In ADB's image, China-led AIIB to test infrastructure alternative in Asia

A road construction in Bhutan. The upcoming Asian Infrastructure Investment Bank will focus exclusively on infrastructure development, which differentiates it from the Asian Development Bank’s broader mission of alleviating poverty. Photo by: Asian Development Bank / CC BY-NC-ND

There’s an undercurrent flowing through the halls of the Asian Development Bank these days. For some ADB staff, it’s causing uncertainty. For others, a fear of marginalization. Yet it’s being brought about by something that nearly every organization or business in the world faces: the threat of competition.

Public sector development organizations are normally protected from this threat. Donor agencies vie for talent, new sources of development finance crop up and aid budgets are squeezed, but industry competition, in the traditional economic sense, is not commonplace for established aid donors.

That changed for the Manila-based development bank when, during the October 2013 Asia-Pacific Economic Cooperation meeting in Indonesia, Chinese President Xi Jinping announced plans to establish the Asian Infrastructure Investment Bank. With proposed starting capital of $50 billion, the China-led multilateral development bank would be well-financed from the start, share member countries with ADB and target ADB’s markets and clients. Some potential members have already signed memorandums of understanding related to AIIB membership, and Chinese officials continue to make their rounds in an effort to attract international interest in what is well-understood as a Chinese initiative.

“At a time when ADB faces a number of challenges, AIIB is the biggest,” according to one senior ADB official who did not want to be named, citing the sensitivity of the issue at the bank. “No matter if the new bank is formed in 2015 as planned or years from now, ADB needs to be prepared. There’s real pressure.”

Despite the similar mandate, AIIB is calling itself a “new-type” bank and Chinese planners have deliberately sought to differentiate its business model from existing multilateral institutions. In contrast to ADB’s broader mission to alleviate poverty in the Asia-Pacific region, AIIB will focus exclusively on infrastructure development, mostly dams, ports, roads, bridges and railways. AIIB planners have also used terms such as “clean,” “simplified” and “efficient” in a not-so-concealed effort to juxtapose it with ADB’s reputation as a slow-moving bureaucracy that issues loans to developing countries in Asia with too many strings attached.

But how the Chinese reconcile their fast and flexible infrastructure development philosophy with MDB standards will likely determine AIIB’s future development impact and shape the potential rivalry with ADB.

New business model patterned after old ADB

No one is disputing the existence and general size of the Asian infrastructure gap. Estimated at about $800 billion per year, Asia’s infrastructure finance needs are big enough to accommodate a new development bank for the region. Publicly, both ADB and AIIB officials have been quick to highlight that gap and stress the prospect for cooperation, partnership and co-financing between their banks to help close it.

So far, that’s where the harmony starts and ends.

“Because the opportunities for infrastructure development in Asia, though vast, are by definition finite, and the pool of funding to finance those needs is also finite, there is clearly competition between a new AIIB and existing institutions,” said Ernie Bower, senior adviser and Sumitro chair for Southeast Asia Studies at the Center for Strategic and International Studies and co-author of the book “Decoding China's Emerging ‘Great Power’ Strategy in Asia.”

It’s a competition that is likely to play out in terms of distinct approaches by the two multilateral banks.

“The Chinese have always been into hard infrastructure for their multilateral borrowing portfolio,” according to Richard Ondrik, who helped establish ADB’s Beijing resident mission and served as its acting representative during his 15-year career with the bank. “AIIB is going to try to mold itself in the image of the ADB of the 1970s. The business model itself was not flawed at the time, but it is also not possible to implement in today's environment.”

That old ADB business model is focused relentlessly on building infrastructure. ADB, an acronym that once facetiously stood for "Asian Dams and Bridges,” tightly managed the projects from design to execution to evaluation, often relying on a staff dominated by engineers and economists, complemented by a trusted legion of largely Japanese and American contractors to deliver every phase. ADB took a direct hand in the bidding, procurement, contract awards and oversight of construction activities to ensure transparency, accountability and value-for-money. The recipient government, however, was solely responsible for its own policies regarding environmental protection, labor, health and safety, relocation, compensation and rights of way, gender and poverty reduction, among other things.

These “policy issues," so prevalent in the development dialogue of today, were not in the mandate of the early ADB. The emphasis on national execution — providing budget support to recipient governments and relying on a predominance of local contractors and consultants — that prevails in international development today was virtually nonexistent then.

