ASIAN INFRASTRUCTURE INVESTMENT BANK ARTICLES OF AGREEMENT NATIONAL INTEREST ANALYSIS

Transcription

1 ASIAN INFRASTRUCTURE INVESTMENT BANK ARTICLES OF AGREEMENT NATIONAL INTEREST ANALYSIS Treasury: v1 1

2 Table of contents 1. Executive Summary 2. Nature and Timing of the proposed Agreement actions 3. Reasons for New Zealand becoming party to the Agreement 4. Advantages and disadvantages to New Zealand 4.1 Advantages to New Zealand ratifying the Agreement 4.2 Disadvantages to New Zealand ratifying the Agreement 5. Legal Obligations which would be imposed on New Zealand by ratifying the Agreement 5.1 Membership 5.2 Capital 5.3 Operations of the AIIB 5.4 Operating Principles 5.5 Terms and Conditions of Financing 5.6 Technical Assistance 5.7 Finance 5.8 Allocation and Distribution of Net Income 5.9 Non-Imposition of Currency Restrictions 5.10 Methods of Meeting Liabilities of the AIIB 5.11 Governance 5.12 Voting 5.13 International character of the AIIB 5.14 Offices of the Bank and nomination of a Depository 5.15 Provision of information to facilitate the AIIB s operations 5.16 Cooperation with Members and International Organisations 5.17 Suspension and Termination of the AIIB s operations 5.18 Withdrawal and Suspension 5.19 Status, privileges, immunities and exemptions 5.20 Interpretation 5.21 Arbitration 5.22 Domestic Implementation 5.23 Reservations Treasury: v1 2

3 6. Measures which the Government could or should adopt to implement the Agreement 7. Economic, social, cultural and environmental costs and effects of the Agreement 8. The fiscal costs to New Zealand of compliance with the Agreement 9. Completed or proposed consultation with the community and parties interested in the Treaty action 10. Subsequent protocols and/or amendments 11. Withdrawal or denunciation of the provision in the treaty 12 Agency disclosure statement Annex 1 Background on the Draft AIIB Environmental and Social Safeguards / Procurement policies Attachment Report on the Articles of Agreement of the Asian Infrastructure Investment Bank Treasury: v1 3

4 1 Executive Summary 1.1 Background The Asian Infrastructure Investment Bank (AIIB or the Bank ) is a multilateral investment bank established to address the gap in infrastructure investment across the Asian region. The purpose of the AIIB is to foster sustainable economic development and to promote regional cooperation and partnership in addressing development challenges by working in partnership with other multilateral and bilateral development institutions. In January 2015 New Zealand was approved as a prospective founding member of the AIIB and joined negotiations on establishing the Agreement. New Zealand became a signatory to the Agreement on 29 June The Agreement is a treaty-level document establishing the framework that will guide the governance, finances and operations of the AIIB. 1.2 Reasons for New Zealand to become a party to the treaty The reasons for New Zealand entering into the Treaty are to contribute to strong and sustained regional growth, consolidate New Zealand s economic and political relationship in Asia, and participate in an institution that will further regional economic cooperation and integration. 1.3 Advantages and disadvantages to New Zealand in becoming a party to the Agreements The main advantages of New Zealand entering into the Treaty are: Increased economic development in the Asian region with flow-on benefits for New Zealand It supports increased economic integration in the Asian region It augments New Zealand s existing relationships in the Asian region It contributes to the implementation of best practice policies, operational standards and economic and social safeguards It reinforces our constructive and positive relationship with China It could provide commercial opportunities for New Zealand firms. Treasury: v1 4

5 Potential disadvantages and risks include: Reputational risks of membership of an institution before it has had a chance to develop an operational track record Being left out of decisions in the early stages of the Bank s development A perception that investment decisions may not meet the level of scrutiny in regards to potential environmental and social impacts. Mitigating these risks is the fact that the AIIB s governance, including the role of the Board of Directors in lending decisions, meets or exceeds best practice for international financial institutions. This is supported by the requirement in the Agreement for the establishment of monitoring and evaluation mechanisms, which provide ongoing oversight for investment decisions and development outcomes. Interim arrangements have been agreed among parties to the Treaty that aim to ensure consultation and participation in early decisions. 1.4 Obligations under the Agreement Obligations include: Providing an agreed share of capital to the AIIB, both paid-in and callable Not imposing capital constraints on the AIIB s transactions Appointing a Governor and Alternate Governor Accepting decisions made in votes at the AIIB, with vote share determined primarily by the size of a member s subscription Nominating the Reserve Bank of New Zealand as a depository with which the AIIB may hold assets Providing information to facilitate the AIIB s operations Accepting a decision to suspend our membership if we fail to fulfil our obligations Liability for decisions made by the AIIB, limited to the size of our shareholding Liability if the AIIB s operations are terminated, limited to the size of our shareholding The extension of privileges, status and immunities similar to those accorded existing international financial institutions 1.5 Implementation New Zealand s membership of the AIIB will be enacted through an amendment to the International Finance Agreements Act This will provide the legal basis for a permanent legislative authority for the capital injections to take-up New Zealand shares, as well as to give effect to obligations regarding taxation and immunity and privileges accorded to the institution and its employees. Treasury: v1 5

