Gerard Sanders, General Counsel of the Asian Infrastructure Investment Bank, speaks about the AIIB’s objectives, operations and current legal needs, and reveals the AIIB’s thinking about various dispute resolution approaches, including whether AIIB views Hong Kong as a likely venue for resolving contractual disputes with the institution.
On 12 May, Hong Kong and the Law Society hosted the international conference, The Belt and Road: A Catalyst for Connectivity, Convergence and Collaboration, providing a platform for participants to discuss issues and opportunities that may flow from China’s Silk Road Economic Belt and the 21st-century Maritime Silk Road project, commonly referred to as the Belt and Road Initiative. While still in its early days, this mega-plan, first announced by President Xi Jinping in 2013, is projected to cover around 65 percent of the world’s population, one-third of the world’s GDP and one-quarter of all of the goods and services traded annually.
Among the renowned guests invited to speak at the conference was Mr. Gerard Sanders, General Counsel of the Asian Infrastructure Investment Bank (“AIIB” or “Bank”), who shared his insights and hopes in a plenary session on a number of Belt and Road-related issues, including the complementary role of the AIIB in financing Belt and Road projects. After the conference, Mr. Sanders spoke to Hong Kong Lawyer more generally about the AIIB’s objectives and his aspirations as the AIIB’s General Counsel.
No Grand Plan
Before turning to the Bank’s operations, Mr. Sanders shared a bit about his background in development finance and his decision to move on from the International Fund for Agricultural Development (“IFAD”), a specialised agency of the United Nations headquartered in Rome, after two years to join the AIIB. Before his time with IFAD, he held various positions at the European Bank for Reconstruction and Development (“EBRD”), rising up to the rank of Deputy General Counsel. He also held a number of roles in the private sector in New Zealand, the US, Amsterdam and London, where he gained broad-based commercial legal experience, much of it in the cross-border financing space and often in developing and emerging economies. “In terms of the legal dimensions of development finance, I’ve been fortunate to have been exposed to a great deal of it,” he remarked.
For Mr. Sanders, the development work he has undertaken for the better part of his career seems deeply aligned with his personal and professional interests. When explaining how he transitioned into this field, he said it was neither by a grand plan nor by complete happenstance, but likely somewhere in the middle and definitely due in large part to the support he received from a number of wonderful mentors. “Gradually, my interest in living and working in different places, studying different aspects of international law, observing what was going on around me and examining different environments from the perspective of development led me to pursue work in this field. I had been thinking a lot about the different levels of equality around the world and why it is that some countries do well while others do not. Why do some states fail, why is there such persistent poverty and what can be done to alleviate it? For me, I wanted to make some personal contribution to addressing these issues. That thinking all coalesced when I accepted my first role with the EBRD, more than two-thirds of a career ago. I still find this work to be deeply meaningful. When I eventually retire, I plan to remain involved in some way in development work – partly for selfish reasons because I find it stimulating, but also because I believe people have an obligation to share what they’ve learned.”
As for his new role at the AIIB, Mr. Sanders is excited by the new professional opportunities that lie ahead. “A new multilateral development bank only comes along once in a generation. Being part of the creation of a new institution – shaping policies, building its internal legal team, as well as shaping the Bank’s legal culture and determining the degree of legal risk it will take – is a once in a lifetime opportunity. Because I was learning a great deal at IFAD about rural development and the particularities of working in the UN system, I was not looking at all for another position. Rome, too, is such a special place, but when the AIIB asked me to join as General Counsel, I felt that it was something I had to do. I thought if I didn’t jump at the chance, then I’d come to regret it. I’ve been fortunate to maintain great contacts with both IFAD and EBRD, which is a boon at AIIB where we place emphasis on working closely with other MDBs.”
