I welcome the Minister of State at the Department of Finance, Deputy D'Arcy.
Asian Infrastructure Investment Bank Bill 2017: Second Stage
Question proposed: "That the Bill be now read a Second Time."
This Bill, if approved by the Oireachtas, will allow for Ireland's membership of the Asian Infrastructure Investment Bank, AIIB. It will provide for the approval of the articles of agreement of the AIIB and payments associated with our membership to be made to the bank.
The AIIB is a new multilateral financial institution which will promote economic development and regional integration in Asia, specifically through investment in infrastructure. The bank commenced operations in January 2016 with 57 founding members, including 14 EU member states, and has now grown to 80 approved members. The establishment of the bank was primarily a Chinese initiative and it is headquartered in Beijing.
A Government decision in December 2015 allowed the Department of Finance to commence formal negotiations with the AIIB secretariat on Ireland's potential membership of the bank. Following this, Ireland made a formal application for membership of the bank in January 2017, which was accepted in March. Ireland must now fulfil a number of requirements before our membership of the bank is complete. Most significantly, our membership of the bank requires ratification of an international agreement, namely, the articles of agreement of the AIIB. Our membership will also involve a capital contribution to the bank. Article 29.5 2° 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. Traditionally, our membership of similar international financial institutions such as the World Bank and the Asian Development Bank has been provided for through the passage of primary legislation.
Why does Ireland wish to join the AIIB? A large part of the rationale is based on further strengthening our trade and economic links with Asia and, in particular, China, the world's second largest economy. This relationship has grown strongly in recent years and in 2015 Ireland's total trade with China was worth over €1.1 billion. This is an increase of 42% on the previous year. Clearly, this relationship is important to an economy such as Ireland's and even more so, given the desire to diversify our exports following the United Kingdom's decision to leave the European Union.
AIIB membership is also in line with Ireland's long-standing commitment to international development which has wide-ranging political support. Ireland's 2013 international development policy includes among its three core goals the aim to support sustainable development and inclusive economic growth - this is a goal which is closely aligned with the mandate of the AIIB. The standards adopted by the bank since its establishment reinforce the perception that it will be an effective driver of economic growth in the region, with sustainability firmly established as a core principle. It is also reassuring to see that the bank has worked very closely with other international financial institution's such as the World Bank, the European Investment Bank and the Asian Development Bank to adopt their best practices in relation to governance, organisational practices, project appraisal and safeguards.
The AIIB's mandate is to address the daunting infrastructure gap in Asia. The case for increasing investment in high quality infrastructure in the world’s fastest growing region is compelling. Research from the Asian Development Bank estimates that Asia will need to invest $1.7 trillion 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.
The bank was declared open for business on 16 January 2016 and approved its first loans on 24 June 2016. The authorised capital stock of the bank is $100 billion, with $20 billion in paid-in capital. The AIIB will broadly follow the model of other multilateral development banks, raising funds on international markets at competitive terms and channelling this into loans, guarantees and equity investments. Since it came into operation, the bank has approved over $2 billion in loans.
The AIIB currently has 80 approved members which are divided into regional members, that is, Asian countries and non-regional members, mainly European countries but also including countries such as Australia and New Zealand. Regional countries will hold 75% of the bank’s shareholding and thus contribute 75% of the capital of $100 billion, with non-regional countries holding 25% of the bank’s shareholding and contributing $25 billion in capital.
China is the largest shareholder in the bank and currently holds approximately 26% of its voting power. India is the second largest shareholder with 8% of total voting power, while Germany is currently the largest non-regional shareholder with over 4% of total voting power. The total voting power of all EU members is approximately 20%. 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, the Minister for Finance would be governor for Ireland at the bank. The board of governors meets formally once a year for the AIIB’s annual meeting. It elects a president for a term of five years. 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 12 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 12 directors. Upon joining, Ireland would be part of the euro area constituency and would be represented by the director for the euro area. The director and alternate director posts in the constituency will rotate between the members of the constituency. Ireland will have an opportunity to hold such a post in the future, although the specific details of the arrangement remain to be decided. Ireland will also hold an adviser position upon joining the bank, through which we will be able to attend meetings of the board of directors.
