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3 April 2019

Asian In­fras­truc­ture In­vest­ment Bank achieves ma­jor mile­stones in its first three years

  • The Asian Infrastructure Investment Bank (AIIB) is the newest multilateral bank. After three years in operation, it has achieved key milestones in its development: The AIIB’s project portfolio, and the number of member countries, have grown. The bank is working together successfully with other multilateral banks. And the three leading rating agencies have given the bank top marks.
  • This solid start is a necessary but not sufficient condition for future success. As a bank that has pledged to operate as a “lean, clean and green” organisation, the AIIB must keep working hard to ensure that its projects are not only financially viable but also sustainable in social and environmental terms.
  • The AIIB is building up its own expertise and has gained the recognition of key players in the field of international financial and development policy. These positive developments attest to the prudent, targeted approach it has taken in its initial years of operation. The bank’s primary challenge now is to sharpen the focus of its business model.

Introduction

The AIIB is the newest member in the family of multilateral development banks. The Beijing-based institution launched operations in January 2016. Germany is one of 57 countries (including many other EU member states) that joined as founding members. During the process of setting up the bank, Germany and other advanced economies pushed successfully to ensure that its Articles of Agreement are fully consistent with established international standards.

The AIIB’s objective is to help reduce what international experts such as the Asian Development Bank consider to be a significant shortfall in infrastructure financing in Asia. Doing this would boost sustainable economic development in the region and foster greater convergence in environmental, social and living standards in the countries where the bank operates. In keeping with this strategy, 85% of the contributions that shareholders make to the bank count as Official Development Assistance (ODA). Investments by the AIIB place a priority on the following sectors: energy, transport, urban development and water, especially in the region’s less-developed countries. Despite dynamic growth in recent decades, the region as a whole is still home to a number of countries where annual GDP per capita remains below US$2,000. At the same time, the bank aims to intensify regional cooperation by working together closely with existing bilateral and multilateral development institutions.

Official Development Assistance (ODA)

is public funding that is made available for development projects bilaterally or by multilateral and international organisations, in accordance with the criteria set by the OECD’s Development Assistance Committee.

For the German government, membership in the AIIB builds on Germany's successful participation in international development banks and financial institutions that provide financing for infrastructure projects. When, in 2015, the German Bundestag gave its approval for Germany to join the AIIB, it stated clearly that the bank needs to apply high environmental, social and governance standards and to put procurement rules into place that are both fair and up-to-date. The bank has been in operation for over three years. Now is an opportune time to take stock of what it has accomplished so far.

A medium-sized development bank with a growing membership

An institution with international drawing power

Since the AIIB launched operations in January 2016, its membership has grown from an initial 57 countries to a total of 93 at the present time (23 of which still need to complete the ratification process). This makes the AIIB the world’s second-largest multilateral development institution, as measured by the number of member countries, behind only the World Bank. Countries from the region (Asia including Australia and New Zealand) comprise the majority of members. The bank also has 26 non-regional members that include Germany, other euro area states (Austria, Cyprus, Finland, France, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal and Spain) and other European countries (such as Denmark, Norway, Poland, Sweden, Switzerland and the United Kingdom). Canada as well as a number of African and Latin American countries are also current or prospective non-regional members. The United States and Japan have not joined the AIIB. The sharp increase in the number of countries that have joined the bank is a testament to its significant international drawing power. It was the right decision for Germany to join the bank as a founding member, because this enabled Germany to have an important impact on the bank’s structure and business policies.

Capital and voting rights

Once capital contributions have been made in full, the bank’s capital stock will total US$100bn. This makes the AIIB a medium-sized multilateral development bank. Multilateral development banks that are significantly larger include the European Investment Bank, with capital stock of approximately US$243bn; and the International Bank for Reconstruction and Development (the branch of the World Bank Group that provides loans to middle-income countries), with capital stock of nearly US$269bn (all values as of 2017). 80% of the AIIB’s capital takes the form of guarantees (callable capital) and 20% is paid-in. Non-regional members account for 25% of the total capital. Germany’s contribution comprises 4.5% of the bank’s subscribed capital. Germany is the AIIB’s fourth-largest shareholder overall (behind China, India and Russia) and the largest shareholder among non-regional members. AIIB members’ voting rights are generally based on their share in the bank’s total capital. In addition, like in other international financial institutions, each member is allocated “basic” votes, which are the same in number for all members irrespective of their capital share. These basic votes give smaller countries greater voting power relative to their size. The AIIB members with the largest share of voting power are China (26.5%), India (7.6%) and Russia (6.0%). Among non-regional shareholders, Germany has the most voting power (4.2%), followed by France (3.2%) and the United Kingdom (2.9%).