Goals as GC
In terms of what Mr. Sanders hopes to accomplish as General Counsel, he indicated that high priority would be given to entrenching an internal rule of law and ensuring that the AIIB is an institution which respects high standards of governance. “I would like to establish a strong legal culture at the AIIB, one that ensures that rules are made in accordance with recognised processes and that the content conforms with universal standards as understood in the world of MDBs. I would like others to see that we abide not only by our public international law obligations, but also in accordance with a sound internal legal framework and that we can be held accountable for the implementation of our social and environmental policies.”
Another objective for Mr. Sanders is creating an internal legal department to help facilitate the proper functioning of the institution. “I want to be able to attract people who share the excitement of creating a twenty-first century development bank, one with a globally relevant remit. The emphasis is on recruiting thoughtful and experienced lawyers with a record of achievement in investment, finance, development and public international law. These areas of law are the most relevant for internal clients, whether the governance bodies or those delivering the projects.”
As to his current legal department, Mr. Sanders said that they are settling in new staff as well as drawing upon the assistance of consultants and secondees for the interim, but the latter will fall away progressively as more staff are brought on. At present, the Office of the General Counsel comprises four units organised around the needs of internal clients. The largest unit advises on investment operations, including projects in the sovereign, sub-sovereign and private sectors. A second unit advises on finance, in particular in relation to treasury operations, the controller’s function and auditing. Two other units advise on corporate and institutional matters, as well as integrity and compliance. Governance issues permeate all aspects of the work done by these units. “While I advise the Boards of Governors and Directors as well as participate in the principal management committees, the heads of the four units advise the Board committees and various management bodies. A lot of emphasis is placed on ensuring that the governance arrangements work well,” he explained.
Finally, Mr. Sanders wants the AIIB to be a knowledge sharing institution. He plans to continue hosting knowledge sharing events at the Bank’s headquarters and speaking and participating at events elsewhere. The AIIB will also host an annual conference and launch an AIIB legal journal. The inaugural conference’s theme will be Good Governance and Modern Multilateral Development Banking, and the first issue of the journal, expected to be published at next year’s annual meeting, will feature articles along this theme. Mr. Sanders also plans to continue accepting opportunities to speak at legal conferences, law schools and at other functions, something which he also encourages his team to do. “If we have knowledge, especially that which we acquire through our investment and other experiences, we should share it. Outreach is really important.”
Private Sector Assistance
As for the AIIB’s legal needs, Mr. Sanders indicated that the Bank currently has in-house capacity to handle institutional matters, and core elements of the operational work. However, the Bank will need the support of external legal advisors for private sector investment, in particular, to provide technical expertise in certain infrastructure spheres, and to assist with logistical challenges in managing complex transactions. In addition, the Bank will need legal advice on local laws, particularly in relation to due diligence and the taking of security.
Interested law firms are welcome to register through the AIIB’s website and give a presentation at the Bank’s headquarters to its lawyers and operational staff on any topic that they specialise in and may be relevant to the Bank.
“To date, we have not had much need for assistance from external counsel, as most of the operations have been sovereign-backed and in the state sector. Most are also being co-financed with other multilateral development institutions, so the governing law for the financing agreements is public international law given the treaty obligations involved. At the AIIB, as is the case at other MDBs, the legal work on this kind of work is all done in-house because that is where much of the expertise really resides,” he noted.
“One project that has been approved by our Board in the private sector is a project in Myanmar. This is being co-financed with the International Finance Corporation in Washington, DC, which is also a multilateral. In that case, we chose the same law firm as the IFC because our interests were so aligned and the IFC was the project lead. So that is our approach to date when we co-finance private sector projects with MDBs.”
“However, going forward, we have many projects in the pipeline that are both stand-alone and in the private sector. So, one issue that increasingly comes to the fore is how we will approach the hiring of law firms. We are still considering whether we will adopt a panel approach, although there is also much value in developing relationships with law firms in the region and remaining open to hiring law firms in every country where we work.”
AIIB’s Complementary Role
Turning to the Bank’s objectives, Mr. Sanders explained the AIIB’s objectives are complementary to those being pursued through the Belt and Road initiative; however, the Bank’s operational remit is much wider.
