In this report, we argued that the creation of the AIIB and the New Development Bank (BRICS Bank) in 2016, is a noteworthy sign that the multilateral development bank model, invented at Bretton Woods in 1944, still makes sense—though in need of retooling for the 21st century.
We visited the AIIB a few weeks ago, and heard more about the emerging AIIB model: What is likely to be the same—as at the five big legacy banks (the World Bank and the four regional development banks) and what is likely to be different.
As President Jin of AIIB has emphasized, environmental, social and human rights safeguards will be the same—meeting high standards consistent with the global agenda reflected in the Sustainable Development Goals. (We hope the new banks can implement the same standards at lower costs for borrowers, avoiding the extreme level of aversion to risk that past scandals have fostered at the legacy banks, but only time will tell.)
But our discussion brought to mind five likely differences from the other banks. They represent some welcome innovations to the MDB model:
A single and singular focus on infrastructure—reflecting China and other borrowers’ investment priorities; (yes China wants to deploy its engineering and construction capacity too….). It looks as though hydroelectric power and railroads could be priorities.
A single governance structure with minimal use of special funds and trust funds directed by outside donors. The World Bank and the African and Inter-American Development Banks have concessional windows with legally distinct governance arrangements. In 2016, the World Bank’s over 900 trust funds, most with their own governance structure (usually representing the principal funder or funders—with most funders being one or more member government donors), had holdings of about $11 billion, covered about 25 percent of the Bank’s administrative expenses, and represented 7 percent of total disbursements. The EBRD does not have trust funds, but does rely heavily on the availability of European Union funding to provide, for example, project preparation funds to its borrowers.
A single balance sheet—as is now the case only at the Asian Development Bank. The World Bank and the Inter-American Development Bank have separate balance sheets and governance structures for their private sector operations. The idea of the single balance sheet at the AIIB is to maintain a focus on its core objectives in all its operations. The single balance sheet will also better enable the bank to deploy a range of financing instruments (loans, equity, guarantees), without the hassle of these products being siloed within separate entities within the institution.
A fresh experiment (for MDBs) in the challenge of what can be called good corporate governance. A non-resident board meets four times a year. The model will rely on far more delegation of power for project approval to management, making the president as chief operating officer more directly accountable for the success of project operations. The Audit Committee of the board, one of three committees, will have two independent, external members, also an innovation. This marks a true innovation over the other MDBs, which rely on the same set of board members to perform the full range of oversight functions, irrespective of their expertise.
No graduation policy. Members will self-graduate, presumably when they can get better terms (interest rate and term of loan), considering whatever tradeoffs they face in greater delays and transactions costs at the AIIB. (Graduation policy from the IBRD (the non-concessional window) at the World Bank has been much discussed and for some countries was reversed.)
The staff of the AIIB listed three cross-cutting priorities: sustainability (as in high environmental standards); cross-border investments (consistent with the idea of China’s One Belt One Road program); and mobilization of private capital. If these prevail as the priorities (avoiding new priorities), they can be added to the list of innovations.
At its founding, the role of China at the AIIB echoed the role of the United States at the World Bank at that institution’s founding. China is so far the single major creditor with 32.4 percent of the capital subscription an effective veto, with 27.8 percent of the votes and key decisions requiring 75 percent; the institution located in its capital city; and the first president a Chinese national. The United States still “reigns” in some ways at the World Bank—but less so at the other legacy banks. Only the future will tell how the AIIB innovates or not on this score.