Boao Forum for Asia Annual Conference 2016 Session Summary (No. 82)

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Maurice Briggs
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1 Boao Forum for Asia Annual Conference 2016 Session Summary (No. 82) Boao Forum for Asia Institute March 25, 2016 Luncheon 5 A Conversation with Multilateral Financial Institutions Leaders Time: 12:15-14:15, March 25, 2016 Venue: ICC, Level 1, Dong Yu Grand Ballroom C&D Moderator: Andrew BROWNE, Senior Correspondent and Columnist, the Wall Street Journal Panelist: JIN Liqun, President, Asian Infrastructure Investment Bank Leslie Warren MAASDORP, Vice President, New Development Bank Betsy NELSON, Vice President and Chief Risk Officer, European Bank for Reconstruction and Development Jonathan TAYLOR, Vice-President, European Investment Bank (EIB) Shang-Jin WEI, Chief Economist, Asian Development Bank Key points: Development financial institutions are essentially different from commercial banks. Multi-lateral developmental banks mainly work as a bridge to direct the capital to where the commercial banks cannot cover. Asian Infrastructure Investment Bank and New Development Bank are new members under the whole international financial system and will not topple the current system. It is hoped that the current mechanism can be improved and serve as a new platform for China, the United States, Japan and other countries to cooperate. 1

2 All the multi-lateral development financial institutions are committed to achieving the 17 objectives of sustainable development by 2030 which are put forward by UN in The objectives include infrastructure. These all can truly help the impoverished in the world to shake off poverty. The European Bank for Reconstruction and Development evaluates all the projects according to the relevant social and environmental standards. 80% of the projects are from the private sector. At present, the biggest challenge is legislation and it requires coordination with the government. The European Investment Bank is a 3A institution with relatively low capital costs. It is a non-profit institution and does not share out the profit. It is obligated to transfer the low-cost capitals to projects or projects beneficiaries. A basic principle is to simply cover the operation costs of the banks and does not seek profits. The most critical job is to bring in other fund sources. The common goal of multi-lateral development banks is to help different people in different nations speed up infrastructure development, including the cooperation projects on renewable resources and so on. All the institutions have noticed the potential cooperation tendencies and each other s advantages. Synopsis: Why Do We Need More Development Financial Institutions? Jonathan TAYLOR noted that some long-term projects need long-term fund-raising. To the investors in the private sector, they hope for returns after they invest the money. The confidence that a 25-year, 30-year, or even 40-year project can guarantee the returns and the recovery of fund can only be ensured by the system of development financial institutions. In this process, a joint investment with funds otherwise raised is a solution. 2

3 JIN Liqun said that development financial institutions are essentially different from commercial banks. Multi-lateral developmental banks mainly work as a bridge to direct the capital to where the commercial banks cannot cover. For example, Asia has very high saving rate, but most of it becomes capital only after operations in North America and Europe and cannot be transformed into effective loans that are needed by those developing regions. This is where the development financial institution can play its role. Through cooperation with all the government, the channel of development bank can effectively reduce and control the risks in the relevant fields of the projects. Leslie Warren MAASDORP noted that the investment need in infrastructure amounts to 3 trillion US dollars. It will be far from this number even we put together the fund-raising capabilities of all the development financial institutions. Therefore, we must coordinate and cooperate. The BRICs New Development Bank focuses on these long-term projects that span 20 to 40 years. The short-term fluctuations may have impacts, but they will not influence the long-term mission and authority endowed by the member governments. Shang-Jin WEI noted that China has very serious air pollution. Northern China has secured a project on the management of air pollution. If all the stakeholders, neighbouring nations can jointly enhance the management of air pollution, then each single country s action can bring benefits to its neighbouring nations and even to the whole world. Such things can be coordinated and operated by multi-lateral development banks and development financial institutions of its kind. The Competition and Cooperation among the Development Financial Institutions JIN Liqun said that the Asian Infrastructure Investment Bank and the New Development Bank are new members under the whole international financial 3

4 system and will not topple the current system. It is hoped that the current system can be improved and serve as a new platform for China, the United States, Japan and other countries to cooperate. Just like when a new Chinese restaurant is opened in the community, the key lies in the local people s choices and the restaurant will not topple the whole community. Currently the global economic scale is so big and there are still urgent problems and needs for development; one or two institutions are far from enough. AIIB is not a conflict in the China-US relations; it is rather a new platform for China, the United States, Japan and other countries to cooperate. Jonathan TAYLOR said that 10% of the operations of the European Investment Bank are outside Europe. Each operation involves cooperation with new institutions, including the Inter-American Development Bank, AIIB, and so on. Even though there is competition, if different expertise or national conditions are brought into the mutual cooperation, there is still room for coordination and cooperation in many aspects. Betsy NELSON said that the European Bank for Reconstruction and Development was founded in 1950s to promote the reconstruction and development of Europe. It may be overlapping with the Asian Development Bank in Central Asia, Turkey, Kazakhstan and other countries in the region. In general, many investment banks are having cooperation with the European Bank for Reconstruction and Development on how to avoid the shortcomings of government policies, how to get good returns from capitals, and how to enhance people s understanding of the stock market. As for the society and environment, the European Bank for Reconstruction and Development hopes to get more help from all sides to know more about global procurement and management and to adopt new point of view in things so as to remain flexible. We are happy to see AIIB to join the big family of development financial institutions. 4