The bank operates primarily by providing finance in the form of loans. It may also make equity investments and provide guarantees. To date, it has approved 18 projects in nine countries, with focuses spanning from transport to energy to urban development. Some typical examples of projects the AIIB has financed to date include a $216.5 million loan for a national slum upgrading project in Indonesia, to be co-financed with the World Bank, a $165 million loan for a power system project in Bangladesh and $329 million loan toward a road project in Gujarat, India. Three quarters 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 co-operate constructively with other international financial institutions. Both the World Bank and the AIIB have recognised 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 co-operation and knowledge sharing between both institutions. This co-operative approach with existing development banks and an emphasis on adopting their best practices has been a priority for EU members of the bank. They have used their influence to ensure the AIIB develops and maintains rigorous policies in terms of investments and lending, environmental and social safeguards, as well as governance, transparency and organisational matters. The bank has been highly receptive to discussions on standards and safeguards. It has made a clear commitment to being lean, clean and green and to adopting best practices. If Ireland becomes a full member of the bank we will, in co-ordination with like-minded members, endeavour to ensure the AIIB lives up to this commitment.
The expected cost of membership for Ireland will be a total of approximately €25 million, paid in equal annual instalments over five years. 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. Each share has a value of $100,000. 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 referred. In general, callable capital represents the capital for which a member country would be liable 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 €25 million would also be broadly in line with our contribution to other international financial institutions relative to their size. For instance, in the World Bank, taking into account the bank’s global role, Ireland has paid-in capital of approximately €49 million, and in the Asian Development Bank Ireland has paid-in capital of approximately €15 million. 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. Ireland's contributions to the AIIB would also count toward the UN target of 0.7% of GNP for official development assistance, ODA. The programme for Government commits to continuing efforts to achieve this target as economic circumstances allow. In line with the bank’s focus on development and its emphasis on the less-developed countries in the region, a significant proportion of our contributions to the AIIB will count toward ODA. The OECD is the body with responsibility for granting ODA eligibility and in June 2017 it agreed that 85% of a member's contributions to the AIIB would be ODA-eligible. Therefore, fulfilling the financial obligations which our AIIB membership would bring will help us in respect of our 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 encourage Deputies to support the Bill and Ireland's membership of the AIIB. The bank will make a significant contribution to economic prosperity and regional integration in the world’s fastest growing region. This is a region which will be central to the 21st century and has a clear need for high quality investment and infrastructure. This investment will spur economic growth, benefitting not just Asia but the wider world. I believe Ireland should play an active role in the bank, shaping its policies in line with our principles and strengthening our ties in the region in the process.
I commend the Bill to the House.
I welcome the Minister of State back to the House for the second time today. I believe we will be seeing him regularly for the rest of the week.
Fianna Fáil is supporting the Bill. There are four Senators on this side of the Chamber, along with the Cathaoirleach and the Minister of State. The four Senators were on the finance committee when this Bill was discussed a number of months ago and it is nice to see a Bill coming through the finance committee and making its way into the system. I hope it will be passed on Thursday.
It is very important that Ireland be part of the new Asian Infrastructure Investment Bank. While Asia is geographically a long way from us and will never be the market that the United Kingdom is for us, regardless of Brexit, it is important that we look at rapidly growing markets further afield which are rapidly increasing in their monetary wealth per head. I do not believe any of us realise how vast China is. India and Pakistan, among others, are enormously large countries, with 600 to 800 million populations. China has over 1 billion people. A new power station opens in China every four days. There are markets and opportunities there. As a First World country, it is our responsibility to provide overseas development aid contributions and do our best to make a statement that we are interested in helping countries that are not as fortunate as our own.
The figures here are very small. It is €25 million paid in over five years, €5 million a year. We do many things which cost much more than €5 million and get considerably less scrutiny than we are giving this Bill. I do not want to repeat everything the Minister of State said in his very comprehensive speech. It is important to acknowledge that there are regional and non-regional members. Helping these countries is not bad for us as we are also getting involved. We are not just giving away money; we are investing in a bank that will invest in projects. By and large, the bank will be investing in projects it expects to generate a return. Its purpose is not just to give away money; it is to invest in projects. It is similar to the EIB but in an Asian context.
I believe we do €11 billion in trade annually with China. By comparison, the level of trade with the United Kingdom is between €1.2 billion and €1.4 billion a week. However, it is still a substantial amount of money and we should not ignore the area. The Bill needs to be passed. I will not go through the various articles of agreement, the operations, the finances, the board of governors and various other provisions. We did a lot of that at the committee. It was important that we did so. We went through it and looked at the benefits. It is clear from the Minister of State's speech that the Department has gone through much of this stuff. We scrutinised it. I am happy to support it. I look forward to it being passed this week, allowing Ireland to play a small but significant part in the Asian Infrastructure Investment Bank.
I welcome the Minister of State, Deputy D'Arcy, back to the Seanad. I wish to make a few observations on the Bill.
