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Proliferating MDBs find politics a developing challenge

By EuroWeek Editor 1
13 Dec 2019

We have more multilateral development banks than ever before. They perform an invaluable job in a challenging and ever-changing world, but as they expand, and as new MDBs emerge, a fear is growing that they are being used as political tools by sovereign shareholders, keen to promote their own interests around the world. By Elliot Wilson

It’s never been a better or more challenging time to be a multilateral development bank. MDBs are growing in scale and number as they scramble to meet surging demand for new or improved infrastructure. The world now boasts more than 30 of them, from the big boys in China, the US and Europe, through to the regional champions, to a gaggle of local or niche players.

Size varies wildly. At the end of 2018, the European Investment Bank (EIB), the  world’s largest lending institution, had €451bn ($497bn) of outstanding loans on its books. Compare that to the Black Sea Trade & Development Bank, with its 12 member states including Turkey and Russia, and €2bn of outstanding loans as of October 2019. 

“It’s just not enough,” the bank’s president Dmitry Pankin told GlobalCapital at the IMF’s annual conference in Washington DC in October. “We need to be a stronger institution that encourages regional co-operation by starting more serious projects.”

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Focus of course differs too. Most MDBs are handed a remit the moment they’re born. Some stick to it rigidly, at least in geographic terms. So the Asian Development Bank invests in projects dotted around Asia, focusing on emerging or frontier states, with the African Development Bank and the Inter-American Development Bank doing the same in Africa and Latin America respectively. 

Others are all but unrecognisable from their early days. Take the European Bank for Reconstruction and Development, set up in 1991 to help ex-Soviet states make the transition to free markets. At times the London-based MDB seems more focused on North Africa and the Levant — two regions it expanded into in the wake of the Arab Spring — than on its original outposts in emerging Europe and Central Asia. 

Going forward, the big question for EBRD shareholders is whether to continue this southward push, into sub-Saharan Africa. Its president, Sir Suma Chakrabarti, certainly believes it should, and rarely misses a chance to push this narrative. In his speech to the EU’s powerful Economic and Financial Affairs Council in early October, he used the word ‘Europe’ four times but mentioned ‘Africa’ six. 

Several new MDBs, despite only recently bursting on to the scene, already seem an integral part of the multilateral map. The Beijing-based Asian Infrastructure Investment Bank has 69 member states and, at the end of 2018, had lent $7.5bn to 35 projects in 21 countries, mobilising $715m of private capital along the way. With members ranging from the UK to Brazil, and South Korea to Saudi Arabia, it is already a global entity in nature, it not actually in name.

Another sparkly new IFI, the New Development Bank, often called the ‘Brics Bank’ due to the initials of its five founding members states — Brazil, Russia, India, China and South Africa — was slower to get going, but has outsized ambitions of its own. It projects net new annual lending to be $10bn in 2020, and $41bn in 2027, from a projected $7bn-$8bn in 2019. 

“We will over time become a global institution with the Brics [markets] at our core,” Leslie Maasdorp, the bank’s finance director, told GlobalCapital. “Over time, the bank will evolve, building far more of a global role” for itself. When quizzed earlier about the bank’s expansion plans, he tipped its roster of members to at least double by the mid-2020s, to include both developed and developing nations.


Remarkable success

When left to their own devices, most big-ticket multilataerals have proved remarkably successful. “The MDB model is tremendous in general,” says Christopher Humphrey, an economics professor at Swiss university ETH Zürich. “You print bonds, and the capital you raise at a really good price pays for your administration costs. You are constantly generating retained earnings, which further boosts your capacity to lend.” 

Humphrey reckons that since its inception in 1944, the World Bank has tapped shareholders for a total of $17bn (not adjusted for inflation), of which the US has contributed $2.3bn. “With that money, the IBRD [the first of the World Bank’s five lending divisions] has generated $30bn of retained earnings, and lent $700bn, mostly to poor countries. No wonder China wanted to build its own equivalents.”  

The re-emergence of China as a 21st Century superpower has changed the entire face of development banking. Its leaders likely would not have formed the AIIB, had it successfully convinced the World Bank to give it a bigger seat at the table. But the emergence of the AIIB, added to the existing firepower of China Development Bank and Export-Import Bank of China, both aggressive lenders to emerging nations, forced the US and Europe to act.

