Crowd Funding

Investors are often suspicious of multilateral development banks. Paul Jarvis says the Asian Infrastructure Investment Bank might be different

For all the rhetoric around the world at the current time, soft power remains a hugely important part of any country’s armoury.

And with the increasing isolation of the US under President Donald Trump, it is perhaps little surprise that China is looking to make the most of this, by upturning the geopolitical order as it seeks, under Xi Jinping, to become the next global superpower.

Over the coming years, it looks likely that one part of China’s soft power strategy will be to leverage its role in international development, supporting the growth of new economies in and around the Asia region. At the forefront of this development will be the Asian Infrastructure Investment Bank (AIIB), which was established three years ago, in October 2014, and has since attracted the attention of countries around the world – including the UK, which became the first major western country and the first member of the G7 to join the bank in 2015.

At an event at Asia House in London in October, Sir Danny Alexander, the former UK chief secretary to the Treasury who is now the AIIB’s vice president and corporate secretary, fleshed out a little of the background on the bank, and how it plans to mobilise private sector capital to meet the enormous infrastructure needs across Asia.

“We cannot bridge the gap without bringing in more private capital,” he said, adding that governments and multilateral development banks (MDBs) currently make up 80% of the region’s spend on infrastructure. The scale of the need dwarfs all the investment available from MDBs and governments. That means co-financing is crucial.

“The pool of private capital is enormous,” Sir Danny continued, explaining that, on some forecasts, institutional investors will hold $106trn by 2030. And experts at the event agreed that there is likely to be plenty of opportunity to invest.

“The more countries see [the likes of] China who have used infrastructure to pull themselves out of poverty, the more they will want to emulate that,” said David Sayer, chairman of high growth markets at KPMG.

When MDBs start talking about financing a wealth of projects across their remit, debt investors often start to get a little uneasy. After all, critics point to several deals across the world, such as the UK’s Mersey Gateway PPP, as examples of projects in which a multilateral has invested money despite most in the market believing that the private sector could have done the deal instead.

Sir Danny, though, is clear that the AIIB is not looking to just throw money at the problem. His background may be important here. During his time at the UK Treasury, he was instrumental in developing the UK Guarantees programme, which was designed to underpin investments in projects that otherwise would not have found support from private investors.

This is an important cultural difference with many MDBs that have been around for some time, and have a history of simply providing loans to countries. “It is sexier to design new financing instruments,” says Jordan Schwartz, director for infrastructure, PPPs and guarantees at the World Bank. “But a pipeline of viable projects is the choke point.” He suggests that there has been an “ongoing process of realisation” at MDBs around the world.

“The World Bank is moving more and more towards a paradigm where its own balance sheet is oriented towards crowding in private finance.”

Sir Danny said that the AIIB has already established a fund for project preparation. “[That] offers grants to members of our bank specifically to help those countries develop projects,” he added.

“For me it was very comforting to hear what Sir Danny had to say about the way that the AIIB intended to support infrastructure growth in Asia going forward, not just in terms of investment but also in terms of project preparation,” says John Seed, global advisory services sector lead at Mott MacDonald.

Multilateral banks now have an important role to play in supporting project preparation. Sir Danny explained that if the bank can help raise the standard and quality of projects being brought to market by governments, that will be good for both private investors and organisations like the AIIB. Many in the industry believe that this should be a long-term goal of the AIIB and other MDBs.

Seed was also pleased to hear from Sir Danny that the AIIB plans to take advantage of new approaches, particularly in relation to the work currently being done by the Sustainable Infrastructure Foundation’s Source platform.

“We see this as the most advanced global online project preparation platform,” says Seed, pointing out that 10 different MDBs such as the World Bank, the European Bank for Reconstruction and Development and the Asian Development Bank are already supporting the platform.

“The aim of these MDBs is for Source to have over 1,000 global projects by 2020, which makes this a very valuable project information tool for the private sector as well.”

The use of a platform like Source could change the way in which countries approach schemes and, ultimately, how they pitch projects to the market to make them much more attractive to private investment.

As Seed puts it: “If enough people from the MDBs, public and private sectors get behind this and support it then it stands the best chance of genuinely acting as a catalyst for the future generation of more and better well-prepared projects, which after all is what everyone wants.”

Sir Danny is eager to look at the problems that lie behind the lack of investable projects that are ready to come to the market. “There are clusters of barriers,” he said. “A big one is the domestic policy climate.”

This is where organisations like the AIIB can come in, supporting those governments as they deliver new measures to introduce the appropriate tariff or regulatory environments.

Matt Cavanagh, director of group government relations at Prudential, pointed out that the AIIB and other organisations in a similar position “can talk to governments about issues of regulation and improving that”.

“MDBs have a huge role to help countries understand the standards that are required,” added Sayer.

Schwartz says that MDBs are putting more effort into this area, but adds that achieving these structural reforms within countries “is hard work and not easily rewarded”. Furthermore, he points out that it is important that existing projects are not held up while those structural reforms are implemented, otherwise enthusiasm will dwindle.

“The strategy should be to look at the pool of projects at an early stage and work with banks and investors so that projects are designed to standards that global investors will recognise,” said Sayer. “The AIIB can play an important role in that. Early engagement is important to do that.”

Another area where Sir Danny believes that the AIIB can play a role is in getting private sector investors comfortable with the infrastructure market more broadly. Institutional investors still face difficulties when putting their cash into more risky schemes, and Sir Danny said MDBs can help to manage the step from construction risk to long-term asset management.

One of the best ways to develop investable projects is, of course, to work alongside the private sector in the early stages of development.

But as Cavanagh pointed out, institutional investors have to have a fixed income stream. “But if you’re investing in the early stage, it’s not going to have that yet. You can sometimes work with banks to get round that but not always.”

And Daniel Hanna, global head of public sector and development organisations at Standard Chartered Bank, said that, while construction risk is a barrier, it is not the only one. He is confident that there are many products already out there that can provide at least part of the solution, and suggests that this is where the MDBs can come into their own.

“There is a huge opportunity here for MDBs to be innovative around how do we mix and match some of the products that are already there to create a strategy,” he said.

Sir Danny is determined that the AIIB can help spur private sector investment, through a range of means.

“Ultimately we want to be able to come into a sector and crowd in private investment. When the private sector sees the AIIB going into new markets, we want that to be a reason for the private sector to crowd in, in and of itself,” he said. “We will structure and execute stand-alone deals. That is the next phase.

“By investing in infrastructure, we can boost prosperity, boost sustainability and improve living standards.”