ON THE PHILIPPINES JOINING THE AIIB WHAT’S THERE TO ‘WAIT AND SEE’?

The Aquino Administration appears waffling on the Philippines being an original member of the China-led Asian Infrastructure Investment Bank (AIIB). Last October, it signed a non-binding memorandum of understanding, together with 22 other countries, to become a founding member. Last week, this newspaper reported that the President said “The Philippines needs to be ‘very very cautious’ about becoming a member... with the government obliged to consider Beijing’s behavior in the Scarborough Shoal crisis of 2012, during which the China Eximbank called in a loan that was to fund a rail line to Clark International Airport.”

China’s Asian Infrastructure Investment Bank (AIIB) secretary-general of the Multilateral Interim Secretariat, Jin Liqun (center), leaving during a break in the Fifth Chief Negotiators’ meeting that discussed draft agreements for the China-backed AIIB, in Singapore last month. 
-- Reuters. 

This indecision is understandable. There are pros and cons that need careful weighing, with intertwined and complex political and economic factors in play.

Many in the business community applauded the government, led by the Department of Finance, when it signed up for the AIIB. This is faithful to the spirit of the Aquino-Hu Jintao 2011 meeting that “The territorial dispute shouldn't be the be-all and end-all of Philippine China relations.” Though this idea seemed to have been eclipsed by subsequent harsh exchanges, the fundamental soundness of it remains. My column last year, “Frozen” (April 2014; it can be accessed on my blogspot, http://romeobernardo.blogspot.com/2014/04/frozen.html), underscored economic ties as an important layer to our multilayered relationship with China. Our joining AIIB will be in keeping with that approach.

In the same spirit, my friend Raphael “Popo” Lotilla, University of the Philippines law professor and former energy secretary, provided precious lessons from Vietnam’s richly textured multi-dimensional ties with China over the years, centuries even (“Dealing with Dragons: Lessons from Across the Sea,” Forbes Magazine, May 2015). His article is a most insightful and fact-based telling of how Vietnam fought Chinese troops over centuries on land and at sea while at the same time engaging China, amicably and profitably, in a variety of ways, including in trade, investments and finance.

And yes, Vietnam is set to become a founding member of the AIIB. For that matter, as Popo observed, so with Taipei, “maintaining its application for membership even after its rejection as a founding member.” And as far as territorial disputes go, this one is the mother of them all!

But wait, does Asia really need another development bank? The case for it is made by an Asian Development Bank (ADB) report that says Asia requires $8 trillion in infrastructure from 2010 to 2020. This is a huge number that dwarfs the capital of the ADB ($160 billion), the World Bank ($220 billion), and other official funders. Having one more funder will surely help.

Besides, some competition is healthy. This early, so as not to be outdone, Japan has announced a $110-billion infrastructure financing package for Asia. Moreover, it has not been lost on many how some of the policies and programs of the World Bank, and to a lesser extent the ADB, have at times seem dictated by narrow interest groups in the West, oblivious to infrastructure requirements of developing countries. 

How else to interpret policies in the World Bank and International Finance Corporation that shun the financing of coal power plants even where such plants may be the only ones that makes economic sense for countries for dependable affordable power? Or take the case of a proposed $1-billion financing for highly subsidized solar plants being processed at ADB, until public scrutiny and more serious thinking within the organization shot it down. (See my column, “Renewable Energy, a Reality Check,” January 2011, blog link: http://romeobernardo.blogspot.com/2011/01/renewable-energy-reality-check.html)

In the case of the Philippines, the government’s Comprehensive and Integrated Infrastructure Program calls for $150 billion of financing in the next five years. Only 25% of this is expected to come from private sources, and the balance from development financing either on-budget or official development assistance. Assuredly, our having access to another source of concessional finance over the medium term will help.

Of course, our current constraint in infrastructure spending is not financing but execution. As a glaring example, had government spent available money as programmed, our GDP growth rate for the first quarter of this year would have exceeded the targeted 7% and not be the mediocre 5%.

And on the private side, what may well lead to underinvestment in infrastructure is the idiosyncratic nature of our regulatory regimes, exemplified in the reinterpretation of contracts by the Metropolitan Waterworks and Sewerage System for the water concessions to exclude recovery of the corporate income taxes -- after 17 years of operation.

But surely, our current situation is not one which we should take as a given if we are to achieve over the medium term the poverty reduction and greater participation in prosperity that relieving infrastructure constraints can bring.

There is less reason to waver now that more countries are joining, including developed country allies of the United States (the country most critical of AIIB). These include the United Kingdom, Germany, France, South Korea, and Australia. As of April 15, the AIIB has 57 prospective founding members, including 16 of the world’s 20 biggest economies and our fellow ASEAN countries. As a result, it is also clear now that China will not have veto power.

Officially, the reason given for the Philippines’ sudden “wait and see” attitude is concern over governance, noting lack of transparency in Chinese bilateral aid. This will be given further clarity later this June when the Bank’s charter will be finalized and up for signature. In the meantime, I would argue that the AIIB in fact helps address this concern, given the multilateral framework that enables sharing of knowledge and experience (especially from the WB and the ADB), and subjects projects and funding processes to greater scrutiny of other members.

Moreover, the reality is that China, with its $4 trillion in reserves, will continue to have bilateral facilities for projects meant to win friends, both countries and persons. And flawed projects (such as the still-born ZTE and North Rail) being pushed by one sponsor or another, from China or elsewhere, will not go away. We just need to be more vigilant, especially in watching our own public officials.

And finally, the nomination of Jin Liqun as AIIB president is reassuring. He is a no-nonsense finance executive honed in the Chinese civil service and multilateral development institutions. Early on, he was a representative of China in the World Bank (we were both there in the 1980s), later pursuing a career as an official there, and later the Asian Development Bank, where he recently retired as vice-president for operations, one rung below the president.

Romeo Bernardo is Philippine GlobalSource advisor and is a board director of IDEA.