By Vandana Gombar, Bloomberg New Energy Finance editor. This article first appeared on the Bloomberg Terminal, and is available to clients on the web and on the Bloomberg Terminal.
The Asian Infrastructure Investment Bank, which has a mandate to invest in “environmentally friendly” projects, is on course to approve $2.5 billion of new loans in 2017, taking its cumulative total to $4 billion since its establishment in 2015.
In 2018, it is aiming for another $3.5 billion in new loans, Joachim von Amsberg, vice-president for policy and strategy said in a phone interview from the bank’s headquarters in Beijing.
The AIIB has approved gas-fired power plants, a gas pipeline and hydro rehabilitation and expansion projects. Earlier this month, it announced $210 million financing for 11 solar photovoltaic projects in Egypt. “Given the cost reduction of solar, it is natural that we will scale up our investments” in that technology, said Von Amsberg. The bank is also interested in solar thermal plants, which reduce the challenge of intermittency.
The “strategic objectives” of the bank mean that renewable energy projects will always get higher priority than less carbon-efficient ones. Also prioritized are projects that help unlock funds from private investors as well as those that aid cross-country connectivity. That would mean AIIB has, and would continue to look at, projects that form part of China’s Belt and Road connectivity initiative. “We will do the same due diligence on those projects as on non-B&R projects,” Von Amsberg added.
The AIIB is often compared with the other new multilateral lender based in China – the New Development Bank. Amsberg said the two are very differently constituted, though they often work together. While NDB has five shareholders – Brazil, Russia, China, India and South Africa – AIIB had 80 approved members at last count.
Q: The AIIB has a mission to invest in environmentally friendly infrastructure projects only. We know that means renewable energy and energy efficiency, transmission and distribution, etc. Has it been a challenge building up a pipeline of investment-worthy projects?
A: We opened our doors literally a few weeks after the Paris agreement, and I think that set the tone for the basic operations of the AIIB. It was almost imperative that as the first multilateral development bank in the post-Paris world, we would take it on to help our member countries meet the goals, targets and commitments that we made in Paris. Over the last year and a half, we have been working to translate that general intention to invest in sustainable energy and sustainable infrastructure, into reality.
We have started with some of the easier projects: we have financed power distribution and transmission, which is a precondition for making power systems more renewable and sustainable. This is a sector in which multilateral development banks have invested for a long time. We have started investing in some power generating projects, in particular in gas. We have made a commitment to a private gas-powered plant in Myanmar [Myingyan Power]. We have co-financed a gas pipeline from the Caspian Sea into Turkey and then to Europe [Trans-Anatolian Natural Gas Pipeline or TANAP] to promote gas as a lower-carbon fossil fuel.
We have also invested in a few projects that increase the generation capacity from existing reservoirs, such as of the Soviet Era Nurek dam in Tajikistan. The Tarbela extension project in Pakistan adds a new powerhouse to an existing dam in Pakistan. These are projects which generate additional electricity while also avoiding the risks that inevitably come with creation of large new reservoirs. Earlier this month, we approved a set of 11 private sector investments in solar power generation in Egypt.
Q: That is quite a few projects in 18 months. Do you think the challenge of building a pipeline will come later, when the first round of “easy” projects are done?
A: We have very strong demand for our financing across the sectors. The challenge is to find among the many investment proposals good projects that are financially viable, technically well prepared and meet all the due diligence requirements – technical, financial and environmental. A very large pipeline then quickly thins down to a much smaller pipeline. We see many investment opportunities in renewable energy, in solar in particular. We hit our sweet spot with the projects in Egypt. It is a good deal for the country, which gets low-cost solar energy. It is also sustainable for the companies as the tariff being paid is adequate to ensure that the projects are financially sustainable.
Q: Given that solar power is emerging as the cheapest source of energy for many countries, will that be a focus area for the bank?
A: Our energy strategy has investment in renewable and low-carbon energy as a priority. Given the cost reduction of solar, it is natural that we will scale up our investments in solar PV. There are developments in concentrated solar power, which reduces the challenge of intermittency, so we are also very interested in following the CSP market, as well as other renewables.
Q: There is the option of storage for intermittency. Are you evaluating any investments there? Or in electric vehicle manufacturing?
A: We have no particular view on the technology. We have no active storage project that we are considering but we are very open to that. We feel it falls very much within our mandate. We know that storage is going to be an important part of the power market and of power grids in the future. Some of our clients are heavily investing in pumped storage. We see studies that show that solar PV including storage is going to be cost-effective and competitive with other fuel sources.
