Can Latin America’s first AIIB member learn from past mistakes?

In a first for Latin America, on November 1 Ecuador became a fully-fledged member of the Asian Infrastructure Investment Bank (AIIB), the China-led multilateral bank that began operating in 2015 with a mandate to finance development projects around the world.

Whether or not Ecuador can properly take advantage of its AIIB membership will depend on managing new resources in such a way that promotes good practices, tempers social conflict, and encourages greater transparency and high environmental standards. 

The AIIB’s first Latin American partner

“This is a very special opportunity for our country to further integrate with the Pacific Rim and the countries linked to this bank,” said José Valencia, Ecuador’s minister of foreign affairs, at an AIIB signing ceremony in Beijing.

Headquartered in Beijing, today the AIIB has more than 90 member countries. The bank’s investments in energy projects, public transport and internet connectivity in Asia and Africa, have created high expectations in Latin America of a new source of vital development finance to compete with the Inter-American Development Bank (IDB) or even the International Monetary Fund (IMF).

Given its AAA credit rating, the bank can also act as a ‘seal of approval’ to catalyse private sector loans, analysts have said.

Yet despite the opportunity to obtain finance for projects that could boost Ecuador’s economy, like many countries in the region, Ecuador was slow to pay up the minimum required capital subscription of US$5 million after expressing its interest in joining in 2017.

Furthermore, analysts say President Lenín Moreno’s government should proceed with caution in order to avoid links with corruption schemes and unnecessary projects.

Paulina Garzón, director of the China-Latin America Sustainable Investment Initiative (CLASII) at the American University in Washington, says it’s important for Ecuador that financial authorities learn lessons from failed Chinese-funded projects promoted under the government of Rafael Correa. These include the notorious Coca Codo Sinclair hydroelectric plant in eastern Ecuador, which ran some US$2 billion over budget.

“If the flagship project of China-Ecuador cooperation is representative of others, the responses are not encouraging,” Garzón said.  “The Coca Codo Sinclair dam was built using obsolete technical studies. Technical flaws have compromised the integrity of the work, and they have not produced the estimated amount of energy.”

To make things worse, Garzón said, contractor Sinohydro is facing a corruption investigation by the Attorney General’s Office.

We end up paying twice

In the past decade, China has become Ecuador’s main source of finance. Though the total value of all loans was not made public, more than US$11 billion came into the country from Chinese lending institutions between 2010 and 2017, according to an investigation by Ecuadorean newspaper El Universo. The Washington-based Inter-American Dialogue puts the figure at over US$18 billion up until 2018.

As of 2018, the outstanding debt amounted to some $8 billion, according to Ecuadorean newspaper El Universal. The figure is equivalent to around 7% of Ecuador’s GDP that year.

Several loans were conditional on the exclusive hiring of Chinese contractors and even special dispensation to bring engineers and other staff from China.

“We end up paying twice,” says economist Jorge Calderón Salazar, dean of the Arcos Technological Education Institute in Guayaquil.

“Firstly, the money must be paid back with interest, and secondly, we are explicitly obliged to hire Chinese companies. The money does not create the desired multiplier effect that should generate labour and technology transfer.”

AIIB and Belt and Road

The AIIB complements China’s flagship Belt and Road Initiative (BRI), one of the pillars of President Xi Jinping’s geostrategic aim to catapult China into the position of a world-leading superpower by 2050.

At the time of writing, 19 Latin American and Caribbean countries have signed agreements promoting the BRI, which seeks greater economic and political integration. Ecuador joined in December 2018 and is one of the countries that has sought to promote more projects under the BRI framework than regional neighbours.

However, the arrival of the AIIB as a new lender raised fears about a “race to the bottom” in terms of social and environmental standards in project planning and execution, especially in Ecuador.

Communities have criticised the effect of dams altering water courses and Chinese-backed mining projects have been associated with the displacement of families and the intimidation of community leaders.

The El Mirador mine in the Cóndor mountain range in the Ecuadorean Amazon displaced families and generated an ongoing conflict, while the Rio Blanco mine in Nankints experienced similar problems.

Let everything be transparent, starting with the bidding process

For Garzón, sound project selection is essential in contributing to the country’s development.

“National governments and international financiers should prioritise water and forest corridor connectivity and ecosystem integrity over infrastructure connectivity,” said Garzón, who authored the Handbook on Chinese Environmental and Social Guidelines for Overseas Lending and Investment: A Guide for Local Communities.

“I think it’s time to stop calling the railways and big dams a clean means of transport and power generation. A railroad crossing the Amazon is a huge threat to the integrity of Amazon ecosystems,” she added, referring to massive Chinese funding of hydroelectric projects in Ecuador and the proposed railroad that bisects the sub-continent through Brazil, Bolivia and Perú.

Calderón hopes that the government of Ecuador will take advantage the AIIB as a funding source to rescue and modernise the country’s agricultural sector, which today has low levels of production levels, due in part to the lack of comprehensive irrigation systems. With better marketing, Ecuador could become a food pantry for China through having recently set record shrimp sales. 

Transparency

Another concern is that AIIB-funded projects must have high standards of transparency in procurement that serve as an effective shield against corruption.

“Let everything be transparent, starting with the bidding process,” says Alberto Acosta Burneo, editor of economics publication Análisis Semanal. “Many of the funding contracts were tied to the hiring of certain operators and builders, without necessarily holding a competition to see which operator had the best offer,” he added.

Acosta also said that projects must comply with laws on accountability so that citizens can access details of the hiring process and complete documentation in order to avoid making the same mistakes.

“At the end of the day, there was no accountability in projects that were oversized and unnecessary – or poorly conceived,” he said.

Garzón said there should be “broad and participatory oversight” from projects by Ecuadorean civil society, along with Chinese regulatory bodies such as the Chinese Ministry of Commerce, the National Development and Reform Commission and the State Assets Supervision Commission, which oversee Chinese investments.

For Garzón, oversight bodies should be setup during the loan approval process and remain throughout the implementation of projects, from the time they are formulated until the works are delivered and the loans repaid.

In such a situation, any AIIB-funded project with its first Latin American partner would meet the highest social, environmental and good governance standards.

Unlike other Chinese institutions whose lending criteria is somewhat secretive, the AIIB prides itself on operating under a policy of greater openness. “Good governance is our hallmark and we strive to operate with the highest possible standards of transparency and accountability”, says its website, which has published risk management and environmental and social frameworks.

The AIIB also has a mechanism for receiving complaints from people who claim to be affected by one of its projects, or who know of irregularities.

The Ecuadorean government is optimistic about joining this multilateral bank: “It is essential for the advancement of infrastructure projects, with resulting benefits for thousands of citizens, in addition to the possibility of accessing a source of funding favourable to the country”, a recent statement from the finance ministry read.

Diálogo Chino requested an interview with officials at the Ministry, but received no response.