On 7 July the five BRICS countries of Brazil, Russia, India, China, and South Africa formally launched the New Development Bank (NDB) at the inaugural meeting of the institution's Board of Governors in Moscow, Russia, ahead of the Seventh BRICS Summit held in Ufa, Russia on 8 & 9 July. The NDB opened its doors at its head office in Shanghai, China on 21 July. The NDB promises to provide not only a new source of funding for energy and other infrastructure projects globally but to also represent a new way of providing such funding. This article examines the rationale for the new institution and outlines some of its key features and its implications for funding energy and infrastructure projects.
Why a new bank?
Former Goldman Sachs Chief Economist Jim O'Neill coined the term BRIC more than a decade ago, which did not initially count South Africa among the ranks of the major emerging economies. Excluding South Africa, the four original BRIC countries today make up more than 40 per cent of the world's population, a quarter of the world's land area and more than 25 per cent of global gross domestic product. The member countries have always had quite different economies but a common feature has often been a high rate of savings. Thus, London School of Economics Professor Nicholas Stern and former World Bank chief economist Joseph Stiglitz came up with the idea of a new development bank at Davos in 2011 as a way for emerging markets with large trade surpluses to recycle those savings into productive investments in their own countries, such as infrastructure.
Another reason behind the establishment of the NDB lies in the BRICS countries' frustration in the World Bank's and the International Monetary Fund's (IMF) delay in reforming their procedures so that voting weight and influence are more commensurate with economic size and contributions to such bodies. For example, the BRICS nations account for more than 25 per cent of global economic output, but have 10.3 per cent of quota in the IMF. European countries, on the other hand, have 27.5 per cent of the voting weight, but make up 18 per cent of global economic output. Compounding this inequality are archaic rules that require a European to always head the IMF and an American the World Bank. Against this context, the NDB represents, together with the Beijing-based Asian Investment Infrastructure Bank (AIIB), a financing alternative to the Bretton Woods institutions of the IMF and the World Bank that have underpinned the global economic order since their founding in 1944.
Establishment of the NDB
India formally proposed the idea to establish a dedicated BRICS bank at the fourth BRICS summit in New Delhi, India in 2012. Articles of Agreement were signed during the sixth BRICS summit in Fortalezza, Brazil, on 15 July 2014 and these entered into force in June 2015 following submission by each BRICS country of documents of acceptance, ratification or approval. As mentioned above, the initial 7 July Moscow meeting of the Board of Governors of the BRICS NDB, which includes finance ministers of the member countries, formally launched the $100 billion new institution. The 8-9 July Ufa summer also formalised the launch of a currency reserve pool (the Contingent Reserve Arrangement) worth another $100 billion USD. Rules regarding procedures and the NDB's five-year development strategy were discussed at the Moscow and Ufa meetings.
Purpose and Functions of the NDB and the Contingent Reserve Arrangement
The bank has a mandate to finance infrastructure and sustainability projects in BRICS and other emerging and developing countries "to complement the existing efforts of multilateral and regional financial institutions for global growth and development". The NDB mandate clearly indicates that it should be involved in projects where private capital is not capable or unwilling, as the case may be, to make major investments due to potential low profitability and long payback periods.
The Contingent Reserve Arrangement is designed to allow the BRICS countries to draw funds during a crisis. In particular, if problems arise providing dollar liquidity to national financial systems, BRICS central banks will support the partner by transferring a sum in US dollars on agreed serviceability and repayment terms. China has pledged to contribute a total of $41 billion USD to the Contingency Reserve Arrangement, giving it the largest share of voting rights at 39.5 per cent.
Focus and approach
The BRICS bank has a global mandate, as opposed to the AIIB, which is exclusively focussed on Asia. The NDB will finance projects in member countries and eventually other developing nations through loans, guarantees, credit and equity investments. Broadening the membership to other countries will be considered in coming months. The NDB's priorities will be in line with national development banks of member countries, including the removal of infrastructural constraints for growth. There are signs that energy will be a key focus of activity for the bank, as well as infrastructure projects that fall within China's "One Belt, One Road" concept for improving connectivity in Eurasia.
The NDB has said that it will be guided by four defining principles: it will be professional, efficient, transparent and green. "Professional" should reassure the international community that the NDB will be properly run as a global rules-based (rather than political) institution, even with a focus on "next practice, not best practice." "Efficient" echoes the AIIB's desire to be "lean" – both institutions will have a leaner management structure than the World Bank and aim at faster decisions. What is meant by "transparency" remains unclear, as do related issues concerning the appropriate level of disclosure to the public of decisions and the processes that lead to such decisions. "Green" reflects a desire to uphold environmental standards and place renewable energy and clean technologies at the core of the NDB's business model. In that vein, India's President Modi has stated that he wants the first project of the NDB to be a renewable energy project.
Initial Capital and Governance
The NDB will have a Board of Governors, a Board of Directors, a President and Vice-Presidents. The President of the Bank will be elected from one of the founding members on a rotational basis, and there will be at least one Vice-President from each of the other founding members. India's K.V. Kamath, the non-executive chairman of ICICI Bank and a former chairman of Indian IT major, Infosysis, has begun his term as the Bank's inaugural President. He will be followed in the office by a Brazilian and then a Russian. A Chinese national will not lead the bank until 2021.
