BRI Cooperation: Functions and Selected Projects of Multilateral Development Banks

In 2015, for the first time in history, the world reached a series of consensus on sustainable development. From the Addis Ababa Action Agenda to the 2030 Agenda for Sustainable Development and to the Paris Agreement, an international framework for sustainable development has gradually taken shape. China’s Belt and Road Initiative (BRI) attaches great importance to sustainable development and aims at helping BRI countries realize sustainable development goals.

Infrastructure construction is an important part of BRI cooperation. Sustainable infrastructure can support BRI countries to development in a low-carbon and sustainable way. In recent years, the World Bank, the Asian Development Bank (ADB) and other multilateral development banks have made much progress in advocating sustainable infrastructure. Typically, new multilateral development banks led by China, such as the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB), has labelled sustainable infrastructure development as their core mission.

This paper will analyze the roles of multilateral development banks in sustainable infrastructure construction with cases, and raise policy suggestions on how China could promote sustainable infrastructure construction in BRI countries and help maximize the functions of multilateral development banks.

Multilateral development banks in sustainable infrastructure construction

Based on multilateral development banks’ project support principles and methods, their own missions and strategies, and action plans to bridge the financing gap in international infrastructure proposed following the 2015 Sustainable Development Goals, the roles of multilateral development banks in sustainable infrastructure construction can be summarized as follows:

1. Providing concessional financing and overcoming market failure

Infrastructure financing is often describe with massive early-stage funding requirements, long investment cycles, high political sensitivity and strict professional requirements. Financial risks arising from private financing could pose infrastructure project to the dilemma of market failure. In addition, sustainable infrastructure financing may face special risks and obstacles related to political, institutional and economic factors at market and project levels. For that, multilateral banks should provide concessional financing to safeguard social capital against market failure that impedes infrastructure financing.

• Formulating policy frameworks and operational guidance

Sustainable infrastructure is highly dependent on policy support and sensitive to regulatory and policy changes. Favorable policy environment means that policies, laws and regulations (incl. legal provisions of project contracts, investment protection, political stability, corruption control, etc.) support infrastructure investments. BRI countries generally lack stable and favorable policy environment, which increases their sovereign risks and infrastructure financing costs. Multilateral development banks are coordinating national policies and standards for sustainable development, reducing fossil fuel subsidies and strengthening carbon pricing, and promoting the development of corresponding policy frameworks and operational guidance.

• Contributing to technological progress and innovation

Sustainable infrastructure development requires technological progress and innovation. At present, BRI countries are relatively lagged in technology development in the field of sustainable infrastructure, where they also face larger financing gaps than in the field of normal sustainable infrastructure due to investment uncertainty and risk of technological obsolescence.

The extent to which new technologies are developed and utilized is an important criterion for multilateral development banks in selecting sustainable infrastructure projects. Relying on political and economic influence of multilateral sovereign governments, the banks extend the influence of technological innovation project, so as to realized innovative financing.

• Promoting development finance cooperation and stakeholder coordination

To minimize the financing gap of sustainable infrastructure and reduce investment risks, multilateral development banks are cooperating through platforms to share project-related risks. This helps them avoid financial bottlenecks and combine comparative advantages of different development financial institutions. By assisting in stakeholder coordination, the banks not only establish and regulate concessional financing procedures, but also create cooperation opportunities for development financial institutions, governments and private capitals.

• Acting as a “knowledge bank”

Multilateral development banks function as a “knowledge bank”, mainly in the following means: project reserve funds (PPF), project assessment tools and effect evaluation, tools for joint financing and risk alleviating, risk assessment and monitoring mechanisms, the PPP regulatory framework and capacity building, scaling structural information, etc.

Typical cases of multilateral development banks supporting sustainable infrastructure construction

Multilateral development banks support sustainable infrastructure construction in a diversified way, for example by cooperating with public capital or fully using private capital. They pay attention to the construction and operation quality of projects and fully consider the actual situation of the receiving country and the project themselves so as to offer appropriate, supportive project designs. Typical cases where multilateral development banks promote sustainable infrastructure development in BRI countries will be exemplified as follows.