I understand Ireland will be required to invest €25 million. Does that provide us with a shareholding in the bank and what percentage shareholding does it provide? Our exposure in terms of the bank would be of the order of €100 million. It is covered on page 8. It is €125 million split between 80% callable capital and 20% paid in. The exposure would be up to €100 million. Obviously, the Department of Finance would have carried out due diligence. I ask the Minister of State to confirm this.
I understand we would be able to nominate a member to the board of governors, but when does the Minister of State anticipate that Ireland would have a member on the operating board, the board of directors? I think Ireland will have the opportunity to hold an advisory position, which will rotate between the members.
We live in a global economy. While I am not being parochial, obviously we have to look after our interests. We are putting €25 million of taxpayers' money into such an institution. What would be the opportunities for an Irish company to look for investment from the Asian Infrastructure Investment Bank? Would it be where an Irish company is looking to set up production in China? Would it be where a company might seek a joint venture with a Chinese company, exporting from Ireland into China? What opportunities does it present in an Irish context? I know it goes towards our ODA investment, which is to be welcomed. I want to bring it back to practicalities. I see the global context and the European-wide context in investing in developing Asian countries.
Many Chinese investors visit Ireland and many Irish companies are looking to get into China. China is the biggest market of all and is largely untapped. I see positives with the Asian Infrastructure Investment Bank. On a practical level, where does this present opportunities for Irish companies? I obviously commend the Bill.
I welcome the Minister of State back to the House. I know that it is really great to be here.
It is like the Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach all over again. I apologise to Senator Grace O'Sullivan who is the only one who is not on that committee.
I welcome the Bill. My party is an internationalist one and believes the State should play a full role in development across the world. Therefore, we support the Bill. It is striking that Ireland is happy to lend to developing Asian economies, yet we are so hamstrung here to invest in our infrastructure because of the anti-investment fiscal rules and the choices of Government in recent years.
We are a member of the World Bank and Asian Development Bank which are the American and Japanese-dominated development banks. Therefore, there would be no reason to shun the Chinese equivalent.
The big question is why we delayed. Why did we miss out on signing up as founding members and getting the benefits that go with it? This was a question pursued by my party colleague during the Dáil Stages but without any real answer. The agreement is clear that founding members enjoy special privileges in nominating and voting for directors. Most of our neighbours will have that privilege but we will not. We hesitated and dithered and were nearly left behind. By delaying our application for no good reason we have put ourselves at a tactical and perhaps financial disadvantage.
Perhaps the Minister of State will address the question as to whether American nervousness about this project was reflected in Irish tardiness. American Nobel Prize-winning economist, Joseph Stiglitz, believes that American nervousness should not have been an issue in stating:
In fact, America's opposition to the AIIB is inconsistent with its stated economic priorities in Asia. Sadly, it seems to be another case of America's insecurity about its global influence trumping its idealistic rhetoric - this time possibly undermining an important opportunity to strengthen Asia's developing economies.
What matters ultimately is that the right decision was made. Asia is a huge part of the world with massive concentrations of population. Its economic potential compared with Europe is very large.
Good trade links in agriculture and other areas with China in particular are essential to our export sector. As the Minister for Finance told the Dáil recently:
Bilateral trade has grown in significance and, in 2014, Ireland’s total trade with China was worth over €8 billion. Ireland’s priorities relate to bilateral trade and investment, particularly: higher education; agrifood; tourism; and aviation-financing sectors.
While the economic rationale for joining is clear, it should not be the only consideration.
I note the articles of agreement state: "The Bank shall ensure that each of its operations complies with the Bank's operational and financial policies, including without limitation, policies addressing environmental and social impacts". That is a very weak nod to those of us who argue for investment that respects human rights and environmental protection. We cannot ignore such issues when we are talking about what is effectively a Chinese bank. Many of the countries that are likely recipients of investment have issues with minorities or national rights that must be taken into account.
The European Parliament has noted: "So far the AIIB’s governance structures do not foresee adequate involvement of shareholders in project financing decisions, and that the publicly available project documentation lacks any detail on the fulfilment of the environmental and social measures that the AIIB requires from its lenders". While we should not shirk away from those questions, on this occasion I believe it is a case of being better off inside the tent.
Dr. Stiglitz stated: "Moreover, the need for environmental and social safeguards in infrastructure investment is more likely to be addressed effectively within a multilateral framework." Irish investment should be monitored to ensure our investment is not being pumped into projects that do not respect social, human and environmental rights.
