As South Africa takes the presidency of BRICS, the setting up of the New Development Bank 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 in July 2014 and launched in 2015. The bank was set up with an initial authorised capital of US$100bn.
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, have either never materialised or took longer 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 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. At the moment it is rated in China only.
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 5 years, and the rest in traditional infrastructure and development projects. The bank will provide mostly “green” loans. The NDB’s strategy of 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 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 only lends to the public sector, but will in 2018 start funding the private sector. In time, the bank envisaged the private sector to make 30% of its loan book.
Zhu Xian, the NDB’s Chief Operating Officer, says the bank will be targeting a future 70%-30% 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 the bank is “committed to develop and deepen local capital markets”.
It 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 that 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, to 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 US$1.5bn in 2016, rising to US$2.5-US$3bn in 2017, and to US$3.5bn in 2018. It aims to disburse between US$10bn and US$15bn in loans by 2021.
So far, the NDB has now funded 21 projects in BRICS countries. Its loan portfolio is now just over US$5.1bn. In May 2018, the NDB announced it plans to raise 5 billion yuan (US$782m) through a yuan-denominated bond issue later this year, with another yuan-denominated bond issue planned before 2020. Last year, the bank raised US$500m through rupee-denominated masala bonds.
Last year the bank approved two infrastructure projects in India and Russia, with combined loans of US$400m. The loans were used to build a toll transport corridor connecting the Ufa city centre to the M-5 federal highway in Russia; and to rehabilitate the Indira Gandhi canal system in India.
Some of the other projects that the bank has funded included a US$ 470m loan for the Madhya Pradesh Multi-Village Rural Drinking Water Supply Scheme Project in India.
Other projects financed include funding China’s Hunan Green Area Watershed Environmental Development Project 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 Project to promote energy conservation, recycling and reducing pollution were given a US$200m loan.
The NDB has also given Russia a US$460m loan to boost information technology systems and infrastructure for its judicial system. Last year the bank earmarked US$180m for state-owned energy utility Eskom for renewal projects, however, this was put on hold because the utility lacked the capacity to implement the envisaged projects.
On 29 May 2018, the bank approved US$200m for the reconstruction of the Durban Container Terminal berth, aimed at “helping the South African state-owned transportation company Transnet enhances the capacity of its port in Durban”.
Last year the bank opened an Africa regional office in Johannesburg. By the end of 2018, the bank plans to open an Americas Regional Office in Brazil. The regional offices will identify and prepare bankable projects in Africa and Latin America. In May 2018, the NDB signed an agreement with the Inter-American Development Bank to co-finance sustainable infrastructure projects in Brazil and Latin America.
The bank has very obvious shortcomings. The NDB currently do not yet have social, environmental and community participation policies to govern the choice of, design and implementation of projects. For example, Kevin Gallagher, a researcher at the Global Economic Governance Institute of Boston University noted that if “the NDB can also devise state-of-the-art safeguards that enhance environmental sustainability and social inclusion without dragging down the project cycle it could become a truly new model for multilateral development banking”.
Furthermore, the corporate governance of the NDB is opaque. BRICS civil society groups, media, and academics will have to monitor to ensure that NDB lending and infrastructure projects are ecologically sustainable, promote inclusive economic growth and development; and that the bank based its operations on good corporate governance.
*This article was published in Business Report. To view the article on their website click here.