“The AIIB, which became operational on 16 January 2016, was conceived at a time when ideas on the Belt and Road Initiative were first taking hold. While the AIIB can and does finance infrastructure projects in Asia, it is not confined to doing so. Furthermore, the governance of the Bank means that investment policies are not necessarily those that drive the Belt and Road Initiative. Indeed, the 57 signatories to the AIIB Charter made no mention of the Belt and Road Initiative in the Articles of Agreement. Similarly, there is no reference to the Belt and Road Initiative in any of the institutional rules or operational policies of the Bank. Conformity with Belt and Road objectives is not a consideration in the AIIB’s evaluation of investment proposals.”
“The effect is that the AIIB finances projects both within and outside the places covered by the Belt and Road Initiative and its financing extends beyond infrastructure to include what, in undefined terms, the Charter calls ‘other productive sectors’,” he said.
To date, 13 projects have been approved by the Bank’s Board of Directors amounting to US$2.2 billion dollars, with the bulk of approved projects being in the transport and energy spheres and marked by high standards of environmental design. “Despite the flexibility regarding where the AIIB may invest, it so happens that all of these projects are located in countries along the Belt and Road. This will not continue indefinitely. Nonetheless, this underscores that, despite the absence of any legal or institutional connection, AIIB financing can sometimes, perhaps often, complement the objectives of the Belt and Road Initiative. Those objectives, in instances where the AIIB finances projects that fall within the Belt and Road corridor, will be shared in that the common purpose of the Bank and the Belt and Road can surely best be understood as the betterment of the lives of the people of the region,” he explained.
Asian Origins, International Mindset
While the AIIB was conceived by those from the Asian continent, when the treaty establishing the AIIB came into effect on 25 December 2015, the 57 Prospective founding members included not only Asian countries, but others from Europe, Africa, South America, Australia and from within Oceania. Today, a further 30 countries are in the process of becoming members, including Canada so that with North America every continent, other than Antarctica, is or will shortly be represented in the membership of the AIIB and in its Board of Governors.
While almost all Asian countries and most large economies are AIIB members, or have applied for membership, the US and Japan have still not applied. On this, Mr. Sanders indicated that the message that has consistently been conveyed to countries that are not yet members is that they are most welcome to apply. “Membership is a matter ultimately for the other members, as represented by the Board of Governors.” Speaking about the role of the country that hosts the AIIB’s headquarters, namely, China, he noted that while the AIIB is a Chinese initiative and China is its single largest shareholder, it is still nonetheless a minority shareholder and over time, its minority share will be further diluted. Also, while the first AIIB President is Chinese, all Vice Presidents and most senior staff are not; and of course, within the governance arrangement – the Board of Governors and the Board of Directors – there is only one Chinese member. “This means that the strategy and the investment decisions are made by the membership as a whole, through those bodies. It is not a question of any one country setting the Bank’s agenda; rather it’s a collective effort. That said, certainly China, as the place where the headquarters are located, is a gracious host.”
Innovative Charter Provisions
While the AIIB’s mandate, governance, funding and operations as reflected in its Articles of Agreement are, in many ways, not fundamentally different from those of other MDBs, Mr. Sanders noted that the AIIB Charter includes a number of innovative provisions.
For instance, he explained the AIIB has introduced a number of governance provisions that should have a beneficial impact on the Bank’s efficiency and thus costs. These include establishing a non-resident board of directors and anticipating the eventual delegation of financing approval authority to the AIIB President.
In agreeing that a non-resident Board of Directors should be established, founding members considered the high costs associated with a resident Board of Directors, including financial and staff resources. They recognised that given advances in travel and communications, there was less need for a board to be resident at the place of the Bank’s business. While smaller institutions often have a non-resident board, apart from IFAD where Mr. Sanders used to work, none of the large MDBs has a non-resident board. While ordinarily at AIIB there are four physical meetings of the Board of Directors each year, technology allows for electronic meetings to be conducted whenever needed and take place at relatively short notice. According to Mr. Sanders, many such meetings, which allow real-time multi-directional communications, have occurred and they work well. The Charter is also special in that it foresees the possibility that the Board of Directors may delegate the authority on the approval of financing, in whole or in part, to the President. In doing so, the Board of Directors would focus on setting the broad parameters within which the President is to conduct the business of the Bank. For his part, the President would focus on the implementation of strategy and policies approved by the Board. Of course, the Board remains the ultimate authority on financings, in that the delegated authority can always be revised.