6 1.6 Economic, social, cultural and environmental effects of the Agreement Infrastructure investment by the AIIB is expected to have a positive impact on regional economic growth. This will have direct and indirect benefits for New Zealand. There are no social or environmental effects for New Zealand. The purpose statement in the Articles states that the Bank shall foster sustainable economic development and required consideration of sustainability issues. The Agreement also requires (Article 13.4) that each of the AIIB s operations complies with policies, including those on social and environmental impacts. 1.7 Costs New Zealand will make a total paid-in contribution to the AIIB s capital of US$92 million over the next five years (approximately NZ$126 million at an exchange rate of US 0.73). New Zealand s commitment of callable capital would be a further US$461.5 million (NZ$632 million at an exchange rate of US 0.73). All other fiscal costs will be met within baselines. 2 Nature and timing of the proposed treaty action 2.1 The full title of the treaty Asian Infrastructure Investment Bank (AIIB) Articles of Agreement (The Agreement). 2.2 Expected date of signature New Zealand signed the Agreement on 29 June Entry into force New Zealand s membership of the AIIB would commence at the point the Agreement enters into force, or upon ratification, if the Agreement is already in force at that time. The Agreement will enter force when the instruments of ratification has been deposited by at least ten States whose initial capital subscriptions comprise not less than 50 percent of total capital subscriptions. The commencement date of the AIIB s operations will be determined at the inaugural meeting of the Board of Governors. Treasury: v1 6

7 2.4 The nature of binding treaty action The binding treaty action that the Agreement proposes is ratification of measures that will establish the AIIB. The AIIB is a multilateral regional investment bank established to address the gap in infrastructure investment across the Asia region. The Agreement makes provision for the AIIB s operating arrangements, including its purpose, functions, capitalisation, membership, governance, operational activities, and signature and ratification processes. In January 2015 New Zealand was approved as a prospective founding member of the AIIB and joined negotiations establishing the Agreement. New Zealand became a signatory to the Agreement on 29 June As at 1 July 2015, 50 countries have signed the Agreement and agreed to join as founding members of the AIIB. The purpose of the AIIB is to foster sustainable economic development by improving infrastructure connectivity in Asia, and to promote regional cooperation and partnership. The operational activities of the AIIB include direct investment in infrastructure development and other activities that encourage public and private investment in the sector, including having special regard to needs of less developed members in the region. The definition of Asia used in the Agreement includes geographical regions classified as Asia and Oceania by the United Nations, encompassing North Asia, South East Asia, South Asia, Central Asia, parts of the Middle East, Australasia, and the Pacific. The AIIB s governance structure comprises the Board of Governors, a Board of Directors, a President, one or more Vice-Presidents, and executive staff. Further details on legal obligations imposed on New Zealand by the treaty action are outlined from page When the Government proposes to complete binding treaty action The Government proposes to complete binding treaty action before the end of Application to Tokelau The proposed amendments to the International Financial Agreements Act 1961 and New Zealand s ratification will not extend to Tokelau. Membership of the AIIB is open to existing membership of the International Bank for Reconstruction and Development or the Asian Development Bank. Officials consider Tokelau does not qualify for membership of the AIIB as it is not a member of either financial institution in its own right. Under the Joint Statement of the Principles of Partnership, New Zealand is expected to ensure adequate consultation with Tokelau on treaty actions that New Zealand is intending to take. Consistent with this expectation, Tokelau has been informed of New Zealand s intended membership of the AIIB. Officials do not consider any further action is required. 3 Reasons for New Zealand becoming Party to the treaty Treasury: v1 7

8 The AIIB is a new multilateral development bank. As set out in Article 1 of the Agreement, its purpose is to foster sustainable economic development, create wealth and improve infrastructure connectivity in Asia by investing in infrastructure and other productive sectors, and to promote regional cooperation and partnerships by working in close collaboration with other multilateral and bilateral development institutions. New Zealand will benefit directly from strong and sustained regional growth, and effective economic cooperation, in the Asian region. The region is home to New Zealand s largest and most rapidly growing trading partners. Participation will allow New Zealand to play a role in an institution that will help foster regional economic cooperation. 3.1 Economic rationale There is a clear need for additional infrastructure investment in Asia to maintain strong economic growth. World Bank and Asian Development Bank (ADB) research suggests a further US$0.6 trillion to US$0.8 trillion annually is needed to support economic growth in the region. 1 The scale of the capital investment required and constraints on existing multilateral development banks mean there is significant scope for the AIIB to complement existing public and private financing. The World Bank and the ADB have welcomed the potential contribution of the AIIB and indicated a desire to work closely with the new institution. It is in New Zealand s economic interests to support strong and sustainable growth in the Asian region. New Zealand has already benefited significantly from the rapid and sustained development in Asia. Our economic prospects are greatly helped by continued growth in Asia. Infrastructure investment will directly underpin economic growth in the region, generating additional demand from our trading partners in Asia. In addition, regional economic cooperation can play a role in fostering continued economic growth in the Asian region, and is one of the purposes of the AIIB. 1 For example, Transformation through infrastructure World Bank Group Infrastructure, Infrastructure Strategy Update FTY Treasury: v1 8

