Robert Bestani: AIIB can succeed where its predecessors have failed

Robert Bestani: AIIB can succeed where its predecessors have failed

It would be hard to say the multilateral development banks that were set up after World War II are accomplishing their high-minded mission of fostering development and alleviating poverty. Almost all are facing some kind of financial challenge, while client states complain they are too slow, bureaucratic and lack the technical skills to do their jobs.

     Now come the Chinese with a new institution, the Asian Infrastructure Investment Bank. On the one hand, we should be pleased the Chinese have opened up such an institution in the traditional mold. At a time when the world is wondering what to make of the rise of China, the adoption of a traditional approach suggests they are intent on being a member of the current global order rather than challenging the status quo.

     But the traditional development solutions of existing multilateral development banks, or MDBs, are clearly not working and if the AIIB is to succeed where others have failed, it must look at the development challenge anew and update its approach to fit the needs of the 21st century. The AIIB must demonstrate that it has learned the core lessons of successful development that seem to have passed the other banks by and left them struggling on in their traditional way.

     Alas, the only thing harder than getting a new idea into the mind of an organization is getting an old one out. However relevant the traditional MDBs were when they were first created, their business model is badly dated and they are grossly out of touch with the times.

     As proof, we need only look at how the world is still desperate for infrastructure development, and yet the MDBs struggle to be of meaningful assistance. The fact that they are losing money when they were set up to be self-funding only adds to the evidence that they are generally failing to live up to their promise.

Not (just) about money

So what lessons should the AIIB learn from this sad history to enable it to succeed where others have failed?

     First, development banking isn’t just about money. Although the AIIB is set up as a bank, its principal contribution will not be the funds it can provide. This is a lesson other MDBs have failed to learn. The belief when these development institutions were created was that a lack of investment funds was the principal reason why countries were not developing. Hence they were founded as banks. But the “funding gap” theory of development died in the early 1970s and not one self-respecting development economist believes in it today.

     The world is awash with money and with the advent of global banking, most developing countries can access financial markets directly. Indeed, many emerging nations are having to deal with surpluses in their sovereign wealth funds and are exporting capital abroad. The biggest development problem for these countries is that they can neither develop the necessary managerial and technical talent to provide the much-needed goods and services for development nor attract it from abroad.

     Moreover, the principal failing of the MDBs is their insistence that the key to development is to be found in public-sector solutions, even while developing member-countries keep asking for assistance in attracting private-sector investment. Since these institutions were founded and staffed as public-sector entities, this remains their comfort zone. And because of cultural differences between the public and private sectors, the MDBs routinely underresource their private-sector operations, even though these are the only areas of the MDBs that make money and can keep their organizations financially afloat.

Sacred contracts

The other challenge connected with money is good governance. Governments almost everywhere, but especially in emerging economies, feel they can break promises and renege on signed contracts. It is only the MDBs who can advocate for compliance with the rule of law and hold governments to the promises they make.

     Without a doubt, the AIIB will be a political institution, just as all the other MDBs are, but the question is how it will use its political clout. If it is used productively to ensure that contracts are abided by, and if the bank advocates for proper regulation, transparency and the rule of law in emerging markets, then it has a shot at being successful. If not — if it sees its role as merely to hand out dumb money — it will assuredly fail.

     Second, the AIIB should focus on the core technical skills that developing countries need. The AIIB must hire a few less economists and many more engineers and urban planners. Yes, client countries can hire such professionals by themselves, but they have no assurance that professed experts are fully qualified and that they have the country’s best interests at heart. Considering the number of power and water projects the Asian Development Bank finances, I still find it amazing that I had one of only two ADB electrical engineers on my staff and that I hired the only water engineer at the bank.

     Third, the AIIB should take on the role of advising countries early in the planning and structuring of infrastructure projects. Typically, MDBs merely provide a list of consultants for hire, leaving countries to deal with firms — entities they neither know nor trust. I very much wanted to start up a consulting unit to the private-sector arm of the ADB, but I could not get the staff resources, even though the board had mandated that our operations should be the bank’s lead priority.

     Fourth, the new bank should help developing countries plan and prioritize a detailed catalogue of projects and help them find willing financiers and project managers.

     Despite bureaucratic obstacles, we proved the soundness of these ideas at the ADB over and over again. Between 2002 and 2008, the ADB’s private-sector financings and earnings grew from $50 million to $2.4 billion. All these transactions were successful and comfortably weathered the 2008 financial crisis. Moreover, we had the pick of the best transactions in Asia and were doing only one in eight deals put to us because of internal resource constraints.

     Over the years, we financed hundreds of developmentally effective transactions such as a water treatment facility in West Jakarta, power transmission lines in Cambodia, a wind power generation facility in India, the first bank and mobile phone company in post-Taliban Afghanistan and mortgage finance in Malaysia, as well as trade finance and equipment finance across most of Asia.

     Similar financings were repeated in other member countries with various partners. We also worked with numerous fund managers to make sure we provided funds in a cost-effective manner to small and medium-size enterprises. Almost all of these financings were public-private partnerships, which were both developmental and consistently profitable to the ADB and our business partners.

     There are hopeful signs that the AIIB is well aware of the challenges it faces. Jin Liqun, its president, was instrumental in the success of private-sector operations at the ADB and supported their growth. But it is far too early to know how the AIIB will develop and whether it will succeed where others have failed.

     If it slavishly emulates its sister organizations, it will suffer their fate. But if it provides what developing countries and the markets truly need, it will not only succeed, but can serve as an important organization for others to emulate.

Robert Bestani is faculty chair for national security and economic policy at the National Defense University in Washington and former director general for private sector finance at the Asian Development Bank.

Robert Bestani: AIIB can succeed where its predecessors have failed