WASHINGTON — The Asian Infrastructure Investment Bank is nearly four years old and as it has grown, it is investing in new areas, building out its systems, and trying to solidify its place as the modern multilateral development bank.
On the speaker circuit at events around the annual World Bank meetings, AIIB President Jin Liqun seemed to have a central message: AIIB is different than other MDBs, but still very much a part of the system.
“It’s irrational to pay a lot of money to a management team and then make your own decisions.”— Jin Liqun, president, AIIB
“We are all deeply committed to work together to create the bank as we envisioned ... This bank should remain in the gene pool of the MDB family but should have its new features, otherwise it’s really redundant,” Liqun said at a Center for Global Development event in Washington, D.C. last week.
More on AIIB
So far, AIIB has cofinanced about half of the 50 projects it has done with other MDBs, following their policies and procedures. But as the bank grows beyond this initial $9.6 billion in commitments, it will likely begin to make more investments on its own, seeking to maintain its lean governance structure, small staff, and clear focus, officials said.
Unlike other MDBs, AIIB does not have a resident board, but rather a board that meets four times a year. Liqun said he was “strongly opposed” to having a resident board because he believes boards should approve policies and strategy, but shouldn’t be involved in specific investments. This would lead to more accountability for senior management when something goes wrong, Liqun said, because they are responsible for the decisions they make.
“It’s irrational to pay a lot of money to a management team and then make your own decisions,” he said.
AIIB also does not provide concessional funding, and that’s partly because Liqun wanted a bank that could “stand on its own feet,” and that “should stop milking the shareholders.”
He does not want to constantly have to go back to shareholders and rely on concessional capital, but instead wants the bank to achieve reasonable profit on its own. The bank will not focus on maximizing profit, but on making “reasonable” profit, he said.
The bank is targeting an average risk-adjusted rate of return on capital of 3% for sovereign loans and 7% for nonsovereign finance. Overall, the bank’s return on its investments is about 5% which is “compatible with organic growth,” he said, but also for sovereign clients provides cheaper funds than market finance. Nonsovereign finance is market-oriented because the bank doesn’t want to crowd out commercial finance or underprice the market, according to Joachim von Amsberg, AIIB’s vice president of policy and strategy.
Von Amsberg, who has overseen a replenishment of the World Bank’s fund for low-income countries, the International Development Association, said that model puts a lot of bargaining power in the hands of the contributors, and the recipient countries have quite a limited voice in the process. While it’s a good model, the financing “comes with many strings attached” and you have to “compromise in terms of client priorities.”
“We don't plan to have the kind of replenishment process that would lead to continuous policy demands from nonborrowing countries. And I think that will make us, in some ways, capable of responding well to clients’ demands, as long as they're compatible with our strategies, our priorities, and our policies. So that's a deliberate choice,” von Amsberg told Devex in an interview.
The bank has started a single trust fund to support limited concessional financing that several countries, including Germany and the U.K., have contributed. AIIB will manage it and determine how the funds will be spent, Liqun said.
The bank will also try to avoid duplicating efforts, so while it will provide some project preparation grants, it will leave policy technical assistance to others such as the World Bank, von Amsburg said.
“Policy advice and technical assistance is an absolutely essential part of development finance… but we have said that's not the primary task of AIIB,” he said.
All members of the bank are eligible to borrow, unlike other MDBs, but collectively the members have decided that the money should be invested in low-income countries, though it can invest in high- or middle-income countries.
The bank will also not have large resident missions, in part to keep costs down, Liqun said. Currently with about 300 staff, AIIB will hire more people as it grows, but will avoid “institutional obesity” and “redundancy,” seeking to hire just enough people to do the job, he said.
Setting up systems
AIIB believes that its different structure means it doesn’t need as many staff as other institutions, but is focused on ensuring it can conduct project supervision and monitoring, von Amsberg said. It is working to find the right models to ensure good operational policies, and environmental and social policies, he added.
