AIIB Strategy Briefing - CICAAIIB Strategy Briefing Background, Strategies, Investment and...

AIIB Strategy BriefingBackground, Strategies, Investment and Challenges

AIIB 2nd Annual Meeting of the Board of Governors

Governor Seminar I

June 2017

2

I. Background and Context of Setting Up AIIB

II. Strategy and Thematic Priorities

III. Investment Strategy and Investments to Date

Presentation


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20,000

40,000

60,000

80,000

100,000

120,000

140,000

GDP per capita, PPP, in 2015 (constant 2011 international dollar)

CHINAINDONESIAINDIA

VIETNAM

AFGHANISTAN

QATAR

PHILIPPINES

JAPAN

NEPAL

BANGLADESH

CAMBODIA

PAKISTAN

MYANMAR

UZBEKISTAN

SRI LANKA

IRAQ

THAILAND

TURKEY

KAZAKHSTAN

SAUDI ARABIA

TAJIKISTAN

AZERBAIJAN

MALAYSIA

ISRAEL

OMAN

SINGAPORE

UNITED ARAB EMIRATES

High income

Upper middle

KOREA

Note: Analysis includes 43 countries – Afghanistan, Armenia, Azerbaijan, Bahrain, Bangladesh, Bhutan, Brunei Darussalam, Cambodia, China, Cyprus, Georgia, India, Indonesia, Iraq, Israel, Japan, Jordan,

Kazakhstan, Korea, Kuwait, Kyrgyz Republic, Lao PDR, Lebanon, Malaysia, Maldives, Mongolia, Myanmar, Nepal, Oman, Pakistan, Philippines, Qatar, Saudi Arabia, Singapore, Sri Lanka, Tajikistan,

Thailand, Timor-Leste, Turkey, Turkmenistan, United Arab Emirates, Uzbekistan, and Vietnam

Source: World Bank, AIIB analysis

Legend: Low income

Lower middle

Upper middle

High income

An uneven development picture in Asia

Country (width reflects population in 2015)

Many countries (with more than half of Asia’s

population) in low or lower-middle income group

With 29% of Asia’s population below $3.1 per day

(poverty) and 8% below $1.9 (extreme poverty)

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Infrastructure has a central role in development


Investing to make up for past

shortfalls

China in 2000s; Korea spent around

12% of GDP on infra in 1990s; Japan

11% of GDP in 1980s

But many developing Asian

economies lag behind

Investment ramp up necessary to

make up for past shortfalls

And sustaining future economic

development

Replacing older infrastructure

Providing for population increase

Deepening capital

% GDP on Infrastructure

An illustrative breakdown

There is no substitute for infrastructure in

development; sustained investment is necessary

Depreciation

Deepening

Population growth

Developing countries need to

sustain at least 7 percentage

points of GDP towards

infrastructure investment

4

Population growth and urbanization will drive demand


Population growth and urbanization

Asia’s population still growing, 42 million per year

Increase in urbanization rate from 48% today to 64% by 2050

Implying 1.25 billion more urban dwellers by 2050

Note: Uses a population of 25.2 million in Seoul Metropolitan Area (as of 2Q 2016)

Source: UN World Urbanization Prospects, Seoul Metropolitan Government, AIIB analysis

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292

545 496346

2,064

42

390581

674

1,137

3,313

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Oceania Northern America Europe Latin America Sub-Saharan Africa Asia

Urban population (million)

2014

2050

0.6x

4x1.4x 7x

32x

50xAdditional urban population = Seoul Metropolitan

Areas

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And also to meet climate change challenges


Asia needs more power generation

Low access to modern energy (500m without regular electricity access)

Asia’s energy consumption will continue to grow faster than rest of world

With dominance of fossil fuel, and rapidly increasing CO2 emission

Opportunity for transition

Reducing carbon emission from BAU

Big opportunities provided by renewable technologies and improved economics

Will require large scale infrastructure deployment to meet this challenge

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Culminating in large infrastructure demand


Global and Developing Asia Infrastructure Demand, in USD trillion

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With energy and transport seeing largest needs


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Low interest rate environment did not lift investment


Low yield

Interest rates have fallen post

financial crisis

Search for yield

Low investment rate

Post-crisis project financing in

Asia remains low

0

1

2

3

4

5

6

0

20

40

60

80

2007 2008 2009 2010 2011 2012 2013 2014

Power

Transport

Project financing in Asia - USD billions Per cent

6-mth Libor (RHS)

