The Widening Path of the NDB

The idea of establishing the New Development Bank (NDB), a multilateral development bank co-founded by the BRICS nations, was introduced at the 2012 BRICS summit in New Delhi, India, in March 2012. According to the agreement, “the Bank shall mobilize resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries, complementing the existing efforts of multilateral and regional financial institutions for global growth and development.” After two years of negotiations, Agreement on the New Development Bank was signed in July 2014, and the bank officially opened for business in Shanghai in 2015.

The NDB was established in a certain context: First, a serious shortage of infrastructure construction funds was bottlenecking development. According to the Organization for Economic Cooperation and Development, global demand for infrastructure financing will reach US$50 trillion before 2030, 60 percent more than the total actual expenditures over the past two decades. By then, the annual financing gap will reach at least US$500 billion. Second, expansion of traditional multilateral development banks is hindered by political restraint. Since the 2008 economic recession, reforms on capital increase and voting rights promoted by the G20 group were limited, resulting in poor funding capacity for infrastructure construction. Furthermore, over the past 50 years, organizations like the World Bank have experienced “mission creep” characterized by ever expanding institutes and steadily deteriorating performance.

The NDB is “new” because shared incentive is employed as a new practice, which attracts BRICS nations to contribute new funds, experience and knowledge on infrastructure financing to projects that benefit developing countries. In terms of its unique strategic vision, the NDB intends to be “new” in a broad range of areas including relationships, project types and instruments as well as approaches. Contrasting traditional multilateral development banks, the NDB has adopted a mechanism enabling equal access in the decision-making process – and no country has veto power, which ensures open doors to the facilitation of cooperation among BRICS nations. BRICS states already control huge capital reserves. According to the World Bank, China’s 2014 aggregate savings rate reached 49 percent, ranking top among the world’s major economies and dwarfing the global average of 24 percent. And the same rate for India was 33 percent. The foreign exchange reserves of BRICS nations also lead the world. China’s foreign exchange reserves alone account for more than one third of the world’s total. Using modern financial instruments and governance structure, these funds will be “internally recycled” to more effectively contribute to infrastructure construction in developing countries and boost their productivity, rather than seeping into the financial systems of Western countries and exacerbating developmental imbalances among countries. Such factors have been cited by world-renowned economists including Nicolas Stern and Joseph Stigliz, who have expressed support for the establishment of the NDB.

Hitting the Ground Running

Two years after its inception, the NDB has been making steady progress, and its market status has been cemented preliminarily.

First, the bank’s organizational structure and strategic planning have taken initial shape. Its first five-year plan (2017-2021) was approved by its Board of Directors and published in early July 2017. Basic policy framework in various fields including organizational governance, corruption deterrence, loans, procurement, environment and social standards are already in place. The bank now employs a staff of about 100, a figure that is expected to increase to at least 125 by the end of 2017 and 400 by 2021. The NDB attaches great importance to the recruitment of young employees, the ideal people to further innovate its development.  

Second, the local currency financing process of the BRICS nations has begun. The bank’s funds come from the five shareholders. The NDB’s initial capital of US$50 billion was equally contributed by the five members. With paid-in capital of US$10 billion, the balance will be paid within the next five years. However, funding from only the five members will hardly meet the bank’s needs in providing medium and long-term infrastructure financing. And it would be difficult for the bank to earn a high international credit rating within such a short time. Thus, local currency financing was elevated from an option to a priority strategy. In 2016, the NDB issued its first green bond worth three billion RMB in the Chinese inter-bank bond market. This was the first time a multilateral development bank issued a green bond denominated in the Chinese currency in China. The NDB also plans to raise US$300 million to US$500 million via rupee denominated masala bonds.  

Third, the bank has reinforced its market position focused squarely on sustainable development and infrastructure construction. In 2016, the NDB’s Board of Governors approved seven projects worth a total of more than US$1.5 billion. These projects were based in the five BRICS countries, with two in China and two in India. Of the seven projects, six are renewable energy programs, and the only exception is a highway project in India’s Madhya Pradesh. In the next two to three years, the scale of NDB loans is expected to double annually. With comprehensive consideration of social and economic benefits, two thirds of loans will go to “sustainable infrastructure,” meaning projects that will cause positive transformative benefits to both the environment and society. The other one third will be invested in “traditional infrastructure” to mitigate potential external risk.

Fourth, the NDB places emphasis on commercialization and efficient operations. The NDB features expanded commercial operations and lacks soft-loan windows. It has flexible financing methods including loans, stock equity, guarantees and co-financing.  And its prospective borrowers are not limited to sovereign states. The NDB has no standing Board of Governors, and considers prospective borrowers’ policies, regulations and institutions to manage their loans, in principle, which greatly reduces administrative costs. For each project, the NDB will appraise the quality of the borrower’s environment, societal situation, credit and procurement system. As long as the bank’s requirements are met, the borrower’s own laws, regulations, and supervision system will be applied as much as possible. Only when a country’s systems fail to meet the qualifications will the bank adopt other standards based on the concrete conditions of each project. Today, many institutions including the World Bank and the Asian Development Bank are using borrowers’ national systems more often. But since some members are less developed, it is hard to promote this new practice.

