AIIB Now Comes the Hard Part

    摘要:Last month the Asian Infrastructure Investment Bank (AIIB)filled its senior management roles, following news reports of Chinese concernsabout the qualifications of the candidate put forward by the United Kingdom.Getting through this political minefield with a respectable slate of Asiantechnocrats and Western ex-officials was the first of what will be manychallenges President Jin Liqun and the fledgling bank will face in the comingmonths and years. Most analysis of the AIIB has focused on concerns aboutcommitment to environmental and resettlement safeguards, but there are in factmany greater challenges the new institution faces.

First, let’s look at the positive contributions the new bankcan make. The additional capital that the AIIB brings to the table forinfrastructure financing in Asia, while helpful, is not the most important ofthese. A $100 billion bank would probably fund about $20–$25 billion ofprojects annually, roughly the same order of magnitude as supplied currently bythe Asian Development Bank (ADB) and World Bank in Asia each. This is a drop inthe bucket of the $700–$800 billion the region needs for infrastructuredevelopment each year.

More important than the additional capital is the opportunityto build from scratch a better development bank. Indeed, President Jin bringsto his new job valuable experience as both a lender of development assistance(as vice president of ADB) and a borrower (as China’s vice minister offinance). The AIIB is an opportunity to experiment with different governanceand operational approaches. Many have criticized China for forgoing a residentboard, for example, but it is arguably worth trying, given the downside risk ofhighly politicized resident executive directors micromanaging the institution.

Speedier project preparation, approval, and implementation isclearly an area for improvement in the existing multilateral development banks(MDBs). China is arguably the most effective borrower in the world in preparingand implementing development projects. Solid project management, use of localdesign institutes, and strong local buy-in result in faster, cheaper, andbetter project execution, without sacrificing the quality of environmental andresettlement safeguards. The AIIB can see if the China experience is replicablein other borrowing countries.

The AIIB can also pioneer new approaches to working with theprivate sector, particularly long-term capital from pension funds and insurers.The bank may be forced to do more lending alongside the private sector as thedemand for traditional sovereign lending is likely to wane in the coming yearsdue to rising public debt levels and higher interest rates. Asian borrowingfrom MDBs exploded from 2004 to 2008 as countries started investing ininfrastructure again following years of austerity in the wake of the Asianfinancial crisis, but now fiscal space is tightening. In fact, China hasreportedly already faced growing resistance to sovereign borrowing from CentralAsian countries for the One Belt, One Road initiative.

The challenges facing the AIIB are mainly how to deliver onthese opportunities. Let me touch on seven challenges.

Human Resources:Building an effective institution with good staff and goodgovernance is President Jin’s number one challenge. The task starts at the top.The process of apportioning the lead management positions among keyshareholders is inherently political and enormously distracting. Some MDBleaders are more successful than others in insisting on merit. As World Bankpresident, Robert Zoellick found excellent officials like former financeministers Sri Muliani and Ngozi Okonjo-Iweala, who provided talent, emergingmarket representation, and gender diversity. But often the process devolvesinto a political scrum and tokenism, with the result that less-than-qualifiedpeople end up in senior positions in MDBs. The process demotivates permanentstaff and erodes the institution’s credibility. President Jin will have to workhard to balance the interests of shareholders while assuring high-qualityleadership and staff—beginning, not incidentally, with his own government.

Another human resources challenge will be location. Beijingis a world-class city, but its pollution, traffic, and restrictive Internetaccess will make it tough to attract good candidates with families. The AIIBwill also find it difficult to attract investment bankers and lawyers, criticalto boosting private-sector operations.

Cost of Funds:The AIIB can operate initially by lending its paid-incapital, but at some point it will need to go to the market to float bonds. Itslending rate will be linked to the price it has to pay on those bonds plus amargin to cover the cost of the institution. The AIIB is likely to face a lowerprice for its bonds than the other MDBs and will have higher costs than theADB, so its lending rates are likely to be higher, which could be a competitivedisadvantage.

