Eastern promise: UK sees opportunities in China’s Investment Bank

10/04/2015

By Elliot Cappel

In late 2014, twenty-one Asian nations signed up to the China-led Asian Infrastructure Investment Bank (AIIB). In March 2015, controversy was stirred when the UK agreed to join China’s initiative, despite clear opposition from the United States.

The UK joins international donors such as Australia and New Zealand as partners in the AIIB, opening up opportunities for development practitioners in the UK and elsewhere to support better infrastructure development.

Infrastructure Procurement Transparency

One area for UK-AIIB collaboration is in infrastructure procurement transparency, particularly in light of concerns – refuted by Chinese officials – that the AIIB will have an opaque governance structure supportive of Chinese business and political interests.

Enter the UK, with its track record in international infrastructure procurement transparency. The UK currently supports the Construction Sector Transparency Initiative (CoST). CoST is the leading organisation in this space, whose work in Asia and elsewhere demonstrates that for the investor, transparency “curbs mismanagement, waste, and corruption and reduces risks to public safety from poor building practices.” Meanwhile, for the recipient government, it “improves fairness in competition for contracts and can also increase the flow of foreign direct investment and development finance into a country’s construction sector.”

CoST counts the Philippines, Thailand and Vietnam as its members in Asia. Leveraging CoST’s inroads can yield a ‘triple-win’: supporting the existing UK investments, China’s stated aims, and ultimately the AIIB’s effectiveness.

‘Upstream’ National Capacity

The AIIB seeks to address the significant infrastructure spending deficit in Asia. However, one cannot simply ‘throw money’ at infrastructure development and expect results. There is a limit to the capacity of developing country governments; and most governments will require support to improve the enabling environment for infrastructure development, such as legal or regulatory reform or macroeconomic management.

Upstream reform offers some scope for collaboration with other multilateral financial intuitions (MFIs), including the Asian Development Bank. One mode of collaboration would be for an MFI to provide a minority share of the financing for investments, but retain an influence on the upstream work.

A potential ‘wild card’ in working with the AIIB in upstream technical assistance is that of ‘buy-in’. Fundamentally, programmes of infrastructure reform have winners and losers; and losers often include entrenched political interests who battle against change. As such, a major focus of most upstream technical assistance projects is building buy-in for difficult reforms among key decision makers. If it were possible to leverage China’s credibility and improve buy-in for upstream enabling environment reform in support of AIIB projects, an AIIB-MFI partnership could deliver significant results.

‘Downstream’ Project Preparation

Downstream collaboration may be more immediate. Fundamentally, the AIIB will fund projects; and, as such, it can only be as effective as the projects in its pipeline.

DfID has a strong track record in early stage project preparation facilities, which identify, scope, and conduct ‘pre-feasibility’ analysis on projects. Partnership with those facilities would help the AIIB find ‘good’ projects to fund.

There are clear benefits for the UK and other donors in such a partnership. For most project preparation facilities, capital is a major limitation for project implementation: linking them with the AIIB will facilitate better access to capital.

Further, a collaborative effort with the AIIB to guide early project preparation would enable donors to ensure cross-cutting issues such as gender, climate resilience, environmental impact and poverty reduction are prioritised. In a sense, partnership on project preparation would enable DFID and others to help ‘set the agenda’, while access to AIIB capital would ensure benefits are realised.

Organisational Culture and Design

Organisational culture and design have a major impact on delivery. Consider something as simple as the language of business: the AIIB may very well produce the required legal and project documents for due diligence review in Mandarin (and not English). Such an approach would inhibit corporate collaboration with most other development organisations.

The AIIB’s business culture will be rooted in a number of organisational development decisions, which are likely to be made very early on. There is an opportunity for the UK and others to contribute ‘lessons learned’ towards the design of the AIIB.

Looking Ahead

How will ‘non-Asian’ member states participate in decision making? How will the AIIB link to other infrastructure institutions? Will there be specific country, sector, or cross-cutting focuses?

Whatever the answers, with the UK’s decision to participate in the AIIB comes influence, the opportunity to help craft the agenda and culture of the AIIB, and a significant opportunity for development practitioners to support infrastructure development across Asia.