Minister Noonan - Asian Infrastructure Investment Bank Bill, 2017 Second Stage Speech

18.05.17

Asian Infrastructure Investment Bank Bill, 2017

Second Stage Speech

Dáil Éireann

 

Introduction

The Asian Infrastructure Investment Bank Bill, if approved by the Oireachtas, will facilitate Ireland’s future membership of the Asian Infrastructure Investment Bank (AIIB).  It will provide for the approval of the Articles of Agreement of the AIIB and for payments to be made to the Bank.

Ireland’s Application for Membership of the AIIB

The AIIB is a new multilateral financial institution which came into operation in January 2016. Its objectives are to foster economic development and regional integration in Asia, primarily through investment in infrastructure. The Bank has 57 Founding Members, including fourteen EU Member States, and is based in Beijing, with China playing a leading role in its establishment.

Following Government approval in December 2015, the Department of Finance commenced formal negotiations with the AIIB Secretariat on Ireland’s potential membership of the Bank. Ireland made a formal application for membership of the Bank in January 2017. On the 23rd of  March 2017, the AIIB approved the applications of 13 new prospective members, including Ireland.

Ireland’s AIIB membership would require ratification of an international agreement represented by the Articles of Agreement of the AIIB. Ireland would also have obligations as regards capital contributions. Article 29.5 of the Constitution provides, among other things, that “the State shall not be bound by any international agreement involving a charge upon public funds unless the terms of the agreement shall have been approved by Dáil Éireann”. Passage of the proposed Bill by the Oireachtas, and its enactment by the President, would confirm such approval. Similar requirements applied when Ireland joined other International Financial Institutions such as the World Bank and, most recently, in 2006 the Asian Development Bank.

Rationale for Membership

The rationale for Ireland’s membership of the AIIB includes geopolitical and economic considerations, in particular trade relations with China and the wider Asian economy. Over the past 15 years, Ireland has increased its engagement with Asia, and particularly China, the world's second largest economy, in a broad number of areas.  Bilateral trade has grown in significance and, in 2015, Ireland's total trade with China was worth over €11 billion. There are significant benefits to strong and open ties with China. Becoming a member of the AIIB would reflect and reinforce the growing relationship between the two countries.

AIIB membership will also complement Ireland’s international development policy, which aims to support sustainable development and inclusive economic growth. The Bank’s governance standards and performance since its establishment in January 2016 reinforce the perception that it will be an effective driver of development. It has worked very closely with other International Financial Institution’s such as the IMF, World Bank, European Investment Bank and Asian Development Bank to adopt their best practices in relation to governance, organisational practices and project appraisal.

On the other hand, to not join the AIIB would raise questions about Ireland’s position on China’s increasing integration into the global economy and international financial architecture. Such a decision could impair Ireland’s growing bilateral relationship with China, with potential adverse effects for Irish businesses.

About the AIIB

The AIIB was founded to address the significant infrastructure gap in Asia. Research from the Asian Development Bank estimates that Asia will need to invest 1.7 trillion US dollars per year in infrastructure between now and 2030. This significant demand for investment cannot be met from other channels of finance such as existing International Financial Institutions, Governments or the private sector in these Asian countries.

The Bank was declared open for business on 16 January 2016. It approved its first loans on 24 June 2016. The authorised capital stock of the Bank is US$100 billion, with US$20 billion in paid-in capital. The AIIB will follow the model of other Multilateral Development Banks, raising funds on international markets at competitive terms.  Since it came into operation, the Bank has approved over US$2 billion in loans.

Governance Structures

The AIIB currently has 57 founding members which are divided into regional members (that is, Asian Countries) and non-regional members (mainly European, but also including Australia and New Zealand). Regional Countries will hold 75 percent of the Bank’s shareholding and thus contribute 75 percent of the capital of $100 billion, with non-regional Countries holding 25 percent of Bank’s shareholding and contributing $25 billion in capital.

China is the largest shareholder in the Bank with 26 per cent of its voting power. India is the second largest shareholder with 8 per cent of total voting power, while Germany is currently the largest non-regional shareholder with 6 per cent of total voting power.

Each member country is represented on the Board of Governors and nominates a Governor and an Alternate Governor. As is the norm for membership of International Financial Institutions, it is envisaged that the Minister for Finance would be Governor for Ireland at the Bank.

The principal office of the Bank is located in Beijing, China. Unlike other International Financial Institutions, there are no representatives from member states based in Beijing, although the  permanent staff  may include people from member states.

The Board of Governors meets formally once a year for the AIIB’s Annual Meeting. They elect a President for a term of five years. One or more Vice Presidents are appointed by the Board of Directors on the recommendation of the President. The current President is Mr. Jin Liqun, a Chinese national and former Vice President of the Asian Development Bank, whose current term will expire in 2021.