• Cooperation with private capital that possesses extensive project operation experiences

Case: The Tafila Wind Power Project in Jordan

Multilateral development banks: International Finance Corporation (IFC), European lnvestment Bank (EIB)

Situation:

The electricity industry in Jordan is highly dependent on fuel imports. However, because of its abundant wind and solar energy resources, Jordan has been seeking ways to use these local resources to reduce electricity prices, meet the growing demand and improve efficiency.

The Tafira Wind Power Project is located in the Tafira area between the capital Amman and the port Aqaba. It involves the construction, operation and maintenance of a 117 MW wind farm and its related equipment. The power plant began commercial operations on 16 September 2015, and is nowadays the first private wind power project financed in the Middle East and North Africa (excl. Morocco). Under a 20-year power purchase agreement, all the electricity generated will be sold to the State Electric Power. The total cost of the project is estimated at $287 million. It is expected that the local CO2 emission could be reduced by 224,000 tons annually and electricity could be provided domestically at a price which is 17% lower than the average electricity price.

IFC and EIB partner with EP Global Energy (EPGE), a private equity firm with extensive project experiences, to provide funding and technical support for the project. EPGE is responsible for the overall operation. Of the project’s total cost of $287 million, $221 million was in the form of loan. IFC provided $55 million USD as a Class A loan, $14 million USD as a Class C loan and $59 million USD in a Class B loan, and attracted $72.24 million USD from the EIB and $21 million USD from the OPEC Fund for International Development (OFID).

Discussion:

In 2013, the project won the International Project Financing Award (Middle East) for projects related to renewable energy. It is a typical case where multilateral development banks cooperate with private capital with rich project operation experiences to provide support for project construction and operation. The IFC and the EIB financed the project. Additionally, the IFC advised on the formulation of the project agreement, helped the Middle East and North Africa area negotiate with the EPGE, and offered interest rate swaps on the entire debt burden of the project.

• Providing credit enhancement for green bond issuance

Case: The Geothermal Power Project in Philippines

Multilateral development bank: Asian Development Bank (ADB)

Situation:

The Geothermal Power Project in Philippines raised funds by issuing climate bonds, and the ADB provided credit enhancement in this project. In 2016, through the Tiwi MakBan Geothermal Power Generation Bond Project, the ADB, the Credit Guarantee and Investment Fund (CGIF) and the Bank of the Philippine Islands (BPI) assisted the APRI Renewable Energy Company in realizing capital expenditures (including acquisition and plant maintenance) and continuous operations. Tiwi and MakBan are the seventh and fourth largest geothermal facilities in the world respectively. CGIF is a multilateral institution established by the governments of the 10 ASEAN countries and the ADB to develop the bond market of the ASEAN countries. APRI is a wholly owned subsidiary of Aboitiz Power Company (APC), a leading developer and operator of electricity generation and distribution in Philippines.

The ADB provided credit guarantee on a certain portion of project bond (10.7 billion pesos or approx. 225 million USD) and a loan of 1.8 billion pesos (approx. 37.7 million USD).

As a climate bond, the issuance of the project bond introduces a new climate financing mode in the Asia-Pacific region. Many institutional investors are increasingly seeking to incorporate ESG factors into their investments, and green bonds perfectly cater to their demand.

Discussion:

The bond issued in the project is the first certified climate bond in the Asia-Pacific region, the first project bond with credit enhancement in Southeast Asia since the Asian financial crisis, and the first project bond issued in local currency for Philippine power industry. The ADB has played a key role in the issuing and increasing investor interest through partial credit guarantees in local currencies. The issuance of this project bond shows that climate finance are critical in infrastructure financing of BRI countries.

• Building connectivity in undeveloped regions

Case: Infrastructure Connectivity Projects in Myanmar

Multilateral development bank: Asian Development Bank (ADB)

Situation:

With higher degrees of participation in international affairs and political and economic reforms, Myanmar’s economy has been growing rapidly in the past few decades. However, before that, due to the decades of international isolation and the dilapidated infrastructure, it had been one of the countries with the fewest telecommunication, transport and logistics facilities in the world and significantly dragged its economic growth.

In response, the ADB provided a loan of 100 million USD to Yoma Strategic Co.Ltd (YSH) to support its infrastructure connectivity construction projects in the fields of telecommunication and transport in Myanmar. Early-phase projects include the construction of telecommunication towers, the development of refrigerated logistics networks and logistics fleets.