Governance and standards in line with international norms

Board of Governors as top decision-making body

In general, the AIIB’s governance structure is consistent with that of other multilateral development banks. Strategically important decisions are taken by a Board of Governors that meets annually. This is similar to practices at the World Bank and regional multilateral development banks. Each member state is represented on the board, mainly at ministerial level. Germany is represented on the Board by the Federal Minister of Finance. This reflects the fact that the AIIB is an investment bank. Overall, the bank’s business model resembles that of the European Investment Bank and the European Bank for Reconstruction and Development more than it resembles the business model of traditional development banks like the Asian Development Bank. The Board of Governors has met four times to date: at the bank’s inauguration in Beijing in 2016, and then for three annual meetings in Beijing (2016), Jeju, South Korea (2017) and Mumbai, India (2018). The next annual meeting will be held in Europe for the first time: in Luxembourg on 12–13 July 2019.

Non-resident Board of Directors

The AIIB’s Board of Directors – which is comprised of 12 directors – oversees the bank’s day-to-day operations. Like the European Investment Bank and the International Fund for Agricultural Development, but in contrast to most other multilateral development banks, the AIIB’s Board of Directors is non-resident, which means that its members do not work permanently at the bank’s headquarters. The Board meets in person four times per year. Conference calls, virtual meetings and written procedures are used for additional consultations. Germany’s representative on the Board, who always serves as a director or alternate director, works at the German Embassy in Beijing. This ensures that Germany can maintain close contact with the bank’s management and staff. This set-up, which has proven highly effective for Germany, is also used by Austria and will soon be adopted by France as well.

Germany and the Euro Area Constituency

Germany and the other euro area countries that are AIIB members have formed a joint voting group, called the Euro Area Constituency (EAC). The EAC is currently represented on the Board of Directors by Austria. France will take over from Austria in July 2019. The EAC is the second-largest constituency on the Board of Directors, with voting power of 15%. This enables the EAC to exercise considerable influence on the Board’s decisions. In addition, EAC members work in tandem to build common positions with other shareholders. Teaming up with other AIIB members in this way makes it arithmetically possible to accumulate the necessary 25%-plus voting power to block major decisions, which require a majority vote of at least 75% under the bank’s Articles of Agreement. The experience that has been built up over the past three years shows that the EAC plays a noticeable role on the Board of Directors and has succeeded in joining forces with other members to influence important decisions in key areas such as: the bank’s energy policy (in particular, ruling out support for projects involving nuclear energy); the division of responsibilities between management and the Board of Directors under the bank’s Accountability Framework (in particular, strengthening the board’s powers of oversight); and the bank’s newly established complaints handling mechanism (ensuring appropriate access, including the use of multiple languages).

Table of the Distribution of voting power on the AIIB Board of Directors

AIIB standards: comparable with those of the World Bank

The German government is also committed to ensuring that the AIIB applies the highest possible environmental, social and governance standards (see “Draft Act on the Articles of Agreement of 29 June 2015 establishing the Asian Infrastructure Investment Bank”, Bundestag printed paper 18/6163). To this end, over the past three years, Germany has worked persistently – in cooperation with other shareholders and in consultation with non-governmental organisations – to promote the adoption of relevant rules. This was the case most recently with the design of the complaints handling mechanism mentioned above.

The AIIB’s Environmental and Social Framework (ESF) is consistent with similar standards in place at the World Bank and other international development banks. This was confirmed in a paper published by the Reference and Research Services of the German Bundestag on 4 July 2016 that compares ESF standards at the World Bank and the AIIB. The analysis found that the ESF standards followed by both banks provide a similar level of protection in many areas, and that some of the AIIB’s standards are even more encompassing than those applied by the World Bank. In the German government’s view, the AIIB’s ESF standards demonstrate a shared interest on the part of the bank and its shareholders to uphold the rules and obligations of the international community.

For the German government, it is also important for the AIIB to pursue open information policies that are comparable to those of other international financial institutions. To date, all of the bank’s key documents – such as project proposals and summaries as well as documents on operational policies and governance – have been published online. In addition, the bank publishes information on planned projects before decisions about their financing are taken by the Board of Directors. The time limits applied in this connection are comparable to those used by other multilateral banks. The German government is working to ensure that these time limits are enshrined in the bank’s official rules.

Management and staff from around the globe

Organisational form reflects international standard practices

AIIB President Jin Liqun is in charge of the AIIB’s day-to-day operations. He is supported in this work by five vice presidents. Three of the current vice presidents are citizens of non-regional member countries, and two are from regional members. The AIIB’s staff has been growing steadily ever since the bank launched operations and now includes international experts from approximately 40 countries. The bank’s organisational structure is in line with the structures found at similar institutions. During negotiations to set up the bank, a high priority was placed on ensuring effective control mechanisms. This control is exercised mainly by the bank’s internal compliance unit and by a Complaints-Resolution, Evaluation and Integrity Unit (CEIU) that reports directly to the Board of Directors.