“We are very mindful of how we’re moving from the sort of build-up phase, where we just cofinance with others, to now having a portfolio of projects where we are the main financier,” he said.
Many of the projects are quite complex and require a lot of monitoring, so the bank will be sure it has enough of a presence on the ground that it can step in if problems happen, he said.
The main responsibility for project documentation sits with the government, private company, or project sponsor, he said, and from the beginning, the bank is building grievance or redress mechanisms — such as local hotlines — into its projects.
“There has to be a mechanism by which if somebody has some negative impact or a complaint about a project, they can immediately complain to the local sponsor or the government,” he said. “That is really the most important line of defense against something going wrong.”
Critics of the bank have expressed concerns that the bank has prioritized efficiency over rigorous monitoring.
AIIB’s layered approach is “practical and reliable,” von Amsberg said, adding that the bank is still young and many of the systems haven’t been fully tested yet.
“But I think the system that we're setting up is quite well-designed and draws well from the experience of my previous employer and other peer institutions,” he said.
Role of China
While China is the bank’s largest shareholder, with 26%, there are now about 100 member countries and most board decisions are made by consensus, von Amsberg said.
“You will not have a decision that is only done by China against the rest of the membership,” he said.
China is interested in being recognized as a leader in setting up a new international financial institution, but in order to get respect, “it needs to be well run and not politicized, and so it is in China’s own interest not to politicize AIIB,” von Amsberg said
“The idea of these portfolios is that we just want to use our investment to create vehicles for much larger investments.”— Joachim von Amsberg, vice president of policy and strategy, AIIB
In its nearly four years, AIIB has invested about $9.6 billion in around 50 projects, at least half of which were co-financed with other MDBs.
The bank has three departments: transportation and water, energy and urban development, and other productive sectors. The bank is trying to be creative and try new things but also recognizes its limitations, and is leaving policy and regulatory work to other institutions, for example, Liqun said.
While much of its funding has gone to traditional infrastructure projects focused on sustainable energy and cities, there has been a stronger focus than expected on innovative capital market operations, von Amsberg said.
The bank has invested a significant amount of money into two bond portfolios, one focused on establishing environmental, social, and governance ratings in Asian emerging markets, and another focused on climate change.
“The idea of these portfolios is that we just want to use our investment to create vehicles for much larger investments,” von Amsberg said. “We are happily equipped by our shareholders with a good capital base, and it’s very substantial also compared to our peers. But it’s small compared to investment needs and so we always have to think about how we can use our financing to influence a bigger market.”
Another way AIIB is trying to do that is by refinancing projects. It has helped refinance infrastructure assets, so that the initial investor can sell them to an institutional investor once a project is built. This approach addresses a key debate and challenge about how to get institutional investors to invest in emerging market infrastructure.
AIIB believes instead of trying to get them to invest in early-stage projects that are messy and complicated, institutional investors can instead purchase portfolios of operating assets. That approach creates a more appealing opportunity for institutional investors and allows the original project owner to use the money it is paid to invest in new projects.
As it makes investment decisions, AIIB uses the Paris Agreement as a prioritization filter for its investment, von Amsberg said.
”We are very much seeing ourselves as an instrument for our clients to achieve their commitments to the Paris goals,” he said.
In practice, that means if someone comes to the bank with a renewable energy program, it is likely to move quickly, whereas a conventional energy program would likely go to the back of the queue of potential investments.
While the bank’s policy doesn’t entirely exclude investments in coal, von Amsberg said there hasn’t been a coal investment and he doesn’t expect the bank to make one.
The language in the policy was not about creating a loophole, but about “showing flexibility, and showing that we’re not ideological about specific fuels but we look at carbon emissions,” he said. “I think now, two and a half years later, people are beginning to believe us.”
The bank has seen little demand from low-income countries for its sovereign financing, in part because they can get lower-cost funds elsewhere, so it is instead focused on nonsovereign and private finance in those places. Moving forward, the bank is considering how project preparation grants or other mechanisms could be used to increase lending in low-income countries.