Eight months after the China-initiated Asian Infrastructure Investment Bank (AIIB) joined the family of Multilateral Development Banks (MDBs), it has already started lending and is working on expanding its membership. The AIIB has impressed the global market with its innovative efforts to engage in investing in infrastructure projects. Experts have noted that the AIIB's advantage lies in its efficient operations and China's understanding of how to cater to the needs of developing countries. Still, its success will hinge on whether it can make a profit on its loans.
The Beijing-based Asian Infrastructure Investment Bank (AIIB) wowed the world last week when a U.S. ally, Canada, announced on Wednesday that it would join the new international bank.
"Succeeding in the global economy of tomorrow will require a strategic partnership and openness to the world, and that's why we're forging new ties with international partners," Canadian Finance Minister Bill Morneau said in a statement on the Canadian government's website.
AIIB President Jin Liqun welcomed Canada's decision, saying that the timing ahead of G20 summit is a vote of confidence in the new bank, according to a CCTV report on Saturday.
Canada is one of dozens of countries that have expressed interest in joining the China-initiated multinational financial institution.
The AIIB has 57 founding member countries, the majority of which are located in Asia and Western Europe, including China, South Korea, the UK, Germany and France.
The bank started accepting applications for new members this year. The application window will remain open until the end of September.
Jin said more than 20 countries have filed applications, and there has been a surge in applicants from outside of Asia, including major powers in Eastern Europe, Africa and Latin America, according to the report.
If the AIIB was to approve these applications, its roster would expand to more than 80 countries, exceeding the membership of the Japan- and U.S.-led Asian Development Bank (ADB), which has 67 members.
Chinese President Xi Jinping proposed the framework for the AIIB two years ago, and the bank began operating in January, with $100 billion committed capital to invest in infrastructure projects across Asia.
China contributed $29.78 billion of the bank's starting capital and is the largest shareholder, with 26.06 percent of the voting rights.
The AIIB held the first annual meeting of its 57 founding shareholders on June 25. On that day, the bank approved its first batch of loans, worth $509 million, which went to fund four projects, including construction of a highway in Pakistan and upgrading a part of the power grid in Bangladesh.
The bank also plans to invest $1.2 billion to $1.6 billion in infrastructure construction this year, and the amount is expected to increase to $2.6 billion to $3 billion in 2017, the report said.
An innovative idea
Thomas Maier, the managing director for infrastructure at the European Bank for Reconstruction and Development, said during the annual meeting that he was impressed by the AIIB's willingness to take risks, especially in terms of striding into the private sector.
Currently, the AIIB's financing model draws on sovereign guaranteed loans, Henry Bell, the AIIB's communication officer, told the Global Times on Thursday.
However, the bank has vowed to engage with the private sector to finance infrastructure projects in Asia over the next few years because private companies are "normally cost-effective and have much less bureaucracy," Jin said at a press briefing in late June.
"Private companies usually lack the incentive to participate in infrastructure projects because some projects are risky and require a long period before they can turn a profit," said Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology.
AIIB's involvement will ease the private sector's concerns about working with local governments, Dong told the Global Times on Thursday.
Experts suggested that AIIB ought to draw on lessons from the financing models of other Multilateral Development Banks (MDBs), such as the European Investment Bank, which offers a system of guarantees to allow public institutions to share the risks.
AIIB advantages
As a newcomer to the MDBs family, the AIIB aspires to be lean, transparent and efficient, which should be its strength, experts noted.
"Getting a loan from existing MDBs, such as the World Bank, borrowers typically need to go through a lengthy process," said Liu Xiaoxue, an associate research fellow at the National Institute of International Strategy under Chinese Academy of Social Sciences.
"Loan approval comes with a number of conditions that the borrowing countries are required to fulfill in the following years," Liu told the Global Times on Thursday, noting that some of the conditions, like cutting public spending in a bid to leverage government debt, actually undermine the well-being of the people in those countries.
In contrast, it took about half a year for the AIIB to approve its first batch of loans, which are free of conditions, adding to the evidence that the institution is efficient and flexible, Liu said.
The AIIB should not be seen as a replacement for the MDBs, but as a supplement, because Asian countries have long suffered from a lack of basic infrastructure, which has hindered the region's economic development, experts said.
According to ADB data, Asia will require $8 trillion in investment by 2020 to plug its infrastructure deficit. That amount far exceeded the funding capabilities of existing multinational financial institutions like the ADB.
The AIIB also benefits from a greater understanding of the "successful experience and lessons of the developing world's years of nation building," China's Finance Minister Lou Jiwei said at the annual meeting in late June.
Profit prospects
Despite its advantages, the new bank is just eight months old. One critical issue for the bank will be how to make a profit, experts warned.
"Infrastructure projects usually invoke a pool of capital and sometimes take years to see a profit," Liu said.
"So, the AIIB's biggest challenge will be to figure out how to maintain sustainable development through infrastructure construction."
Experts highlighted the importance of a good track record of performance in reducing the AIIB's financing cost.
Jin was optimistic about the AIIB's future. He forecast that the bank's investments in infrastructure projects would yield returns ranging from 6 percent to 10 percent, domestic news portal sohu.com reported.
"Unlike subsidized lending, which was issued by the World Bank with a relatively lower interest rate," Bell said. "AIIB will ultimately make a profit from the loans, as they are based on the market interest rate."
