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Lean, Clean and Green. An interview with AIIB
Lean, Clean and Green. An interview with AIIB
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Lean, Clean and Green. An interview with AIIB

02/12/2019

Thierry de Longuemar

Thierry de Longuemar

Chief Financial Officer

AIIB

Asian Infrastructure Investment Bank CFO Thierry de Longuemar reflects on the Bank's extraordinary first three years.

In 2013, China embarked on an ambitious venture to bridge Asia’s infrastructure funding gap, which the Asian Development Bank (ADB) estimates to be USD 26 trillion through to 2030, as outlined in its 2017 report, Meeting Asia’s infrastructure needs. Keen to showcase its ability to create a new multilateral institution, China set out to invite other countries to join it in setting up the Asian Infrastructure Investment Bank (AIIB).

Operating on ‘lean, clean and green’ principles, AIIB would fund infrastructure projects in emerging markets – predominantly in Asia, but also in other regions, including Africa, Europe, the Middle East and Latin America – that had experienced highly challenging credit cycles in the past. As part of this strategy, it would develop infrastructure as an asset class aligned to environmental, social and governance (ESG) investing principles. At AIIB's official opening three years later, 57 countries had joined China. Today, it has 72 members and 28 prospective members.

In 2017, the Beijing-based bank awarded BNP Paribas Securities Services a global custodian mandate.

Here, AIIB’s Chief Financial Officer Thierry de Longuemar discusses the Bank’s impressive progress, its focus on sustainable investing and its proposition to private investors.

What have AIIB's major achievements been so far?

Setting up a new institution takes three to five years. We have almost completed this process now, which is a real achievement. The Bank approved its first loan six months after it had been established – that's remarkably fast. We had been called upon by the World Bank, ADB, the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD) to fill a USD 600 million financing gap for the Tanap [Trans Anatolian Natural Gas Pipeline] project. That pipeline connects a gas field in Azerbaijan with western Turkey, linking it to southern Europe. As a matter of comparison, the ADB financed its first project three years after having opened. Third, we received three AAA ratings from the world's major credit rating agencies a year and a half after our establishment. That was a first in the history of multilateral financing institutions. The EBRD was granted three AAA ratings three years after starting its operations.

In May 2019, the Bank debuted a global five-year bond on the capital markets, unlocking USD 2.5 billion of capital. Why do you think it attracted so much interest from investors?

We started very early with a clear marketing strategy. We had met more than 200 investors from across the world during the two years leading up to the bond issue. This helped us achieve a successful transaction. Plus, it happens very rarely that a new AAA issuer enters the debt capital markets. The last major AAA issuer had been the EBRD in 1994. So, there was a lot of interest in our bond and we ended up not paying a “new issue” premium. After announcing an indicative spread of 8 basis points above swaps, we landed at 6, which was exactly at par with an EIB five-year dollar bond launched a day earlier.

Why did you choose that particular strategy?

We will have received about USD 20 billion of paid-in capital by the end of 2019. That makes us the best capitalised multilateral financing institution in the world. As a matter of comparison, the International Bank for Reconstruction and Development’s paid-in capital – that is, direct contributions to the Bank’s equity by member countries – stands at about USD 16.5 billion after 75 years. So, issuing the bond is a strategy. We plan to start borrowing to finance the Bank’s operations from 2024–2025. But you don't enter the bond market overnight – you need to establish your name in capital markets over years. You need to build your own yield curve, so the investor community understands where your price stands versus comparators to assess the liquidity of your bonds in the secondary market. This first transaction will be followed by other transactions as we intend to tap the global dollar market as well as other markets in the future.

Can you share some examples of the projects that you have funded so far? You talked about the Tanap project, but are you also funding renewable energy projects?

The first projects we financed were primarily in the traditional energy and transport sectors. As mentioned, Tanap was a traditional energy project. We also financed a highway in Pakistan and our first private sector project was a gas turbine power plant in Yangon, Myanmar, co-financed with the International Finance Corporation (IFC).

In terms of renewable energy, we financed our first project in 2017. It’s a USD 210 million solar project in Egypt, not far from the famous Aswan Dam. This project is interesting because it’s a combination of 11 projects out of a total 50 projects, which are all based in the same part of the desert. The capacity of those 50 projects will be above 1 gigawatt, which makes it one of the largest ever solar projects in terms of electricity capacity. We have since also funded other solar projects and wind farms in Asia.

