Building a development bank for the 21st century

The AIIB is emerging as one of the major forces driving infrastructure investment across Asia. DJ Pandian, the multilateral’s chief investment officer, tells Nia Tam how it plans to help plug the continent’s $26trn funding gap.

It is a sunny day in Beijing, with the kind of crystal-clear blue sky you rarely find in the Chinese capital during winter. It’s probably too early to tell whether that is a result of the air quality improvement project being supported by the Asian Infrastructure Investment Bank. But DJ Pandian, its chief investment officer, leaves us in no doubt the AIIB is on a mission to improve Asians’ quality of life through infrastructure investing.

Pandian joined the AIIB as a vice-president and chief investment officer in December 2016, after spending more than 30 years in key positions with the Indian civil service at the state, national and international levels, covering energy, infrastructure and finance.

He now leads the investment portfolio for the $100 billion multilateral development bank. As its name suggests, the AIIB’s top priority is to promote Asian infrastructure development, with a focus on the energy and transport sectors.

“Our main mandate is to enhance regional connectivity, to bridge the [Asian] infrastructure gap,” Pandian says. It’s not a small gap. According to the Asian Development Bank’s latest estimates, the region will need to spend $26 trillion through 2030 to plug it.

The question for the new multilateral on the block is: how will it help reduce that deficit?

NOT A CHINESE BANK

Before we get to that, though, there’s another, larger question looming in the minds of many investors: what, exactly, is the relationship between the AIIB and its largest shareholder, China?

After all, it’s hard to forget some of the comments made shortly after the bank was launched – not to mention the Obama administration’s hostility to it. Eswar Prasad, former head of the China division at the International Monetary Fund and a professor at Cornell University, called the AIIB “an instrument for China to lend legitimacy to its international forays and to extend its sphere of economic and political influence” in comments to the New York Times.

It’s true the AIIB is based in Beijing and, yes, its creation was the brainchild of Chinese President Xi Jinping in 2014. But when asked about that relationship, Pandian is clear: “We are not a Chinese bank,” he stresses, echoing Jin Liqun, the institution’s president, who has repeatedly – and very publicly – emphasised the AIIB’s international credentials.

The AIIB bills itself as an apolitical organisation owned by 84 shareholders. It is positioned to finance projects at the invitation and approval of the host country and it is driven by its members, Pandian points out.

While China is its largest shareholder – with voting rights of 26.9 percent – India and Russia hold the second- and third-largest voting shareholdings at 7.7 percent and 6.1 percent, respectively. India, in fact, is currently the AIIB’s largest borrower.

“By partnering with fund managers, the AIIB can also leverage their resources and expertise to evaluate projects and mitigate risks”
Pandian

In addition to its regional activities in Asia, the bank has allocated 15 percent of its investments to non-regional members, which include Egypt and several European countries. Last September, the bank approved as much as $210 million in financing to a portfolio of solar projects in Egypt. “It is not regional, and it is not Asia, but it’s very close to Asia,” Pandian says.

Nevertheless, setting up the AIIB’s headquarters in Beijing is strategic. “China’s development model is an exciting one. How China developed its infrastructure with such speed, quality and quantity over the past decade has set an example to the regional countries. Can this development model be repeated in other countries? My duty is to see the best development model applied to our member countries, so that they can benefit from infrastructure development,” Pandian says. The nationality of that model “is irrelevant”, he adds.

In that sense, Pandian sees similarities between China’s One Belt, One Road initiative, which aims to connect people and facilitate trade and investment, and the AIIB’s mission. But he makes clear the bank is not necessarily associated with the OBOR initiative, although he acknowledges projects backed by the bank may eventually fall under the countries covered by the scheme, which include a significant portion of the bank’s members.

BUILDING A TRACK RECORD

Having celebrated its second anniversary in January, the AIIB has approved $4.38 billion of loans and investments in 25 projects in its first two years of operation.
Its largest investment has been a $600 million loan to the Trans-Anatolian Natural Gas Pipeline project, an $8.6 billion pipeline transporting natural gas extracted from a field in the Caspian Sea, in Azerbaijan, across Turkey and then to Italy, in southern Europe. The project is a co-financing with the ADB, the European Bank for Reconstruction and Development and the European Investment Bank to improve security and diversity of energy supply in Europe.

