The establishment of the Asian Infrastructure Investment Bank (AIIB) reached another milestone on Monday when 50 of the 57 founding members signed the AIIB's Articles of Agreement. Seven countries are still sorting out domestic requirements before signing.

China's Finance Minister Jiwei Lou and Australian Treasurer Joe Hockey, Brisbane, November 2014. (Flickr/G20 Australia 2014.)

The pace of progress has been impressive and the AIIB has gained a momentum that has surprised many, including China.

In October 2014, 22 Asian countries signed a Memorandum of Understanding on the establishment of the new bank. By early April, the list of countries which wanted to be founding members had grown to 57 and, notwithstanding pressure from Washington, included such US allies as the UK, Germany, France, Korea and Australia. 

China's drafting of the AIIB's Articles of Agreement has also been impressive, both in terms of speed and responsiveness in accommodating the views of other countries. China appeased concerns by some countries, including Australia, that the Bank may not truly be a multilateral institution.

 So far, the AIIB has been a big win for China.

It appears that China wants to maintain the pace in getting the AIIB up and running, with Chinese Finance Minister Jiwei Lou indicating that he was confident the AIIB could start functioning before the end of 2015. What constitutes 'functioning' is not defined, but China may be wise to hasten slowly when it comes to entering into its first loan programs.

It will be important for the AIIB to have in place thorough processes and procedures before it starts lending. Among the steps necessary for the AIIB to be fully functional: the establishment of a treasury function so that the bank can access international capital markets; the recruitment of an international (and not predominantly Chinese) workforce with the appropriate expertise; and the development of rigorous procurement procedures and safeguards policies covering the environmental and social aspects of the bank's activities.

Another crucial first step will be to clearly establish the roles, responsibilities and expectations of the Board of Directors, management and staff. The AIIB has a three-layer governance structure involving a Board of Governors (usually the finance ministers of member countries), a twelve-member Board of Directors, and management/staff. The AIIB has wisely chosen against having a full-time resident board of directors, and unlike most other international institutions, board members will not be officers of the bank, nor will they be paid by the bank. The problem with a full-time executive board is that directors get too involved in the detail of individual loan decisions and do not exercise strategic oversight. The roles of executive directors and management are thus blurred. And there can be a conflict of interest in directors performing as officers of the bank and as representatives of country shareholders.

But for a non-resident board to be effective, its role has to be clearly defined. The expectations placed on management and staff also have to be clearly laid out if they are to be held accountable for their performance. This is not done in other international institutions.

But perhaps the most important first step is to determine the business plan for the AIIB. Some of the key issues to be resolved include:

  • Who will be the bank's clients?
  • What will be its main activities?
  • On what terms will it lend?

There is still uncertainty as to the precise role of the AIIB and how it will interact with the multilateral development banks such as the World Bank and Asian Development Bank. Unlike those institutions, the AIIB does not have a poverty alleviation function. Nor does it have any provision to provide concessional loans to low-income countries. Does this mean the AIIB will be seeking to lend on commercial terms to projects with the highest rate of return?

There are expectations that the AIIB should focus on big ticket infrastructure projects such as power plants, airports, seaports, thus filling a gap left by other lending institutions. But part of the reason for that gap is that big projects have many environmental and social considerations that have raised problems for other multilateral lenders. Good planning and preparation will be essential.

The AIIB will be under close international scrutiny from day one to see if any of the concerns initially raised about this Chinese initiative are realised. Such concerns include the fear that the bank would primarily be a vehicle to promote China's political and social interest, and that it would ignore social and environmental considerations with its loans. Given these concerns, it will be important not only for China but for all the founding members that the AIIB's performance is beyond criticism from day one.

As such, the AIIB would be wise to hasten slowly in its quest to get the bank up and running. The success China has achieved to date could be lost if the AIIB rushed too quickly to get money out the door. This would be a loss not only for China but for the international community, which has much at stake in ensuring that the AIIB is a success.