AIIB set to play role in development

The early part of 2018 marked the second anniversary of the founding of the China-led Asian Infrastructure Investment Bank (AIIB). With the intention it was created, many are still debating whether it will be something very different from existing multilateral financial institutions or development banks like the World Bank or the Asian Development Bank (ADB).

The debate is gathering momentum as the AIIB would like to enter the trade in terms of granting loans for infrastructure projects, the very purpose for which it was created. The intention behind the creation of AIIB is to oversimplify the challenges for setting up a new multilateral development bank from scratch. The World Bank has been in operation for over 70 years, having more than 120 offices around the world and had around 12,000 total full-time staff members in 2017. In comparison, AIIB, till the middle of June 2016, had 39 staff members and anticipated a total staff of 100 by the end of that year.

With such meagre presence, AIIB will take some time before it can match the lending scale of those with a long history. Robust multilateral institutional foundations and practices take deep roots with enormous planning, strategy and activity. In fact, the AIIB is setting up its plan of declaring the period 2016–2020 as its “startup phase” and 2021–2027 as its “growth phase”. This gradual approach is somewhat in sync with China’s overall style of pragmatic economic reforms and opening up that it launched in 1978 and continued thereafter.

As the AIIB gears up, certain features that allow for institutional experimentation seem to be moving into place. The AIIB currently follows the advice and directions of its president JinLiqun, who is trying to inculcate some creative spirit, and determined to see that AIIB neither becomes a clone of the World Bank nor a copy of the ADB. Instead, it should review and absorb good experiences and strive to build a multilateral financial institution with advanced 21st-century governance concepts.

The current aim of the AIIB leadership is to reduce administrative costs and loan approval times. To make this happen, the AIIB Board of Directors are unpaid and non-resident. Even bidding for AIIB projects is not confined to member countries. On environmental and social safeguards, some have expressed concerns over the AIIB’s reliance on corporate and country reporting systems, but others believe this could promote greater borrowing capacity in recipient countries and promote holistic development.

What possibly haunts the minds of policymakers at AIIB is how to effectively can they handle AIIB’s loan capacity and loan conditions. Can the bank strike a balance between high-standards and safeguards on project loans while improving the speed and size of loan dispersion without resorting to strict policy conditionalities? If such provisions are allowed and fail in its attempt, will it then give rise to another Asian financial crisis, if not a global financial crisis of that magnitude?

Too early

As AIIB’s mandate is to participate itself considerably in developmental goals of various economies, it ought to be liberal in nature. It may be too early to assess these aspects, though China is clearly far less willing to impose wide-ranging policy conditionalities than that of other multilateral development banks.

The articles of agreement of AIIB also covers provisions for a “special funds” mechanism, whereby funds are managed by the AIIB, and they can be channelled into AIIB infrastructure projects and are held separately from the organisation’s shareholder equity. The idea is that outside public and private investors can contribute resources to these special funds. In fact, to take this initiative forward, already China has created several stand-alone investment vehicles, such as the Silk Road Fund, the China–Africa Development Fund and the China–Russia Regional Development Investment Fund, which collectively have a target fund size of almost $ 100 billion. These efforts are building blocks that will help create a China-led global development framework.

Most of these vehicles have received their capital from China’s national development banks, which in turn leverage the equity capital received from the country’s foreign exchange reserves to raise cheap financing from domestic capital markets.
It looks apparent that at some point, some of these various vehicles could selectively finance AIIB infrastructure projects through a special funds mechanism, especially as the organisation garners further expertise managing projects in different regional settings.

Such an inclination to experiment with innovative financial arrangements could allow the AIIB to improve upon the existing multilateral development bank practices, at least in terms of extending large and rapid infrastructure project loan dispersions. With the motive and intention of creating a better financial development institution compared to the World Bank and ADB, the AIIB may develop into a more liberal development bank over time with its truly distinctive operational features.

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(The author is currently professor, LBSIM, and former senior faculty at IIFT, Delhi)