New Development Bank (NDB): BRICS Bank

Introduction

    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.

BRICS

  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 12^th 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 12^th 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. 

Infrastructure Financing

      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.

World bank

    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 1/5^th .

    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.

Bank President

     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 21^st century development bank to compete with the 20^th 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.

Conclusion

  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.

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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

Problem is Not in the Implementation

       In this note I want to address some dangerous myths that underlie public discourse and Civil society participation in public policy discussion and lobbying for their pet concerns.  There is an illusion, bordering on delusion, that the source of all our problems is the Central Government in Delhi and if only it had the intelligence and the moral fiber to pass the right laws, all our problems would be solved.  The problem is the opposite: there are myriads of laws, rules regulations programs and projects on every conceivable problem and issue under the sun and we keep adding to them every year, without putting in the hard work of studying and changing them.  On the other side, the bureaucracy, which stretches from State capitals (including Delhi as a State distinct from the central govt) down to the village, is completely in adequate to implementing the plethora of laws, rules regulations and of carrying out programs and projects with any degree of rationality.  The few intelligent and sincere people who still try to do their job to the best of their ability, are completely outnumbered by those who make little pretense of serving public purpose and are there merely to further their own welfare.  Unlike in a business, there is no metric to alert the public of the performance of any government office.
      As I wrote over a decade ago,"The power to do good has been severely reduced while the power to do harm has increased." As the proportion of the corrupt increases the constraints on corruption decline. The bureaucracy, from the pettiest official at the bottom of the pyramid to the top, has little positive incentive for doing good, while the risk of going against the prevailing culture of self-aggrandizement is grave. So it is advisable to keep your head low and do the basic tasks with a minimum of effort.

      Is there a way out of this negative spiral.  In the same paper (which incidentally was presented at RGIDS, published in 2 journals and reprinted in 3 books) I suggested that Government must focus its limited resources (financial, human, attention span, time) on those problems and issues only it can do well and others cannot do.  Business and Non-Government organizations must not only be freed to do what they are good at, but be encouraged and supported. 

     "Inclusive Growth" is a very nice phrase that captures the philosophy and poetry of what the government must try to do, but unless backed by hard scientific analysis of problems solutions and priorities, it results in a further diffusion of focus to more and more problems, and less and less solutions.  It adds to the burden of the 150 odd programs that a typical district magistrate/collector is required to run in a district -- One has to be totally delusional to believe that the DM/DC can actually run so many programs or that he even bothers to try.  

     A law, rule, policy or regulation that is made without understanding the system that will be required to implement it, is a bad law, rule, policy regulation.  Those who propose it, cannot later deny culpability, by saying that "the problem was in the implementation,"or that "It is the failure of the system."  If you claim the right to determine policy, people have the right to expect you to learn about the system that will implement it!

      An understanding of systemic limitations leads to two different but complementary approaches: One, keep trying to reform the system, even though this is a long and frustrating process. Two, in the immediate future try to minimize/reduce the demands on the government system by creating a policy and regulatory environment that makes it possible for business, non-government organizations and civil society to solve the problem more effectively.  In the decades since I understood the system, I have applied this approach to policy reform.  Focus on essentials, prioritize, compare solutions and suggest only those that have a higher probability of success (there are no perfect solutions only better or worse). 

     If you want to get a flavor of these policy reform suggestions in different areas & sub-sectors, see www.chintanlive.org. When you are ready to dig deeper see https://sites.google.com/site/drarvindvirmani/ .