw the inevitable influence that a China-led MDB would command in the close future in the global development arena.

Membership

AIIB comprises of regional and non-regional members. The following contributor generated map identifies AIIB’s regional and non-regional members:

Figure 1: AIIB’s Regional and Non-Regional Members (Data Source: AIIB)

Shareholders and voting rights

The AIIB’s authorized capital stock is US$100 billion, which is divided into shares valued at USD100, 000 each (Articles of Agreement). Meaning, each share is equivalent to USD100, 000. Regional members will hold 75% of total subscribed capital stock, while non-regional members will hold the rest. Nepal’s two neighboring countries China and India are the largest shareholders with 30.34% and 8.54% respectively of the total shares issued, while holding 26.06% and 7.51% voting rights (Articles of Agreement). Nepal holds a share of 0.08 percent (809 share units) and 0.33% voting rights. For a comparative perspective, take these numbers: China, India, and Russia hold 300,398, 86,267, 67,956 votes respectively (AIIB).

Selected AIIB Members’ Voting Rights in Percentage (Data Source: AIIB)

Nepal in AIIB

Nepal became one of the 57 prospective founding members of the AIIB by signing the Article of Agreement on 29 June 2015.

Although, what does it really mean for Nepal in terms of decision making in AIIB? Does it mean it is now in a better position to leverage more loans? It should be noted that a meager 600 votes are allotted to each founding member. In total, Nepal has been allocated 3839 votes- of 809 votes are based on the share purchases (worth USD80.9 million), basic votes of 2430 provided to each member, and 600 for being a founding member.

An American politician Michael Enzi remarked, “If you are not at the table, you are on the menu.” Despite the status that comes with being a founding member, it is unlikely that countries like Nepal (with negligible voting rights) will have an influence on major decisions at the institution. Hence, how Nepal fares in this institution may depend on the country’s concerted effort at understanding how the institution functions. While the Board of Governors consist a member from Nepal, they will at least be cognizant of the major decisions taken at the annual meetings. The following are the reasons why Government of Nepal needs to be ‘on top of things’ when it comes to any issue pertaining to AIIB:

  • To be legally on the safe side: To clearly understand the legal implications of being a member and a borrower. There may be conditions attached to specific projects that Nepal would rather be better off avoiding.
  • To avoid unnecessary politicization of infrastructure projects in Nepal: Once the Government of Nepal is well versed with the nitty-gritties associated with the MDB, it will be able to run more accurate and effective public discourses on the projects financed by AIIB. This will help avoid politicization of projects by opposing political parties. There has been disappointing wrangling among succeeding governments in Nepal recently with regard to awarding hydropower projects to its two mighty neighbors. Engaging in such public discourses will also encourage transparency and invite lesser political interventions.
  • Financial opportunities beyond Upper Trisuli I Hydropower Project: It may be useful to study the publicly available data on the 40 or so approved projects costing USD 8.03 billion by AIIB and identify the type of projects that possibly matches with Nepal’s infrastructural needs. Projects that are often financed are related with water resource management, energy, transport, telecom, landslide and disaster mitigation projects etc. Plus, it is also useful to be on the lookout for possible co-financiers because AIIB has not undertaken projects that require too big a financing. Detailed information is available on proposed and profiled projects (find link here). It is useful to note that AIIB has financed projects in the same country multiple times (Refer to Annex III). Indicating, that there may be a possibility of getting multiple projects financed in the country.
AIIB in Nepal

As it is typical of AIIB-financed projects, they are co-lending in Nepal too. As a new agency, it is understandable that they would seek to avoid major risks that come with lending considerable sums of money to nations like Nepal.

The total project cost of the Upper Trisuli I Hydropower Project is USD647.4 million, of which USD90 million will be loaned by AIIB. Not limited to just co-financing with other MDBs such as the ADB, IFC and a Korean Consortium in Nepal, AIIB will also adhere to the IFC’s Policy on Environmental and Social Sustainability (IFC Policy) and Performance Standards on Environmental and Social Sustainability (IFC PSs) (2012). Designated as Category A by AIIB, “The project is likely to have significant adverse environmental and social impacts that are irreversible, cumulative, diverse or unprecedented” (AIIB 2019).

Implications
  1. Smoother operations for an MBD in Nepal. The two largest shareholders in AIIB are China and India. This will likely deter adventurism by either party in the development sector in Nepal, as it happened recently with Budhi Gandaki Hydropower Project.
  2. Scope for growth: Recently, AIIB raised USD2.5 billion through its debut global stock in a matter of just a week time. This exhibits its immense capacity to raise finances and consequently potential for growth. Today, its authorized capital stock is less than that of the World Bank and Asian Development Bank and is not at par with such MDBs that have an institutional experience- in terms of research, network, and reputation- of more than 50 years. Nonetheless, AIIB will continue growing in terms of its financing capacity, and as mentioned earlier Nepal should be on the lookout for more funding shortly.
  3. With further diversification of MDBs in Nepal, it would foster competitiveness among them, especially with the entry of an institution led by emerging countries. While it is premature to exactly understand the implication of AIIB’s entry into Nepal, the Bank’s infrastructure-driven-economic-development model will indeed propel Nepal’s infrastructure forward on the whole.
Bibliography
  1. ADB. (2019, March 21 ). ADB and AIIB Presidents Discuss Strategic and Operational Issues. Retrieved from ADB : https://www.adb.org/news/adb-and-aiib-presidents-discuss-strategic-and-operational-issues
  2. AIIB. (2015, June 29). 50 Countries Sign the Articles of Agreement for the Asian Infrastructure Investment Bank. Retrieved from AIIB: https://www.aiib.org/en/news-events/news/2015/20150629_001.html
  3. AIIB. (2016, January 16). AIIB Turns 3, Reflects on Startup Growth. Retrieved from AIIB : https://www.aiib.org/en/news-events/news/2019/20190116_001.html
  4. AIIB. (2018). The green imperative: developing interconnected low-carbon power networks in AsiaThe EIU. Retrieved from AIIB: https://www.aiib.org/en/news-events/asian-infrastructure-finance/articles/a03-green-imperative.html
  5. AIIB. (2019, June 10). AIIB Approves First Investment in Nepal. Retrieved from AIIB : https://www.aiib.org/en/news-events/news/2019/20190610_001.html
  6. AIIB. (2019). Introduction . Retrieved from https://www.aiib.org/en/about-aiib/index.html
  7. Reuters, Agence France-Presse. (2015). China to hold 30 per cent stake in AIIB and 26 per cent voting rights. Retrieved from South China Morning Post: https://www.scmp.com/news/china/policies-politics/article/1829095/founding-nations-attend-signing-ceremony-china-led

