Fast-growing Asian infrastructure bank hits milestone

The AIIB, short for the Asian Infrastructure Investment Bank, was first proposed by China back in 2014.

It has since been compared to other multilateral development banks (MDBs): the World Bank, the Asian Development Bank (ADB), the European Bank for Reconstruction and Development (EBRD) and the International Monetary Fund (IMF). These, however, are largely fronted by the US, Europe, and Japan.

The ADB estimates Asia will need US$8 trillion between 2010 and 2020 and US$26t by 2030 to address the infrastructure investment shortage and to maintain current economic growth.

The current MDBs are far from able to help service this need.

So it does make sense to have another funding option – especially for projects in lessdeveloped countries.

For a new international organisation that has no prior track record, AIIB membership uptake has been fast.

Twenty-one countries signed up as founding members in October 2014 with an initial capitalisation of US$50 billion.

Amazingly, when the deadline for founding membership closed on April 15, 2015, the AIIB had settled on 57 founding members, including 34 from Asia, 18 from Europe, two from Oceania (New Zealand and Australia), two from Africa, and one from Latin America. The initial capitalisation was revised upwards to US$100b.

Notably, the large emerging markets of India, Russia, Indonesia and Brazil (and of course China) are part of this group. More noticeable though, is the absence of the US and Japan.

Asian countries own around 75 per cent of the bank.

Officially launched in January 2016, the AIIB has a three-tier structure: a board of governors, a board of directors, and a management team. When a new member joins, existing members will see their shares and voting rights adjusted proportionally.

The largest project that the AIIB has funded so far is a US$600 million loan for an energy project in Azerbaijan.

By the end of 2016, the AIIB had awarded loans of US$1.73b to nine projects. Initial targets stood at US$1.2b. Seventy-five per cent of projects are co-financed with other existing MDBs.

By June 2017, the funding had extended to 16 projects, with a loan value of US$2.49b.

Meanwhile, membership has expanded to include 23 new countries so far this year, bringing the total membership to 80 nations.

The AIIB expects membership to reach 85 if not 90 by end of 2017.

New Zealand was one of the first 21 countries to sign up. In June 2015, it committed to a US$87m investment into AIIB over five years.

Given New Zealand’s increasing engagement in Asia and with Asia, this investment is a small price for becoming part of the discussion.

Late last month, Moody’s gave the AIIB the highest possible rating: AAA, with a stable outlook. The rating was awarded on the basis of ‘‘the strength of the AIIB’s governance frameworks, including its policies on risk management, capital adequacy and liquidity’’. This is testimony to the AIIB’s fast evolution.

The co-financing of AIIB projects with other MDBs also provides a lot of legitimacy for the newly minted MDB.

Further, it also distances it from China (even though China remains its largest shareholder), which is a good move.

China would do well to keep it this way, as the country clearly needs a lot of infrastructural developments on its own as well as hoping that infrastructural developments elsewhere (funded by AIIB and other MDBs) will boost its bilateral trade and investment with these countries.

New Zealand was one of the first 21 countries on the initial membership list.