Source: Thomson Reuters Project Finance

Constraints

Many governments facing fiscal

constraints

Context

Huge unmet infrastructure needs in Asia

Low global growth, historically low interest rates with ample capital searching for yield

Slow pace of governance reform in major MDBs

MDBs are uniquely placed to accelerate sustainable infrastructure investments

High standard of environmental and social requirements

Closely working with country governments

Longer tenor suitable for infrastructure financing

Intermediate, leverage, and mobilize financing

Broad consensus on urgency and need of sustainable infrastructure

Paris Agreement to address climate change

Spurs growth by supporting trade and productivity

Generates employment and provides services to the poor

Accelerates and locks in transition toward sustainable energy, transport, and cities

Setting up AIIB to address Asia’s needs


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Chinese President Xi and Premier Li announced the AIIB initiative during the

respective visits to South East Asian countries, Oct 2013

AIIB is set up to bring countries together to address the daunting infrastructure needs across Asia

MOU signed by 22 countries Oct 2014

AOA was signed in Jun 2015 and took effect on 25 Dec, 2015

The Bank began operations in Jan 2016

Mooted in late 2013, began operations in 2016


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With wide ranging membership


Fiji

Hong Kong

Membership in AIIB continues to be open to members of the IBRD or the ADB. Since launching, 20 prospective new members

have been approved to join AIIB, bringing the Bank’s total membership to 77. AIIB’s role in facilitating infrastructure

development is an important priority for shareholders’ long-term economic development goals

Additional sources: Various

public press releases; AIIB;

77 members include 53

members, 4 prospective

founding members (who

have signed, but not yet

ratified the Articles) and 19

prospective new members

EuropeAustria

BelgiumCyprus

DenmarkFinlandFrance

GermanyGreece

HungaryIcelandIreland

ItalyLuxembourg

MaltaNetherlands

NorwayPoland

PortugalRomania

SpainSweden

SwitzerlandUnited Kingdom

Central AsiaKazakhstanKyrgyzstan

TajikistanUzbekistan

Russia

Mongolia

South-Eastern AsiaBrunei

CambodiaIndonesia

LaosMalaysia

Myanmar

PhilippinesSingaporeThailandTimor-LesteVietnam

AustraliaNew Zealand

Western AsiaAzerbaijan

BahrainIsrael

JordanKuwaitOmanQatar

Saudi ArabiaU.A.E.

South Africa

Brazil

Turkey

Georgia

Southern AsiaAfghanistanBangladesh

IndiaIran

MaldivesNepal

PakistanSri Lanka

The Bank … will help to mobilize

much needed additional resources

from inside and outside Asia

….and will complement the

existing multilateral development

banks

Articles of Agreement

China

Prospective regionalProspective non-regional

Members

RegionalNon-regional

Armenia

Peru

Venezuela

Canada

Sudan

Ethiopia

South Korea

Egypt

Chile

Bolivia

Samoa

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And strong governance structure


For Share Votes, each member has one vote for each

share of capital stock held

Each Founding Member to be allocated six hundred

Founding Member Votes

Basic Votes ensure that smaller member countries have

a minimum voting power, constituting 12 percent of the

total number of votes at any time.

Members' voting power is the sum of their Basic Votes,

Share Votes and, where applicable, Founding Member

Votes

Board of Governors

President

Vice Presidents (5)

Board of Directors

One governor per member

All power vested on governors

Non resident Board (for leanness)

12 Directors, 2 year terms

Supervises Management

Elected by governors on merit

5 year term

From regional member

Appointed by BOD based on

recommendation by President

Based on merit

Compliance,

Effectiveness and

Integrity Unit

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Who is AIIB?

o 18-month old multilateral financial institution – began operations in January 2016

o USD100 billion subscribed capital, 20% paid-in capital

o 77 member countries from Asia (45 regional) and beyond (32 non-regional)

o Presently has ~100 staff (and still growing!) from around the world

o Principles – lean, clean and green

What does AIIB do?

o Invest in infrastructure and other productive sectors to foster sustainable economic development,

create wealth and improve infrastructure connectivity in Asia

o Promote regional cooperation and partnership in addressing development challenges by working

in close collaboration with other multilateral and bilateral development institutions