“ADB was really quite successful under that model,” Ondrik insisted. “But the world was different then."

ADB evolved — and opened window for China

Today’s ADB is markedly different. While investments in infrastructure comprised the majority of ADB’s spending in 2013, ADB’s strategic plan, Strategy 2020, lists infrastructure development as just one of 10 strategic priorities together with softer initiatives such as climate change and knowledge solutions. Alongside a smaller pool of infrastructure engineers and economists sit social protection, governance, environment, gender and communications specialists.

The 58-year-old bank is also operating under more scrutiny than ever, so working with noncorrupt and competent governments, choosing projects with appropriate risk and return profiles, and enforcing social and environmental safeguards are as high on the agenda as they’ve ever been. These realities limit the number and scope of infrastructure deals the bank can make with its developing member countries.

“In order for infrastructure investments to maximize development impact, financial, social and environmental safeguards are critically important. While there are costs associated with implementation, either in in terms of time or money, all of our member countries recognize how important safeguards are to sustainable and inclusive development,” said Stephen Groff, ADB vice president for East Asia, Southeast Asia and the Pacific.

“China's intention on the infrastructure development is benign, but not altruistic.”

— Yun Sun, China expert and fellow with the East Asia Program at the Stimson Center

This market-oriented evolution — from a hardcore, get-it-done infrastructure development bank to a more diversified and cautious development organization — has opened a window for the Chinese who unabashedly offer a more streamlined alternative to infrastructure development in emerging markets.

“China's intention on the infrastructure development is benign, but not altruistic,” said China expert Yun Sun, who is a fellow with the East Asia Program at the Stimson Center, a Washington-based think tank. “The ideology-driven side of the Western aid closes many possibilities, making it rigid, inflexible and less efficient in providing what the local people need. Beijing's view is the exact opposite, that a loan decision could be easily and quickly reached if there is a real need on both sides.”

China’s less-constrained and demand-based outlook has already been put into practice in Africa, where the country has been extending infrastructure loans and winning infrastructure development contracts that have consistently created business opportunities for Chinese companies. African countries, such as the Democratic Republic of the Congo and Angola, have used natural resources to guarantee loan repayment, raising questions about China’s motivations, intentions and methods. The country’s loan procedures and project management have sparked condemnation over its commitment to basic global development concepts such as human rights and anti-corruption.

Chinese President Xi Jinping holds a bilateral meeting with United States President Barack Obama at the U.S. ambassador’s residence in the Hague, the Netherlands in March 24, 2014. The creation of AIIB is not just another front in the brewing geopolitical tension between China and the United States and its allies. Photo by: Pete Souza / The White House

AIIB’s balancing act: Maintaining flexibility and safeguards

China’s aggressive push into international development comes amid intensifying debate across the MDB community over social and environmental safeguards and how to strike an appropriate balance between high-impact infrastructure investments and adverse effects embedded within those investments. Devex has reported allegations of safeguard violations related to ADB-funded infrastructure projects in Cambodia and Laos. Earlier this year, the World Bank’s proposed new safeguards were met by a firestorm of criticism. Opponents of the draft policy accused the bank of transferring responsibility for compliance with the standards to the borrower and expanding and accelerating investments at the expense of the poor. Meanwhile, China is one of the World Bank member countries accused of obstructing efforts to bolster explicit human rights protections in the bank’s investments.

While AIIB planners have not confronted the safeguards issue head-on yet, they haven’t completely ignored it either. Jin Liqun, a former ADB vice president who also served as China’s vice minister of finance and is leading the working group for the establishment of AIIB, told attendees of the Boao Forum earlier this year: “With zero tolerance of corruption, we have every confidence to establish a high-standard bank, and tackle security and environmental issues.”

Some analysts believe that Beijing, despite the precedent it has set in some parts of the world and its principle of noninterference, is beginning to get the message about stronger standards and safeguards, which is one of the reasons why the AIIB proposal has gained early traction with developed and developing member states alike. Others say AIIB’s multilateral structure will automatically impart a system of checks and balances that will bring Chinese leadership in line with international best practices.

The Economist, in an extensive essay titled “What China Wants,” recently suggested that while the country may not be satisfied with its current standing within international organizations — which has elicited its own multilateral initiatives such as AIIB and the New Development Bank established by the BRICS countries — it has no intention to disrupt the international order.

