The potential role of the Asian Infrastructure Investment Bank

China’s president, Xi Jinping, announced the creation of an Asian Infrastructure Investment Bank (AIIB) just before the October 2013 APEC meeting in Bali. If the new bank is managed professionally to finance commercially viable investments in economic infrastructure, it can begin to correct a very significant failure of global financial markets.

There is room for a new development bank, specialised in financing large-scale economic infrastructure on commercial terms, working alongside existing multilateral development banks, including the World Bank and the ADB. These well-established institutions have the expertise to lend a lot more for infrastructure, but have moved in a different direction. Net lending by multilateral development banks on commercial terms has been negative in five of the last ten years, including 2011 and 2012. The World Bank and the ADB are now focusing on concessional lending and knowledge sharing with low-income countries, leaving an important niche to be filled by a new financial institution.

Following China’s decision to set up the AIIB, consultations are likely to take place around the Asia Pacific, encouraging governments as well as private investors to become foundation shareholders. Potential investors in the AIIB will want to be assured that the management of the new bank will be of high quality, preferably selected on a competitive basis, and will be overseen by independent, commercially experienced directors. Sound procedures for project selection, designing financing plans and tendering for project implementation can be based on those developed by existing multilateral development banks.

If it is carefully set up and well managed, the AIIB should be able to attract shareholding from Asia Pacific governments committed to their new APEC Framework on Connectivity, as well as from some private sources. If APEC governments on both sides of the Pacific participate in the new infrastructure development bank, the AIIB could be transformed into an Asia Pacific Infrastructure Investment Bank, which could invest in projects to upgrade connectivity among all Asia Pacific economies.

To have a significant impact on the need for economic infrastructure, the AIIB would have to expand as rapidly as it can acquire the necessary expertise. In time, its impact on the region could be greater than the ADB or the World Bank, depending on whether those institutions decide to rediscover their capacity to finance productive infrastructure on commercial terms. The AIIB will create new competition for the World Bank and the ADB, but the new bank will also have a strong incentive to cooperate with them. Tapping into the expertise of experienced development banks is the most efficient way, and perhaps the only way, to build the capacity of the new bank to assess and implement projects successfully.

Full article: The potential role of the Asian Infrastructure Investment Bank (East Asia Forum)

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