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Andrew Cainey: Expectations are high, now the AIIB has to deliver

The official launch of the China-led Asian Infrastructure Investment Bank on Jan. 16 marked an important milestone in global development finance. In the commercial sector, new multinational entities come to the fore on a regular basis. Companies like Samsung Electronics, Embraer and Huawei Technologies are increasingly well-known and global in their reach. But the creation of a new multilateral organization is a much rarer event.

     The world needs more and better innovation in its multilateral institutions -- all the more so as the world's economic center of gravity shifts toward Asia. The challenges facing the world are increasingly global. These challenges demand multilateral solutions -- and what are organizations but mechanisms for people and resources to come together to find solutions to problems? With its impressive development track record over the past decades, China is well-placed to help find such solutions.

     For infrastructure, the "problem" that needs to be solved is clear, both in Asia and globally. Asia needs more infrastructure investment and yet -- despite abundant capital in the world -- the path to financing and delivering this is often rocky. Financing and delivery are also inextricably linked: A sure-fire investment project becomes a liability when budgets overrun, corruption takes a share and construction times drag out.

SPURRING GROWTH   Infrastructure is a key enabler of economic growth and improved living standards. The Asian Development Bank estimates that a 10% increase in paved roads increases economic growth by more than 5%. Reducing electric power transmission and distribution losses by 1% increases growth by 1.1%. The unmet needs in the region are massive. For the period 2010-2020, the ADB estimated an $8 trillion infrastructure financing need for Asia.

     China's rapid development is a testament to the power of sustained infrastructure investment. For each "ghost" real estate development standing empty in a Chinese provincial city, there are countless success stories of urban growth and a country that is connected internally as never before by road, rail, air, water and telecommunications.

     Capital today is abundant and interest rates are low. Governments, multilateral agencies and long-term institutional investors have a clear intent to invest in infrastructure, yet projects are still not getting done. Government budgets are always tight. Approval processes between multilateral agencies and recipient governments can be long and slow. Institutional investors often struggle to find bankable projects. They balk at the uncertainties of investing in emerging economies with often weak or uncertain governance, whatever commitments to reform the current government is making. Getting cross-border projects off the ground and then delivered on time and on budget is even more complex.

     Launching a new organization into this arena is a good move. The AIIB can bring fresh perspectives, a fresh approach and a new group of leaders committed to solving the problem of getting infrastructure projects financed and delivered. With 57 countries signed up as founding members and up to 30 waiting to join, most of the early skepticism about the need for a new institution has now passed.

     In fact, to take a lesson from the corporate world, a new institution always represents a solid path to innovation. Established companies often struggle to innovate based on increased capital and scale alone. Newcomers provide added impetus to others to do things better and differently. Equally, the creation of the AIIB means that governments seeking to fund projects have another choice in which organization to approach. What the AIIB offers by way of solutions will need to be attractive in order for the new bank to prosper.

     We should not take the corporate analogies too far. Collaboration and cooperation with commercial investors and other multilateral institutions will be more important to the AIIB's success than out-and-out competition. The AIIB adds one more -- very distinctive and significant -- piece to the jigsaw puzzle of infrastructure finance. The key will be how the AIIB and all other participants adapt and fit together to finance and deliver projects in new ways. A positive, engaging stance on all sides is the best route forward for Asian development.

BUT WILL IT WORK?   So much for the promise. What are the prospects for turning promise into reality? Even before its official launch, the AIIB has had an impressive debut. It has attracted a long line of countries wishing to join and gained positive press coverage. The commitment of its president, Jin Liqun, to build an organization that is "lean, clean and green" is the right one. The AIIB is actively drawing on the experience of others from around the world, is seeking to put in place an international management team, and is committed to international governance standards.

     However, as with any startup, the execution challenges are not to be underestimated. This is all the more so for an organization with many stakeholders, $100 billion in capital, an Asia-wide if not global reach and a place in the public spotlight. Knitting the AIIB together as an organization with a common international culture and a distinctive, effective way of operating is a major leadership and management challenge. It is also China's most significant initiative in creating a new multilateral institution. There will be a lot for all to learn.

     There is no shortcut here, though the pace of ramping up the organization can be rapid. Success will ultimately flow from a persistent focus on the details while keeping a clear eye on the overall vision. Both the substance and the perceptions of the first projects the AIIB selects will be critical. With the long lead times inherent in infrastructure projects, people cannot and will not wait until the road, rail or port is complete to make their judgments. Some will keep a close eye on the implementation of its "clean and green" promises -- as a number of nongovernmental organizations have done during the consultation process on the AIIB's Draft Environmental and Social Framework. Governments, too, need to learn how best to engage with the AIIB.

      Learning by doing, by seeing what does and does not work, then adjusting course as needed, will be key for all. By its very nature, innovation means doing things differently. As the U.S., Europe and Japan created and shaped multilateral institutions in the 20th century, so now China, together with other economies, has the opportunity to contribute. This, in turn, can generate better ways to get more infrastructure in place more quickly for the benefit of people across Asia. It can lead to a new set of infrastructure best practices that all institutions can benefit from -- not just the AIIB.

Andrew Cainey is Asia partner for Tony Blair Associates -- Government Advisory.

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