The Widen­ing Path of the NDB

China Pictorial (English) - - Contents - Text by Ye Yu

The idea of es­tab­lish­ing the New De­vel­op­ment Bank (NDB), a mul­ti­lat­eral de­vel­op­ment bank co-founded by BRICS nations, was in­tro­duced at the BRICS sum­mit in New Delhi, In­dia, in March 2012. Ac­cord­ing to the agree­ment, “the Bank shall mo­bi­lize re­sources for in­fra­struc­ture and sus­tain­able de­vel­op­ment projects in BRICS and other emerg­ing economies and de­vel­op­ing coun­tries, com­ple­ment­ing the ex­ist­ing ef­forts of mul­ti­lat­eral and re­gional fi­nan­cial in­sti­tu­tions for global growth and de­vel­op­ment.” Af­ter two years of ne­go­ti­a­tions, Agree­ment on the New De­vel­op­ment Bank was signed in July 2014, and the bank of­fi­cially opened for busi­ness in Shang­hai in 2015.

The NDB was es­tab­lished in a cer­tain context: First, a se­ri­ous short­age of in­fra­struc­ture con­struc­tion funds was bot­tle­neck­ing de­vel­op­ment. Ac­cord­ing to the Or­ga­ni­za­tion for Eco­nomic Co­op­er­a­tion and De­vel­op­ment, global de­mand for in­fra­struc­ture fi­nanc­ing will reach US$50 tril­lion be­fore 2030, 60 per­cent more than the to­tal ac­tual ex­pen­di­tures over the past two decades. Sec­ond, ex­pan­sion of tra­di­tional mul­ti­lat­eral de­vel­op­ment banks is hin­dered by po­lit­i­cal re­straint. Since the 2008 eco­nomic re­ces­sion, re­forms on cap­i­tal in­crease and vot­ing rights pro­moted by the G20 group were limited, re­sult­ing in poor fund­ing ca­pac­ity for in­fra­struc­ture con­struc­tion.

The NDB is “new” be­cause shared in­cen­tive is em­ployed as a new prac­tice, which at­tracts BRICS nations to con­trib­ute new funds, ex­pe­ri­ence and knowl­edge on in­fra­struc­ture fi­nanc­ing to projects that ben­e­fit de­vel­op­ing coun­tries. In con­trast with tra­di­tional mul­ti­lat­eral de­vel­op­ment banks, the NDB has adopted a mech­a­nism en­abling equal­ity in the de­ci­sion-mak­ing process—and no coun­try has veto power, which en­sures open doors to the fa­cil­i­ta­tion of co­op­er­a­tion among BRICS nations. BRICS states al­ready con­trol huge cap­i­tal re­serves. The for­eign ex­change re­serves of BRICS nations also lead the world. Us­ing mod­ern fi­nan­cial in­stru-

ments and gover­nance struc­ture, these funds will be “in­ter­nally re­cy­cled” to more ef­fec­tively con­trib­ute to in­fra­struc­ture con­struc­tion in de­vel­op­ing coun­tries and boost their pro­duc­tiv­ity. Such fac­tors have been cited by world-renowned econ­o­mists in­clud­ing Ni­co­las Stern and Joseph Stigliz, who have ex­pressed sup­port for the es­tab­lish­ment of the NDB.

Hitting the Ground Run­ning

Two years af­ter its in­cep­tion, the NDB has been mak­ing steady progress, and its mar­ket sta­tus has been ce­mented pre­lim­i­nar­ily.

First, the bank’s or­ga­ni­za­tional struc­ture and strate­gic plan­ning have taken ini­tial shape. Its first five-year plan (2017-2021) was ap­proved by its Board of Directors. Ba­sic pol­icy frame­works in var­i­ous fields in­clud­ing or­ga­ni­za­tional gover­nance, cor­rup­tion de­ter­rence, loans, pro­cure­ment, en­vi­ron­ment and so­cial stan­dards are al­ready in place. The bank now em­ploys a staff of about 100, a fig­ure that is ex­pected to in­crease to 400 by 2021. The NDB at­taches great im­por­tance to the re­cruit­ment of young em­ploy­ees, the ideal peo­ple to fur­ther in­no­vate its de­vel­op­ment.