The first project that we funded in China was a USD 250 million loan to Beijing Gas. That’s also an interesting project because it will enable households surrounding Beijing to replace traditional coal-based cooking systems, which emit a lot of CO2, with gas. So, funding Beijing Gas was part of AIIB’s strategy to tackle climate change, even though it is a traditional energy company.

That said, we do not just finance renewables. We also fund roads, ports, airports and urban infrastructure, such as wastewater management. The scope of our infrastructure financing is broad and must comply with fundamental environmental and social safeguard policies.

What systems does the Bank have in place to ensure that the projects it funds have a positive impact on local communities and the environment?

All projects comply with the Bank’s environmental and social framework that was approved by its Board in February 2016. That policy is public. We have in-house environmental and social specialists who do their due diligence to check if the project, before approval, does indeed fit with the Bank’s standards for environmental and social principles.

What role is the AIIB playing in the wider push for energy transition?

A great role, but with some challenges. For example, a low-income country that needs energy will generally opt for the cheapest source. If the cheapest source is coal, what is our response? Should we just tell them that we can’t fund their energy projects because they are not clean? If we do, others might say we are not supporting the development of low-income countries. It’s a serious dilemma.

If you look at the energy strategy of the Bank, we will finance investments that are compatible with a country’s transition towards sustainable, low-carbon energy and internationally agreed targets. While fossil fuels will continue to play a significant role in the energy mix of most of our members, the Bank supports accelerating our members’ transition towards a low-carbon future, including lower-carbon emissions from fossil fuels. There are clean energy solutions but in the context of a low-income country, they are sometimes not easy to implement.

Supporting the energy transition, in addition to mitigation activities, is part of AIIB’s strategy and we have already financed a number of projects. We often participate in major events organised to gather experts in this field and to push for an expansion of climate change related activities. For example, AIIB was represented at BNP Paribas’ famous Sustainable Future Forum in Singapore in 2018 and 2019.

Traditionally, it has been difficult to incentivise private asset owners to invest in ESG-related projects, but do you think public support for energy transition and other such changes is making it easier to encourage the private sector to join this effort? 

No, that hasn’t changed, but may in the future. Private sector mobilisation is one of the three major priorities that the Bank is pursuing. In the past, multilateral institutions failed to attract so-called ‘non-traditional lenders’ in the field of infrastructure. We aim to change that.

We wish to attract private investors. It’s too early to claim any victory as this is a long-term journey. We are speaking with pension funds, insurance companies, asset managers, sovereign wealth funds and others to try to convince them to team up with us to finance some infrastructure projects – a lot in the renewables space. It seems to gather significant attraction, but future success will also depend on innovative solutions that we have started to promote.

Why is the AIIB an attractive proposition for managers of private assets?

The value we bring to asset managers is that, through us, they find new ways to mitigate specific risks to infrastructure financing. Traditionally there was a lack of interest in infrastructure, mainly because of financial risks – particularly for greenfield projects – during the building phase of infrastructure when no revenue is generated. There are also political risks. AIIB offers private sector lenders or investors the opportunity to get involved directly in the infrastructure asset class under a more attractive risk environment.

One effect of mitigating risk is that margins are lower. Nonetheless, infrastructure finance remains quite attractive, particularly in the current very low interest rate environment. We are also considering promoting other financial instruments. For example, project bonds, risk-sharing products and guarantees. All of these solutions can increase the attractiveness of this asset class to the private sector.

So, in fact, you are reducing the barriers to entry to this kind of investment which very few asset managers have been able to enter.

Yes, we’re aiming to do that. I’m not saying we have done it. It needs to be proven. But it’s clearly an objective that we would like to achieve and the more private sector participants we are able to bring to the table, the better.

 

The evolving role of the CFO

Technology will have an increasing influence on the evolution of the CFO role, according to de Longuemar. Finance chiefs will be leading departments that employ fewer people and make greater use of automation via data analytics tools, artificial intelligence, robotics and other technologies. He also expects technology to enable CFOs to allow their teams to work remotely while delivering the same high-quality results – something he believes will be a great motivator for employees.

CV:Thierry de Longuemar

Thierry de Longuemar has spent more than three decades working in the multilateral and private sectors. Prior to joining AIIB as CFO in 2016, he spent five years as Vice President of the Asian Development Bank. He has also served as Vice President Finance at the African Development Bank and as Global Head of Central Banks and Supra-nationals at ABN Amro. He holds an MBA from French business school ESSEC.

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