Global asset management quarterly: A global briefing on developments and market trends
Welcome to the thirteenth edition of Global asset management quarterly.
Three years on from the founding of the Asian Infrastructure Investment Bank (AIIB) in 2016, how is AIIB progressing with its objectives and how does it differentiate itself as the newest multilateral development bank (MDB)?
Contrary to the fears of some among the economic and geopolitical community, the AIIB has not developed into the financing arm of China’s Belt and Road strategy. Nor is it competing to finance projects with other MDBs, or becoming a weak form of under-regulated Chinese development financing. Instead, the AIIB is evolving into an MDB focusing on bringing countries together to address Asia’s significant infrastructure funding gap and to improve the social and economic outlook of the region.
The AIIB’s governance model is based on that of existing MDBs, with a board of governors, board of directors and president, and decision-making follows the established MDB practice of weighted voting.
AIIB aspires to meet the needs of its constituents as those needs develop into the future: President Jin Liqun openly embraced the experience of other MDB’s when he appointed Natalie Lichtenstein as chief counsel for the establishment of AIIB and as its first general counsel after a 30-year career at the World Bank. Likewise, Gerard Sanders, the incumbent general counsel, had previously worked at the International Fund for Agricultural Development as general counsel and the European Bank for Reconstruction and Development (EBRD) as deputy general counsel.
The board of directors is non-resident and part-time: directors do not all live and work in Beijing, but maintain their roles and residency elsewhere, called upon as necessary by the AIIB. In addition to efficiencies of time and cost, this model allows considerable flexibility: meetings can be held electronically as and when required and often at short notice. The board is also able to delegate its authority (with a 75 per cent majority) in respect of the operations of the bank to the president, allowing the board to focus on strategy, policy and the parameters within which the bank must operate. This model enables the president to focus on day-to-day decision-making and implementation of strategy, with the assistance of a small and highly skilled senior management team. President Jin Liqun’s approval of a US$120m loan to upgrade and expand the power transmission system in Chittagong, Bangladesh at the end of March 2019 is evidence of this delegated accountability framework in action.
AIIB’s first annual meeting was in Beijing, the second in Jeju, South Korea, the third meeting was in Mumbai and this year it will be in Luxembourg; the rotation of the meeting through different regions and member countries is an indication of the board wanting to canvass views across all of its members. Indeed, the theme of this year’s meeting in July is 'Cooperation and Connectivity' with a focus on furthering economic and social benefits through better connectivity across regions including between Europe and Asia.
A key innovation unique to the AIIB is that the bank’s charter is flexible, and can be amended as long as there is sufficient consensus among its members. This means that the charter may be adapted to changing circumstances as the bank matures. For instance, the bank’s range of instruments currently includes sovereign loans, non-sovereign backed financing, equity investment and guarantees; it may in time want to expand or adjust the type and amount of financing that it provides.
Membership of the AIIB has grown steadily from 57 founding members in 2016 to 93 today. Unusually for an MDB, the AIIB includes sovereign and non-sovereign states, so long as the non-sovereign states are recognized by the United Nations (such as special economic region Hong Kong). Members are not restricted to Asia; the bank takes an expansive view of the region with members ranging from New Zealand to Cyprus. The growing membership is indicative of the growing eastwards shift in economic influence. The UK’s decision to join the AIIB in spite of US opposition is seen as a pivotal moment: Switzerland, France, German, Italy and Australia joined shortly thereafter. Neither the USA nor Japan are members (they are material supporters of the Asian Development Bank (ADB)) but Japan has indicated that it may join in time. If you contrast the membership of AIIB to that of ADB, (ADB has 68 to AIIB’s 93), you can start to understand the similarities and the differences between the two organisations. AIIB recently admitted Egypt, Ethiopia, Madagascar and South Africa to membership; prospective members include Brazil, Chile, Ecuador and Peru. None of these aforementioned countries are members of ADB and therein is an insight into AIIB’s focus on connectivity between regions and to improve social and economic outlooks of members.