Creditor Status:A related problem is the AIIB’s creditor status and how thatrelates to its creditworthiness. The World Bank and ADB enjoy an informal“preferred creditor” status that is not likely to extend to the AIIB (this willdepend on the attitude of borrowers). That will make it vulnerable to sovereigndefaults and raise its cost of capital as investors factor its creditor status intotheir pricing. In this context, it will be important for the AIIB to pay closeattention, in contrast to past Chinese bilateral lending, to WorldBank/International Monetary Fund debt sustainability analyses.

Private-sector Operations: Public-private partnerships (PPPs)and other private-sector lending are far more complicated than sovereignlending. PPPs take more time, need expertise that many MDBs do not have, areprone to corruption, and require a sound regulatory framework. What will be theAIIB’s role in improving the governance around PPPs? President Jin will have toresist pressures from his members, starting with his own government, to dodeals that benefit business interests but may not make sense from a commercialor development point of view.

Conditionality:China has led criticism of Bretton Woods institutions forconditioning lending on policy reforms. Though the AIIB will probably notundertake policy loans, it will still face the problem of how to improvegovernance and policy needed to make infrastructure investment work. Forexample, a power project cannot succeed without an effective energy policyframework governing off-take and pricing. A water project cannot work unlessfarmers pay enough for water. China has not been a fan of policy loans tosupport reform, but interestingly, it has recently agreed to its first policyloan with the ADB. Could this be an attempt to prepare the ground for areversal of China’s “hands off” approach to policy assistance in the AIIB?

Country Ownership:Country ownership is the central tenant of the ParisDeclaration on Aid Effectiveness (2005). Putting countries in the driver seatto draw up their country strategies, identify projects to be financed, andimplement those projects is sound theory, but weak capacity, a highlypoliticized decisionmaking process, and corruption make true country ownershipof development highly problematic in practice. The answer is technicalassistance to improve capacity and the policy framework. Will China’s outspokensupport for country ownership lead to failed projects because local capacity issimply not up to the task? Will it invest in capacity building? If the latter,how would it fund that training?

Safeguards:The AIIB’s approach to environmental and resettlementsafeguards has received the most attention to date. I don’t doubt PresidentJin’s commitment to international standards, but meeting those standards whilestreamlining the project process will be a major challenge. The bank will havescant resources, particularly in its early days, to ensure compliance. Equallyproblematic is China’s uneasy relationship with nongovernmental organizations,which are the main monitoring entity for MDB compliance globally and bestinsurance to stop small problems from becoming big ones. The AIIB willinevitably have a slip or two on safeguards, as all MDBs have had. What mattersis attitude and commitment, not an impossible zero tolerance threshold.

What are the prospects for AIIB dealing effectively withthese challenges? So far so good. President Jin has announced that he willfollow international safeguards, will cofinance and otherwise work closely withthe existing MDBs, will push for more private-sector lending, and may open thebank to worldwide procurement (which the ADB shamefully has not). He has inplace what appears to be a workable arrangement for the board and is hiringsome good staff. He has wisely forgone the ADB’s policy of forced retirement atage 60 and is picking up experienced retirees from the ADB and World Bank. Runningan MDB is tough work. Though the U.S. government took some time to get to theright place, I hope Washington will continue to wish President Jin and the AIIBwell in undertaking its critical but very difficult mission.

Larry Greenwood is a senior adviser(nonresident) with the Simon Chair in Political Economy at the Center forStrategic and International Studies in Washington, D.C., and a former vicepresident of the Asian Development Bank.

Commentary is produced by the Centerfor Strategic and International Studies (CSIS), a private, tax-exemptinstitution focusing on international public policy issues. Its research isnonpartisan and nonproprietary. CSIS does not take specific policy positions.Accordingly, all views, positions, and conclusions expressed in thispublication should be understood to be solely those of the author(s).