Abu Dhabi, UAEThursday 6 August 2020

New Chinese-backed banks defy sceptics

Two multinational, Beijing-backed lenders have already loaned billions since they were formed a little over a year ago, disproving those who saw little chance of success.
Cranes stand at a massive drydock and ship repair facility in Oman's Duqm Special Economic Zone. Fatma Alarimi / Reuters
Cranes stand at a massive drydock and ship repair facility in Oman's Duqm Special Economic Zone. Fatma Alarimi / Reuters

BEIJING // The China-backed Asian Infrastructure Investment Bank (AIIB) has defied critics by rapidly accelerating its lending programme after its creation a little over a year ago.

The AIIB has already made funds available to eight different countries, including Oman, since its launch in mid-January last year.

The bank went beyond initial expectations of funding projects only in China and the South East Asian region when it allocated US$301 million to support a capacity expansion programme at the Duqm project in Oman.

“Duqm’s long-term potential is underlined by its mammoth size,” says the Port of Duqm Company.

“Covering an area of 1,777 square kilometres, the Duqm SEZ [special economic zone] – which incorporates the Port of Duqm – is by far the largest economic initiative in Oman’s modern history. In the initial phases, only the northern half of the SEZ is being taken in hand for development. This area in itself is large enough to cater to demand for land leases well into the 2035-40 time frame. Development of the southern half of the SEZ will be pursued only thereafter, denoting thus the long-term vision underpinning this giant venture.”

Port of Duqm Company is a 50:50 joint venture between the Omani government and the Consortium Antwerp Port. CAP is supported by the Port of Antwerp (Belgium), one of Europe’s largest hub ports. Under an agreement signed with the Omani government in April 2011, the joint venture has been granted a 28-year concession to co-invest, operate, manage and market the Port of Duqm.

Equally surprising is AIIB’s latest decision to lend $600m for the Trans-Anatolian gas pipeline (Tanap), which will connect Azerbaijan to Turkey in Europe. After completion, Tanap will transport natural gas from fields in Azerbaijan into Turkey and then on to markets in southern Europe. Investment in this energy infrastructure project is crucial for integrating Azerbaijan with new markets and enhancing energy security for Turkey, while also benefiting Europe. China could also gain hugely through the AIIB because it may bring several more major European powers to the table, says Julian Evans-Pritchard, the China economist for Capital Economics.

Tanap is a part of the Southern Gas Corridor Programme that consists of the development of Shah Deniz 2 gasfield in Azerbaijan and construction and commissioning of 3,500 kilometres of pipeline from Azerbaijan to Italy through Georgia, Turkey, Greece and Albania. The project includes construction of an 1,850km pipeline, representing about half of the total 3,500km of pipeline to be constructed under the programme. Turkey is the prime project organiser. The construction of this pipeline will also create numerous employment opportunities in Azerbaijan and Turkey, AIIB said.

Together with another new China-backed bank, New Development Bank (NDB) of the Brics nations, AIIB has jointly lent more than $3 billion covering projects in more than a dozen countries within their first year. The NDB has financed 41.5bn worth of projects in each of its member countries – Brazil, Russia, India, China and South Africa.

“China is certainly making robust efforts to strengthen its relations with neighbouring countries and expand its economic footprint,” Paul Haenle, the director of the Beijing-based Carnegie-Tsinghua Center for Global Policy, tells The National. “There is an enormous need for high-quality infrastructure and greater connectivity in Asia, and China purports that the AIIB and One Belt, One Road both seek to address this need.”

In its quest for financially viable options, the AIIB is expected to look at more projects in the Middle East, particularly in the Arabian Gulf region. It has spent most of the first year lending to “good projects” that had already been vetted by the World Bank and the Asian Development Bank, and found to be viable in terms of strong return on investment. But finding such projects in Asia is a challenging task because of political uncertainties in some areas and the fact that many infrastructure programmes involve more than one country, some of whom are not on the friendliest of terms.

The AIIB faced serious scepticism when it was first formed with critics saying China would use the new bank as an economic and political lever to serve its own purposes.

“At the formation of the AIIB, the US, the base of the Bretton Wood Institutes that manage the world economy including the World Bank and the IMF, saw the new body as a threat to its dominance and importance in the world economic order,” says the AIIB chief Jin Liqun.

“They raised issues on whether the bank’s functions would be consistent with fundamental human and environmental rights of the borrowers or state members. We did our best to convince them that we were no threat or rivals or either naive as not to know the basic rules of operations.”

Lourdes Casanova, the academic director of the Emerging Markets Institute at Cornell University, points out that both AIIB and NDB have been able to attract talent from the World Bank, the IMF and the Asian Development Bank.

“We should not underestimate the tremendous know-how that China has acquired during the last 20 years in domestic infrastructure projects. China has now the largest fast-train network in the world among many other achievements,” Ms Casanova tells The National.

The Oman project caused some surprise because few expected the AIIB to go so far into the Gulf area. Its main area of focus was expected to be China’s immediate neighbours, which include Pakistan, the central Asian region and South East Asian countries. The Duqm project will mainly include the civil works for the construction of port-related infrastructure including access roads, cargo storage, buildings in the terminal and the operational zone’s facilities. The project is expected to be completed by June 2020.

The AIIB has also financed the Dushanbe-Uzbekistan Border Road in Tajikistan. In addition, the bank has also provided $100m for the national motorway M-4 in Pakistan, $300m for a hydropower project in Pakistan, $165m loan for a power distribution system upgrade in Bangladesh, $216.5m for slum upgrading in Indonesia and $20m for a power plant in Myanmar.

“By setting up the AIIB, China has shown it is capable of playing by the established rules. This is in contrast to what we see in the US where Donald Trump increasingly seems to be going rogue on not just America’s traditional role, but also many of the international rules it help set up,” says Jacob Kirkegaard, a senior fellow at the Peterson Institute of International Economics.

“As such, AIIB is an institution that will help China garner support from other countries in any direct confrontation with Mr Trump. AIIB will not, however, provide China with any particularly better economic ability to do so in a bilateral confrontation with Mr Trump,” he adds.

Mr Jin says the “door is open” for the US to join the AIIB despite the fact that the previous Obama administration had decided against it. He also predicted that the Trump administration would choose to join the AIIB.

“I was told that many in his [Mr Trump’s] team have an opinion that Mr Obama was not right not to join the AIIB, especially after Canada joined, which was a very loud endorsement of the bank. So we can’t rule out the new government in US endorsing the AIIB or indicating interest to join as member,” Mr Jin said.

However, Ms Casanova is doubtful: “President Trump has been more confrontational with Mexico and also with China, as well as critical of multilateral organisations, which makes us believe that he has no intention to join AIIB.”

business@thenational.ae

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Updated: February 12, 2017 04:00 AM

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