These projects address the lack of infrastructure connectivity in Myanmar by improving basic social services and rural infrastructure to increase productivity and income. Reduced transaction costs, increasing number of opportunities for domestic and cross-border trade, and easier access to reliable and sustainable public services further facilitate the economic development in Myanmar and its integration with other BRI countries.

Discussion:

Due to the weaknesses of Myanmar’s financial market, it is in urgent need of loan financing from local and international banks, which therefore makes the support of the ADB crucial to the country. The ADB’s project has effectively promoted sustainable economic growth and brought Myanmar steps forward towards the goal of poverty reduction. In addition, the project structure indirectly extend the influence of the ADB to multiple connectivity sub-projects that are nearly impossible to reach directly.

Policy suggestions on China’s BRI sustainable infrastructure construction with the support of multilateral development banks

• Promoting tailored technical standards and service standards for developing countries, and promoting scientific and technological innovation

Due to different stages of development and resource advantages, developing countries are generally disadvantaged in terms of sustainable infrastructure, and there are misunderstanding and disparities in technology and quality standards of infrastructure sustainability between developing and developed countries. The experiences and standards of project development of multilateral development banks led by developed countries are not perfectly applicable in developing countries.

China is the largest developing country, and is moving from a big infrastructure country to a strong infrastructure country. In the construction of the Belt and Road, China should attach importance to R & D and platform construction of sustainable infrastructure, and formulate sustainable infrastructure technology standards and service standards in line with the developing countries’ situation based on the multilateral development banks led by developing countries. In this regard, multilateral investments by the AIIB and the NDB could be referred to as successful investments.

• Strengthening the financing process of multilateral development banks in sustainable infrastructure construction investment and regulating the disclosure of environmental and social benefits of project

As the main receiving countries of loans are mostly less developed, the international community has more worries for the multilateral development bank’s projects in this area. To mitigate these public worries, multilateral development banks should ensure stricter assessment standards to measure environmental and social impact of projects, and strengthen disclosure of environmental and social benefits of projects. Under this premise, new multilateral development banks should pay attention to the preparation of sustainable infrastructure projects through specific project preparation funds, and help BRI countries form a stably financed infrastructure project reserve.

• Supporting multilateral development banks in developing green finance and making the best of private capital

Multilateral development Banks should be encouraged to develop innovative green financial instruments and financing models such as green credit, green bonds and green funds for BRI projects. By using credit enhancement mechanisms such as risk guarantees, the banks can leverage public funds, sovereign wealth funds, pensions, insurance funds and private funds to reduce financing risks. They are recommended to start cooperation in low-carbon, resilient, climate-related infrastructure sectors where widely accepted standards have been set up, accumulate experience in coordinating green standards, and then eventually enhance the breadth and depth of cooperation in green finance.

• Promoting the new multilateral development banks as “knowledge banks” to disseminate, exchange and share experience and knowledge of sustainable development in developing countries

As China’s innovative financing tool for global economic governance, new multilateral development banks should learn from others while actively playing the role of “knowledge banks”. Banks should lead the formulation of sustainable infrastructure regulation, policy framework, and technical and service standards from the perspective of developing countries. Based on specific situations of sustainable infrastructure development, banks should carry out targeted research. China’s experience in sustainable development can be used as an example to benefit BRI countries.

• Managing the competition and cooperation with the existing multilateral development banks and building a new type of partnership among multilateral development agencies that coordinates and complements each other

In face of the huge financing gap of sustainable infrastructure in BRI countries, a new type of partnership for cooperation and coordination between multilateral development institutions is indispensable. For that, China should absorb advanced practices and experiences of other multilateral development banks and international financial institutions in terms of project management, risk prevention, country cooperation, knowledge reserves, capacity building and transparency, and enhance the operation and management of the AIIB and the NDB. Using networks and resources of other multilateral development banks would make it easier to promote the co-financing of sustainable infrastructure. Additionally, China should actively participate in the joint action plans of the World Bank on sustainable infrastructure standards and statistical capacity-building and the joint green financing initiatives by the EIB, the European Bank for Reconstruction and Development and the ADB to jointly guide and mobilize institutional investors in developed countries.