The depth of AIIB membership is testament to and ensures one of the AIIB’s main thematic priorities, that of catalyzing ESG investment strategies in emerging Asia. The AIIB has adopted stringent environmental and social standards that are front and centre of its discussions around infrastructure development, and are almost identical to those of the World Bank and ADB. In fact, the AIIB’s emphasis on 'lean, green and clean' activities and practices have done much to alleviate fears that the AIIB is simply beholden to China. The bank recognizes that environmental and social sustainability is a pre-requisite for sound banking principles – and to achieving its ambition of improving economic and social development in Asia. In 2017 and 2018, the AIIB achieved a triple-A rating across all three ratings agencies, and now has US$100bn of subscribed capital stock. It’s no coincidence that AIIB’s policies for energy and cities focus on the sustainability of both. This prioritisation demonstrates an independence of thought from that of any individual member.
The AIIB has not set itself up in competition with the pre-existing nine MDBs. Rather, it acknowledges the enormous demand for infrastructure financing in Asia and sees itself as complementing, rather than competing with, other MDBs. Infrastructure demand in Asia is estimated at US$26 trillion to 2030 – considerably more than any single MDB can finance alone. More than 60 per cent of the AIIB’s projects to date have been financed in co-operation with other MDBs. The AIIB intends to invest US$3.5-4.5bn in 15–20 projects in 2019 and to catalyse billions of dollars of investment in sustainable infrastructure in Asia. Indeed, AIIB has openly noted that its initial investments in 2016 were deliberately set up as co-financings alongside the International Finance Corporation and ADB in order for it to leverage their due diligence and credit assessment experience as the bank established its own systems and frameworks (contrast that speed of investment with the time it took EBRD to undertake its first investment, which was a number of years after its establishment). AIIB is indeed an MDB keen to be seen to be making a difference, and quickly.
With its lean structure, the AIIB necessarily focuses on shovel-ready projects, that is, projects seeking finance that are already at a relatively advanced stage. Most of its projects are in Asia, but the AIIB will invest further afield if there is a benefit to Asia – for example, if a project in Latin America might mitigate the effects of climate change.
The AIIB is still in build-out phase but is proving more agile, innovative and transparent than many political and economic commentators anticipated. While China has the single largest weighted voting power, decision-making is being increasingly diluted as more members join. There is some overlap between the projects considered Belt and Road and the AIIB’s objectives, but the Belt and Road’s bottom-up approach is in marked contrast to the AIIB’s top-down clearly defined mission statement.
The AIIB continues to build institutional capacity, including taking market soundings on appropriate dispute resolution mechanisms. By the end of 2018, the AIIB had approved over US$7.5bn for projects across transport, energy, telecommunications and urban development in 13 countries. It plans to continue its efforts to mobilize private capital into infrastructure investment, with sustainable development at the forefront of its strategy. We’re excited to see the AIIB progress through its start-up phase, building on the lessons learnt by existing MDBs and innovating to develop a sustainable financing platform and sustainable Asia.
In 2018 AIIB formulated its strategies for Cities, Energy and Transport. In 2019 it will finalize its strategy for water investment. President Jin Liqun is a president in a hurry; he closed his address to the 2018 annual meeting with the statement that “We are investing in infrastructure in a wide range of countries, investments that are already starting to have an impact. But we must ramp up quickly because infrastructure needs in developing Asia are huge. And we need to work in partnership, particularly with the private sector and local governments. Solid global growth is crucial for our members to meet their objectives, and an open trading system is a foundation of that global growth”.
We are confident that we will see a number of major milestones achieved in 2019 as AIIB is increasingly seen to be getting shovels in the ground and building a better Asia.
Welcome to the thirteenth edition of Global asset management quarterly.
If COP25, 2019 were to be summarized in a word, it would be ‘pathways’ – shorthand for the social, economic and technological choices that must be made in the near term in order to avoid catastrophic climate change.