Q: How does AIIB allocate funds between sectors and regions? I am sure demand plays a role, but what are the other considerations?
A: As a bank, we have our risk limits and concentration limits. Demand is an important driver of our investment, because without clients, we cannot do anything. Our clients are both governments and private companies. Then there is the strategic perspective: there are certain investments we prioritize. Renewable energy investments and solar investments are prioritized over other energy sector investments. We have not set ourselves quantitative targets yet because we are so young, and our business is lumpy.
We have set ourselves three higher level strategic objectives that prioritize projects. One is sustainability, so renewable energy projects would always get higher priority from us than less carbon-efficient ones. Secondly, cross-country connectivity is a priority. We are particularly interested in projects that facilitate trade or connect energy networks of countries. The third priority is private capital mobilization: we prioritize projects where our financing unlocks funds from institutional investors or other private investors.
Q: The average funding per project is not very large?
A: We have financed 28 projects so far, totaling just over $3 billion. A few days ago, it was 17 projects and $2.8 billion. When you are so young, and have a small portfolio, these numbers jump around. We are doing a wide range of projects. The single largest investment we have made so far is in a gas pipeline – $600 million.
Q: What is the portfolio growth target you are working with?
A: We committed $1.5 billion last year, and are aiming for $2.5 billion this year, which would take our total portfolio to $4 billion by the end of 2017. We plan to increase our commitment every year. There is no fixed target for 2018, but I would expect maybe around $3.5 billion of new investments next year.
Q: In your approved projects of over $3 billion, what is directly committed to renewable energy? Do you think the total share of renewables will substantially increase by end-2018, given your priorities?
A: We have so far committed $610 million to renewable energy generation. We are keen to increase our commitments to renewable energy and energy efficiency. However, our financing always depends on client demand. Given the rapid expansion and cost reductions of renewable energy, I see many opportunities in this area.
Q: Since all your investments are supposed to help members meet Nationally Determined Contributions, that would rule out most coal-powered plants?
A: Our intention is to focus on clean energy sources but we don’t want to absolutely rule out coal under any circumstances. There may be countries that have no viable alternative. I can add that we have no coal-fired plants in our pipeline. This may be a discussion of the past rather than the future, because the future clearly lies in renewable energy.
Q: What about AIIB’s appetite for new large hydro plants?
A: We are open to financing hydro but committed to carefully reflect all the experiences of decades of good and not so good investments in hydro. We are keen to help countries with clean energy, and hydro can be part of clean energy. If we engage in new hydro, we will be extremely careful in environmental and social due diligence so that we ensure that there is no unacceptable damage on the environmental or social side. We are looking at an investment in the medium-sized Nenskra dam [280 megawatts] in Georgia. We are doing a very careful due diligence to see whether that project is viable.
Q: AIIB received top credit rating, paving the way for the issue of bonds. Will these be green bonds?
A: We have not yet finalized our funding strategy. Green bonds would make sense because we want to position ourselves as a green bank, but we have not yet decided the color of our bonds. We are very well capitalized, so we are not rushing to the capital markets.
Q: What are the typical terms of loans from AIIB?
A: Tenors are typically at the long end: 18-22 years. Our financial model is similar to other multilateral development banks, so the pricing of loans is also very similar. For sovereign backed financing, we charge the same rates to all borrowers. For non-sovereign financing, our rates depend on the risks of the specific project.
Q: How many of the overall loan approvals are for so-called “Belt and Road” projects?
A: That is difficult to answer. We have financed a few projects that clearly fall under this, in particular, highways in Tajikistan and Pakistan. Since both the Belt and Road project and AIIB emphasize connectivity, and in particular trade connectivity across Asia, I would expect us to support B&R projects that are proposed to us. We will do the same due diligence on those projects as on non-B&R projects.
Q: What do you have to say to this whole comparison between AIIB and the NDB? There seems to be some extra tension in that narrative?
A: I don’t think I see tension. We are differently constituted, though we were born at a similar time. NDB has five shareholders. We have 80 approved members. We are exchanging views and cooperating with each other. The demand for development banking is so large that there is space for the two of us, plus many more. There is a huge latent demand for infrastructure investment. The challenge is to convert that latent demand into financeable projects.
Q: Do you see the AIIB team expanding soon?
A: AIIB is very lean organization, with just 120 staff. I think we want to distinguish ourselves from our peers in being this lean organization that is agile, nimble, responsive, and can react very quickly. We will grow to 150 by the end of the year. We will grow further but will remain a relatively modest sized organization with a few hundred staff. We have no ambition to become an organization with thousands of staff any time soon.