The China-led Asian Infrastructure Investment Bank (AIIB) is taking its first steps amid increasing interest – and some veiled scepticism. The AIIB set up operations in Beijing earlier this year after gaining the support of the 57 countries that signed off the bank’s founding document. The bank's president, Jin Liqun, further strengthened its international profile when he closed two memoranda of understanding with the Asian Development Bank (ADB) and the EBRD. Meanwhile, Mr Jin has been working to share the AIIB’s mission.

“When this earth was created by whomever, there was no such thing as Europe and Asia,” he told a discussion panel at the ADB annual meeting in Frankfurt in May. “God didn’t do it. Humans did it, partly because of non-connectivity. Now it’s our job to have this landmass connected.”

An Asian alternative

First announced by China’s president, Xi Jinping, in 2013, the project of a Beijing-based multilateral bank focusing on pan-Asian infrastructure development marked Beijing’s first attempt to shape a regional alternative to Bretton Woods institutions based in Washington, DC such as the IMF and the World Bank. The announcement stirred interest, and dozens of countries applied for membership despite the lingering feeling that the AIIB would become just another tool of foreign policy for the politburo in Beijing (a concern particularly nurtured in Washington).

Nevertheless, signatories to the founding documents included countries traditionally aligned with the White House such Australia, Germany, South Korea and the UK. The latter's membership even prompted an unnamed US official to tell the Financial Times: “We are wary about a trend toward constant accommodation of China, which is not the best way to engage a rising power.”

“If China’s proposal was good for China alone, who would respond to it?” Mr Jin wondered provocatively in Frankfurt, highlighting the win-win outcome of infrastructure developments in Asian countries.

An $8000bn shortfall

Doubts may remain, but Asia’s need for a deep overhaul and upgrade of its infrastructure is unquestionable. From traffic jams in Jakarta and Mumbai to power blackouts in Pakistan and Afghanistan and bumpy journeys across the central Asian steppe, the social and economic potential of Asia as a whole is greatly hindered by poor infrastructure. The ADB estimates the continent needs to invest more than $8000bn by 2020 to bridge the investment gap.

No single institution will be able to bridge such a financing gap by itself, not even the AIIB. The bank has a registered capital of $100bn, of which 20% will be paid by the shareholders over the next five years, while callable shares make up the remaining 80%. However, if Mr Jin’s plan materialises, in five years the bank will be able to muster more paid-in equity capital than the World Bank’s International Bank for Reconstruction and Development ($15.8bn) or the ADB ($7.4bn). This should make possible the bank’s mission to replicate across Asia the experience of China, where infrastructure investments have been a key pillar of the country’s tremendous economic growth in the past 20 years.

The AIIB has already announced its first two projects: a $273m motorway project in Pakistan’s Punjab province to be co-financed with the ADB, and a $105.9m road project in Tajikistan to be co-financed with the EBRD. The bank is also assessing a $262.2m project to upgrade power infrastructure in Bangladesh.

“The projects we support have to meet three basic requirements: they have to be financially sustainable, environmentally friendly and socially acceptable,” Mr Jin told fDi Magazine. “From an economic and financial perspective, in central Asia some of these areas are sparsely populated and lack the kind of traffic flows needed to make these roads feasible. A road going through some sparsely populated area would generate benefit if it played a central part in connecting different areas. A road through Mongolia, for example, is certainly better than just a road in Mongolia.”

Making a name

But it is the bank’s governance that will be most subject to public scrutiny. Chinese government-sponsored investment has a mixed track record in terms of environmental, social and even political sustainability. The AIIB has to prove it can be different.

“I don’t look simply at the financing side,” says Mr Jin. “I look at the bank’s governance, its modus operandi. The bank should be lean, clean and green, cost-effective, responsible. If we want the AIIB to be a success, it will not simply be by making a lot of money through infrastructure financing, but also by being a role model in terms of governance. My dream is to make it a bank with 21st-century governance.”

China is by far the AIIB’s largest shareholder, having subscribed a capital stake of $29.87bn (which includes paid-in and callable shares), followed by India with $8.37bn and Russia with $6.54bn. Its stake and founding member status guarantee China more than one-quarter of the board of directors’ voting rights, essentially power of veto over the board’s decisions.

Meeting standards

With regards to the governance of single projects, procurement will be open to contractors from any country, not just member countries, nor Chinese firms. Every project will have to comply with a set of social and environmental standards covering stakeholder engagement, gender equality, fair treatment of labour and measures to tackle climate change.

However, the AIIB has already drawn criticism for its involvement in the Punjab road project. Kate Geary, land rights policy lead at UK charity group Oxfam, notes that the gender equality part of the project’s preparation was far from flawless: only 88 out of more than 12,000 women living along the project corridor were consulted during the drafting of the resettlement plan, compared with 521 out of 11,130 men.

“The finest policies mean nothing unless they are implemented,” she said in Frankfurt.

Expedited action has been a key part of China’s infrastructure success. The AIIB vows to uphold this tradition, although its Chinese officials are now accountable to a multitude of shareholders, and this will test the bank’s ability to emerge at the forefront of 21st-century multilateral development.