As members of the Asian Infrastructure Investment Bank hold their second annual meeting on the South Korean island of Jeju, they can take comfort that the new lender is in good shape both substantively and reputationally. It has received plaudits for its management team and corporate governance, its commitment to enforcing high standards and its openness to new members.
Rather than competing aggressively with existing multilateral institutions, the AIIB has seen the wisdom of partnering and of complementarity. Cooperation agreements with the World Bank and the Asian Development Bank have cemented this.
Substantively, the AIIB has taken a measured approach to lending, extending $1.7 billion of loans in 2016, ahead of its $1.2 billion target. All but one of its projects so far have been co-financed with other multilateral institutions.
Early critics of the China-led bank voiced several fears: a membership tightly restricted to countries willing to follow China's will; opaque lending and procurement practices; a management team dominated by Chinese policy bankers; and competition with established multilateral banks in a "race to the bottom." The positive choices and follow-through in implementation at the bank are both striking and help build credibility for the future.
Success breeds success. In March, the bank approved 13 new members. Jin Liqun, its president, has stated clearly that the bank would welcome U.S. and Japanese membership. In the immediate term, individuals and companies from non-member countries are able to seek employment and contracts at the AIIB, which is not the case at most other multilateral institutions.
Success also brings new opportunities and risks. The AIIB needs to remain focused and level-headed in developing its own distinctiveness, while making the best use of the credibility and capability it has built up so far.
Eight of the 13 new members lie outside Asia -- Belgium, Canada, Ethiopia, Hungary, Ireland, Peru, Sudan and Venezuela. Some question whether this geographic spread weakens the bank's Asian focus and the voice of the new institution. Yet the case for inclusiveness is overwhelming. Higher-income economies have long featured in the membership of regional multilaterals, regardless of geography. Denmark, Luxembourg and Austria joined the Asian Development Bank when it was founded in 1966.
In today's world, it makes sense to be open to all countries that are interested and committed, rather than drawing a dividing line between developed and developing economies. What would the cut-off be? How would the AIIB decide?
China also benefits from pursuing an open stance. Many countries welcome the opportunity to join a new multilateral institution with a different remit and approach. Yet establishing such an institution is a gargantuan task. Building on the foundations laid at the AIIB is simpler than starting yet another institution whose remit might fit non-Asian countries more closely.
Moreover, while the AIIB's focus on Asia and infrastructure is clear, the region itself is increasingly integrated into the world. Infrastructure provides linkages within Asia, but is also needed to connect Asia with other areas.
What matters is that the AIIB keeps its lending programs focused on its mission. Some transportation and logistics investments in non-Asian countries can still fit. However, trying to replicate its 2016 loan to an Indonesian slum upgrading program in Peru, for example, would be a diversion.
The AIIB needs also to communicate clearly how it fits with Chinese President Xi Jinping's Belt and Road Initiative. As a Chinese-led multilateral, the AIIB is quite separate from that framework, yet it is also well-placed to make a unique contribution.
Investments to improve Asian infrastructure long pre-date the Belt and Road plan. While China has articulated an especially ambitious vision of connectivity -- leading, understandably, to and from China -- it is far from alone. India is keen to develop Chahabar Port in Iran and is pursuing an "Act East" policy to build links with members of the Association of Southeast Asian Nations. Russia seeks stronger links with Azerbaijan, Iran and India through the North-South Transport Corridor.
Infrastructure for all
As a multilateral institution, the AIIB should finance attractive infrastructure projects in Asia, regardless of whose vision they best fit. Mostly, this need not be controversial. There are many opportunities to put in place complementary connectivity.
In some places, though, there will be conflicting choices. How will the bank choose between projects to strengthen transport links that are part of the Belt and Road and alternative projects that bolster competing routes? Decisions here will be a test of how the AIIB navigates between the Chinese-led and multilateral aspects of its identity. Constructively, the AIIB provides a vehicle for identifying and resolving complementarities and conflicts in project priorities from wherever they flow. It should, though, take care not to follow China's vision alone.
The bank can also play a distinctive role within the Belt and Road Initiative. To date, the overwhelming majority of Belt and Road funding has come from Chinese policy banks and other state-owned lenders. While AIIB lending will no doubt grow rapidly, it will remain far below the levels of the Chinese banks. The AIIB is well placed, however, to help address two issues facing the initiative -- attracting non-Chinese financing and meeting concerns about procurement and governance practices with individual projects.
China will be hard-placed to finance the Belt and Road Initiative alone. Yet, commercial institutions are struggling to find projects that they can finance, both from a risk/return perspective and in terms of compliance and governance. In some situations, there may be little option but for China to provide policy finance, linked to geopolitical considerations and with associated contracts for Chinese companies, such as in Pakistan.
However, elsewhere this approach can bring problems. The European Union is reviewing China's agreement to build a Belgrade-Budapest high-speed rail line. In contravention of EU procurement guidelines, no public tenders were issued. At the recent Belt and Road Forum in Beijing, European countries refused to sign the final communique, objecting to the lack of commitments to social and environmental sustainability, transparency and competitive tendering.
While a blanket set of principles applied across the many Belt and Road countries may not be appropriate, good governance practices will be needed to bring in significant commercial and multilateral financing. The experience that the AIIB is building in co-financing and project structuring can help as a bridge to the involvement of non-Chinese financial institutions. Its efforts to invest pragmatically across the region, while operating to global standards, can provide both a benchmark and a seal of credibility for Belt and Road projects to which it lends.
In its short existence, the AIIB has established capability and credibility as a Chinese-led multilateral institution that is committed to addressing broad-based infrastructure needs in Asia. In the next couple of years, it needs to build on this progress, at the same time starting to deploy its unique strengths to support initiatives such as Belt and Road in often challenging geographies.
Andrew Cainey is a fellow with the Hong Kong Institution for International Finance and a partner with Asiability, an advisory company supporting collaboration between Chinese and Western businesses.