Asian Infrastructure Investment Bank hits major milestone

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 that Asia will need U$8 trillion in the period 2010-2020 and U$26t by 2030 to address the infrastructure investment shortage and to maintain its current economic growth rates.

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 less developed countries where funding obstacles are common.

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

21 countries signed up as founding members in October 2014 with an initial capitalisation of U$50 billion.

Amazingly, when the deadline for founding membership closed on 15 April 2015, the AIIB had settled on 57 founding members, including 34 from Asia, 18 from Europe, 2 from Oceania (New Zealand and Australia), 2 from Africa, and 1 from Latin America. The initial capitalisation was revised upwards to U$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 United States 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 U$600-million loan for an energy project in Azerbaijan.

By the end of 2016, the AIIB had awarded loans of U$1.73b to nine projects. Initial targets stood at U$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 U$2.49b.

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

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

New Zealand was one of the first 21 countries in the initial membership list announced in October 2014. In June 2015, it committed to a U$87m investment into AIIB over five years.

Given New Zealand's increasing engagement in Asia and with Asia, this investment is considered a small ticket price for becoming part of the discussion around Asia and New Zealand (investment infrastructure) future.

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 a testimonial to how far the AIIB has evolved within a short period.

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 as it seeks to continue its journey in infrastructure.

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.

Published on stuff.co.nz