5 Shang-Jin WEI noted that the common goal of multi-lateral development banks is to help different people in different nations speed up development in infrastructure, including the cooperation project on renewable resources and so on. All the institutions have noticed the potential cooperation tendencies and each other s advantages. Leslie Warren MAASDORP noted that the BRICs New Development Bank hopes to attend BFA with a new look five years later. Currently, all the industries are undergoing great changes because technological innovations can bring new changes. Therefore, we hope to enhance operation capability, build a flat management framework to pay attention to sustainable development, clean energy, renewable resources, and so on. These are the main areas that the projects will support and will learn from the best practices in the industry. All the BRICs countries have an equal say and maintain their own full flexibilities, and they adopt a humble attitude to learn from early entrants and strive to do the best. Standardization System of Development Financial Institutions JIN Liqun said that AIIB has a unified purchasing term and it will set up a fair market. All the enterprises can participate in the bidding so that the successful bidder can get the best services and products with the lowest price. In terms of governance mechanism, AIIB will follow the highest possible standards, for which the best international practice needs to be defined. This is a dynamic content. The development experience of most Asian countries, including China, should be taken into consideration. In the past 30 years, China has obtained great achievements in poverty alleviation. AIIB attaches great importance to environment and biodiversity, therefore, it is necessary to integrate that into the standard for evaluating Asian countries practices in development. Otherwise, it cannot be regarded as the real standard for international practices. 5

6 Leslie Warren MAASDORP noted that BRICs countries have many differences in economic structure, scale, industry, system, law, and so on. Therefore, there are not real BRICs standards. It is already noted in the first place that those countries have different standards and their own systems should be respected to make sure that local standards are followed. For example, in terms of demands on procurement, the issue is more on compliance rather than on standard. China actually has very strict standards on environment, but the implementation is not satisfactory. There should be one best practice to be followed by all the member counties. Member countries should integrate their practices instead of developing a super standard. Meanwhile, the BRICs New Development Bank does not offer policy suggestions to its member states but will provide technological support to make sure that the projects meet the environmental standards. Jonathan TAYLOR said that the European Development Bank will carefully think about whether a project will bring tangible economic added value, and meanwhile meet the corresponding environment standards, especially those policies of EU. Betsy NELSON noted that the European Bank for Reconstruction and Development evaluates all the projects according to the relevant social and environmental standards. 80% of the projects are from the private sector. At present, the biggest challenge is legislation. Sometimes it is difficult for an enterprise to meet the laws of all the countries, so it requires coordination with the government and attention to problems such as corporation management, human resources management, project management, and so on. Pricing Mechanism For Development Financial Banks Jonathan TAYLOR said that the European Investment Bank is a 3A institution with relatively low capital cost. It is a non-profit institution and does not share out the profit. It is obligated to transfer the low-cost capitals to projects or projects beneficiaries. A basic principle is to simply cover the 6

7 operation costs of the banks and does not seek profits. The most critical job is to bring in other fund sources. The real fundraising volume and capital costs are determined by client credibility, and the capital price will be decided according to client ratings and project risks. Betsy NELSON said that the European Bank for Reconstruction and Development mainly cooperates with private sectors. They bring in investors but will not push out the local commercial banks. The prices will be decided by the market, i.e. the London Interbank Offered Rate. It refers to sovereign credit rating, takes into consideration the operation cost, and provides favorable loans to all the countries, but sovereign guaranteed loan is different in pricing. JIN Liqun pointed out that AIIB basically has very competitive price and can provide favorable interest rates to all its member states. Shang-Jin WEI noted that when AIIB is setting the price, the interest is just one aspect. It considers many more aspects. For example, AIIB helps build a clean water supply project in Kunming, Yunnan Province. The capitals come from three sources: Financial capital of the Chinese government, 7-year period, 7% interest rate loan provided by the Bank of China, and the 32-year loan provided by AIIB. The price is London interbank interest rate plus 50 basis points, which is a good combination. Whether Development Financial Institutions can Really Solve the Problem of Development Leslie Warren MAASDORP said that all the multi-lateral development financial institutions are committed to achieving the 17 objectives of sustainable development by 2030, which are put forward by UN in The objectives include infrastructure. These all can truly help the impoverished in the world shake off poverty. Besides the BRICs New Development 7

8 Bank(NDB), all the member states will provide loans through different channels. The governments are making efforts to realize the goals of sustainable development; development banks will mainly play a supporting role. Shang-Jin WEI said that an important agenda item of sustainable development is climate change. AIIB is committed to the fundraising for projects on climate change and sets up the goal to double the loans by 2020 on climate change management, such as reducing emissions, reconstructing the dams so as to lower the effects on climate change. Jonathan TAYLOR said that AIIB is committed to realizing the goal of sustainable development put forward by UN. Besides providing funds for projects, it will also bring in funds from other sources to cope with the challenge of alleviating millions of people out of poverty. Betsy NELSON noted that, pragmatically, borrowing money means you have to pay back. The European Development Bank is mainly helping the countries that already have funds and do not need to borrow much to promote economic development. While providing supplementary fundraising mechanism, it will not impose burdens on the economy. For some special projects, specialized development institutions can provide aid. Shang-Jin WEI said that AIIB s commitment to projects and policies is conductive to environmental management, emission reduction, and energy conservation. There are two projects of this kind in China. One is the coal gasification technology project in Tianjin. This is a high-end project for a developing country. It will be easier if carbon capture is involved, but such pilot project needs a large amount of capital. The other is the carbon emission-trading project started in There are now seven pilot cities, three of which are sponsored by AIIB, including Shanghai. It is hoped that by 8

9 2017, this experience can be pluralized and then a national carbon emission trading market can be built. If it is successful, then other countries, such as Kazakhstan, can copy the practice. 9

Detailed Recommendations 11: Create Green Investor Networks

Detailed Recommendations 11: Create Green Investor Networks 11 This is a background paper to the report: Establishing China s Green Financial System published by the Research Bureau of the People s Bank