Sec­ond, the lo­cal cur­rency fi­nanc­ing process of BRICS nations has be­gun. The bank’s funds come from the five share­hold­ers. The NDB’S ini­tial cap­i­tal of US$50 bil­lion was equally con­trib­uted by the five mem­bers. In 2016, the NDB is­sued its first green bond worth 3 bil­lion yuan (about US$448 mil­lion) in the Chi­nese in­ter­bank bond mar­ket. This was the first time a mul­ti­lat­eral de­vel­op­ment bank is­sued a green bond de­nom­i­nated in Chi­nese cur­rency in China. The NDB also plans to raise US$300 mil­lion to US$500 mil­lion via ru­pee de­nom­i­nated masala bonds.

Third, the bank has re­in­forced its mar­ket po­si­tion fo­cused squarely on sus­tain­able de­vel­op­ment and in­fra­struc­ture con­struc­tion. In 2016, the NDB’S Board of Gov­er­nors ap­proved seven projects worth a to­tal of more than US$1.5 bil­lion. Of the seven projects, six are re­new­able en­ergy pro­grams. The only ex­cep­tion is a high­way project in In­dia’s Mad­hya Pradesh. In the next two to three years, the scale of NDB loans is ex­pected to double an­nu­ally. Two thirds of loans will go to “sus­tain­able in­fra­struc­ture,” mean­ing projects that will cause pos­i­tive trans­for­ma­tive ben­e­fits to both the en­vi­ron­ment and so­ci­ety. The other one third will be in­vested in “tra­di­tional in­fra­struc­ture” to mit­i­gate po­ten­tial ex­ter­nal risk.

Fourth, the NDB places em­pha­sis on com­mer­cial­iza­tion and ef­fi­cient op­er­a­tions. The NDB fea­tures ex­panded com­mer­cial op­er­a­tions and lacks soft-loan win­dows. It has flex­i­ble fi­nanc­ing meth­ods in­clud­ing loans, stock equity, guar­an­tees and co-fi­nanc­ing. And its prospec­tive bor­row­ers are not limited to sov­er­eign states. The NDB has no stand­ing Board of Gov­er­nors, and con­sid­ers prospec­tive bor­row­ers’ poli­cies, reg­u­la­tions and in­sti­tu­tions to man­age their loans, in prin­ci­ple, which greatly re­duces ad­min­is­tra­tive costs.

Lo­cal Roots

The NDB and the Asian In­fra­struc­ture In­vest­ment Bank (AIIB) are of­ten men­tioned in the same breath. Both banks are ded­i­cated to mend­ing de­fects in the ex­ist­ing in­ter­na­tional fi­nan­cial sys­tem, mo­bi­liz­ing funds in emerg­ing economies and sup­port­ing in­fra­struc­ture projects in de­vel­op­ing coun­tries. More­over, both banks at­tach im­por­tance to flex­i­ble and ef­fi­cient gover­nance pat­terns. How­ever, the two banks have grad­u­ally veered off on dif­fer­ent de­vel­op­ment paths since their re­spec­tive in­cep­tions.

As a plat­form to pro­mote South-south co­op­er­a­tion, the NDB places more em­pha­sis on lo­cal­ized de­vel­op­ment. The AIIB, which is more in­ter­na­tional, em­bod­ies China’s piv­otal role in pro­mot­ing South-north co­op­er­a­tion. Along with the afore­men­tioned fi­nanc­ing lo­cal­iza­tion, the NDB’S fo­cus on lo­cal de­vel­op­ment is main­tained through the fol­low­ing steps:

First, em­ployee re­cruit­ment and pur­chas­ing poli­cies are lo­cal­ized. While all NDB em­ploy­ees hail from BRICS nations, the AIIB re­cruits in­ter­na­tional em­ploy­ees. In terms of the pur­chas­ing pol­icy, the NDB, in prin­ci­ple, only make pur­chases from its mem­bers, while the AIIB’S pur­chas­ing pol­icy is open to the world.