Also innovative is the provision that opens up the AIIB’s membership to sovereign states and non-sovereign territories. While some MDBs confine their membership to sovereign states, the AIIB has chosen not to do so and has opened membership to non-sovereign territories that are members of the World Bank or Asian Development Bank, provided that their applications for membership are supported by the AIIB member responsible for such territory’s international relations. It is on this basis that Hong Kong’s application was approved by the Board of Governors on 23 March.
Other innovative provisions include: the creation of a sizeable number of “basic votes” ensuring that smaller members nonetheless have a meaningful voice in the governance arrangements of the Bank; a modest-sized Board of Directors (currently 12); the ability of the Bank to invest outside of the region (of Asia and the Pacific), provided that such investment fosters development, creates wealth or improves interconnectivity in the region; substantial flexibility in the use of financing instruments, and the power of the Board of Governors to amend the Articles of Agreement without parliamentary or other approval on the part of members.
Dispute Resolution Approach
Anticipating the possibility of disputes arising, the AIIB is currently conducting due diligence to determine the best approach to deal with them.
For disputes arising from sovereign-backed operations, Mr. Sanders explained that the approach is fairly well settled. “These disputes are rarely, if ever, resolved through formal adjudicative processes, as they usually involve payment failure. The problem is almost invariably an economic and political one, so having an arbitral award may not be useful if there are no assets against which enforcement might be effected.”
However, for disputes involving sub-sovereign borrowers where there is no sovereign financial support, and in the case of investments in the private sector, the Bank may wish to litigate in court or, where there is a genuine dispute and not a mere payment failure, will likely pursue arbitration. Consideration might be given to mediation in an appropriate case, such as where the parties consider an ongoing relationship worth preserving. Mr. Sanders indicated that the AIIB is undertaking extensive due diligence before deciding on the approach it will adopt. “We will likely have a high level of standardisation. We plan to offer a limited suite of dispute resolution mechanism choices to borrowers and other investees to consider – in all of these instances, the arrangements would also suit us. The idea is that this would streamline the due diligence process in relation to an aspect of contract negotiations which can sometimes be difficult. This has been quite an exercise for us, but we hope to have it concluded by the end of the year.”
Some of the issues Mr. Sanders and his team are currently grappling with include:
- should there be a preference for institutional or ad hoc arbitration;
- where should the seat of arbitration be;
- should there be a role for mediation (excluding situations where there is merely a payment failure); and
- what approach should be adopted regarding the appointment of arbitrators – should this be left largely to the institution or should there be extensive party involvement.
As for Hong Kong’s potential to be considered by AIIB as one of several suitable places for arbitrating disputes, Mr. Sanders indicated that the city is a credible contender. “Hong Kong has an established and enviable reputation in the sphere of commercial dispute resolution. In respect of arbitration, relevant treaty and other legal arrangements are in place and the courts are recognised for fostering arbitration, ensuring that party autonomy is respected. Hong Kong is also home to well-functioning arbitral institutions.”
“Of course, there are other credible dispute resolution jurisdictions and established arbitral institutions. Even once our initial suite of dispute resolution options is settled, we will remain open to agreeing other approaches that would be in the interests of both the Bank and its contractual counterparty. We want to be responsive to the reasonable needs of clients. However, if a client wishes to explore options outside of the set ones on offer, then this will inevitably involve additional due diligence, further time and attendant costs for that client, something which all parties would ordinarily wish to avoid. So the burden on AIIB choosing its menu options wisely from the outset is a heavy one.”