Strict division of functions between management and Board of Directors

In 2018, the Board of Directors adopted an Accountability Framework that aims to ensure state-of-the-art governance by putting clear accountability rules into place. Taking into account the fact that the AIIB’s Board of Directors is a non-resident body, the Accountability Framework seeks to ensure that, as the bank ramps up its business activity, the board remains capable of conducting strategic discussions on bank management and oversight without giving up key powers of control. The Accountability Framework also delegates project approval authority to the bank’s president, a step that is provided for in the Articles of Agreement. This delegation of authority is subject to quantitative and qualitative criteria and is consistent with the regular practices of commercial and investment banks. At first, this delegation of authority to the president will apply to around 15% of the new projects in the bank’s project pipeline and will gradually increase over time, subject to a review by the Board of Directors within three years. Thanks to efforts by shareholders including Germany, important control mechanisms are included in the Accountability Framework. This includes, in particular, a “one director rule” that allows projects to be referred for approval to the Board of Directors if so requested by one or more directors.

Integration within the international financial architecture

Stand-alone investments and co-financing with other institutions

The AIIB’s instruments are those of an investment bank. This covers a wide range of financing instruments such as direct loans at market conditions; holdings; guarantees; and co-financing arrangements with states, national banks, multilateral development banks and private sector companies. In February 2018, the bank adopted a “Strategy on mobilizing private capital for infrastructure”. Based on this strategy, the bank is now increasing its efforts to mobilise private sector financing for infrastructure projects, for example through funds and fund holdings, but also in the form of public-private partnerships under the bank’s transport sector strategy. When the bank first launched operations, it started out mainly by co-financing projects together with other institutions (such as the World Bank and the Asian Development Bank) in order to establish its presence on the market. Since then, the AIIB’s Board of Directors has approved 35 projects with a total investment volume of roughly US$7.5bn. The majority of these projects still consist of co-financing arrangements with other development banks. German institutions are also involved in some of this co-financing: the Gesellschaft für Internationale Zusammenarbeit (GIZ) has signed a framework agreement on regional cooperation with the AIIB, and the KfW Group is making plans to cooperate with the bank as well.

Table showing the AIIB project financing by sector.

Recognition by the United Nations and other multilateral institutions

The AIIB has concluded partnership agreements with all of the multilateral development banks in which Germany holds shares (with the exception of the Caribbean Development Bank). Cooperation with other development banks is a key element of the AIIB’s work, and these activities facilitate its integration into the international financial architecture.

In addition, the United Nations General Assembly granted permanent observer status to the AIIB in December 2018. This privilege – which is extended to the AIIB and other multilateral development banks that, unlike the World Bank and the International Monetary Fund, are not part of the United Nations system – allows the AIIB to follow UN policy discussions in areas relevant to the bank’s remit. In the German government’s view, the widespread recognition granted to the AIIB – including recognition by major multilateral organisations – sends a positive signal that will encourage the bank to continue making forward progress.

Top marks from leading rating agencies

In 2017, the AIIB received AAA ratings from the three leading credit rating agencies (Moody’s, Standard and Poor’s, and Fitch). This top rating was confirmed in 2018. In addition, the Basel Committee on Banking Supervision (based at the Bank for International Settlements) assigned the AIIB a zero risk weight. These top ratings from the “Big Three” and the positive assessment by the Basel Committee for Banking Supervision attest to the AIIB’s successful integration within the international financial architecture. The bank’s transparent decision-making processes and high project standards form the basis for these ratings, which are a key factor in safeguarding its financial sustainability.

Communication with civil society

In order to ensure that the AIIB’s activities are subject to effective public monitoring in line with prevailing international practices, it is especially important for the bank to maintain open channels of communication and participation with civil society organisations. To this end, representatives from the German government and from other AIIB member governments hold regular talks with representatives from these organisations. These talks often take place at events such as conferences and symposia. In addition, the AIIB’s annual meetings provide a forum where AIIB management and staff can discuss relevant issues with representatives from non-governmental organisations, industry, academia and the media. The German government is committed to the active inclusion of non-governmental organisations in the bank’s procedures, for example through consultations during strategy and policy development processes.

Summary and outlook

The AIIB has gotten off to a successful start. It is succeeding in integrating itself into the international financial architecture, as evidenced by its rapidly expanding membership, its recognition by the United Nations and all relevant multilateral development banks, and its top marks from the leading rating agencies. During its first three years of operation, the AIIB’s activities focused mainly on co-financing arrangements. Now it is crucial for the bank to hone its own business profile. As it moves forward, it is important for the bank to put rules into practice (such as rules in the area of procurement) that have so far been applied only to a limited extent in the context of co-financed projects. As a member of the bank, Germany will continue to provide the AIIB with rigorous and constructive support.

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