Monday, 10 November 2014

China's Bank proposal

There is little reason for Australia to fund a new multinational government-owned bank. Not only would the Asian Infrastructure Investment Bank (AIIB), proposed by China, be expensive at a time when budget funds are limited, but it would be contrary to our basic policy of supporting the private banking sector.

So far, 21 Asian region countries have signed a Memorandum of Understanding to establish the AIIB but no one knows the details except that the Chinese like the European Investment Bank (EIB) model. The Chinese should think again about their model. Having spent six years as the Australian representative at the European Bank for Reconstruction and Development (EBRD) and having watched the EIB at close range, Australia should not be involved of either of them.

Apparently, Australia was about to agree to our involvement in the AIIB but the Cabinet decided against the proposal  after pressure from the US. But that may not be the end of the matter.

Australia is already a member of the Asian Development Bank and the EBRD. At one point, I persuaded Treasurer Wayne Swan to sell our shares in the EBRD because the bank had done its job.  However, he was overruled by Kevin Rudd, who thought we needed to keep our shareholding to help us win a seat on the UN Security Council. Rudd also wanted Australia to join the African Development Bank (AfDB) but eventually the Coalition wisely dropped that idea. Needless to say, Australia got onto the Security Council regardless of the AfDB, which proved that retaining our shares in the EBRD was also unnecessary.

The EIB is a classic example of how multinational banks are run by the staff for the staff, with very generous remuneration, minimal accountability to taxpayers and a determination to build its own empire.

Originally the EIB was established to fund projects in poor countries like Italy as a quid pro quo for the Italians and others to join the European Union. However, contrary to the original intentions, bigger economies like Germany and the UK gained more and more of the funds. EIB funding in the UK economy in 2013 was €5.8 billion($8.4 billion), with €7.8 billion for France and €7.45 billion for Germany.

The EIB is also not alone in breaching its mandate.

The EBRD was established to support those countries previously behind the iron curtain. The mandate was to promote the private sector and democracy, and not to compete with private banks. Today, the EBRD regularly lends money to Russia.Russia is not democratic, it has no qualms in funding oligarchs, it does not run a free market economy, and to add insult to injury it waged war against Ukraine and its actions  led to the loss of many Australian lives. Egypt is another example of a broken mandate. Egypt was never behind the iron curtain, but it is now a beneficiary of the EBRD, it's not democratic either and it has an Australian journalist in  jail on trumped up charges.

I spent six years with the EBRD. The bank was largely run by the French and the Germans, who had about 8 per cent each. The biggest shareholder was the United States with 10 per cent, but even the Americans were regularly ignored by the Europeans. The Board of the EBRD is more like a meeting of the United Nations than a meeting of a bank: it has  more than 40 directors and alternates.  Many of the directors are on a tax-free merry go round with pensions from the bank as well as their ministry. For many, the gravy train starts at the EBRD for three years, then a few years at the EIB, then one or two of the other banks and then return to the EBRD as an executive director. Accountability is weak:  too often decisions are made by political compromise and in breach of the mandate. In my six years at the EBRD, there was not one case where the board was able to overrule a staff recommendation.

The AIIB would be capitalised at about $US50 billion ($58 billion). I surmise that participants would put in about $US10 billion; we would get about 5 per cent of the shares and would be liable to be called for the rest. Our upfront cost would therefore be about $500 million.  

I hope that the government does not change its mind on the AIIB. But if it does change, it should ensure that our money is not just gobbled up and never seen again and never acknowledged. To achieve at least something, the government should demand that the AIIB pay an annual dividend, demand commercial rates on loans, commit to not competing with private banks and provide that any government can sell its shares at any time on the open market.

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