The Board of Governors also elect the twelve members of the Board of Directors, who are responsible for the direction of the general operations of the Bank. Nine Directors are elected by regional members, and three others are elected by non-regional members. Members are arranged in Constituencies headed by one of the twelve Directors. Upon joining, Ireland would be part of the euro area Constituency and be represented by the Director for the euro area.

Operations and Standards

To date the Bank has approved thirteen projects in eight different countries, with focuses spanning from transport to energy to urban development. Some examples of projects the AIIB has financed to date include:

  • a 216.5 million dollar loan for a National Slum Upgrading Project in Indonesia, to be co-financed with the World Bank;
  • a 100 million dollar loan to finance a motorway project in Pakistan, co-financed with the Asian Development Bank and the United Kingdom’s Department for International Development;
  • A 600 million dollar loan to support the Trans Anatolian Natural Gas Pipeline in Azerbaijan, co-financed with a number of development banks.

EU Member States have used their influence to ensure that standards of other Multilateral Development Banks are mirrored at the AIIB in terms of investments, environmental and social safeguards, institutional governance and organisational matters. The Bank has been very receptive to discussions on standards and safeguards. It has sought to adopt ‘best practices’. The mandate of the Bank and the work undertaken by it to-date on governance structures and safeguards covering investment, environmental and social issues demonstrate that it will complement existing International Financial Institutions.

Indeed, the majority of AIIB projects have been co-financed with other development banks, including the World Bank, the Asian Development Bank and the European Bank for Reconstruction and Development. This demonstrates the standard of project which is being financed by the AIIB and its intent to cooperate constructively with other International Financial Institutions. Both the President of the World Bank Group, Mr Jim Yong Kim, and the President of the AIIB, Mr Jim Liqun, have recognized the importance of ensuring a partnership approach, as is evidenced by the memorandum of understanding recently co-signed by both Presidents at the 2017 IMF/World Bank Spring Meetings to strengthen cooperation and knowledge sharing between both institutions.

Cost Implications

The expected cost of membership for Ireland will be a total of approximately €25 million, spread over a five year period, depending on prevailing exchange rates.

Ireland has been offered 1,313 shares in the Bank. This figure is based on the remaining unallocated capital in the Bank and Ireland’s relative GDP share among non-regional countries applying for membership in this round of applicants.

In capital terms, this equates to a total subscription of approximately €125 million split between 80% callable capital and 20% paid in. In practice this would result in the subscription of approximately €25 million, to which I have already referred.

In general, callable capital represents the capital which a member Country would be liable for if the Institution encountered acute financial distress, while paid-in capital is the amount which a member actually contributes to the Institution in normal circumstances. Based on Ireland’s membership of existing International Financial Institutions, and the performance of those Institutions to date, the probability of the callable capital being called upon is negligible.

A contribution of approximately €25m would also be broadly in line with our contribution to other International Financial Institutions, relative to their size. For instance, in the World Bank, where taking into account the Bank’s global role, Ireland has paid-in capital of approximately €49m, and in the Asian Development Bank, where Ireland has paid-in capital of approximately €15m.

Ireland’s capital contribution to the AIIB would be sourced from the Central Fund as is the normal practice for International Financial Institutions. This has been provided for in the legislation.

It is also expected that Ireland’s contributions to the AIIB would count toward the UN target of 0.7 per cent of GNP for overseas development assistance (ODA). The Programme for Government commits to continue efforts to achieve this target as economic circumstances allow. While it remains to be formally decided whether contributions to the AIIB will count toward ODA, indications are positive that this will be the case. In December 2016, the Secretariat responsible for this issue in the OECD recommended that the AIIB be included on its list of ODA-eligible organisations. Once details are finalised, AIIB members would be able to count their AIIB contributions, or a significant proportion of them, towards their individual ODA targets

I will now turn to the specific provisions of the four sections of the Bill

 

Section 1    sets out the definitions used in this Bill.

Section 2    provides for the approval of the terms of Agreement for membership of the Asian Infrastructure Investment Bank. The Articles of Agreement establishing the Asian Infrastructure Investment Bank are set out in a Schedule to the Bill.

Section 3    sets out the financial and other provisions associated with joining the Bank.

 Section 4   deals with the short title of the Bill. It also provides for the commencement of the provisions in Section 3 on the day when the State becomes a member of the AIIB.

I will conclude by saying that I strongly recommend Ireland’s membership of the AIIB. The Bank will make a significant contribution to economic prosperity and regional integration in Asia. Ireland’s active participation in the AIIB will further strengthen our ties to this region, with expected benefits in terms of trade links and possible procurement opportunities. Our membership would be in line with Ireland’s strong commitment to international development and I am confident that the AIIB will be an effective channel in this regard.

I recommend the Bill to the House.