European bank seeks to combine strength with AIIB

2015-06-22 09:28China Daily Editor: Wang Fan

The European Bank for Reconstruction and Development is keenly eyeing opportunities to work closely with the Asian Infrastructure Investment Bank, both in offering advice to the AIIB as it grows and in jointly funding infrastructure projects.

Suma Chakrabarti, president of the EBRD, said the creation of the China-led bank has significant implications for an older development-oriented bank like the European bank because the combined strength of both can allow them to take on much larger projects.

In addition, efficient and innovative ways of funding that may be demonstrated by the AIIB will provide inspiration and create benchmarks that affect how the EBRD examines and funds projects, Chakrabarti said.

Chakrabarti, who is due to visit China for a two-day visit beginning June 26, will be giving a speech outlining his advice to the AIIB, including details about setting up a reasonable business model, governance and standards.

He will also have conversations with counterparts in China to examine how the two banks can cooperate, especially in geographical regions where they have overlapping responsibilities.

"What I'd really like to achieve by next year, when the AIIB is running, is to have at least two or three cofinance projects. That's going to be our main push. Of course we can do other things together, but projects will be a good way to start," Chakrabarti said.

Founded in 1991, the EBRD is a multilateral developmental investment bank that initially focused on countries of the former Soviet Eastern bloc, but over time it expanded to support development in 30 countries from Europe to Central Asia.

Potential partnerships between the two banks have attracted great attention from industry experts, although they could only speculate on the effects of future cooperation at this stage.

Hou Zhenbo, a researcher of the London-headquartered think tank Overseas Development Institute, said the overlap between the two, given what we know so far, would probably be infrastructure projects in Central Asia and former Soviet republics, although it is "difficult for us to speculate how large these sets of investments would be in the future".

Christopher Bovis, a professor of business law at the Business School of the University of Hull in Yorkshire, England, said that the EBRD's investment partnership with the AIIB could help to develop and continuously expand a pipeline of public private partnership projects on the basis of a clearly defined eligibility framework.

The European Regional Development Fund would carry out the due diligence and financial appraisal in the structuring phase and monitor the project thereafter. The fund may also be prepared to act as the controlling creditor according to principles to be established by agreement with market participants, Bovis said.

"The AIIB and the ERDF would share the risk of the losses of the project portfolio. The ERDF risk would be ring-fenced and its participation therefore capped at an agreed annual budgetary amount.

"The ERDF would be covering the residual risk up to its maximum exposure on any individual transaction. The risk-taking of the AIIB on the other hand, would be compensated via a risk premium charged up front to the project entity at the time of agreement.

"This premium will be priced to reflect the subordinated status of the credit line and the associated risks for the ERDF as well as covering expected management and other costs," Bovis said.

Chakrabarti said that because both the EBRD and the AIIB have similar financing structures and goals, they can jointly invest in projects and share revenue based on percentage shares. In addition to debt financing, he said, the two banks can also work together on equity financing.

In particular, opportunities exist in the municipal infrastructure investment sector-for example, in waste, water management, public transportation and street lighting, Chakrabarti said.

"Equity investment, in our view, will allow us to use our expertise to help a company become more comfortable and effective on the ground. As an equity investor, we would typically have a position on the board of a company, and we can then cooperate with the company to make it better," he said.

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