The US is rolling out a new federal agency called the US International Development Finance Corporation (DFC) out of the bones of the Overseas Private Investment Corporation (OPIC). It aims to modernise the country’s development lending capabilities and, in the long term, to mobilise up to $60bn of private capital, to channel to worthy projects in the developing world. Much of that freshly tapped capital will be directed to fast-growing Asian markets, where the DFC will compete and likely also collaborate with, among others, the AIIB and the Asian Development Bank.


Europe on the move

Europe in turn is still mulling the future of its own extraterritorial lending activities. In March, a so-called ‘high level group of wise persons’, which included bankers and academics, were asked to analyse how the EIB should operate outside the European Union. 

Their report, published in October, suggested three courses of action. First, it could transfer all of its non-EU lending activities to the EBRD. Second, it could merge its lending operations with the EBRD’s, creating a new agency owned by both development banks as well as the EU and its member states. 

With the first a non-starter and the second unfeasible, given that the EBRD’s shareholders include the Russian and US governments, the third option on the table — to task the EIB with creating a new division that would be part-owned by EU-based national development banks — is by far the most viable. 

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When interviewed in October by GlobalMarkets, EIB president Werner Hoyer described it as the “best option” of the three. The aim as it stands is to create, by 2027, a €60bn offshoot, tentatively called the European Bank for Sustainable Development, which will put European development capital to work in projects across Africa and Asia. 

Much political wrangling will likely need to take place before a decision is made and any new development bank is created. But the fact that the various arms of the European project are working largely in harmony to project internationally the EU’s significant financial firepower, in the hope of boosting its hard and soft-power status, is in itself interesting. 

Europe’s migrant crisis, which began in 2015, and saw millions of undocumented immigrants enter the EU from from Africa and the Middle East, accelerated thinking in Brussels and the main European capitals. That coincided with a wider acceptance that China, thanks to the deep pockets of its development banks, was winning the battle for hearts, minds and wallets in Africa, while Europe had more broadly fallen far behind both the US and China on a host of metrics, most notably technology.

Development lending, for so long a side issue, has become, belatedly but undeniably, central to the EU’s sense of identity. The EIB is central to this shift in thinking. It has supported €100bn worth of investments in Africa over the past 10 years, and the continent is now its biggest arena of activity outside the single market. 

To some, this is proof that the world’s largest and most expansive development banks are becoming politicised and even, to use language from the social media era, ‘weaponised’, in that they are being used to channel lending to projects favoured by a sovereign owner or group of dominant shareholders. It’s hard to argue with this view. Europe is using its willing accomplice, the EIB, to channel every year substantially more capital to Africa and Asia, to compete for relevance and influence with China. The US, through its new development agency the DFC, is likely to do the same.

Others might argue that MDBs have in truth always been political tools, used to channel capital to projects or individuals — or commercial lenders or corporations — in friendly or strategically valuable nation states. EIB president Hoyer said as much earlier this year when he described his lending institution as “a political instrument” that “serves a political purpose”. 

Curiously, it can be argued that the China-backed Asian Infrastructure Investment Bank is, for now at least, actually less politically motivated than many of its far older Western peers, certainly in terms of how it targets lending opportunities in member countries. 

“For sure, politically directed lending happens at the legacy development banks,” says the ETH Zurich professor Humphrey. “There is no doubt that throughout history, the United States has used the World Bank to ensure that countries like Afghanistan and Iraq get the loans they need.” By contrast, he says, very few of the loans disbursed so far by the AIIB appear to be made with a strategic national imperative in mind. 

“I’m finalising a paper on the first three years of the AIIB and the NDB, and a key question I asked was if China was using either bank to channel cash to Belt and Road Initiative projects,” Humphrey adds. “The answer is a pretty definitive ‘no’. Two of the biggest sovereign recipients of Belt and Road loans are China and India. Certainly, China is not lending to itself on its own behalf, and India is highly vocally opposed to the entire plan.”

In turn, he adds that of all the NDB’s outstanding loans, only three can be construed as being connected to Belt and Road projects. One is a port in South Africa, and the other is a highway in eastern Russia. “The evidence is that neither development bank is being used to further China’s own initiatives. That’s not to say that won’t change, and perhaps [China is] just trying to build up the banks’ brands before being more heavy-handed and political with them” further down the line. 

Watch this space.

By EuroWeek Editor 1
13 Dec 2019