Mandate of AIIB


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Lean

Focused on infrastructure project financing

Work with other multilateral institutions and partners

Streamlined staff structure

Clean

Zero tolerance for corruption

Strong emphasis on integrity and honesty in corporate culture

Green

Invest in sustainable infrastructure

Help Asian countries and members meet climate change targets

Forging a new path


Adds financial capacity to MDB system

High standards in environmental and social requirements as well as procurement

Strengthens the voice for emerging economies and borrowers

Innovates with a lean business model supported by financial strength and clear focus

AIIB complements existing MDBs in several critical areas


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17

AIIB’s key differentiation

One single balance sheet for sovereign-backed and private sector loanso Greater flexibility

o Open to financing sub-national entities, SOEs, private sector companies, or hybrid structures

Investment in countries across all income levels, with attention to lower income countrieso Based on project’s inherent benefits

No budgetary, programme or reform lendingo Focused project financing

o Projects must have infrastructure or productive assets

No concessionary financeo Financing done on commercial terms

o But with a Special Fund (with country contributions) to support project preparation in low income

countries


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AIIB as the Lean, Clean and Green infrastructure investment bank for the

21st Century, focused on three priority themes

Sustainable infrastructure (sustainable energy, transport and cities)

Cross-country connectivity

Mobilization of private capital for infrastructure

Thematic priorities


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A brief strategy map


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Forging partnerships for better projects

Regulatory environment

Policy Guarantees

Professional service

Think tanks, knowledge base

Project owners

Implementation experience

Multilateral financing institutions

Investors

Banks

Finance Sponsors

PolicyExpertise

Roles often overlap, but 4

key types of entities would

be required to sustain

infrastructure investment

AIIB plays the role of

financier (and some

expertise) but will require

partnerships with other

entities

Within finance, partnerships

in co-financing also useful in

risk diversification and

increased balance sheet

capacity

Improve bankability


A brief on project process


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Forms of AIIB Financing Available

Sovereign-backed financing (requires sovereign guarantee)

oLoan

Non Sovereign-backed financing (Private, SOEs, Sub Sovereign, Municipalities)

oLoan

oEquity

oOthers : bonds, credit enhancement (e.g. guarantees), funds, etc.


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Key features of operations

Financing can be single product or combination

Investment in infrastructure or productive sectors

A cap of total investment to crowd in co-financiers

No controlling stakes, unless under exceptional circumstances

Usually no tied projects (procurement must be open)

Strong environment and social safeguards

Key Features of Investments


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Practical considerations

At this juncture, funding mainly in USD and based on floating rates (Libor +

spreads). More currency capability and derivative instruments are being developed

Credit enhancement instruments (e.g. guarantees) are allowed for, but not fully

developed as a product yet

Long or short tenors have to be considered against fundamentals of projects and

market conditions

Bankability

o Sovereign-backed projects should meet the key conditions set in “AIIB General

Conditions Sovereign Backed Loans”

o Non-sovereign projects need to be financially viable

Key Features of Investments (Practical Considerations)


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Approved investment and future projects

0

500

1000

1500

2000

2500

3000

1Q16 2Q16 3Q16 4Q16 1Q17 2Q17

Approved Investments

Many “connectivity” and energy

related projects

More sovereign projects in initial

stages

Investment outlook

Continued focus on priority areas

More private sector projects

Investment in funds

See website for projects under

consideration

Highways, roads

Transmission

Urban redevelopment

Hydropower

Gas power plant

Gas pipeline

Port

Rail

Gas extraction;

pipeline

Dam rehabilitation

Investment fund

US$ millions


Powerlines

Equity funds

Selected projects


26Co-financing Project Standalone Project

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Progressive pipeline and capability building

Granulation of country and sector knowledge to ensure value adding

Early involvement to prepare projects

Taking inclusive approach to work with clients, consultants and co-financiers

Conscious of the risks of creating ‘stranded assets’

Investment strategies


To sum up

AIIB is set up to complement existing institutions and address Asia’s

development needs by focusing on infrastructure project financing

Significant progress in first 18 months since inception in Jan, 2016

Started with 57 member countries (regional and non-regional), expanded to 77

US$20 billion in paid in capital

Just crossed US$2.5 billion in loan and equity investments in 2Q17

Will continue to develop and refine strategy, scale up to meet clients’ needs and

build up the institution

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