Sec­ond, part­ner­ships and stan­dards are lo­cal­ized. The NDB has al­ready signed mem­o­ran­dums of un­der­stand­ing with nine mul­ti­lat­eral de­vel­op­ment banks to learn from their ex­pe­ri­ence. Ac­cord­ing to NDB Pres­i­dent K.V. Ka­math, al­though his bank will seek co-fi­nanc­ing projects, this realm will only ac­count for a small pro­por­tion of the NDB’S op­er­a­tions. The first seven projects ap­proved by the NDB are all in­di­vid­ual fi­nanc­ing pro­grams pri­mar­ily sup­ported by the gov­ern­ments of its five mem­bers.

Vig­or­ous Growth

The NDB is a new in­sti­tu­tion. Its or­ga­ni­za­tion, gover­nance and poli­cies still have room to be tested, honed and im­proved. A sta­ble mar­ket­place for the NDB is ex­pected to form within the next five to 10 years. Be­fore that time, the bank needs to over­come the fol­low­ing ma­jor chal­lenges.

First are prob­lems of in­ter­na­tional credit rat­ings and fi­nanc­ing costs. At present, al­though the NDB has re­ceived high credit rat­ings from Chi­nese rat­ing agen­cies, reach­ing the top in­ter­na­tional rat­ing has proved more dif­fi­cult. Cap­i­tal mar­kets of BRICS nations still need im­prove­ment, costs for lo­cal fi­nanc­ing are com­par­a­tively high, and un­sta­ble eco­nomic and po­lit­i­cal sit­u­a­tions in some BRICS coun­tries are chal­lenges to be over­come to im­prove the

NDB’S fi­nanc­ing ca­pa­bil­i­ties.

Sec­ond, in­com­plete na­tional gover­nance sys­tems bring risks. The NDB mainly re­lies on the bor­row­ers’ na­tional sys­tems. While this prac­tice can in­deed en­hance project ef­fi­ciency, mar­ket su­per­vi­sion reg­u­la­tions of BRICS nations still need to be fur­ther im­proved be­cause of the dif­fer­ent na­tional con­di­tions and de­vel­op­ment stages of BRICS coun­tries.

Third, the joint force of BRICS nations needs to be strength­ened. If the five BRICS nations can col­lec­tively act as a pow­er­ful po­lit­i­cal force, the NDB will bet­ter ex­plore lo­cal re­sources and re­al­ize de­vel­op­men­tal ad­van­tages. How­ever, be­cause com­pe­ti­tion be­tween BRICS nations is so in­tense at present, dis­tri­bu­tion of rel­a­tive gains has be­come a press­ing prob­lem. Op­ti­mal dis­tribu- tion of re­sources among the five nations has yet to be sat­is­fac­to­rily re­al­ized, which in­creases the op­er­a­tional costs of the bank.

In­spired by the AIIB’S mem­ber­ship ex­pan­sion, the NDB also seeks to ex­pand its mem­ber­ship to solve its prob­lems and fur­ther de­velop. Con­trast­ing the BRICS Sum­mit which fo­cuses on emerg­ing economies and de­vel­op­ing coun­tries, the NDB’S cri­te­ria for mem­ber­ship are more flex­i­ble and prac­ti­cal. Ac­cord­ing to the bank’s five-year plan, it should main­tain a ra­tio­nal pro­por­tion of de­vel­oped, mid­dle-in­come and low-in­come coun­tries when re­cruit­ing new mem­bers, ev­i­denc­ing that the bank is open to de­vel­oped coun­tries. The par­tic­i­pa­tion of new mem­bers will make the NDB more in­ter­na­tional.

In 2016, the NDB’S Board of Gov­er­nors ap­proved seven projects. Of them, six are re­new­able en­ergy pro­grams. The only ex­cep­tion is a high­way project in In­dia’s Mad­hya Pradesh. VCG

July 21, 2015: At the open­ing cer­e­mony of the NDB in Shang­hai, then Chi­nese Fi­nance Min­is­ter Lou Ji­wei (cen­ter), then Shang­hai mayor Yang Xiong (right), and NDB Pres­i­dent K.V. Ka­math jointly launch the bank. by Zhang Chun­hai/xinhua

Au­gust 17, 2017: South African Pres­i­dent Ja­cob Zuma cuts the rib­bon at the launch of the NDB’S African Re­gional Cen­ter in Jo­han­nes­burg, South Africa. VCG

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