9 3.2 Strategic rationale New Zealand membership of AIIB would also represent a valuable platform to advance our strategic interests. The strategic benefits are probably as material as the economic benefits, reflecting that the AIIB would have proceeded with the same level of capitalisation with or without New Zealand participation. Membership would contribute to the objective of integrating New Zealand into the Asia region and regional institutions. Becoming a party to the Agreement represents another step in consolidating our relationship with China as the initiator and largest shareholder of the AIIB. New Zealand s early association with the AIIB as a prospective founding member (the first western developed country to do so) continues to be recognised by China as another relationship first. Our involvement in negotiations has contributed to ensuring the AIIB meets or improves on international best practice in operational standards and safeguards. Becoming a member of the AIIB will ensure New Zealand has a voice at the table when key decisions are made, including ongoing development of operational polices and lending operations. 4 Advantages and disadvantages to New Zealand of the Agreement entering into force and not entering into force for New Zealand There are a range of advantages and disadvantages for New Zealand in respect of the Agreement entering into force. On balance it is in New Zealand s interests to ratify and bring the Agreement into force. 4.1 Advantages The advantages for New Zealand of the Agreement entering into force are: Increased economic development in the Asian region helping lift people out of poverty and building a large, and growing, market for New Zealand goods and services It supports increased economic integration in the Asia region It augments New Zealand s existing relationships through APEC and our Free Trade Agreements in the region and reinforces our reputation as a key partner of our Asian neighbours in regional economic development New Zealand will be able to build on the AIIB Agreement and contribute to the implementation of best practice policies, operational standards and economic and social safeguards As a China-led initiative, membership in the AIIB will reinforce our constructive and positive relationship with China It should provide some additional commercial opportunities to New Zealand infrastructure firms Increased economic development Treasury: v1 9

10 F 2016 F 2017 F 2018 F 2019 F Current US$ In promoting continued growth in Asia, infrastructure investment offers the potential to support New Zealand s own economic growth prospects. New Zealand has already benefited significantly from the rapid and sustained development in Asia. The AIIB represents an opportunity to further support regional growth. In addition to China, the founding membership of the AIIB includes ASEAN members. ASEAN is already of vital importance to New Zealand. As a major engine of economic growth in the Asia region, the ASEAN bloc is likely to be a significant target for AIIB investment and will directly benefit from economic growth generated by improved infrastructure. New Zealand is also likely to benefit. ASEAN is our fourth largest trading partner with total two-way trade in goods and services is around $16 billion annually. ASEAN is a major global hub of manufacturing and trade, as well as one of the fastest growing consumer markets in the world. As a bloc, from the period 2000 to 2014, ASEAN s GDP per capita grew more than two and a half fold to reach US$3,982 billion. This grow trajectory is forecast to continue (see chart below) spurred by increasing urbanisation, affluence, consumer growth, as well as infrastructure development. A rapidly growing, increasingly wealthy middle class will drive the region s demand for high quality goods and services (such as food and beverage, education and tourism) that New Zealand is able to offer. Chart 1: ASEAN-10 GDP per capita, current US$, (including forecasts) Source: IMF World Economic Outlook database 6,000 5,000 4,000 3,000 2,000 1,000 0 Treasury: v1 10

11 Increased infrastructure investment and concomitant economic growth is also likely to support poverty alleviation in the greater Asia region. Significant numbers of people in Asia lack access to roads, toilets, reliable electricity, clean water and telecommunications. According to the World Bank, two out of every five people in South Asia lack access to sanitation and three out of four people don t have access to piped water. Significantly increased infrastructure investment in Asia will support economic development, help raise people out of poverty and improve their living standards Supporting economic integration in Asia Expansion of telecommunications and transport infrastructure will support greater economic integration across the region. Regional economic integration can play a critical role in accelerating economic growth, reducing poverty and economic disparity, raising productivity and employment, and strengthening institutions. By creating opportunities it can narrow the gap between Asia s developing countries by building closer trade integration, intraregional supply chains, and stronger financial links, enabling slow-growing economies to speed their own expansion. For more middle-income and developed economies greater regional economic integration can assist in providing a destination for investment, smooth obstacle to trade and as a source of competition to spur productivity. There are a range of potentially important sub-regions of Asia that could benefit from greater economic integration. For example, the ASEAN Economic Community (AEC) has the goal of regional integration among ASEAN members by The AEC is an ambitious economic integration programme and aims to transform ASEAN into a single market and production base, a highly competitive economic region, a region of equitable economic development, and a region fully integrated into the global economy. Broadly speaking, the AEC is likely to be positive for New Zealand s economic interests as it could offer new business opportunities and/or new demands for intellectual input (for instance in the agricultural services and technology space). For New Zealand effective and open regional integration can help simplify trade and make it more efficient and profitable than selling into disparate Asian markets, including by smoothing behind-the-border barriers and non-tariff measures. The AIIB, with a focus on infrastructure development, is a tool which could help deepen, widen and accelerate that integration process. Treasury: v1 11

