Open for Business: The New Development Bank

While much attention has been focussed on the birth of the Asian Infrastructure Investment Bank (AIIB), another China based institution has also recently opened for business. The New Development Bank, aka the BRICS bank appears to have receded in relative importance to the AIIB, perhaps mirroring the relative economic decline of three BRICS members, namely Brazil, Russia and South Africa who have all suffered recession or tepid growth thanks to the recent collapse in the price of many commodities and a failure or inability to restructure their economies towards manufacturing or services.

The structure of the Bank based around five members now seems rather arbitrary and restrictive, although the door remains open for new countries, but the original five are guaranteed 55% of voting rights. The five members are geographically disparate so the Bank will perhaps have a hard time gaining a geographical focus. The Western equivalents like the African or Asian development banks work in a specific region and so build up regional expertise and identity.

The first South African based deal was funding to build transmission lines to connect new renewable energy projects to the grid. The country has long standing energy supply issues, so it will be a shot in the arm for the sector, but the project still only represents a fraction of the country’s overall needs. On a similar vein the first Indian based project was for a solar power plant in Karnataka. Other planned projects will be in renewable energy along with some traditional infrastructure projects, e.g. roads and bridges.

The NDB’s decision to prioritise renewable energy would appear to be a wise choice given the sector’s rapid take off in the last few years (receiving double the new finance that fossil fuels have received) and the members (apart perhaps from Russia) are a natural fit in terms of latitude and geography for solar and wind technology.

In parallel to these energy infrastructure projects the Shanghai based lender will issue green bonds in the Chinese market which will allow it to finance further projects. The NDB is currently undergoing due diligence carried out by the world’s rating agencies, (Moody’s, Fitch, S&P), the result of which should be worth watching given the widely divergent credit ratings of the NDB founder nations. Thanks to its recent economic travails Brazil’s rating has fallen to junk – while China and India remain on a more solid footing. The agencies may decide that China is the de facto leader of the NDB (although the five countries have equal voting rights) – having stumped up most of the capital for the contingency currency pool which is designed to help countries facing a currency crisis.

The Bank also promises to retain a flat organisational structure and a fast drawing board to delivery process. However multilateral organisations are notoriously prone to excess bureaucracy and slow consensus driven decision making, which could make it difficult to achieve these ambitious goals. On the plus side there are only five countries involved so far which should reduce political disputes and make it a relatively focused institution for now at least.

Between the emergence of the AIIB and the size and scale of China’s policy banks – the China Development Bank and EXIM bank the need for the NDB has been questioned. The Bank represents Chinese institution building in the developing world and demonstrates its commitment to South – South co-operation. The AIIB in comparison has many European members. China still casts itself as a developing country and in some respects remains more comfortable with allies in this category in comparison to Western countries.

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