The policy decision for me is clear, but we should not forget this is not just a matter of signing an agreement; we have to put our money where our mouth is. This is not an insignificant investment for a country the size of Ireland. It is only right that it be debated here and requires our approval. When we dealt with the Finance (Certain European Union and Intergovernmental Obligations) Act, which was originally titled the Single Resolution Board (Loan Facility Agreement) Bill 2016, Sinn Féin made the point which was accepted through an amendment that when we sign off on these international agreements it is not good enough to have the Dáil sign off once and then to have changes to what we agreed made without further approval.
There is a question of how practical Dáil approval for every change might be, but I would tend to err on the side of caution.
In the Single Resolution Board (Loan Facility Agreement) Act, the issue was that a call on the State to provide more money could be made beyond what was agreed without the Dáil having to approve such a change. We have strict rules over the money that can be spent in Bills, which I believe is an archaic system, yet when it comes to the international agreement a blank cheque can be written.
I note that because of the constitutional limitations, there is much tighter democratic control here, which I welcome. Development banks are good and we should use them more. Our take-up of the European Investment Bank, EIB, funding remains too low, even during a housing crisis, and there is a huge deviation between the current position on our capital investment and where it needs to be. The State investment arms are not necessarily doing the maximum they could be doing, for example, we could be tapping into greater funding from the EIB. However, we support the Bill which we welcome.
I welcome the Minister of State. The Bill is very welcome. It is good to see Ireland engaging in the global challenge of providing the infrastructure for sustainable development and co-operation with a wide range of other countries. It is in line with our policy for international development and our commitments to human rights and climate justice. However, Ireland’s strong international development policy and our commitment to food security in developing countries makes our failure to address climate issues at home even more embarrassing.
The Asian Infrastructure Investment Bank, AIIB, is a more inclusive institution that moves away from western-led world governance to east-west co-operation. As a result, it has the power to influence and shape globalisation for the better. It is vital that the AIIB practises what it preaches and is held to respecting human rights and the right to sustainable development.
The establishment of a new bank is an opportunity to learn from the mistakes of other international development banks such as the World Bank. Unfortunately, in the name of development, mistakes have been made and grave injustices committed. Actions have been taken in developed countries like Ireland, but even more so in developing countries, which have not respected human rights and have damaged the natural environment on which we all depend.
International financial institutions have frequently been the plunderers of fossil fuel investments, mega-dams and other projects that have dispossessed local indigenous populations, destroyed local environments, reduced biodiversity and increased greenhouse gas emissions. As an example, the International Finance Corporation, IFC, the World Bank’s private sector arm, has funded some of the South-East Asia and Pacific region’s most destructive projects, contravening the IFC’s performance standards and its own social and environmental guidelines. These projects include mega-hydropower dams in Vietnam and Cambodia, dirty coal fired power plants and mines in the Philippines, Vietnam and Myanmar, and massive industrial land grabs in Cambodia and Laos.
The AIIB has made commitments to human rights and protecting the environment, but, as the Minister of State will be aware, the difficult part is putting the commitments into practice and working out sustainable development on the ground. As an example of the difficulties of practical application, the independent watchdog of the International Finance Corporation, the Office of the Compliance Advisor/Ombudsman, found systemic non-compliance by the corporation with its own policies and procedures across all stages of the investment process.
All the signs are that the AIIB is coming up against real challenges. The AIIB is just getting going, but already there are debates between AIIB members, some of whom, astonishingly, want the bank to fund coal and nuclear power. In Ireland, we have had our own experiences of communities divided by fossil fuel infrastructure projects. We have learned that local Irish communities must be included in the decisions made about them. We must apply this learning abroad and ensure communities in developing countries are not similarly undermined by projects funded by Irish investments.
As one of its international priorities, the Department of Foreign Affairs and Trade was due to publish its National Plan on Business and Human Rights in the first quarter of 2017. The plan is aimed at implementing the 2011 United Nations Guiding Principles on Business and Human Rights. It will provide Irish companies with guidance on how to ensure respect for human rights in their activities at home and abroad. The action plan aims to also build on Ireland’s national plan on corporate social responsibility, which was published by the Department of Jobs, Enterprise and Innovation in April 2014. In that context, it is welcome that Ireland is bringing its voice and its strong international development policy to the AIIB. The AIIB can benefit from the work of the Department of Foreign Affairs and Trade in the areas of business and human rights.
At the Department of Foreign Affairs and Trade NGO forum on business and human rights in November 2014, the then Minister for Foreign Affairs and Trade, Deputy Flanagan, stated:
Ireland has an opportunity to become a leader in the area of business and human rights. However, I worry that the current delay in publishing the National Action Plan will have implications for financial investments under the AIIB.
