The leaders of the BRICS countries approved the formation of the BRICS Bank at their meeting in Brazil, on July 15, 2014. The idea of a BRICS Bank was floated by India in 2011-12 during its chairman ship of the grouping . A study group was formed in 2012 to explore the idea further. The leaders of the BRICs countries, approved the setting up of an inter-governmental group at their meeting in S Africa in March 2013, to work out the modalities. The unresolved issues have been resolved and final approval given by the leaders in their summit in Brazil.
Plurilateral discussions among the four largest non-OECD economies, China, Russia, Brazil and India started in late 2006 on the sidelines of the UN. They were given a strong impetus by the start of discussions in 2007 on the IMFs 12th General Quota Review (GQR) slated to be completed by January 2008. It was feared that the Europeans and the US which controlled the management and equity of the IMF (and the World Bank) would continue to resist giving a greater share of equity to the BRICs and other developing countries. As a consequences the Executive directors of these four countries based at the IMF & World Bank, started meeting informally in Washington, to exchange views on the GQR and to co-ordinate their approaches to the extent approved by their “principles” in respective capitals. The Governors of the IMF from these countries (three Finance Ministers and one Central Bank Governor) also started meeting on the sidelines of Bank-Fund annual and bi-annual meetings. The limited success achieved in the 12th IMF GQR and the corresponding review of World Bank capital, led the BRICs to heighten their interaction. A full diplomatic meeting was held in Russia in May 2008. The global financial crisis that erupted in 2008 in the developed countries, highlighted the need for BRIC countries to provide an alternative to the philosophy and economic thinking of the G7 and to work together to change governance structures at the IMF and the World Bank. This paved the way for the first formal summit of BRIC leaders in Russia in June 2009. There has been heightened co-operation between the BRICs countries from 2009 onwards, with respect to the IMF and World Bank, even though the interests of individual countries sometimes differed from the rest. Efforts were also initiated to expand the areas of collective action, of which the BRICS bank and the Reserve Fund are an outcome. South Africa was invited to the BRICs summit in China in 2010 and admitted to the group thereafter.
India, along with other developing countries in Sub-Saharan Africa, faces an enormous challenge of finding the financing to upgrade its infrastructure. Traditional funding sources are heavily constrained, both in the total funds available for development and for the financing that they are able or willing to allocate for development of new infrastructure projects. At the same time China and oil-gas exporting countries have surplus funds, which are currently being recycled primarily through international financial markets in the Developed countries. A New Development BRICS Bank has the potential to intermediate these savings from the surplus emerging economies to developing economies with a deficit of finance for infrastructure investment thus accelerate economic growth of developing and emerging economies.
My friend (and former colleague in Washington), Amar Bhattacharya has estimated that the Developing and Emerging economies need for infrastructure funds will increase from the current $800 bi per year to about $2.4 trillion a year in the next two decades. Of this the about $1.2 trillion a year is for new greenfield projects, essential for accelerating and/or sustaining growth and improving the welfare of its people. Besides networks of railways, highways, ports and airports, the surge in urbanization will put huge demands on both the quantity and quality of urban infrastructure. In many countries the rural areas still lack basic facilities like clean water, sanitation and sewage, which must be built. In addition, budgetary resources of many countries will be stretched just maintaining existing stocks of infrastructure at acceptable levels of quality. Private investment through Public Private Investment (PPP) is another source of infrastructure investment but has its own limitations.
The multilateral institutions like the World Bank are struggling to maintain infrastructure funding at old levels, given new demands and lack of lending capacity. The World Bank’s lending is reduced to half of what it was before the global financial crisis. It is unable to increase its capital base for further lending, because of the fear of loss of traditional control of this institution by the developed countries. Private lending for infrastructure has shrunk to one-third of its pre-crisis level. The BRICS bank is a small but significant step to fill this yawning gap in infrastructure funding. Just the idea of a BRICS bank had energized the management of the World Bank to set up a special fund for infrastructure. It is likely that the actual setting up of the Bank will induce to bank to improve its own rules and procedures for infrastructure lending. However, given the large disparity in share capital, the BRICS Bank will not be a major threat to it in the next five-ten years.
Equity Shares & Power
The New Development bank (NDB) will be $100 bi Bank with an initial subscribed share capital of $50bi with equal shareholding of all five BRICS countries (i.e. $10 bi each). Of this $10 bi will be put up in cash by the five countries in cash over seven years. The remaining $40bi will be in the form of guarantees. Thus India will have to budget for cash infusion of about $300,000/year or Rs 1.8 crore per year for the next seven years. Any future expansion of the subscribed share capital to bring in new ones, will ensure that the BRICS continue to have a majority ( > 55%) shareholding.
Our experience of the World Bank and IMF tells us that this is a necessary condition for an equal share in governance of new Bank. This also ensures that all five will have an equal voice in defining the philosophy, operational rules and procedures and governance of the bank. The bank will have to raise debt capital on international capital markets, for lending to potential borrowers. The IMF and World Bank follow the conservative practice of a 1:1 Debt-equity ratio, and the NDB may also have to follow this practice to ensure a high safety rating. Even if China is a major supplier of this debt capital, it will be at competitive rates, through open bidding and will therefore give no additional power to China as a bond holder (not anymore than it has over the US treasury/Govt. as a buyer of US Govt. bonds). Its equity share and power over NDB lending decisions will be 1/5th .
On issues of vital national interest to any of the shareholders, a consensus of five countries is likely to favor status quo. For instance it is likely that the BRICS bank will be unable to make loans to projects in parts of India like Arunachal Pradesh, expansively claimed by China, if India has already accepted such conditions in the ADB and World Bank.
The first President of the NDB, who will be an Indian with a six year term, will play a vital role in setting up the management philosophy, rules and procedures under which the Bank will operate. It will be very important to appoint a banking-financial expert, familiar with the latest instruments, practices and procedures of a competitive private bank, who can develop a 21st century development bank to compete with the 20th century one like the World Bank. One possibility is an eminent Indian who rose to the top of an international bank, but has retired from the job and thus had the time to reflect on broader issues.
The Indian presidency will be followed by five year terms for Brazilian and Russian nominees. From this we can assume that the new president will have one extra year to complete all the formalities necessary to create a functioning organization.
Some have bemoaned that Shanghai and not Delhi is the seat of this new Bank. For this we have no one to blame but ourselves: We have been talking about making Mumbai and international financial center for a decade or more and are no closer to it than when we started! Some analysts have raised the concern that China will have an inordinate influence on the functioning of the Bank. There is nothing in the agreed structure of the Bank that would justify these fears. Others are concerned about India budgeting so much money for a plurilateral bank. Rationally this should be compared to our funding for World Bank, IMF and other multilateral and Regional Banks and the benefit-cost ratio of each. In my judgement the benefit-cost ratio will not be any less and perhaps somewhat more.
A version of this article appeared in the Economic Times of 17 July 2014 under the banner, “BRICS Bank will help fund infrastructure projects in Emerging Economies” http://economictimes.indiatimes.com/opinion/guest-writer/brics-bank-will-help-fund-infrastructure-projects-in-emerging-economies/articleshow/38504229.cms