12 4.1.3 Augments New Zealand s status as a regional partner New Zealand membership of the AIIB also represents a valuable platform to advance our strategic interests. Membership contributes to the objective of integrating New Zealand into regional institutions, and helps ensure that we maintain a seat at the table in key regional fora on an ongoing basis. The AIIB sits alongside our ASEAN, China and Korea FTAs, and our participation in APEC, as part of the hard infrastructure which strongly connects us to Asia. It also complements New Zealand s engagement with the Regional Comprehensive Economic Partnership (RCEP) FTA negotiations (which includes China and the other major regional economic players), and the Trans-Pacific Partnership negotiations. Demonstrating an ongoing commitment the region through membership of institutions such as the AIIB also ensures that we continue to articulate an independent distinct New Zealand presence in the region, with a view to better understanding and influencing key decisions and policy developments that could impact on New Zealand s economic future Allows New Zealand to positively influence the standards of the AIIB Membership also provides New Zealand with an additional avenue through which to support its wider objectives in the region, including that the institution promotes and applies best practice in areas such as social and environmental frameworks, cooperation with other multilateral development banks, governance, and procurement policy. Annex 1 contains a summary of an initial draft of operational policies in the areas of procurement, and social and environmental framework Reinforces our relationship with China Membership of the AIIB represents another step in consolidating New Zealand s relationship with China as the initiator and largest shareholder of the AIIB. New Zealand s early association with the AIIB as a prospective founding member ( the first Western developed country to do so ) continues to be recognised by China as another relationship first. The AIIB also has wider strategic significance. It reflects in a tangible manner the reality of China s increasing economic and political power, especially in our region, and the wider shift in global economic power. The success of the AIIB will be particularly important for China as its first major multilateral institutional initiative. Treasury: v1 12

13 4.2 Disadvantages The following section outlines potential disadvantages and risks for New Zealand of the Agreement entering into force Reputational risks There were reputational risks of being involved with a new institution before it has had a chance to develop an operational track record. These risks are mitigated by the quality of the Agreement and the multilateral membership of the organisation. New Zealand will have representation in the direction and operations of the AIIB. With over 50 prospective founding members, the AIIB is firmly multilateral and no member will be able to unilaterally control the operation of the AIIB Interim decision-making processes are not robust Transparent and robust oversight for the interim period between signature of the Agreement and the AIIB commencing operation is crucial, to avoid a risk that countries unable to ratify the Agreement early may be left out of key discussions establishing the AIIB s operational policies or decisions around appointments, such as the election of the President. These concerns are mitigated by establishment of interim arrangements to ensure that all members are consulted on key decisions, with current Chief Negotiator meetings continuing and an agreement to seek broad consensus of all signatories in the early stages of the AIIB s operation. These arrangements are summarised in the attached Report on the Articles of Agreement of the Asian Infrastructure Investment Bank, which outlines the understanding of the negotiation of the Agreement Investment decisions may not meet international best practice The AIIB may face challenging investment decisions, particularly in the early stages of its operation, due to the specific nature of commercial and noncommercial risks involved in large infrastructure investments in developing economies and the learning process associated with a new institution. There could be a perception that investment decisions made by the AIIB, for example, will not enjoy the level of scrutiny in regards to potential environmental and social impacts that is found in existing international financial institutions or other jurisdictions. Mitigating these risks is the fact that the AIIB s governance, including the role of the Board of Directors in lending decisions, meets or exceeds best practice for international financial institutions. This is supported by the requirement in the Agreement for the establishment of monitoring and evaluation mechanisms, which provide ongoing oversight for investment decisions and development outcomes. Progress has already been made on the establishment of the more critical operating documents relating to procurement, and environmental and Treasury: v1 13

