The Asian Infrastructure Investment Bank (AIIB) and the International Finance Corporation (IFC) have signed an agreement to deepen collaboration and enhance infrastructure finance in Asia.
The pair have signed an International Swaps and Derivatives Association (ISDA) master agreement, which will allow them to hedge each other the interest rate and currency risks associated with emerging market investments, expanding their overall lending capacity.
The agreement will see them leverage debt from the capital markets to pump into cross-border infrastructure lending in Asia. It was signed in Beijing.
The institutions have worked together previously, collaborating on the financing of the Myingyan gas turbine power plant project in Myanmar in September last year, when the AIIB contributed US$20mn to a kitty already bolstered by the IFC and Asian Development Bank (ADB). However, this is their first formal and bilateral agreement.
The IFC had welcomed the AIIB to the development finance table before it started lending last year, with Lance Crist, the IFC’s global head of oil and gas, telling GTR: “We do not have any concrete plans since it is early in the process of establishing the AIIB, but it is likely there will be areas where the IFC and AIIB can work together to achieve our mutual interest in supporting development in Asia.”
A year later, the AIIB has joined the ADB, African Development Bank (AfDB) and European Bank for Reconstruction and Development (EBRD) in signing into an ISDA agreement with the IFC.
The IFC’s deputy treasurer for Asia, Andrew Cross, says: “Modern infrastructure is essential for lasting growth and prosperity. Yet the financing gap in this sector is huge, totalling trillions of dollars a year in emerging markets alone. Our partnership with the AIIB will enable us to offer more efficient infrastructure financing through the broader use of capital markets tools.”
The AIIB’s treasurer Søren Elbech adds: “This agreement facilitates the AIIB’s ability to support our clients’ projects and help promote local currency bond issuance. Multilateral financial institutions, like AIIB and IFC, have a much larger risk-bearing capacity, compared with private sector companies in the countries where we lend. It therefore makes a lot of sense for us to create financing solutions that significantly reduce our clients’ risk of losses from such currency risks.”
Since opening its books at the beginning of 2016, the AIIB has been more collaborative than some anticipated. Before it launched, it was billed as a rival to the World Bank and ADB. Many of its deals to date, however, have been co-financed with the existing development financiers.
In December 2016, the AIIB gave its approval to a US$600mn loan to be used in the construction of the Trans-Anatolian gas pipeline (TANAP) project in Turkmenistan, while the World Bank pledged US$800mn.
In January of this year, the pair collaborated to co-finance the US$720mn debt portion of the Tarbela-Fifth hydropower plant which will bring 1,410MW to the Pakistani electricity grid.