The Asian Development Bank (ADB) and the Asian Infrastructure Investment Bank (AIIB)

By Ichiro Suzuki When Xi Jinping floated the idea of creating the Asian Infrastructure Development Bank (AIIB) to be based in Beijing, there was a question of why Asia needs another multilateral lender when there are already two, the International Bank for Reconstruction and Development (IBRD or the World Bank) and the Asian Development Bank (ADB), even in the face of obviously voracious demand for funds for infrastructure investments in the region. Japan, along with the United States, has chosen not to be a part of the AIIB, while a number of European countries have participated in the newly created bank. Takehiko Nakao, former President of the Asian Development Bank, in his memoir talks about how Japan relates itself to the AIIB and how he sees the bank. The following is direct translation from the memoir written in Japanese, except words and sentences in parenthesis. Why isn’t Japan in the AIIB? 1. There are good reasons for the AIIB to be founded, and there is not need for Japan to be hostile to the AIIB. As a developed country within the region, Japan is likely to be asked for a greater amount of capital commitment than European countries. There are little reasons for Japan to join the AIIB in this fashion, committing a large amount of tax payers money. 2. Infrastructure investments have been financed by taxes and selling bonds in the domestic market. Power generation has been essentially private sector projects. Borrowing from international organizations has had only limited shares in financing needs of infrastructure development. 3. While cooperation with China is important, it can be done through the Japan International Cooperative Agency (JICA), and the ADB over which the U.S. and Japan have an influence. (It does not have to be through the AIIB). 4. Japanese corporations have a tendency of over-engineering projects (for excessive quality) and costing more than other bidders. They often fave a tough time in winning JICA and ADB projects for this reason. In addition, the AIIB says that the bank does not discriminate between bidders from the bank’s member countries and others. (Therefore, it doesn’t matter whether Japan is in the AIIB or not, from the perspective of winning projects. And Japanese companies don’t have a good track record of winning them anyway.) 5. Some say Japan should have an influence on the AIIB, being its member country. However, China holds approximately 26% of the bank‘s voting power (which is very large), though this is due in part to the absence of the U.S. and Japan. It could be easier for Japan to say what it thinks from the outside, from some distance from the AIIB (than from the inside with a far smaller voting power than China’s.) 6. Other Asian countries think having Japan inside makes the bank better balanced vis-a-vis China. However, this is Japan’s decision to make (based on its own national interest.) 7. At the 1944 Bretton Woods Conference where creation of the World Bank and the IMF was discussed, and also at the 1966 conference that created the ADB among the U.S. and Asian countries as well as others outside the region, opinions were divided among participating countries. Consensus was formed only after years of talks. Despite being the major advocate of the ADB, Japan did not succeed in having its headquarters in Tokyo, having been outvoted by Manilla. (Japan didn’t get all it wanted.) As for the AIIB, China has displayed very strong leadership from the idea of its creation to calling for member countries. While being multilateral organizations, the ADB and AIIB are different in character. (China has a much greater influence on the AIIB than Japan does on the ADB.) Differences between the ADB and the AIIB 1. The AIIB is focused on infrastructure development, whereas the ADB looks at development in a broader sense, including education, public health and poverty reduction. The ADB provides grants for this purpose, on top of extending both short and long-term loans. It extends loans to the private sector as well as governments. (The AIIB has recently announced that it has agreed with Turkey to lend the country 70 million euros to help them cope with the COVID-19 pandemic, breaking from infrastructure investment for the first time.) 2. The ADB is capable of extending loans for the purpose of macro-economic reform of member countries. The bank is able to support member governments at the time of balance-of-payments or fiscal difficulties. 3. ADB directors are based in Manila, while the AIIB does not have its directors in Beijing from an efficiency point of view. The AIIB’s board of directors meetings are held several times a year in Beijing, connected through the Internet. 4. The ADB has its office in almost every developing county, whereas the AIIB does not plan to have offices physically for cost reasons. 5. The AIIB’s loans outstanding at the end of 2019 amounted to $4 billion, including $500 million extended to China. In contrast, the ADB extends $21.7 billion in loans and grants. The ADB employs 3,500 professional staffs dwarfing the AIIB’s somewhere between 200 and 300. The AIIB’s size limits the scope of its projects, necessitating the bank to act in concert with the World Bank or the ADB. 6. The AIIB have 101 member countries at the end of 2019, including 23 that are yet to ratify the membership treaty at its parliament, exceeding the ADB’s 68 countries. The AIIB includes Russia and Middle Eastern countries such as Saudi Arabia, UAE, Iran, Israel, and African and Latin American countries. The AIIB is capable of extending loans to African and Latin American members, after certain procedures. There are countries that seek an ADB membership from outside of the region, but such requests have not been approved by the current members. 19 ADB members from outside the region are limited to the U.S., Canada and European countries. The greater the number of members, the more complex the decision-making process becomes, even if voting power is given in relation to capital commitments. 7. The AIIB’s debt is rated AAA by S&P, as well as the ADB's. The rating is higher than China (A), Japan (A), or the U.S. (AA+). Of course, the AIIB is well managed. At the same time, S&P obviously has looked at the AIIB’s large cash position that far exceeds its loans outstanding. This reduces risks of default of AIIB debt securities. The AIIB is in the process of receiving $30 billion paid-in-capital from member countries in five installment payments. (Compared to this capital base, AIIB has lent only $4 billion so far.) The ADB’s capital stood at $147 billion at the end of 2019, as opposed to $100 billion for the AIIB. This capital base includes guarantees from member countries in the event that makes it difficult for the ADB (or the AIIB) to repay the debt it issued. This guarantee does not require cash payment from member countries (and is not reflected on their balance sheets.) On the other hand, paid-in-capital is cash payment from members’ tax payers money. Since its foundation in 1966, the ADB has received cash payment from members five times, for a total of only $5.4 billion. Retained earnings (accumulation of past profits) amount to $14 billion, and $31 billion was added at the beginning of 2017 through the ADB’s merger with the Asian Development Fund (ADF), the ADB’s sister organization. The ADB’s shareholders’ equity amounts to $52 billion on the balance sheet. This is a strong equity base compared to the bank’s loans outstanding at $114 billion. This makes the ADB capable of lending further without asking member countries for additional capital. In contrast to this, the AIIB receives $30 billion outright. (Inside the ADB, there is an air that this difference is not fair.) (The AIIB has to prove that the bank is capable of generating profits through the projects it finances. The AIIB cannot come back easily to member countries for more capital since they have already committed $30 billion. Should it lean heavily toward the Chinese Communist Party’s politically-favored projects, as some fears, it would damage both its financial health and reputation as a multi-lateral lender.) About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.