14 social safeguards that will give effect to the principles established in the Agreement (Annex 1). The environmental and social safeguards draft policy outlines an approach to (i) identifying and managing environmental and social risks, (ii) the formulation and implementation of environment and social management plans for each AIIB operation, and (iii) ongoing monitoring and post-project evaluation. The policy covers biodiversity, sustainable land use, climate change and greenhouse gas emissions; gender, working conditions, community health and safety; and child labour and forced labour. In cases of complex or sensitive operations there is a requirement to appoint Independent Advisory Panels or Experts to assist, and provide oversight, on the implementation of the safeguards policy. There is also provision for public disclosure of all elements of the process. The procurement policy requires AIIB operations be unrestricted as to country of source, whether a member of AIIB or not. Procurement is to be transparent and open (with E-procurement encouraged) and free from fraudulent and corrupt practices and conflicts of interest. The environmental and social safeguards and procurement policy documents will remain drafts until approved by a Board of Directors, which will be assembled after the Agreement comes into effect. 5 Legal obligations which would be imposed on New Zealand by the treaty action, the position in respect of reservations to the treaty, and an outline of any dispute settlement mechanism 5.1 Membership Membership in the AIIB is open to members of the International Bank for Reconstruction and Development (IBRD) or the Asian Development Bank (ADB) (Article 3). Regional members are those from Asia and Oceania, except as otherwise determined by the Board of Governors (Article 1.2). Regional members are listed in Part A of Schedule A to the Agreement. All other members are considered non-regional members (Article 3.1a) and are listed in Part B of Schedule A. New Zealand will be a regional member. A new applicant that seeks to join the AIIB, but is not sovereign or not responsible for the conduct of its international relations, must first seek approval from the relevant member of the AIIB that is responsible for its international relations. Founding members are those members listed in Schedule A which sign the Agreement on or before 31 December 2015 and have and shall have fulfilled all other conditions of membership before 31 December 2016 (Article 3.1b). New Zealand signed the Agreement on 29 June 2015, and will become a founding member provided ratification is completed by 31 December Treasury: v1 14

15 Additional members may be admitted to the AIIB by a Special Majority vote of the Board of Governors. 2 The AIIB will determine the terms and conditions by which that can take place Article 3(2). 5.2 Capital By ratifying the Articles of Agreement, members are legally bound to provide a capital contribution to the AIIB through a share subscription (Article 5). The initial authorised capital stock is of the AIIB is US $100 billion. The Board of Governors shall at intervals of not more than five years review the capital stock of the Bank (Article 5.4). The authorised capital stock of the AIIB may be increased by the Board of Governors by a Super Majority vote (Article 4.3). If there is an increase, members will have a reasonable opportunity to subscribe to a proportion of the increase in the same proportion as its stock immediately before the increase (Article 5.4) The capital contribution for each regional member is based on the relative share of Gross Domestic Product for regional members. For New Zealand, the capital subscription will be US $461.5 million, which is approximately NZ $630 million (based on an exchange rate of 73c US to 1 NZD). 2 A Super Majority is required by the Agreement, it requires two thirds of the total number of Governors, representing not less than three-fourths of the total voting power of the members. Treasury: v1 15

16 The capital subscription comprises two elements. 20 per cent is paid-in capital, with the remaining 80 per cent callable if needed (Article 5, paragraph 1). For New Zealand, this will mean a paid-in capital contribution of US$92.3 million (approximately NZ $126 million) and a further US$369.2 million (NZ $504 million) of callable capital. Article 6, paragraph 1 details the 5-year schedule of equal payments of 20 percent paid-in capital stock. The first instalment is payable within 30 days after the entry into force of the Agreement, or on or before the date of deposit of a members instrument of ratification, whichever is later. The second instalment is due one year from the entry into force of the Agreement, and subsequent instalments are due successively one year from the date of the second instalment. Different rules apply to instalments for less developed countries (Articles 6.5, 6.6). All rights, including voting rights, acquired for paid-in and associated callable shares where payments are due but not received are suspended until full payment is received (Article 6.2). The AIIB s operations will be funded through lending and the likelihood of the remaining capital being called is low. Article 6(3) states that capital will be called only as required to meet the AIIB s liabilities, and that calls will be uniform in percentage on all callable shares. If additional capital is called, then the liability for members is limited to the unpaid proportion of their issue price (Article 7 and Article 42). In accordance with Article 7, shares of stock must not be pledged or encumbered in any manner whatsoever, and they shall be transferable only to the AIIB. Members are not liable by reason of their membership for the obligations of the AIIB (Article 7.4). 5.3 Operations of the AIIB The AIIB s resources must be used exclusively to implement the purpose and functions of the AIIB and in accordance with sound banking principles (Article 9). The purpose of the AIIB is to foster sustainable economic development, create wealth and improve infrastructure connectivity in Asia by investing in infrastructure and other productive sectors, and to promote regional cooperation and partnership by working in close collaboration with other multilateral and bilateral development institutions. (Article 1). The functions of the AIIB are to promote investment in the region of public and private capital for development purposes, in particular for development of infrastructure and other productive sectors; utilize the resources at its disposal for financing such development in the region, including those projects and programs which will contribute most effectively to the harmonious economic growth of the region as a whole and having special regard to the needs of less developed members in the region; to encourage private investment in projects, enterprises and activities contributing to economic development in the region, in particular in infrastructure and other productive sectors, and to supplement private investment when private capital is not available on reasonable terms and conditions; and undertake such other activities and provide such other services as may further these functions (Article 2). Treasury: v1 16