Local Roots

The NDB and Asian Infrastructure Investment Bank (AIIB) are often mentioned in the same breath. Both banks are dedicated to mending defects in the existing international financial system, mobilizing funds in emerging economies and supporting infrastructure projects in developing countries. Moreover, both banks attach importance to flexible and efficient governance patterns. However, the two banks have gradually veered off on different development paths since their respective inceptions. 

As a platform to promote South-South cooperation, the NDB places more emphasis on localized development. The AIIB, which is more international, embodies China’s pivotal role in promoting South-North cooperation. Along with the aforementioned financing localization, the NDB’s focus on local development is maintained through the following steps:

First, employee recruitment and purchasing policies are localized. While all NDB employees hail from BRICS nations, AIIB recruits international employees. At present, three of AIIB’s vice presidents hail from developed countries outside the region, namely, Britain, France, and Germany. In terms of the purchasing policy, the NDB, in principle, only make purchases from its members, while the AIIB’s purchasing policy is open to the world. Thus, even though some countries like the U.S. and Japan are not member states of the AIIB, their citizens and enterprises can equally enjoy the opportunities offered by the AIIB.  

Second, partnerships and standards are localized. Already, the NDB has signed memorandums of understanding with nine multilateral development banks to learn from their experience. According to NDB President K.V. Kamath, although his bank will seek co-financing projects, this realm will only account for a small proportion of NDB’s operations. The bank’s initial focus will be independent projects that will allow the young bank to learn and improve its capabilities. Only with improved operations will the bank be able to cooperate with other multilateral development banks to provide access to greater resources. The first batch of seven projects approved by the NDB are all individual financing programs primarily supported by the governments of its five members. The NDB stated that it views development banks from its member states as “strategic partners” and will learn from their inspirational models. By contrast, by the end of June 2017, 12 of the 16 projects approved by the AIIB were joint financing programs with other financial institutes including the World Bank, Asian Development Bank, and European Bank for Reconstruction and Development.

Vigorous Growth

The NDB is a new institution. Its organization, governance and policies still have room to be tested, honed and improved. A stable marketplace for the NBD is expected to form within the next five to 10 years. Before that time, the bank needs to overcome the following major challenges.

First are problems of international credit ratings and financing costs. When it was just 18 months old, the AIIB obtained a AAA credit rating, the highest score given by Moody’s Investors Service. The rating is tied to the bank’s abundant capital and strong support from developed countries. At present, although the NDB has received high credit ratings from Chinese rating agencies, reaching the top international rating has proved more difficult. Capital markets of BRICS nations still need improvement, costs for local financing are comparatively high, and unstable economic and political situations in some BRICS countries are challenges to be overcome to improve the NDB’s financing capabilities. 

Second, incomplete national governance systems bring risks. The NDB mainly relies on the borrowers’ national systems. While this practice can indeed enhance project efficiency, market supervision regulations of the BRICS nations still need to be further improved because of the different national conditions and stages of development and transition of BRICS countries. The NDB places more social and environmental responsibility on the borrower country. Thus, despite the bank’s utilization of external supervision, it still suffers from information asymmetry and weak supervision, which can lead to diffused risk. In the future, if the NDB accepts developing countries with comparatively weak national governance systems as members, these problems will be exacerbated. 

Third, joint force of the BRICS nations needs to be strengthened. The EU integration process provided a solid political foundation for the development of the European lnvestment Bank. And the European lnvestment Bank, in return, supported the infrastructure connectivity between old and new Europe, which promoted the EU integration process. If the five BRICS nations can collectively act as a powerful political force, the NDB can better explore local resources and realize developmental advantages. However, because competition between BRICS nations is so intense at present, distribution of relative gains has become a pressing problem. Optimal distribution of resources among the five nations has yet to be satisfactorily realized, which increases the operational costs of the bank.

Inspired by the AIIB’s membership expanding, the NDB also seeks to expand its membership to overcome its problems and further develop. Contrasting the BRICS Summit which focuses on emerging economies and developing countries, the NDB’s criteria for membership are more flexible and practical. To promote the bank’s further development, Agreement on the New Development Bank stipulated that membership of the bank shall be open to borrowing and non-borrowing members, which means that developed countries are not excluded from membership. According to the bank’s five-year plan, it should maintain a rational proportion of developed, middle-income and low-income countries when recruiting new members, evidencing that the bank is open to developed countries. The participation of new members will make the NDB more international.

The author is an associate research fellow at the Shanghai Institute for International Studies.