By Aashna Mehra and Meeta Keswani Mehra
The emergence and persistence of BRICS – a group of “like-minded” emerging economies, namely Brazil, Russian, India, China and South Africa (BRICS) – has often been viewed sardonically, described in a recent opinion editorial in The Diplomat as “a talk shop among apparently incongruent powers and a meaningless investment-banking acronym long past its sell-by date.” As the twelfth BRICS summit on November 17, 2020, comes into increasing focus against a relentless India-China border dispute, a raging global pandemic and a dramatic shift in American policy post-election, one of the summits’ pioneering creations, the New Development Bank (NDB or the Bank), also marks its fifth anniversary.
The NDB was first mooted by India in 2012 and came into existence in July 2014 at the sixth BRICS summit in Brazil. The motivation behind the creation of the Bank was to challenge the Western-dominated paradigm of international development finance embodied in organizations such as the World Bank and the International Monetary Fund (IMF).
In the past five years since it began actively investing, the NDB has recorded a number of successes and has cemented its place as a preeminent multilateral development bank focused on sustainable infrastructure. As of November 2020, it has approved 65 sustainable development and infrastructure projects across all BRICS economies worth $21 billion, spanning clean energy, transport infrastructure, water resource management, urban development, environmental efficiency and social infrastructure.
Notably, 27% of the Bank’s project approvals are denominated in the local currencies of the respective borrowing members instead of USD. This percentage is among the highest for multilateral development banks, and growing, and reflects the Bank’s desire to address currency volatility risk and its detrimental impact on the creditworthiness of project cashflows. In 2019, the NDB approved loans denominated in Euros, Renminbi, South African Rand and Swiss Franc and issued an RMB 3 billion bond in the China Interbank Bond Market, which was three times oversubscribed.
The NDB also received AA+ credit ratings from Fitch and Standard & Poor’s as well as AAA ratings from the Japan Credit Rating Agency and the Analytical Credit Rating Agency. This has allowed the Bank to raise funds at competitive rates and pass those savings onto its member borrowers, who, on average, have a credit rating of BBB- and would be charged much higher rates for development financing were it not for the NDB.
However, the most impressive achievement of the Bank has been its ability to operate not just steadily, but at a growing pace even as economic and geopolitical challenges have plagued some of its member countries. In 2019, global economic growth, including in BRICS countries, slowed to 2.9% from 3.6% the year before, marking its lowest level since the Great Recession of 2008.
This has been exacerbated by increasing protectionism and trade restrictions across the world as well as an intensifying border stand-off between India and China, both BRICS members and two of the largest contributors to global GDP expansion.Even as COVID-19 began to take centre stage around the world, the NDB stepped in and committed to a $10 billion Emergency Assistance Program to help BRICS countries tackle immediate health impacts and economic recovery concerns; assistance that would not have existed without the NDB. As the Bank looks ahead to its next five years, it must draw upon and double down on these experiences of successfully operating in an increasingly volatile and multi-polar world.
At the same time, the NDB must also learn from the omissions and lessons of the past five years. As of December 31, 2019, the NDB had committed capital of $15 billion in aggregate, but of this committed capital, only $1.5 billion (or 10%) had been disbursed as cash to projects by the end of 2019. Increasing the rate of utilization of its committed capital must remain a major focus of the Bank in the coming years.
Moreover, even though the NDB has stated its support for sustainable and green infrastructure, it’s funding for a Trans-Amazonian highway project (Para Sustainable Municipalities Project) in Brazil has come under scrutiny from environmentalists, who have highlighted the disproportionately negative effects of deforestation in the Amazon as a result of urban development projects in the region. Historically, the Bank has tried to use the socio-environmental standards of the respective borrower nations to approve funding for projects, but it should gradually push to develop an internal set of consistent and transparent compliance standards that ensure that environmental and/or social damages do not begin to outweigh the stated economic benefits of projects. Finally, a large part of the NDB’s portfolio of infrastructure projects thus far consist of financing for government-sponsored or government-backed public sector firms in the borrowing countries, with 80% of approvals in 2019 concentrated on “sovereign and sovereign-guaranteed operations”.
As the NDB diversifies towards making equity investments and attempts to crowd-in private investments to complement its efforts, it should begin to pivot towards investing in private sector firms and projects in its borrowing countries.
Going forward, at the upcoming BRICS Summit on November 17, 2020, one needs to sketch out the short-, medium- and long-run lending priorities for NDB. In the immediate future, there should be an emphasis on building healthcare capacities and national health preparedness for its member nations and other vulnerable countries, with special support towards containment of the spread of COVID-19 and assistance for social and economic recoveries in terms of incomes and jobs.
From a medium-term perspective, investments for reinforcing urban resilience in mega-cities and densely populated agglomerations for mitigation of adverse impacts of air pollution and adaptation to climate change needs to be the focus. In keeping with its current emphasis, a medium to longer-run priority should be on lending support for renewable energy technologies (solar, wind and biomass) to help improve their dissemination in the overall energy mix of the member nations of BRICS and elsewhere. In all of these endeavours, the Bank could attempt to devise mechanisms to elicit public-private partnerships for long-run financial sustainability.
(Aashna Mehra is an investor at renewable energy and infrastructure private equity firm in the United States. She received her MBA as a Silver Scholar and Kerry Fellow from Yale and her Bachelors of Science in Mechanical Engineering from Princeton. Views are personal.
Meeta Keswani Mehra is a Professor of Economics at the Center for International Trade and Development, School of International Studies, Jawaharlal Nehru University, New Delhi. Views are personal.)