Private sector sees opportunities — and risks — in AIIB collaboration

By Lean Alfred Santos 07 July 2016

Jin Liqun, president of the Asian Infrastructure Investment Bank during the financial institution’s first annual meeting held in Beijing, China. The establishment of the Asian Infrastructure Investment Bank is opening up opportunities for more private sector involvement in infrastructure development. Photo by: Lean Santos / Devex

The establishment of the Asian Infrastructure Investment Bank is opening up “potential opportunities” for collaboration between the global development community and the private sector, Chris Heathcote, chief executive officer of Global Infrastructure Hub, told Devex.

Yet these opportunities will remain potential ones — and without full realization — if the AIIB and other multilateral development banks fail to create the proper platform and incentives for businesses and companies to be more involved.

“All MDBs … need to be looking at the private sector as being a partner for you, so in effect you can lever[age] up your offering with private sector money,” said Heathcote, who was the most prominent voice representing the private sector at the AIIB’s recent annual meeting in Beijing, China. “MDBs have to send a signal to the private sector saying ‘we are here to work with you, to make projects come about’.”

The call for more private sector participation and collaboration to address challenges and finance development solutions is not new. Infrastructure investment demand for the Asia-Pacific region has been estimated to surpass $800 billion per year through 2020 — a figure even the combined capital of all development banks around the world could not match.

Multilateral institutions such as the World Bank and the Asian Development Bank have expanded their outreach to the private sector in recent years. As a new player, AIIB could be a leader by helping “to crowd in private finance,” Heathcote said, engaging business and companies as partners rather than mere contractors.

“AIIB has a fantastic opportunity to be the leader” on private sector engagement, he said. “[AIIB] don’t have the baggage of the existing MDBs. They have a clean slate from which to start to create themselves,” the GIH chief added.

Despite ambitions, however, private sector representation at the two-day inaugural annual meeting of AIIB was disappointing. Most discussions were dominated by multilateral development leaders and officials from all over the region. This is something Heathcote said MDBs such as AIIB needs to address before the private sector will be ready to engage.

“The challenge for AIIB is they need to form themselves [and] get staff on board,” he said. “They need to show that they have their systems functioning. That’s not a small task. They need to start building a track record in living up to their promises, and they also need to start showing that they’re going to be different in engaging with the private sector.”

Private sector interest

As part of its mandate to engage the private sector, the AIIB has a universal procurement process open to bidders from all countries. The bank will place “no restriction upon the procurement of goods and services from any country,” according to the bank’s procurement policy

“We require the most openness and therefore provide opportunities to business[es] even not located in our [currently 57] member countries,” Joachim von Amsberg, vice president for policy and strategy at AIIB, told Devex at the meeting.

Private sector interest appears to be there. A survey by GIH and Singapore-based knowledge hub EDHEC Infrastructure Institute that will be released in the next few weeks showed that there is a growing appetite from institutional investors — 65 percent of the 180 entities surveyed — to invest in infrastructure projects in emerging markets.

But the platform for this sort of investment is still lacking, said Heathcote. Investors are wary of high-risk environments in emerging markets. AIIB — and, to an extent, other MDBs — can be more innovative in their approaches to becoming a bridge to the private sector.

“There’s a lump of money, there is an inability to invest existing money and there’s a desire to increase investment even further in infrastructure and the emerging markets,” he said. “But most of these entities don’t have boots on the ground. They don’t have people in these countries.”

Game of risk

Risk is where MDBs — particularly the traditional ones — can help, Heathcote said. These institutions have a level of trust and historical partnership with the governments, and they have a whole set of products and guarantees to balance risks and opportunities.

“The private sector will really be interested in an MDB when that MDB shows itself as being a willing partner to the private sector,” he said. “It should be a match made in heaven, but for some reason it’s not working. But I think it will come.”   

MDBs can reassure investors by covering specific risks “which the private sector can’t take but which the MDB feels that it can understand,” Heathcote said.

Some examples of such policies and efforts include project preparation facilities from the World Bank, ADB, and the European Bank for Reconstruction and Development launched over the years. AIIB, during its inaugural annual meeting, also launched its own project preparation special fund worth $50 million.

“Getting the risk proportion right is really the key part of deciding which projects should go to the private sector and which risks should be borne by which party,” Heathcote told Devex. “We need the governments, private sector and MDBs to be having sensible conversations around projects, and those have to be about risk sharing and risk taking and not risk avoidance.”

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About the author

Lean 2
Lean Alfred Santos@DevexLeanAS

Lean Alfred Santos is a Devex development reporter focusing on the development community in Asia-Pacific, including major players such as the Asian Development Bank and the Asian Infrastructure Investment Bank. Prior to joining Devex, he covered Philippine and international business and economic news, sports and politics. Lean is based in Manila.


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