The Asian Development Bank (ADB) is now open to cooperating with China’s Asian Infrastructure Investment Bank (AIIB), though the potential for more competitive relations lurks in the wings, says a former official for the US-and-Japan-led ADB.
“After a very rocky start — caused principally by Japan and the US not seeing the need for an additional development bank in Asia – the ADB is now receptive to cooperation with the AIIB,” Jeff Procak, a former regional cooperation specialist for the ADB’s East Asia Department, told Asia Times.
At the same time, he notes that “cooperation” between the ADB and AIIB, for the moment, is limited to co-financing small projects in Pakistan and Bangladesh.
Procak was in charge of delivering the ADB’s technical assistance for trade in Central Asia before retiring in November. Prior to joining the ADB in 2009, he served as the World Bank’s country officer for Russia.
Longer term, Procak says the AIIB could emerge as a more aggressive rival to the ADB after passing its start-up phase.
“Once the AIIB is fully staffed and has operating procedures in place to the point where it’s able to process and fund its own projects independent of other development banks, a more competitive dimension could complicate the relationship,” Procak said, noting that a number of ex-ADB staffers are already working for the AIIB.
On the upside, Procak notes the ADB has sought to keep both banks in business by upwardly revising its estimate of Asian infrastructure investment needs going forward.
In 2009, the ADB pegged such infrastructure spending at about US$8 trillion through 2020. But now that the AIIB is on the scene, the ADB has more than doubled its regional investment estimate to $17 trillion by 2030.
The ADB approved its first co-financing with the AIIB for a Pakistani road project in June 2016. The two banks each chipped in $100 million in loans for the project, which is part of a 1,800-kilometer transport corridor linking the port of Karachi with cities in the north including Lahore and Islamabad.
“This is a historic milestone for ADB and AIIB as we jointly aim to meet the pressing infrastructure needs in Asia and the Pacific region,” ADB president Takehiko Nakao said in a statement.
The ADB signed a second co-financing deal with the AIIB last November for a natural-gas project in Bangladesh. The ADB kicked in $167 million and the AIIB lent another $60 million for the project, which seeks to improve production and transmission at a key gas field north of Dhaka.
Procak cautions that it’s too early to tell how far collaboration between the ADB-AIIB will extend. The AIIB only began operations last year and financing cooperation is still limited.
Scott MacDonald, an economist and risk consultant specializing in Asia, says the ADB and AIIB must cooperate to keep regional growth humming.
“While having two major multilateral development banks operating in Asia obviously complicates matters, the region still has enormous funding needs,” MacDonald said, adding that “two development banks may not be enough”.
Spreading the risks
Procak, who has expertise in railway and other transport projects, stresses that co-financing between the ADB and AIIB is a good way to share risks and give everyone a piece of the pie.
David Dollar, a former World Bank official and US Treasury emissary to Beijing, agrees. “Co-financing is a rational way of spreading the risks,” said Dollar, a senior fellow at the Washington, DC-based Brookings Institution, who notes “quite good cooperation between the ADB and AIIB” at this time.
In addition to co-financing, Procak says cooperation can take the form of several development banks teaming up to fund their own pieces of a mega-project. He cites a road traversing Kazakhstan where several segments have been built with funds provided by the European Bank for Reconstruction and Development, the World Bank and the ADB.
Can’t just build roads
On the downside, Procak says the issue is that development banks like the ADB and AIIB aren’t especially good at compelling countries to budget and carry out robust maintenance programs for the infrastructure built. Extreme climate conditions in Mongolia, for example, can lead to rapid degradation of ADB-financed investments due to inadequate maintenance.
Another issue, according to Procak, is that development banks aren’t well positioned to provide incentives for the adoption of more liberal policies that expedite cross-border trade.
“This means that the roads don’t achieve their full economic impact,” Procak said. “Capitalizing on this failure, the banks invest in grandiose border-crossing complexes — which are nothing more than monuments to policy failures.”
Current ADB-AIIB collaboration is focused on South Asia. But Procak says Southeast and Central Asia appear ripe for future ADB-AIIB collaboration.
He points to the ADB’s Greater Mekong Subregion and Central Asia Regional Economic Cooperation programs as potential vehicles for such team ups. But he says there has been an overemphasis on transport projects in these locales.
“Many of these countries don’t care to borrow for environmental protection, public health, and education, so transportation is very much the default,” Procak said. “The [public] policy framework, however, is where the greatest effort is needed.”