AIIB: Lean, Mean, Funding Machine

The Asian Infrastructure Investment Bank (AIIB) is a step closer to issuing its first bonds after Moody’s Investors Service became the first international credit ratings firm to assign the lender a ranking.

The multilateral development bank, which China set up in 2015, has said it wants to sell bonds to international investors, but can’t do so until it has a credit rating. Moody’s announced on June 29 that it had given the Beijing-based lender its highest rating of Aaa, putting it on the same level as the World Bank and the Asian Development Bank (ADB), and reflecting its view that the AIIB’s debt would be of the highest quality and carry minimal risk.

Soren Elbech, the AIIB’s treasurer, told Caixin that the bank has been working with other ratings agencies and expects them to issue their credit rating decisions in the near future.

“The work we’ve done over the last few months has been very rewarding,” Elbech said. “We still have some tasks to complete, but once they are done the AIIB will start issuing bonds. Getting a credit rating was the last piece of the puzzle.”

The AIIB was set up with $100 billion of authorized share capital and paid-in capital of $20 billion. But over the next few years, after the paid-in capital has been allocated to projects, the bank will need to issue bonds to raise money to support more projects.

“We started making preparations early so that we can get the AIIB’s name out in the market and make it a recognized name among investors,” Elbech said.

Fast loans

That time may come sooner than expected for a new multilateral development bank, given the speed at which the AIIB has been lending. Although formal operations began in January 2016, the bank has given the go-ahead to 16 projects involving $2.5 billion in loans and equity investment. In comparison, the ADB and the European Bank for Reconstruction and Development (EBRD) didn’t make their first loans until two years after they were founded.

Not only has the AIIB moved quickly, but it has done so with far fewer employees. The EBRD had 1,000 staff when it approved its first project, while the AIIB has just over 100, a reflection of President Jin Liqun’s mantra that the bank should be “lean, clean and green.”

Pursuing those objectives has led the bank to learn lessons from the often unwieldy bureaucracy of some of its peers. The World Bank, for example, has a resident board of directors who live in Washington, meet twice a week and approve every loan. A 2009 report by the Zedillo Commission into reform of the World Bank criticized this structure, saying that not only did it cost more than $60 million a year to run the offices of the directors, it also slowed down project preparation and made the bank less efficient.

At the AIIB, the directors don’t all reside permanently in Beijing. Instead, they only travel to the lender’s headquarters for board meetings four times a year. The rest of the time, they hold meetings via video conference or teleconference.

This nonresident board structure helps avoid the problem of board micromanagement and allows members to stay focused on strategic issues, a board member from a developed country told Caixin.

At the annual meeting of the AIIB’s board of governors last month in South Korea, Jin reiterated his plan for the board to delegate project approval to the bank’s management, although Michelle Gysin, an alternate AIIB board member from Switzerland, said at the meeting that this proposal was still in the initial stages, as the types of projects that should be delegated had not yet been decided.

While board governance may be different, the AIIB largely mirrors older multilateral development banks such as the World Bank and the ADB when it comes to investment. It co-finances projects with other international institutions and mostly provides loans with sovereign guarantees.

Of the 16 projects that the AIIB has so far approved, three-quarters are jointly financed with other institutions. The remainder has been funded solely by the bank.

Infrastructure demand

So far, the AIIB has only made two investments that have not been guaranteed by a member nation. The first was a combined cycle gas turbine power plant in Myanmar, which was jointly financed with the International Finance Corporation (IFC), the private sector lending arm of the World Bank. The second was the bank’s investment in the India Infrastructure Fund, which was also its first equity investment. The AIIB is contributing $150 million to the fund, which is seeking $750 million in capital to invest in infrastructure companies.

Four more nonsovereign-backed financing projects have passed preliminary screening. Among them is a $2.2 billion project for a subway line in Mumbai, for which the AIIB may provide a loan of up to $500 million. Nonsovereign backed financing is expected to reach $500 million this year and $1 billion by 2020, according to an AIIB official.

But multilateral development banks like the AIIB can never provide all the funding needed for infrastructure construction around the world. In a February report, the Asian Development Bank estimated that developing Asia alone needs to invest $22.6 trillion in infrastructure, excluding climate change-related investment, from 2016 to 2030, or $1.5 trillion a year. In a study of 25 developing member countries, the ADB estimated a gap between current and needed investment levels of $330 billion during the five-year period through 2020.

Multilateral development banks can only provide about $100 billion of lending per year between them, while global demand for funding for infrastructure is about $3 trillion, said Zhu Xian, a former vice president at the World Bank who is now chief operations officer at the New Development Bank, a multilateral development bank set up in 2015 by Brazil, Russia, India, China and South Africa. Multilateral institutions can create new markets and attract private capital to participate in this investment, Zhu said.

The AIIB sees itself over time playing a bigger role in generating investment from the private sector, said Joachim von Amsberg, vice president of policy and strategy, at the bank’s annual meeting.

However, this strategy is not limited to the AIIB. The World Bank also aims to harness capital from private investors who have trillions of dollars available, a process its President Jim Yong Kim described as “crowding in the private sector.”

In a speech in April, Kim said that all development finance institutions should be working to boost the involvement of private capital in infrastructure investment, and portrayed the World Bank as playing the role of matchmaker between investors with money and projects in need of funding, while also helping to reduce the risks for investors. He also urged multilateral lenders to stop competing with each other to finance projects that could be funded by the private sector.

Gysin, the alternate AIIB board member, cautioned that the bank needs to manage the expectations of the international community. “The AIIB isn’t going to reinvent the wheel just yet,” she said.

Contact reporter Liu Xiao (liuxiao@caixin.com)