The Asian Infrastructure Bank Represents a New Standard
Hayden Kim, Dartmouth Business Journal
The Asian Infrastructure Investment Bank (AIIB), a multilateral development bank (MDB) that aims to support the building of infrastructure in the Asia-Pacific region, has quickly filled a vacuum left by traditional MDBs that have become bloated and inefficient. Since the 2008 financial crash, traditional multilateral development banks have neglected their duties to guide and fund developing nations. Given the ineptitude of the administration-heavy MDBs and the failure of the banks to account for every developing region, AIBB has been forced to find innovative solutions to typical MBD problems, such as “often slow and overly bureaucratic ways of the traditional lenders and their slow pace of representational and operational reform,” according Gregory Chin in an article about the AIIB.
For most MDBs, board structures revolve around a host country. In the case of the International Monetary Fund (IMF) and the World Bank, the board structures center around the United States, which developing nations to adapt a similar board configuration. In contrast, the AIIB does not revolve around a host country, allowing the bank a more flexible transition between countries, directly tailored to their needs. This fluidity is innovative in that it allows other nations to take initiative and adapt the AIIB to future scenarios, preventing one nation from controlling a dominating share of the bank.
There are critics who reject the structure of the AIIB. Currently, China has a 28.7 percent voting share in the AIIB, which suggests the country may use its influence in the AIIB to push its political ideologies and shut down dissenters. However, to assuage these fears of a dominant national influence, Chinese officials in Beijing offered to forgo veto power and reduce their own voting shares to less than one-quarter (if the United States or Japan agreed to join). While neither country joined the AIIB by the opening deadline, President Jin Liqun was quick to assert China will forgo its veto ability anyway to reassert the AIIB’s objective of creating a bank that is “inclusive and transparent” with a focus on the “achievement of common development.”
Perhaps the most polarizing feature of the AIDD is that it “functions on a non-resident basis,” according to Gregory Chin, a professor of political science at New York University. In general, the role of a resident board is to act as another layer of control over management. The AIIB has no need to follow this antiquated practice, as resident boards in various MDBs act as a political check on every decision taken, which confuses the line between board and management. By streamlining the resident board, which accounts for between 3 percent and 7 percent of operating budget in conventional banks, the AIIB can allocate greater funding to other operations. In the World Bank, for example, the resident board costs about $70 million annually, creating an environment in which “resident boards often slow down decision-making, sometimes unnecessarily…having nonresident boards may help to streamline decision-making processes,” according to David Dollar of the Brookings Institution.
In terms of significance to developing member nations of the AIIB, the innovative capital structure of the AIIB is the most tangible difference between the AIIB and other traditional MDBs. The AIIB’s initial capital base of $100 billion indicates it is a medium-size MDB. In comparison to the Asian Development Bank’s (ADB) capital base of about $160 billion and the World Bank’s $223 billion, the AIIB’s capital base seems insufficient and lacking. However, the AIIB spans the gap between capital bases through its capital structure set up. For reference, shareholders pay MDBs through either paid-in capital or callable capital. Paid-in capital is the payment of the capital to the MDB from the onset, while callable capital is compromised of the funds that shareholders agree to provide when necessary. Callable capital acts as an I.O.U. where the promised number of funds is only given up when needed for a project. Paid-in capital is the preferred form of contribution to MDBs as it speeds up the loan process and distribution of capital for projects.
Most MDBs have approximately a 5 percent paid-in capital fund, limiting the bank’s efficiency and speed on development projects. In contrast, the AIIB’s larger 20 percent paid-in capital fund exponentially raises their efficiency, allowing the AIIB to ramp up lending quickly. To give context, the ADB has an immediately available fund of $8 billion, the World Bank has $11.2 billion and the AIB holds a paid-in capital fund of $20 billion. This gap only increases every year with nearly 30 nations waiting to join the AIIB while the World Bank’s and ADB’s growth has stagnated. In projects where time is of the essence, AIIB’s innovative capital structure allows them to be efficient in lending and project developments, whereas other MDBs would delay payments and projects until all the necessary capital has been acquired from the callable capitals of shareholders.
Some critics argue that this structure only allows China to funnel money into its allies even more efficiently. However, based on the AIIB’s recent projects in India, whose industrial rise directly threatens China’s economic dominance, this is not the case. In the bank’s first two years of operation, half of all proposed projects are in India, ranging from highways to power plants. In addition, there are multiple projects in indirect rival countries, such as NATO ally Turkey and NATO partner Georgia.
In response to growing concerns of China’s historical struggles with sustainability, AIIB officials were quick to assert that the AIIB will be “lean, clean, and green.” To this end, the AIIB has published the “Environmental and Social Framework (ESF),” which it invited environmental organization to review and improve. In addition, the AIIB reassured shareholders that its operations would satisfy the latest international agreements on sustainable development, such as the 2015 Paris Agreement on Climate Change and the United Nations 2030 Agenda for Sustainable Development.
A key defining factor of the AIIB is the types of projects it takes on. Since the 2008-2009 financial crash, MDBs have refused to fund large infrastructure in developing nations, preferring risk-averse loans in stable countries. Even by the 1980s, MDBs had started shifting their focus away from large infrastructure projects and towards the development of less capital-intensive investments, like legal and political ministries. Under the overwhelming support of developing nations, the AIIB will focus on “big-ticket investments” such as power plants, highways and railways, which will greatly improve the quality of life for citizens. This investment strategy puts the power of the bank into the hands of the member nations, where the benefits will be reaped by millions of citizens.
While the AIIB has multiple innovative features that are not seen in existing MDBs, its most important aspect is giving a voice to previously underserved developing nations. Although still a relatively young bank, the AIIB represents a new golden standard that can be summarized by its modus operandi: “lean, clean and green: lean with a small efficient management team and highly skilled staff; clean, an ethical organization with zero tolerance for corruption; and green, an institution built on respect for the environment.”