Focus on BRICS Inside
New bank is a major BRICS success story
AS SOUTH Africa takes the presidency of BRICS, the setting up of the New Development Bank (NDB) must rank as the major single success story of the grouping of large emerging markets. The NDB, headquartered in Shanghai, was founded by the BRICS countries at the fifth summit in Fortaleza, Brazil, in July 2014 and launched in 2015. The bank was set up with an initial authorised capital of $100 billion (R1.3 trillion).
Setting up the bank itself so quickly was a feat in itself. Similar attempts by developing countries to set up alternative banks to the industrial-country dominated World Bank and International Monetary Fund (IMF) have either never materialised or took long to become a reality.
An example is the Bank of the South (Bancosur), a monetary fund and lending institution originally conceptualised by Argentina, Brazil, Paraguay, Ecuador, Bolivia and Venezuela in 2009, but which began operations only in May 2015. Bancosur, established by the countries of the Union of South America (Unasur), is also intended to be an alternative lender to the IMF and the World Bank for Latin American countries.
Furthermore, the NDB was established during a period when all its members, bar India, experienced economic downturns or faced political turmoil or were downgraded by international credit rating agencies.
After initial stumbles, the NDB has now established the basic banking infrastructure, staff and systems. The bank is busy securing an international credit rating. Currently it is rated only in China. It plans to extend its membership beyond BRICS to other developing and developed countries also. In the future it wants a membership with “geographic diversity and a reasonable mix of advanced, middle-income and lower-income countries”.
In its 2017-2021 general strategy document the bank said it would put two-thirds of its loans into sustainable, “green” infrastructure and renewables over the next five years, and the rest in traditional infrastructure and development projects.
The bank will provide mostly “green” loans.
The NDB’s strategy to use “green” bonds to predominantly part-finance infrastructure projects brings a new approach to infrastructure development.
The bank uses the methodology of “on-lending”, meaning it lends through member countries’ state-owned development banks, rather than doing so directly. This means that project funding recipients are then required to follow the environmental, social and financial rules of the country’s state-owned development banks through which the money is channelled, rather than the NDB’s own rules.
In the bank’s current model each member country has equal management and board participation, with no country having a veto. For now, the bank lends only to the public sector, but will start funding the private sector this year. In time, the bank envisaged the private sector to make 30 percent of its loan book.
Zhu Xian, the NDB’s chief operating officer, said the bank would be targeting a future 70 percent to 30 percent split between sovereign and non-sovereign loans in its loan book.
The bank provides loans denominated in local currency, as well as US dollars, in order to minimise the use of the US dollar, as well as reduce foreign currency risks.
Leslie Maasdorp, the chief financial officer of the NDB, wrote recently that the bank was “committed to develop and deepen local capital markets”.
The bank will focus on the needs identified by clients, rather than identifying the need for clients, and then provide finance, as is the mode of operation of many industrial country-based multilateral development finance organisations.
The bank promises it will not, like the World Bank and IMF, impose “structural adjustment” policies, demand they take up lender-imposed positions on international issues or appoint lender-approved staff in the countries it lends to. The NDB preferably will lend on its own, but will consider co-lending and investing on a case-by-case basis with non-BRICS development banks.
The NDB is an infrastructure-focused lender, which is issuing debt in the currencies of its five member countries, prioritising infrastructure, “green” projects, and renewable energy.
The idea is that the NDB will try to build development models, which could be replicated in funding projects in BRICS countries and other developing countries.
In 2016, the head of the NDB, Kundapur Vaman Kamath, said the bank would lend $1.5bn in 2016, rising to $2.5-$3bn in 2017 and $3.5bn in 2018. It aims to disburse between $10bn and $15bn in loans by 2021.
So far, the NDB has now funded 21 projects in BRICS countries. Its loan portfolio is now just more than $5.1bn.
In May 2018, the NDB announced it plans to raise 5 billion yuan (R9.7bn) through a yuan-denominated bond issue later this year, with another yuan-denominated bond issue planned before 2020.
Last year the bank raised $500m through rupee-denominated masala bonds.
Last year the bank approved two infrastructure projects in India and Russia with combined loans of $400m.
The loans were used to build a toll transport corridor connecting the Ufa city centre to the M5 federal highway in Russia; and rehabilitate the Indira Gandhi canal system in India. Other projects that the bank has funded included a $470m loan for the Madhya Pradesh Multi-Village Rural Drinking Water Supply Scheme in India.
Other projects financed include funding China’s Hunan Green Area Watershed Environmental Development with 2bn yuan to boost the water quality of the Ziang River watershed and strengthen flood controls; and the Jiangxi Industrial Low-Carbon Restructuring and Green Development, to promote energy conservation, recycling and reducing pollution, was given a $200m loan. It has also given Russia a $460m loan to boost information technology systems and infrastructure for its judicial system.
It was established when all its members, except India, were in an economic downturn. Its strategy is to use ‘green’ bonds to partfinance infrastructure.
William Gumede is associate professor at the School of Governance at Wits University; and author of South Africa in BRICS (Tafelberg) http://www.amazon.com/Tafelberg-Short-AfricaSalvation-ruination-ebook/dp/B00FRHV7LC