17 Articles 8, 9 and 10 set out how the ordinary resources and the Special Funds resources of the Bank will be held and used entirely separately from each other. Ordinary operations will be funded through the ordinary resources of the AIIB, comprising capital stock, funds raised by the AIIB, funds received in repayment of loans or guarantees or as returns on equity, income derived from loans or any other funds or income received by the Bank which do not form part of its Special Funds resources (Article 8). Special operations will be financed from the Special Funds resources which are designed to serve the purpose and come within the functions of the AIIB (Articles 10 and 17). The financial statements of the Bank shall show the ordinary operations and special operations separately. (Article 10.2 to 10.4)) The two types of operations may separately finance elements of the same project or program. (Article 10.1) Recipient and methods of financing The AIIB may provide or facilitate financing to any member, or any entity or enterprise operating in the territory of a member, as well as to international or regional agencies or entities concerned with economic development of the region. (Article 11) The Board of Governors may also determine by a Super Majority vote to provide assistance to a recipient not listed above. But it may do so only if the Board of Governors has determined that such assistance is designed to serve the purpose and come within the functions of the Bank and is in the interest of the Bank s membership; and have specified the types of assistance that may be provided to such recipient (Article 11). As set out in Article 11.2, the AIIB may carry out its operations in any of the following ways: (i) (ii) (iii) (iv) (v) (vi) by making, co-financing or participating in direct loans; by investment of funds in the equity capital of an institution or enterprise; by guaranteeing, whether as primary or secondary obligor, in whole or in part, loans for economic development; by deploying Special Funds resources in accordance with the agreements determining their use; by providing technical assistance; or through other types of financing as may be determined by the Board of Governors, by a Special Majority vote. Treasury: v1 17

18 Limits on ordinary operations Article 12 makes clear that the total amount outstanding of loans, equity investments, guarantees and other types of financing provided by the Bank in its ordinary operations may not exceed the total amount (100%) of its unimpaired subscribed capital, reserves and retained earnings included in its ordinary resources, except by a Super Majority vote of the Board of Governors to increase the limitation up to 250% of the Bank s unimpaired subscribed capital, reserves and retained earnings included in its ordinary resources. The amount of the Bank s disbursed equity investments must not exceed the value of its total unimpaired paid-in subscribed capital and general reserves (Article 12.2). 5.4 Operating Principles Article 13 sets out the guiding principles that the AIIB must operate in accordance with: Guided by sound banking principles. Provide principally for the financing of specific projects or specific investment programs, for equity investment, and for technical assistance. Not finance any undertaking in the territory of a member if that member objects to such financing. Comply with the AIIB s operational and financial policies, including policies addressing environmental and social impacts. Pay due regard to the ability of the recipient to obtain financing or facilities elsewhere and the prospects that the recipient and guarantor, if any, will be in a position to meet their obligations under the financing contract. Set financial terms which are, in the opinion of the Bank, appropriate for the financing concerned and the risk to the Bank. Place no restriction upon the procurement of goods and services from any country from the proceeds of any financing. Take necessary measures to ensure that the proceeds of any financing provided, guaranteed or participated in are used only for the purposes for which the financing was granted and with due attention to considerations of economy and efficiency. Pay due regard to the desirability of avoiding a disproportionate amount of its resources being used for the benefit of any member. Seek to maintain reasonable diversification in its investments in equity capital. 5.5 Terms and Conditions for Financing (Article 14) Article 14 explains that for loans made or participated in or loans guaranteed by the AIIB, the contract will establish the terms and conditions for the loan or guarantee, in conformity with the principles in Article 13 and subject to the other provisions of the Agreement. Such terms and conditions must take fully into account the need to safeguard the AIIB s income and financial position. Treasury: v1 18

19 Where the recipient of loans or guarantees of loans is not a member, the AIIB may require that the member in whose territory the project concerned is to be carried out guarantee the payments. 5.6 Technical Assistance The Bank may provide technical advice and assistance and other similar forms of assistance which serve its purpose and come within its functions. These can be reimbursed or charged to the income of the Bank (Article 15). 5.7 Finance Article 16 sets out the general powers the AIIB has to raise and disburse finance. These are: i. To raise funds, through borrowing or other means, in member countries or elsewhere. ii. To buy and sell securities the AIIB has issued or guaranteed or in which it has invested. iii. To guarantee securities in which it has invested in order to facilitate their sale. iv. To underwrite securities issued by any entity for purposes consistent with the purpose of the AIIB. v. To invest or deposit funds not needed in its operations. vi. It must ensure that every security issued or guaranteed by the Bank has on it a conspicuous statement whether it is or is not an obligation of any Government. vii. To establish and administer funds held in trust for other parties. viii. To establish subsidiary entities which are designed to serve the purpose and come within the functions of the Bank. ix. To exercise such other powers and establish such rules and regulations as may be necessary or appropriate in furtherance of its purpose and functions. 5.8 Allocation and Distribution of Net Income The Board of Governors will determine at least annually what part of the net income of the Bank shall be allocated, after making provision for reserves, to retained earnings or other purposes and what part, if any, shall be distributed to the members. Any decision on the allocation of the Bank s net income to other purposes must be taken by a Super Majority vote. (Article 18). Any distribution to members would be made in proportion to the number of shares held by each member. Treasury: v1 19