“In much of the world China seeks to work within existing norms, not to overturn them,” the magazine concluded.

“International criticism has become an embarrassment for China,” Yun Sun claimed, pointing to the constructive role China has played in existing international organizations, the professionalism of the China Development Bank and a widespread desire to reduce China's isolation from the West as evidence the country is open to aligning AIIB with some traditional MDB principles.

“AIIB might adopt a midway approach that maintains such flexibility while holding a higher standard on the issues of transparency and corruption,” she suggested. “But I doubt it will actually have any requirement similar to the ones stipulated by the Washington Consensus.”

That approach could be preferable for many developing countries in Asia that are aggressively seeking economic growth and would rather not endure the oversight, restrictions and timelines of an ADB loan. If AIIB can distinguish its lending practices to be more sensitive to the requirements of developing countries and better serve them while creating a bank that is politically acceptable to member countries and civil society, it could present a formidable challenge to ADB in some markets, like those geographically close or land-linked to China. That result would also help realize AIIB’s “foster connectivity” goal with the mainland.

Myriad challenges for MDBs

None of these inaugural arrangements will be easy, however, and the extent of the challenge to ADB and AIIB’s development impact in the region will be determined by the types of projects they pursue and the instruments they bring to market. For example, AIIB could become the financier of first resort for coal power plants and other controversial energy projects — projects that ADB and World Bank are avoiding even though some developing countries embrace them at the expense of the environment and global climate change.

Geostrategic realities are also a factor, according to Bower of CSIS, who said that many countries in the region have concerns about supporting the China-centered model Beijing is promoting.  

“Asian countries … fear becoming more dependent on China as they are in the trade arena,” he said.

“If AIIB can distinguish its lending practices to be more sensitive to the requirements of developing countries and better serve them while creating a bank that is politically acceptable to member countries and civil society, it could present a formidable challenge to ADB.”

 

There are also strategic and operational decisions ADB must make to distinguish itself in this new marketplace; one that will inevitably be influenced by AIIB, if not disrupted by it. During ADB’s 2014 annual meeting, ADB President Takehiko Nakao hinted at a major operational move to merge two of the bank’s major financial instruments to better respond to the needs of a rapidly changing Asia-Pacific region. According to bank officials, the institution is set on introducing and adhering to even higher standards and multidisciplinary approaches as opposed to relenting on the responsible investment practices it has worked hard to advance in Asia.

“ADB, the World Bank and others need to look at their processes, and while not compromising their values and expertise, find ways to up their game in the face of a new competitor or potential partner,” said Dan Runde, the director of the project on prosperity and development at CSIS. “There are various forms of globalization on offer and the West should respond to this by improving what it has to offer in response to the AIIB.”

There is general consensus among regional development analysts and experts that China will aggressively move forward with the establishment of AIIB, which could very well be sometime in 2015, as planned. It may also be possible for AIIB to make a couple of loans between now and the end of 2015. But building a true multilateral membership and structure, instituting the internal and external policies and procedures necessary to govern it, and attracting the talent to run and sustain it is a different matter, and there is widespread skepticism that the momentum captured through high-profile announcements during ADB's 2014 annual meeting will continue at pace as these hard decisions are made.

Issues around human resources are particularly significant for ADB as its Manila headquarters and missions around the region could be fertile recruiting grounds to attract the experts that would help facilitate AIIB's aggressive launch plans — at a time when ADB is rationalizing its own workforce and benefits structure. And if China permits AIIB headquarters to locate outside the mainland and instead pursues the AIIB presidency (Japanese planners of ADB set this precedent in the 1960s, realizing that installing both a Tokyo headquarters and a Japanese president would be overreach), then it could increase the appeal for some development professionals, including those working at ADB.

So the creation of the AIIB is not just another front in the brewing geopolitical tension between China and the United States and its allies. This time, it’s both ideological — a battle between competing development models — and, especially for those who have built their careers at ADB, personal.

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About the author

  • Troilo pete%2520head

    Pete Troilo

    As director of global advisory and analysis, Pete manages all Devex research and analysis operations worldwide and monitors key trends in the global development business. Prior to joining Devex, Pete was a political and security risk consultant with a focus on Southeast Asia. He has also advised the U.S. government on foreign policy and led projects for the Asian Development Bank and International Finance Corp.