AIIB itching to link up more with private capital

At a conference, senior executives of the Asian Infrastructure Investment Bank said they were keen to work more with pension funds and sovereign wealth funds.
Jin Liqun, President of the Asian Infrastructure Investment Bank (AIIB)
Jin Liqun, President of the Asian Infrastructure Investment Bank (AIIB)

The Asian Infrastructure Investment Bank (AIIB) is ready to step up operations and is itching to link up with private capital to help plug the funding needs of developing countries, not least in Asia where the projected infrastructure spending requirements run into the tens of trillions of dollars.

That was the key message at an industry conference this week in Hong Kong as several senior executives of the multilateral lender lined up to address delegates.

One of the AIIB's "core objectives" is to facilitate the mobilisation of private sector investments and to that end it hopes to partner up with long-term investors like pension funds and sovereign wealth funds, AIIB chief financial officer Thierry de Longuemar said at the summit.

“We offer the role of risk mitigator. In the world of multilateral development banks, we have dreamed of attracting the private sector for many years, but we failed. The problem is how to price risk. Pricing risk is not easy,” de Longuemar said.

AIIB, headquartered in Beijing, is the new kid on the block among multilateral development banks like the US-led World Bank and the Asian Development Bank, whose biggest shareholders are the US and Japan. Since it was mooted by the Chinese government in 2015, AIIB has gained more than 85 countries as members. Notable by their absence is the US and Japan, which are widely believed to shun the AIIB out of geopolitical rivalry with China.

Its emergence is timely, though, given developing Asian countries will require infrastructure investment totaling US$26 trillion, according to Paul Chan Man-po, Hong Kong's Financial Secretary, who also spoke at the summit jointly organised by the AIIB and Financial Times.

And since starting operations in January 2016, AIIB has so far approved over US$5 billion of projects in countries like Turkey, Egypt, Bangladesh, Pakistan, Indonesia and Tajikistan. 

The problem, Chan added, is that there is "a lack of bankable projects out there for investors and financiers due to political and legal risks at the country level [and] to construction, operation and financial risks at the project level."

"Mitigating these risks is critical to improving the bankability of infrastructure projects and, in doing so, narrowing the infrastructure financing gap," he said. "In this regard, the AIIB plays a key role.” 

In an interview with FinanceAsia on the sidelines of the conference, AIIB President Jin Liqun underlined the bank's key objectives. “It is so important for us to mobilise private sector investments," he said, noting how the AIIB co-invests in infrastructure projects to help mitigate the associated risks and instil confidence in the private sector.

Jin cited the example of a gas-fired power plant in Myanmar to which AIIB lent US$20 million. The US$300 million power plant, which began operations earlier in October, was constructed by a Singaporean company, Sembcorp Industries.

Previously, Jin was a Chinese vice minister of finance, chairman of China International Capital Corporation, a major Sino-foreign joint venture bank, and ADB vice president. “I’m not promoting China as I’m an international civil servant, but I do hope we take advantage of a growing China,” he said in an earlier summit speech.

POLITICAL RISKS

The risks in infrastructure projects, which typically involve huge spending and long payback times, include political risks like a new government cancelling a project and inconsistencies in a government’s policy. So one way the AIIB can reduce risks is to focus on projects given priority by the local government as it means they will more likely step in to help if things go wrong.

“It gives the private investor assurance, as it is an important project and we put funding in it,” he said.

And in that respect, the AIIB takes a proactive line by conducting due diligence and feasibility studies and mitigating any regulatory risks through dialogue with governments, Jin told FinanceAsia. “Private investors really hate uncertainty, especially regulatory uncertainty.”

Another way that multilateral development banks can attract private investment to projects in developing countries is to provide credit guarantees, said AIIB vice president Joachim von Amsberg.

He cited the World Bank’s provision of credit guarantees for the Sankofa oil and gas project in Ghana, developed by Italian oil and gas major ENI and Vitol, a UK energy and commodities company. This credit guarantee unleashed US$8 billion of private investments in the Ghanaian project, von Amsberg said.

Jin expressed hopes of encouraging private investment in such developing countries, which normally would not be attractive to private capital.

Low income countries face a dilemma, Jin said at the FT-AIIB summit. On the one hand, they need to spend on infrastructure, otherwise their economies cannot grow. But if low income countries spend too much, they incur debt which is unsustainable, he pointed out. “This is a very delicate balance. We are trying to be more creative to deal with such challenges.”

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