ANNEX I
Governance Structure

In an excellent comparative study of governance structures of major MDBs, Johns Hopins Professor Natalie Lichtenstein concludes, AIIB follows multilateral development banks (MDBs) such as the World Bank, Asian Development Bank, European Bank for Reconstruction and Development and Inter-American Development Bank in its governance structure (Board of Governors, Board of Directors and President)”.

For the extended organogram, visit AIIB

Important note: The Board of Directors consists of 12 Directors, and under each Director’s purview exists a constituency comprising a number of member countries. For instance, under the Director represented by the Philippines, the countries Bangladesh, Malaysia, Maldives, Nepal, and Thailand have been clustered (Article of Agreement).

Annex II

AIIB on social, labor and environmental guidelines

For parties who are skeptical of a China-led MDB complying with international social, labour and environmental standards, it should be consoling that AIIB has explicitly laid down legally binding guidelines to observe international standards (see AIIB Environmental and Social Framework). Furthermore, most of the approved projects AIIB is financing are co-financed by other MDBs such the World Bank, ADB, JICA, and the governments of recipient countries. There are very few stand-alone projects that the AIIB has undertaken (look at figure 03). Take for instance, as of now, AIIB and ADB have co-financed 5 projects: Bangladesh, Georgia, India, and Pakistan, and Myanmar. Further, in March 2019, AIIB and ADB also signed a Cofinancing Framework Agreement, ‘that will guide overall co-financing arrangements between the two institutions going forward, including regular meetings to discuss co-financing matters’ (ADB, 2019). Meaning, it can be expected that there will be collaboration between the AIIB and ADB wherever there is a convergence of strategic interests.

Hence, it is unlikely that AIIB financed projects will flout international standards on labor, environmental and social concerns given the multi-institutional collaboration they usually undertake. AIIB is also committed to a green imperative that aims at ‘Developing interconnected low-carbon power networks in Asia’, which demonstrates their commitment to environment and the climate (AIIB, 2018).

Annex III
AIIB Approved Projects in 2018 and 2019

 

Country Approval Date Sector Project Loans

M$

Co-financers
Nepal May 21, 2019 Energy Upper Trisuli I Hydropower Project 90.0 ADB, IFC, Korea Consortium
Sri Lanka April 04, 2019 Urban housing Colombo Urban Regeneration Project 200.0 Government of Sri Lanka and Private Partner
Sri Lanka April 04, 2019 energy Other Reduction of Landslide Vulnerability by Mitigation Measures (RLVMM) Project 80.0 Government of Sri Lanka
Lao PDR April 04, 2019 Transport National Road 13 Improvement and Maintenance Project 40.0 Government of Laos, NDF and IDA
Bangladesh Mar 26, 2019 Energy Power System Upgrade and Expansion Project 120.0 Government of Bangladesh and Power Grid Corporation of Bangladesh

 

India Dec 07, 2018 Water Andhra Pradesh Urban Water Supply and Septage Management Improvement Project 400.00 Government of Andhra Pradesh, Andhra Pradesh Urban Finance Infrastructure and Development Corporation
Indonesia Dec 07, 2018 Multi-sector Mandalika Urban and Tourism Infrastructure Project 248.39 Government of Indonesia
Turkey Sep 28, 2018 Finance TSKB Sustainable Energy and Infrastructure On-lending Facility 200.0 Sole finance by AIIB
Egypt Sep 28, 2018 Water Sustainable Rural Sanitation Services Program 300.0 World Bank
India Sep 28, 2018 Transport Andhra Pradesh Rural Roads Project 455.0 Government of Andhra Pradesh
Indonesia June 24, 2018 Water Strategic Irrigation Modernization and Urgent Rehabilitation Project 250.0 World Bank
Turkey June 24, 2018 Energy Tuz Golu Gar Storage Expansion Project 600.0 World Bank, Islamic Development Bank, BOTAS and commercial loans

 

India June 24, 2018 Finance National Investment and Infrastructure Fund 100.0 World Bank, Islamic Development Bank, BOTAS and commercial loans

 

India April 11, 2018 Transport Madhya Pradesh Rural Connectivity Project 140.0 World Bank
Bangladesh Feb 09, 2018 Energy Bangladesh Bhola IPP 60.0 Sole finance by AIIB

Table 1: AIIB Approved Projects in 2018 and 2019 (Source: AIIB)