On a personal level, though, India’s Gujarat Rural Roads project excited Pandian the most. “The project is located in the province where I came from. In India, we have national highways and district networks connecting cities and districts, but there are missing links, particularly in the rural areas,” he explains. “People from villages cannot sell their products to the districts, children cannot go to schools, and patients cannot get to hospitals, all because of a lack of proper rural road access.”

The AIIB is funding 50 percent of the first phase of the rural road project, to build an all-weather road network for more than 1,000 villages in Gujarat’s 33 districts. With a cost of $658 million, the scheme is expected to benefit around 8 million people in the country’s ninth most-populous state, which harbours some 63 million people.
“It also showed that our bank is able to provide funds from a national level to a village level. We are touching every spectrum of society, touching lives through our programme,” Pandian says.

BEYOND LENDING

As a development bank, the AIIB provides loans to both sovereign and non-sovereign borrowers for infrastructure development. But direct lending to private projects, such as power generation in Myanmar or air quality improvements in Beijing, is only one of the many ways the AIIB gets the private sector involved in the development of Asian infrastructure.

“Many banks, including both development and commercial banks, are very good at lending money. That’s the debt side. However, equity is the premium,” Pandian argues. “People could have great ideas and technologies, but they may not have their own capital. It’s clear that funds play an important role here.”

Pandian says the AIIB would be interested in funds with a diversified portfolio. He believes that, by providing them with seed funding, the AIIB can help funds raise further capital from third parties.

“If I put some $20 million in funds, the funds can then raise $200 million from other people, so with my $20 million, I am able to leverage more money to invest in many projects,” Pandian argues. But it’s not all about money. By partnering with fund managers, the AIIB can also leverage their resources and expertise to evaluate projects and mitigate risks, hopefully securing a higher success rate than it would investing on its own.

“That’s why we think a fund investment strategy is very good,” Pandian says, adding that the bank has allocated $2 billion – 10 percent of its paid-in capital for the first five years of operations – to equity investments.

So far, the bank has approved commitments of $150 million each to two infrastructure equity funds: an India-focused infrastructure vehicle managed by Morgan Stanley; and the IFC Emerging Asia Fund. It is also considering a $200 million commitment to India’s National Investment and Infrastructure Fund, a $6 billion state-backed investment vehicle aiming to raise half its capital from institutional investors to develop domestic infrastructure schemes.

In addition to direct lending and fund investments, the AIIB can raise funds in the capital markets, allowing institutional investors such as pensions and insurance companies to come on board and invest alongside it. And, while It has not officially announced any plans to raise funds through bond issuances, it is ready to do so.

Last summer, the bank received triple-A credit ratings from the three global ratings agencies – S&P Global Ratings, Fitch Ratings and Moody’s Investors Service – with a stable outlook. Given the wider conversation in the MDB world, led by the World Bank, around shifting multilateral focus from direct lending and towards risk mitigation and credit enhancement, we ask Pandian if he plans to put those triple-A ratings to wider use.

“The time will come, very soon,” he asserts. “When we evaluate a project, if by providing guarantees the sponsors can raise money in the market at a cheaper rate, we can facilitate that with our triple-A rating. So, we are well-placed to provide them.”

However, he stresses the bank is still new and building its track record with direct lending to governments and the private sector. And he sounds a note of caution:
“We cannot just rely on guarantees,” he warns. “Even today, the World Bank and the ADB still provide direct lending. Guarantees can only account for a small portion – a supplement – because ultimately you need the money.”

In the short term, Pandian is laser-focused on delivering quality projects. He has a bigger vision for the long run – building what he describes as a “21st century multilateral development bank” that will be a trusted, reliable partner to its members and play a key role in providing financing and solutions to infrastructure development in Asia.

“It’s important to remember we are a start-up. We need to show our foundations are strong,” he concludes.