The Asian Infrastructure Investment Bank is putting increased focus on ways to mobilise private capital and co-operate with other development banks to fill funding gaps in the region.
"We have recently focused on private sector mobilisation, because we don’t want to put pressure on public balance sheets," said AIIB president Jin Liqun, speaking at the development bank's annual meeting in Samarkand, Uzbekistan last week.
Established in Beijing in 2016, the AIIB currently has US$100bn in capital. Having begun with 57 members, the number has now grown to 110, after Nauru joined last week.
As the name suggests, the AIIB differs from other multilateral development banks in its focus solely on infrastructure development, but there are other distinctions.
“One difference is our capital structure,” said Andrew Cross, chief financial officer at AIIB, in an interview with IFR. “We have a much higher proportion of paid-in capital – around 20% compared with 3%–5% elsewhere in the MDB community. Dollar-wise that’s a very strong signal of support from our shareholders.”
Despite its strong financial backing, Triple A rated AIIB is still prudent in how it deploys capital.
“We are very disciplined in how we use every dollar,” said Cross. “We are guardians of rare treasure. It all comes from taxpayers and we are very disciplined about how we put capital to work.”
While the African Development Bank this year introduced the first hybrid capital issue from an MDB to provide more funding options to the sector, Cross does not anticipate issuing such instruments.
“We don’t need to look at hybrid capital, which tends to be more expensive,” he said. “But we have participated in discussions with rating agencies about the methodology they use to rate hybrid capital from supras.”
AIIB in August sold its first “digitally native” bond, the biggest by any MDB to date. The US$300m bond was publicly bookbuilt, in a change from most other digital offerings that tend to start with a pre-built book to give investors time for internal approvals.
“It’s important to create momentum," said Cross. "For these things to be sustainable, they have to be adopted by other issuers."
Apart from the digital offering, in January the AIIB raised US$3bn and £500m (US$666m) from sustainable development bonds, and last year printed its first Swiss franc issue.
“We want to tap diversified markets, currencies and instruments,” said Cross.
The AIIB has been involved in almost 300 projects in almost 40 countries, and Cross said its vision is to provide 50% of its lending to the private sector and 50% to the public sector.
“A lot of capital resides in the private sector, but to use that capital you have to mobilise it,” said Cross.
As well as funding projects directly, the AIIB has also participated in public market deals, giving issuers the certainty of anchor support. It has invested in asset-backed securities backed by infrastructure loans and issued by Bayfront Infrastructure Management and Hong Kong Mortgage Corporation. In January, it invested Rs4.86bn (US$58m) in India’s largest renewable energy infrastructure investment trust: Sustainable Energy Infra Trust, co-sponsored by Mahindra Susten, the renewable energy platform of Mahindra Group and Ontario Teachers’ Pension Plan.
Along with other MDBs, it has also been providing private sector institutions with historical information on the performance of past projects, giving them data they can use for better credit and risk analysis.
It has co-funded projects with the likes of Asian Development Bank, International Finance Corp and the World Bank, which follow similar standards around things like environmental and social frameworks. Like them, it has been trying to find effective ways to help developing countries transition away from carbon-intensive industries. The ADB’s energy transition mechanism, which raises new financing to decommission coal-fired power plants early and replace them with renewable energy capacity, has shown early promise.
“We are all trying to figure out that space,” said Cross. “We’ve got to give ADB plaudits for ETM and try to figure out what we can do that might be complementary.”
There is plenty of work for them to do to address the Asian infrastructure funding gap – the difference between the amount of infrastructure development needed, compared with what is budgeted by governments. The ADB in 2017 estimated the funding gap at around US$800m a year.
“You could argue these are underestimated, accounting for things like inflation,” said Cross. “And that’s before thinking about climate change. A road might be built to withstand a once-in-a-hundred-years storm, but if those kinds of storms happen more frequently you have to change the way you build the roads. Every metre of elevation increases the cost.”
India is currently the AIIB's largest borrower. The development bank had approved 48 projects there amounting to US$10.45bn as of August 14.
Jin acknowledged the difficulties of funding projects in countries with weak credit ratings, and said the AIIB was thinking about ways to finance infrastructure in those countries without relying solely on concessional funding.