20 5.9 Non-imposition of currency restrictions Article 19 requires members not impose any currency restrictions on the AIIB s transactions Methods of Meeting Liabilities of the AIIB In the Bank s ordinary operations, in cases of arrears or default on loans made, participated in, or guaranteed by the AIIB, and in cases of losses on equity investment or other types of financing, the AIIB will take such action as it deems appropriate. It will maintain appropriate provisions against possible losses. (Article 20) 5.11 Governance The AIIB will have a Board of Governors, a Board of Directors, a President, one or more Vice-Presidents, and such other officers and staff as may be considered necessary. (Article 21) Board of Governors In accordance with Article 22, each member will be represented on the Board of Governors and shall appoint one Governor and one Alternate Governor. Alternate Governors may vote only in the absence of the principal. All the powers of the AIIB will be vested in the Board of Governors. The Board of Governors may delegate to the Board of Directors its powers, except the power to: i. admit new members and determine the conditions of their admission; ii. increase or decrease the authorized capital stock of the Bank; iii. suspend a member; iv. decide appeals from interpretations or applications of the Agreement given by the Board of Directors; v. elect the Directors of the AIIB and determine the expenses to be paid for Directors and Alternate Directors and remuneration; vi. elect the President, suspend or remove him from office, and determine his remuneration and other conditions of service; vii. approve the general balance sheet and the statement of profit and loss of the Bank; viii. determine the reserves and the allocation and distribution of the net profits of the AIIB; ix. amend the Agreement; x. decide to terminate the operations of the AIIB and to distribute its assets; and xi. exercise such other powers as are expressly assigned to the Board of Governors in the Agreement. The Board of Governors will retain full power to exercise authority over any matter delegated to the Board of Directors. A majority of the Governors shall constitute a Treasury: v1 20

21 quorum, provided such a majority constitutes not less than two thirds of the total voting power of the members. Board of Directors Article 25 states that there will be 12 members of the Board of Directors, with nine of them elected by the Governors representing regional members and three elected by the Governors representing non-regional members. Detailed election procedures are set out in Schedule B to the Agreement. The Board of Governors must, from time to time, review the size and composition of the Board of Directors, and may increase or decrease the size or revise the composition by a Super Majority vote. Directors must be nationals of member countries and will hold office for a term of two years and may be re-elected. The Board of Directors is responsible for the direction of the general operations of the Bank and, for this purpose, will exercise all the powers delegated to it by the Board of Governors, and in particular: (i) (ii) (iii) (iv) (v) (vi) prepare the work of the Board of Governors; establish the policies of the AIIB, and, by a majority representing not less than three-fourths of the total voting power of the members, take decisions on major operational and financial policies and on delegation of authority to the President under Bank policies; take decisions concerning operations of the Bank, and, by a majority representing not less than three-fourths of the total voting power of the members, decide on the delegation of such authority to the President; supervise the management and the operation of the Bank on a regular basis, and establish an oversight mechanism for that purpose, in line with principles of transparency, openness, independence and accountability; approve the strategy, annual plan and budget of the Bank; appoint such committees as deemed advisable; and (vii) submit the audited accounts for each financial year for approval of the Board of Governors. Article 27 states that the Board of Directors will meet as often as the business of the Bank may require, periodically throughout the year. A majority of the Directors shall constitute a quorum for any meeting of the Board of Directors, provided such majority represents not less than two-thirds of the total voting power of the members. Treasury: v1 21