The NDB's initial authorised capital equals $100 billion USD. The BRICS countries have agreed that the bank's subscribed capital would amount to $50 billion USD, of which only $10 billion USD would actually be paid in (each of the BRICS member countries would contribute $2 billion USD within a seven year period according to an established schedule).
The voting power of each NDB member will equal its subscribed shares in the capital stock of the bank. Since the initial subscribed capital ($50 billion USD) is equally distributed amongst the founding members, each member state will have an equal twenty per cent share in the bank's capital and, consequently, equal voting rights (at least in the beginning). The voting calculation mechanism that ensures that NDB members have equal voting rights or, as the case may be in the future, voting rights proportionate to their actual shares, is the key feature that differentiates the NDB from other international financial institutions, such as the World Bank and the IMF.
Little has been made public about the health, safety, environmental and social norms of the NDB. However, Lou Jiwei, Chinese finance minister, has stated he believes the NDB can improve upon existing norms. "This bank will place greater emphasis on the needs of developing countries, have greater respect for developing countries' national situation, and more fully embody the values of developing countries," said Mr. Lou. "Development is a dynamic process. There's really no such thing as so-called 'best practices'." Indeed, Mr. Kamath has pledged to move the bank "from best practices to next practices", and has described traditional development lending as often "too rigid, inflexible, and slow".
Bribery and corruption
Comparisons between the NDB and the recently established Asian Infrastructure Investment Bank are inevitable. The broader AIIB membership will pressure that institution to uphold international rules and norms relating to bribery and corruption, such as the OECD Anti-Bribery Convention (1997) – based on the U.S. Foreign Corrupt Practices Act of 1977 – and the IFC Anti-Corruption Guidelines. That pressure will be missing for the NDB and it remains to be seen what rules (if any) the bank will adopt in respect of bribery and corruption, though it has committed in general terms to transparency.
Recently, there has been much discussion of bilateral trade among certain BRICS countries switching to national currencies instead of the US dollar, which remains the default currency for global trade, even among BRICS countries. In particular, Russia and China have agreed to use each other's currencies to promote bilateral trade and investment, with Russian President Putin saying that Moscow would be keen to expand the use of national currencies with other BRICS countries. However, notwithstanding these political pronouncements and some increased use of national currencies, it seems clear that the NDB's basic currency, at least for the foreseeable future, will remain the US Dollar. Indeed, the capital of the NDB is denominated, and is supposed to paid by the bank's members, in US dollars, and the Contingent Reserve Arrangement is sized at 100 billion USD, thereby implying provision of US dollar liquidity to the members of the Contingent Reserve Arrangement. Notwithstanding the foregoing, Mr. Kamath has foreshadowed that the NDB's first loan will be made in Chinese Renminbi (RMB) and stated that the NDB will encourage local currency credit to protect the BRICS countries from currency fluctuations and volatility.
Working with other institutions
The NDB follows the establishment of two other China-led institutions over the past year: the AIIB and the Silk Road Fund (SRF). Some commentators see this trio of new institutions as ushering in a new world economic order. However, Russian President Putin has said that the NDB will complement, not replace, existing global institutions; and this reflects the Bank's mandate set out in its Articles of Agreement. The fact that all BRICS countries are now founding members of the AIIB could also help the NDB develop a consistent and complementary relationship with that organisation.
The heads of the World Bank, Asian Development Bank and African Development Bank have shared encouraging words that indicate a desire to cooperate with the NDB. These words from Asian Development Bank President Takehiko Nakao are indicative of their attitude: "We look forward to working with this new member of the global family of multilateral development banks in areas of common interest in Asia and Pacific, including possible co-financing for infrastructure and projects promoting sustainable development, utilising our long experience and expertise in the region". Although the NDB has made clear that it will seek a new way of operating compared to established development finance institutions, true partnership rather than competition with such institutions will mean that the NDB would not turn its back on what their knowledge and experience can offer it as a new institution.
At the recent BRICS meeting in Ufa, Russia, development banks of each of the BRICS countries (BNDES, Vnesheconombank, Export-Import Bank of India, China Development Bank Corporation and Development Bank of Southern Africa Limited) entered into a Memorandum of Understanding to engage in interaction with the NDB within the areas of infrastructure and sustainable development as well as other areas of mutual interest including: (i) agreements, including loan facilities, currency swaps and issuance of bonds; (ii) joint programs for project finance; (iii) information sharing on potential projects, and mechanisms for project monitoring; (iv) guarantees and counter-guarantees to secure obligations, including in respect of securities issued by the parties; (vi) investment funds to finance projects in sectors and industries that are a priority for the parties; (vii) experience and knowledge sharing through consultations, conferences and round tables; and (viii) regular dialogue and meetings between the parties and the NDB.
More projects, faster
Against the background of enormous capital outflows from China in recent months and the faltering growth of the Russian, Brazilian and South African economies, it is a difficult time for the BRICS economies. The establishment of the NDB offers a piece of good news, a chance to shape a new nimble and responsive institution that can offer an alternative to the energy and infrastructure funding needs of the BRICS economies. The hope is that the NDB will lead to more projects, faster.