Three ma­jor chal­lenges AIIB must over­come

China Daily (Hong Kong) - - VIEWS -

Moody’s In­vestors Ser­vice gave the Asian In­fra­struc­ture In­vest­ment Bank its high­est pos­si­ble rating of Aaa, with a sta­ble out­look, on June 29, be­cause of “the strength of AIIB’s gov­er­nance frame­works, in­clud­ing its poli­cies on risk man­age­ment, cap­i­tal ad­e­quacy and liq­uid­ity”.

The Bei­jing-based AIIB has proved suc­cess­ful dur­ing its “test­ing the wa­ter” pe­riod. Last year, the AIIB com­mit­ted a to­tal of $1.73 bil­lion to nine projects, achiev­ing its loan tar­get of $1.2 bil­lion for the first year, which amounted to about one-fourth of the to­tal loan com­mit­ted by the In­ter­na­tional Bank for Re­con­struc­tion and De­vel­op­ment and the In­ter­na­tional De­vel­op­ment As­so­ci­a­tion dur­ing the same pe­riod, which was $7.62 bil­lion in to­tal.

The suc­cess of the AIIB could be as­cribed to pru­den­tial op­er­a­tion, a well-de­signed le­gal frame­work, good gov­er­nance and, in­ter alia, the mu­tual trust among its mem­ber states. How­ever, as a new mul­ti­lat­eral de­vel­op­ment bank, the AIIB faces some sig­nif­i­cant chal­lenges, and it has to over­come three ma­jor ones in the next stage.

The first chal­lenge is to trans­form the AIIB’s fund­ing projects from “hard in­fra­struc­ture” to “com­pre­hen­sive in­fra­struc­ture”. The projects that the AIIB pro­vided fund­ing for last year cover a gas pipe­line, two power plants, a port fa­cil­ity, rede­vel­op­ment of a poor district, a power dis­tri­bu­tion line, a mo­tor­way con­struc­tion, and rail­way and road im­prove­ment, which all be­long to “hard in­fra­struc­ture”.

In con­trast, the Word Bank’s top nine projects cover not only hard in­fra­struc­ture such as roads, elec­tri­cal trans­mis­sion/ dis­tri­bu­tion, wa­ter sup­ply and ur­ban de­vel­op­ment, but also some “soft in­fra­struc­ture” such as health pol­icy and ad­min­is­tra­tive man­age­ment, public fi­nance man­age­ment, ur­ban man­age­ment and de­cen­tral­iza­tion and sup­port to sub­na­tional gov­ern­ments.

In re­al­ity, both “hard in­fra­struc­ture” and “soft in­fra­struc­ture” are critical to the de­vel­op­ment of Asia. To this end, the AIIB needs to ex­pand the scope of its fund­ing projects as early as pos­si­ble to meet the de­mand for the com­pre­hen­sive de­vel­op­ment in in­fra­struc­ture in the re­gion. In do­ing so, the AIIB, how­ever, needs to main­tain a del­i­cate bal­ance be­tween fund­ing for “soft projects” and not in­ter­ven­ing in the do­mes­tic poli­cies of the bor­row­ing states.

The sec­ond chal­lenge is “up­grad­ing” of the AIIB’s fund­ing projects from “com­pre­hen­sive” to “en­vi­ron­men­tally friendly” pro­grams. Al­though the AIIB has taken the en­vi­ron­men­tal fac­tor into con­sid­er­a­tion while mak­ing de­ci­sions, still some projects are not en­vi­ron­men­tally friendly, such as elec­tric­ity sup­ply. To reach the global goals set forth by the Paris cli­mate change agree­ment, the AIIB should bet­ter ful­fill its so­cial re­spon­si­bil­ity, by im­prov­ing its en­vi­ron­men­tal stan­dards for project fund­ing, and not al­low­ing any en­vi­ron­men­tally un­friendly projects to re­ceive its funds. Ob­vi­ously, the con­sen­sus in this re­gard among the 77 AIIB mem­bers is fun­da­men­tal and nec­es­sary.

The third chal­lenge is to make the AIIB more in­de­pend- ent in its project se­lec­tion and fund­ing. Of the nine fund­ing projects the AIIB com­mit­ted to last year, six were co-lent by the World Bank, the Asian De­vel­op­ment Bank or other in­sti­tu­tional in­vestors. As co-lender, the Word Bank or ADB could un­doubt­edly pro­vide as­sis­tance to the AIIB in terms of in­for­ma­tion, ex­per­tise and project man­age­ment. Still, the AIIB should build up its own man­age­rial, fi­nan­cial and le­gal teams to in­de­pen­dently run its op­er­a­tions. Of course, this does not mean the AIIB should not co­op­er­ate with the World Bank, ADB or other mul­ti­lat­eral de­vel­op­ment banks for risk dis­tri­bu­tion.

Ap­par­ently, the AIIB still needs time to get used to its busi­ness en­vi­ron­ment, in or­der to build up its own spe­cial­ist teams and to over­come the three ma­jor chal­lenges. But no mat­ter how long the AIIB takes to over­come these chal­lenges, we can ex­pect it to play a more vi­tal role in the world in the fu­ture.

The au­thor is a pro­fes­sor at Uni­ver­sity of In­ter­na­tional Busi­ness and Eco­nom­ics.

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