Responding to the AIIB: The Need for Process Reorganization by Traditional MDBs
June 25, 2015
The emergence of the Asian Infrastructure and Investment Bank (AIIB) is a salutary moment of truth for international development finance. It marks a clear departure from the status quo.
U.S.-and Organization for Economic Cooperation and Development (OECD)-dominated multilateral development banks (MDBs) no longer have a monopoly on financing infrastructure projects in developing countries, nor in deciding how and how long they should be evaluated before implementation. To continue to be relevant and responsive to the global demand for infrastructure, the MDBs need to initiate a significant reorganization of their approval processes.
Infrastructure investment needs are estimated at $1 trillion a year for developing countries, a shortfall that stifles both human and economic development. A 2013 World Bank Report noted that despite rapid poverty reduction, South Asia continues to face insufficient economic growth, slow urbanization, and huge infrastructure gaps that together could jeopardize future progress. Citizens in rural Bangladesh need new and improved roads, for example, to connect them to schools, hospitals, and markets.
The gap between what people need and what can be funded is exacerbated by excessively long approval times for infrastructure projects by the traditional MDBs. While there is good reason for the evaluations that must take place before a project begins construction, they should not take years to complete. Specific statistics on infrastructure projects are difficult to find, but a 2014 review paper on the World Bank’s public sector management (PSM) portfolio notes that the average time for a non-PSM project to move from concept note to “effectiveness” or implementation is approximately 2 years and 5 months. Frustration with such MDB approval processes and bureaucratic hang-ups will likely lead some countries to embrace alternatives like the AIIB and bilateral finance from China.
Scrutiny of infrastructure projects has markedly increased in the past 40 years. Valid concerns that arise when building a new highway or dam - environmental externalities, displaced communities, a change in the way of life for native peoples, negative effects on gender equity – led to well-intentioned safeguards. These range from environmental impact assessments to local community stakeholder consultations that seek to weigh whether the negative impact of a potential project outweighs its benefits.
The issue is not these principled safeguards, but rather how quickly we can honor them. Speed did not matter as much when there was little private and domestic capital in the system. Today foreign and local companies engage in infrastructure public-private partnerships (PPPs) and countries are more able to collect taxes to fund their own projects. The funding that MDBs can provide looks less attractive when it is accompanied by years of convoluted roadblocks. Further, these delays can impact a country’s human and economic development prospects.
A 2014 study from researchers at the University of Oxford examined planning and evaluation documents for large dam projects from the World Bank and the Asian Development Bank, among other funders. Looking at 245 dams in 65 countries between 1934 and 2007, the study found that these projects take 2.3 years longer to complete than originally promised and run 96 percent over budget on average.
China recognized these efficiency concerns in spearheading the AIIB and claiming de facto veto power on its decisions. Initial concern that China would lead the bank to completely turn away from internationally accepted principles regarding infrastructure projects has been somewhat assuaged recently by the addition of countries such as Australia, theUnited Kingdom, and Germany. However, the bank has openly stated it will prioritize efficiency; the AIIB’s interim chief said in April that it would be “lean, clean, and green” in its standards.
“Lean” is the important word here. It acknowledges that the AIIB will strive to be efficient with cost and also with time. With traditional donor countries such as Sweden and Norway among its 57 founding members that are capable of contributing high quality technical assistance and oversight, the AIIB is in a strong position to take what has worked for the traditional MDBs and jettison what has not.
Instead of being fearful of how AIIB stands to change the system, Bretton Woods Institutions like the World Bank should see this as a moment of opportunity to improve how they approve projects. Many developing countries now see infrastructure finance as their greatest external funding need , yet slow timelines put into place by the US and other donors prevent some of these needs from being met. China clearly sees financing infrastructure as a development and political winner. Whether MDBs seek to counter other detrimental influences or expand the important development work they do, they need to take a hard look at approval processes and find ways to better facilitate global infrastructure finance.
MDBs should recognize the frustration with approval process times that has compromised their mission, but not discard the values that make them attractive partners to developing nations. They should seek a reorientation that balances efficiency with the cutting edge standards and principled processes that are a hallmark of the international system.
Daniel F. Runde is director of the Project on Prosperity and Development and holds the William A. Schreyer Chair in Global Analysis at the Center for Strategic and International Studies (CSIS) in Washington D.C. Helen Moser is a research fellow with the CSIS Project on Prosperity and Development and the Project on U.S. Leadership in Development.
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