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The Asian Infrastructure Investment Bank gears up



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The Asian Infrastructure Investment Bank gears up

Posted 6/01/2016 by Cameron Hill

In anticipation of the commencement of operations in 2016, the Asian Infrastructure

Investment Bank (AIIB) has been increasing its engagement with potential clients and

development partners. The AIIB is one of three major new infrastructure financing initiatives

led by China—the other two are the New Development Bank and the Silk Road Fund. The

AIIB will have a total authorised capital of US$100 billion and initially aims to lend between

US$10 and US$15 billion a year.

The AIIB’s incoming President, China’s former Vice-Minister for Finance, Jin Liqun (pictured),

has recently met with the heads of the Asian Development Bank (ADB), the World Bank, and

the European Bank for Reconstruction and Development. Mr Jin has also visited several

potential recipient countries—including Indonesia, Bangladesh, and Pakistan—where it is

expected the AIIB will play an important role helping meet infrastructure funding

gaps. Indonesian officials have expressed an interest in accessing US$1 billion in AIIB

financing, including for coal-fired energy projects. Chinese state media reports that Burma

is looking to the AIIB to fund priority projects, as is Thailand.

Regional financing needs are enormous. In 2009, the ADB estimated that between 2010 and

2020, Asia needs to invest approximately $US8 trillion in national infrastructure. Ambitious

connectivity initiatives such as China’s ‘One Belt-One Road’ concept (OBOR, see map) and

the Greater Mekong Sub-region (GMS, see map) network will also require the mobilisation of

substantial levels of public and private capital.

In helping meet these needs, Mr Jin has promised that the AIIB will be characterised by a less

bureaucratic and ‘leaner’ decision making structure than that of the established multilateral

development banks. The AIIB Secretariat is recruiting staff, with a focus on experience in

‘investment finance, infrastructure development, treasury operations, administration,

monitoring and evaluation, and management’. Significantly, unlike the ADB and the World

Bank, the AIIB will have a part-time, non-resident board of directors, an arrangement that

will likely enhance the autonomy of the bank’s Beijing-based managers.

Nevertheless, the AIIB is unlikely to be fully immune from the challenges that bedevil its

established counterparts. Many of the countries that comprise OBOR rate high on

assessments of levels of security, political and legal risk. In GMS countries such as

Cambodia and Myanmar, some of China’s infrastructure investments have been a source of

political contention. Assessments of credit risk and moral hazard will require meticulous

due diligence, as will implementing members’ agreement that the AIIB’s social and

environmental standards ‘should be based on international best practices’. The AIIB

released draft standards for consultation in August 2015. Other challenges include building

the capacity of local officials charged with implementing large-scale projects, allowing

adequate time for project preparation and design, and ensuring transparent procurement

arrangements. Mr Jin has stated that the AIIB will have a ‘zero-tolerance’ approach to

corruption.

Seen in the light of these challenges, claims that the AIIB will simply be a vehicle for

pursuing China’s regional economic and strategic objectives become harder to

sustain. While China will have the largest voting share (see table), Beijing’s ability to pursue

its own agenda through the AIIB will be tempered by the complexity of lending operations,

the scrutiny that will inevitably surround the implementation of agreed standards and

safeguards, and the strictures of the multilateral form. For these reasons, China will

continue to pursue infrastructure investment opportunities outside of the AIIB framework,

including through state-owned enterprises.

Nevertheless, the AIIB represents an important platform for Australia and others to engage

with China on regional development issues. After some debate, in June 2015, Australia—

along with 49 other founding members—signed the AIIB’s Articles of Agreement. An

additional seven members have signed subsequently. As the Parliamentary Library noted at

the time, the Australian Government’s decision to join the AIIB was supported by the Labor

Opposition and the business community. The Australian Government will contribute

US$738 million (approximately A$932 million) paid-in capital to the AIIB over five years and

will be the sixth largest shareholder.

Australia has a long history of working with the established multilateral development banks

to improve aid effectiveness in small island and ‘fragile’ states and, more recently, to

strengthen social safeguards in areas like resettlement and HIV/AIDS prevention.

Australia is also gaining some experience working with China on development issues. In

2013, China and Australia signed a Memorandum of Understanding (MOU) on Development

Cooperation. This MOU provides the basis for a new joint program to combat malaria in

Papua New Guinea.

The lessons that have emerged from this interaction, albeit tentative, in the field should

assist Australia’s efforts to influence Beijing, other board members, and the bank’s

management as the AIIB commences operations.

Tags: Foreign affairs ODA China