22 President of the AIIB The Board of Governors will elect a President of the AIIB by a Super Majority through an open, transparent and merit-based process. The President must be a national of a regional member country, and the term is for five years. The President is the legal representative of the AIIB and conduct, under the direction of the Board of Directors, the current business of the AIIB. (Article 29) Voting As set out in article 28, the voting share of members will be determined primarily by the size of their shareholding, plus a basic share for all members and a special share for founding members. New Zealand will have % of the total voting power. Unless expressly provided for otherwise, decisions of the Board of Governors are decided by majority. Where a Super Majority is required by the Agreement, it requires two thirds of the total number of Governors, representing not less than three-fourths of the total voting power of the members. Where a Special Majority vote is required by the Agreement, that requires a majority of the total number of the Governors, representing not less than a majority of the total voting power of the members. For the Board of Directors voting, each Director is entitled to cast the number of votes to which the Governors who elected him are entitled and those to which any Governors who have assigned their votes to him are entitled. Unless the Agreement expressly provides otherwise, matters before the Board of Directors are decided by a majority International character of the AIIB The AIIB must not accept Special Funds, loans or assistance that may in any way prejudice, limit, deflect or otherwise alter its purpose or functions. The AIIB, its President, officers and staff must not interfere in the political affairs of any member, nor be influenced in their decisions by the political character of a member Offices of the Bank and nomination of a depository The principal office of the Bank will be located in Beijing, China (Article 32). Under Article 33, members are required to designate its central Bank (or such other institution) as a depository with which the AIIB may hold its assets. The Reserve Bank of New Zealand will be designated the depository on behalf of New Zealand Provision of information to facilitate the AIIB s operations Under Article 34, members are required to furnish the Bank with such information it may reasonably request of them in order to facilitate the performance of its functions. The Bank must establish a policy on the disclosure of information in order to promote transparency in its operations. Treasury: v1 22

23 5.16 Cooperation with Members and International Organisations The AIIB must work in close cooperation with its members, and as appropriate, with other financial institutions and international organisations concerned with economic development of the region or the AIIB s operational areas. (Article 37) Suspension and Termination of the AIIB s operations In an emergency the Board of Directors may temporarily suspend some operations (Article 40), and the AIIB may terminate its operations by a resolution of the Board of Governors approved by a Super Majority vote (Article 41). Articles 42 and 43 set out processes that apply in the event of termination of the AIIB Withdraw and Suspension Any member may withdraw from the Bank at any time by delivering a notice in writing to the Bank at its principal office (Article 37). A withdrawing member shall remain liable for all direct and contingent obligations to the Bank to which it was subject at the date of delivery of the withdrawal notice. If a member fails to fulfil any of its obligations to the Bank, the Board of Governors may suspend such member by a Super Majority vote. The suspended member shall automatically cease to be a member one year from the date of its suspension. While under suspension, a member shall not be entitled to exercise any rights under this Agreement (except the right to withdrawal) but is subject to all its obligations Status, privileges, immunities and exemptions All members are required to extend specific status, immunities, privileges and exemptions to the AIIB to enable it to fulfil its purpose and carry out its functions (Article 44). These include: Article 45: The AIIB will have full juridical personality and full legal capacity to contract, acquire and dispose of property and to institute and respond to legal proceedings. Article 46: provides for immunity of the AIIB from every form of legal process, except in certain specified cases. Article 47: property and assets of the AIIB are immune from search, confiscation or any other form of taking. Archives and all documents of the AIIB are inviolable. Article 48: property and assets of the AIIB must be free from restrictions, regulations, controls and moratoria of any nature in order to carry out the purpose and functions of the AIIB effectively. Article 49: the AIIB official communications will be accorded the same treatment which New Zealand accords to the official communications of other members. Treasury: v1 23

24 Article 50: Governors, Directors, Alternates, President, Vice-President and other officers and employees of the AIIB are immune from legal process for acts performed in their official capacity (except where the AIIB waives immunity) and enjoy inviolability of all their official papers. Such people are also immune from immigration restrictions and registration requirements to the same extent that New Zealand accords such immunities to the representatives of other members. Article 51: exemption of the AIIB, its assets, property and income from tax and customs duties. Tax cannot be levied on salaries, emoluments and expenses paid by the AIIB to Directors, Alternate Directors, the President, Vice-Presidents and other officers or employees of the AIIB, including experts and consultants performing missions or services for the AIIB, unless a Member deposits a declaration with its instrument of ratification that it retains the right to tax salaries and emoluments paid by the AIIB to its nationals. The AIIB may waive any of the above privileges, immunities and exemptions if it determines it to be appropriate in the best interests of the AIIB (Article 52) Interpretation Any question of interpretation or application of the provisions of this Agreement arising between any member and the Bank, or between two or more members of the Bank, must be submitted to the Board of Directors for decision. In any case where the Board of Directors has given such a decision, any member may require that the question be referred to the Board of Governors, whose decision is final (Article 54) Arbitration Arbitration by a tribunal of three arbitrators will be used to settle any disputes between the AIIB and former members, or between the AIIB and any member after a decision has been made to terminate the AIIB s operations. One arbitrator will be appointed by the AIIB, one by the country concerned, and the third member by the President of the International Court of Justice or other authority if the two sides cannot agree. A majority vote of the arbitrators is sufficient to reach a decision which is final and binding Domestic implementation Provisions in the Agreement will be largely implemented through amendments to the International Financial Agreements Act 1961, or through Government policies and practices. The extension of privileges, status and immunities required by the Agreement are consistent with existing New Zealand policy, and will extend to the AIIB treatment equivalent to that provided to existing international financial institutions. In the case of privileges and immunity for of the AIIB, the changes would require New Zealand to Treasury: v1 24