Recent news that the United Kingdom and other Western European countries will join the China-led Asian Infrastructure Investment Bank (AIIB) has prompted a flurry of discussion about how the United States, which has been reserved about the new institution, should respond. The Chinese-led AIIB is a new international financial institution (IFI) that will finance infrastructure projects in Asia.
Whatever Washington decides, it’s clear that the AIIB and other new multilateral institutions are becoming an important part of the development finance landscape. These banks can support much-needed infrastructure improvements in the developing world, but they’ll also need to ensure that their investments do not come at the expense of local communities or the environment.
Why new multilaterals? Why now?
In terms of economic power and population, emerging economies are underrepresented in existing IFIs like the World Bank and Asian Development Bank. Brazil, Russia, India, China and South Africa (BRICS countries) together comprise 21 percent of the world economy and 43 percent of the world’s population, yet their voting power at more traditional IFIs does not match their size. For example, they collectively hold 14 percent and 11 percent of voting shares in the International Bank for Reconstruction and Development and International Monetary Fund, respectively.
At the same time, today’s infrastructure investment needs far exceed the amount of finance currently available. In Asia alone, the overall need for national infrastructure investment is estimated to be about US$ 8.22 trillion for the period between 2010 and 2020. Existing available capital will not meet this financial need—new financial institutions like AIIB and the New Development Bank (NDB), a bank initiated by the BRICS countries, are stepping in to fill the gap.
In October 2014, 21 countries signed an MOU to create the $100 billion AIIB. As of April 2015, 35 countries had signed up to be prospective founding members—including a number of European countries such as the UK, Germany and Switzerland— and dozens more have applied. The bank is expected to be formally established by the end of 2015. Also in 2014, the BRICS signed an agreement to create a $100 billion NDB. These banks usher in a new wave of increased development and financial cooperation between developing countries, emerging markets and developed economies.
5 key questions for new development banks
These banks can support much-needed infrastructure improvements in the developing world, but they’ll also need to ensure that their investments do not come at the expense of local communities or the environment.
These new actors in development finance have the advantage of learning from existing IFIs’ decades of experience and setting a new international standard. As they move forward with their operations, they’ll need to ensure that the infrastructure projects they fund do not generate pollution, damage health or otherwise harm people or the planet. There are a number of questions they should consider, such as:
1) Voice and Vote: How will the banks structure governance?
If the intention is for these institutions to address the needs of emerging economies, will emerging economies retain a combined majority voting power?
2) Climate Risks: How will they factor climate into investments?
What will be the balance between “green” investments, such as those in renewable energy and efficiency projects, and “brown” investments, such as those in extractives? How will they fund climate change adaptation and mitigation projects? Will they rule out investments in high-carbon infrastructure like coal-fired power plants?
3) Environmental and Social Risk: What role will environmental and social safeguards play?
Will the banks create environmental and social safeguards to ensure that infrastructure projects do not generate unintended consequences like pollution or social unrest? How will they incorporate lessons and experiences of existing IFIs? What measures will they take to ensure thorough and robust implementation?
4) Transparency and Accountability: How will they handle information and data?
Will information regarding investment decisions be publicly available? Will there be a grievance mechanism and an independent accountability mechanism? What are the expectations for stakeholder engagement policies, and how will they consult stakeholders?
5) Country Systems and Principle-Based Systems: How will new institutions strike the balance?
How will institutions balance internal safeguard policies with country-level safeguards? Under what circumstances, if any, will country systems operate independently?
It’s clear that the world needs development banks led by emerging economies, both to scale up the level of investment and to give developing countries better representation in the world of development finance. Yet these new banks will also need to play another role: championing sustainability as they usher in more development.
Athena Ballesteros is Director at WRI’s Sustainable Finance Program, and Denise Leung is Associate at WRI’s Finance Center. This post was originally published on WRI’s Insights blog.