Money Matters

Asia Infrastructure Investment Bank is not just about politics, it is about business too

PUBLISHED : Friday, 20 March, 2015, 11:53pm
UPDATED : Tuesday, 28 April, 2015, 11:22am

To Beijing, the proposed Asia Infrastructure Investment Bank (AIIB) is not just about politics, it is about business too.

The bank, with the right kind of governance, is expected to reduce China's political and financial losses in its aggressive quest for influence, markets and natural resources through investment. And so far, the losses have been significant.

The controversy over the US$1.4 billion Colombo Port City project undertaken by state-owned China Communication Construction is the most telling. The project was to be the jewel in the crown of the billions of dollars of Chinese investment in Sri Lanka that Beijing sees as a key piece of its Maritime Silk Route linking China with Europe.

Six months into its inauguration by President Xi Jinping, the newly elected Sri Lanka administration ordered its suspension, alleging corruption behind the way it was fast-tracked.

The setback in Sri Lanka follows Mexico's cancellation in November last year of a US$4.4 billion high-speed railway contract to a Chinese consortium over "doubts about legitimacy and transparency".

That cancellation came shortly before it came to light that the Mexican president's wife had acquired a lavish mansion from a contractor in the consortium. China pledged to rebid but Mexico declared an indefinite shelving of the project in February.

Whether personal gains were involved in these cases is not proven. Chinese officials are no strangers to fast-tracking major projects. It happens all the time in China. But abroad, when the political tide turns, the consequences of such deals can be devastating both politically and financially.

But China needs overseas investments all the same, given its pile of foreign exchange and the slowing domestic economy. So the pressing question is how can it better invest abroad?

That is where the AIIB comes in. A China-led multilateral financial institution with the tight governance and anti-corruption rules of entities like the World Bank and the Asian Development Bank could be the answer to China's woes. While China will continue to decide the priorities of such a fund, the projects it would cover would be subject to a level of scrutiny that could save China from fiascos like Mexico and Sri Lanka.

Investments through such an institution would also insulate China from the political controversies that arise from its investments. The country has been criticised as a "neo-colonial" power for the money that it has poured into Africa to build ports and roads.

So the question that follows is how would China Inc ensure a good share of the pie for itself under a multinational umbrella?

A town planner, who used to bid for various feasibility and consultant contracts funded by multilateral development banks, has the answer.

"When the Americans would bid, various people would signal you to leave," said the planner, who started out in a non-American firm.

Years later, he move to an American house and saw a "different world". One of his tasks was to secure the consultant contract on the redevelopment of a major Asian city. Before putting in a bid, his colleagues in New York put him in touch with a US government official to brief the latter on the company's strengths. He was not privy to how the official did the lobbying. What he knew was that every door opened for him.

He suddenly found himself in luncheons and business forums where he would run into officials from the multilateral development bank financing a part of the redevelopment, and even delivered a speech at one of these. The speech and his subsequent bidding presentation were polished by American government officials to make sure they "suited the client's taste".

Needless to say, his firm landed the contract.

Multilateral development banks have strict procurement and hiring rules. But when you are the leader of a group, there are subtle ways to get things done to your advantage. After all, despite all the noise about helping the host economy, locals seldom land the contracts related to these projects.

Between 1966 and 2013, the Japan-led Asian Development Bank was awarded 188,780 contractors' and suppliers' agreements relating to its investment in Vietnam. The locals got only 8,477 worth US$3.3 billion, out of a total US$120 billion.

[email protected]