The concept paper Public Development Banks: Towards a Better Model, published in April 2017 by Eurodad, argues that private investment can have positive outcomes, but historically, infrastructure development has been primarily publicly financed. Multilateral development banks like the European Investment Bank, EIB, and the World Bank must prioritise development outcomes over profit to lift countries into the position of being able to build their own infrastructure rather than being reliant on private investment whose interests may align with profit over the public good.
Ireland, having once been a colonised country with a commodity export dependent economy, well understands the need for independence in setting a country’s priorities. We can play a mediating role in ensuring the AIIB supports infrastructure development that benefits communities and helps countries transition to a sustainable and beneficial development model away from a commodity-dependent development trajectory.
The purpose of our amendment is simply to ensure we in the Oireachtas give the Minister a clear mandate to operate on the basis of our existing policies. It makes good sense that the environmental, climate and human rights principles we develop for Irish companies operating in Ireland and abroad should be applied to our financial investment activity overseas. The amendment, in setting out our mandate, starts by emphasising three main areas of concern, namely, human rights, climate change and biodiversity. Our amendment also mandates that Ireland promote, in the work of the bank: the development of human rights and other environmental safeguards to achieve the objectives; the implementation of effective remedies for failings; the operation of due diligence processes and public consultation with affected or potentially affected communities; and the implementation of international standards relating to responsible lending and borrowing.
The second subsection requires the Minister to report annually to the Dáil on membership of the bank and the steps taken in accordance with the first subsection. The amendments will strengthen Ireland’s reputation as a mediator on the international stage in regard to development, business and human rights.
I will start with the issue of the protection of human rights and the environment. A development should not be at the expense of vulnerable communities or the environment. We will work to ensure the bank has a positive impact in that regard.
The bank's environmental and social framework released in early 2016 recognises and makes provision for issues such as climate change, gender, biodiversity, resettlement, labour practices and indigenous peoples. The true test of such a framework will be its implementation. However, it is an important building block and a notable public commitment to which the AIIB can be held accountable.
Regarding measures to combat climate change in particular, the AIIB has an opportunity to make a major contribution. Through its focus on infrastructure, it can lay the foundation for a transition to more suitable, sustainable economic growth. That is particularly important in a region such as Asia which already accounts for 60% of the world's population. Every year the population of Asia increases by 42 million people.
The AIIB is clearly aware of the role it can play in this regard and has committed to being a green bank. It recently released its energy strategy which promises to uphold the Paris Agreement on climate change and assess its clients in meeting its targets under the agreement.
There was also the issue of reporting and oversight. The Government is cognisant of the importance of transparency and openness in the use of Government funding and will endeavour to ensure there is an appropriate level of reporting and oversight. I will consider what the Senators have said.
I wish to clarify the issue of the State being out of pocket by not being a founder member. The State is in no way disadvantaged financially by joining the AIIB now as a regular member rather than having joined as a founding member. Each share in the bank has a par value of $100,000. Ireland would have paid the same amount per share, irrespective of the day on which we joined or our status in doing so. As the Minister for Finance outlined to the Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach, it is true that had Ireland joined as a founding member, it would have received an additional 600 founding member votes. However, voting rights are not equivalent to shares and do not determine the extent of our financial commitment. In the event that any income of the bank is distributed to members, it will be distributed in proportion to the number of shares a member holds. I will try to ensure I respond to any question I am unable to answer or that I have missed on the next Stage.
With regard to Senator Kieran O'Donnell's questions, our shareholding will be 0.14%. A sum of €100 million will be callable but our experience with other financial development banks is that these moneys are never called. While one can never say never, there is some risk, but we consider that risk to be negligible. I do not have the answer to the question about becoming a member of the board. Opportunities for Irish companies will most likely be in the services sector. We have a strong service sector in construction in respect of quantity surveying and civil engineering. The funding streams the AIIB will operate will be similar to the European Investment Bank. Equity funds that are based all over Europe are used to establish the funding requirements of financial development banks of this type. Financial services, quantity surveying and civil engineering would be the likely sources of opportunities.
Question put and agreed to.
When is it proposed to take Committee Stage?
Tomorrow.
Is that agreed? Agreed.
Committee Stage ordered for Wednesday, 19 July 2017.
When it is proposed to sit again?
At 10.30 a.m. tomorrow.
The Seanad adjourned at 7.45 p.m. until 10.30 a.m. on Wednesday, 19 July 2017.