On Tuesday, the US$100 billion BRICS New Development Bank (NDB) was opened in Shanghai by Brazil, Russia, India, China and South Africa. This follows the institution's entry into force, confirmed two weeks ago at the 2015 BRICS Summit in Ufa, Russia. This, along with the Asian Infrastructure Investment Bank's (AIIB) signing ceremony on 29 June, marks a substantial month in the establishment of new additions to the multilateral development banking system.
The vibe at the NDB inauguration here in Shanghai was buoyant and optimistic, with the rhetoric focused on innovation in solving global investment problems and complementing existing institutions. The NDB was lauded as a major step forward for BRICS cooperation and for collaboration among emerging markets more broadly, as well as being seen as a rebuttal to cynics who have questioned the capacity of the BRICS forum to deliver concrete outcomes.
As my colleague Ye Yu recently noted, the NDB aims to finance investment projects and contribute to economic development in emerging market and developing economies, particularly through infrastructure and energy projects. Judging by the rhetoric invoked at the launch, it's likely that 'new' will become the watchword for the institution. Based on the concept that economists Joseph Stiglitz and Nicholas Stern first espoused back in 2012, the Bank will aspire to new mandates, new instruments and new practices.
The NDB's leadership team said the organisation will adhere to four defining principles: it will be professional, efficient, transparent and green. [fold]
- 'Professional' is to assure the international community that the NDB will operate to a standard expected from a global institution. This is particularly important given the Bank will aim for 'next practice, not best practice'. This infers that rather than the Bretton Woods 'high standards', where institutions set the minimum social and environmental criterion before they lend (even if those standards are more strenuous than national settings), the NDB's lending will be made on the basis of domestic standards and 'be flexible to local conditions'.
- 'Efficient' refers to '21st century governance arrangements' such as a non-resident board and a leaner, flatter institutional structure and decision-making process than in the Bretton Woods institutions. On staffing, disgruntled employees at the World Bank, Asian Development Bank and other regional banks who have been dusting off their CVs may need to look elsewhere. Rather than drawing heavily from the established banks, the NDB will look to recruit and train bright and inexperienced young talent from BRICS countries.
- The transparency principle will need to be laid out in detail in coming months, but will be a crucial component to operations, particularly if the bank aims for 'reasonable returns' rather than a strict profit-maximising approach.
- 'Green' is meant to be more than just a catch phrase. The Bank's vision is to not compromise on environmental standards. Clean energy and new technologies are seen as a key part of the NDB's business model.
The NDB will need to hit the ground running. Its executive board will be expected to make decisions on its first tranche of loans as soon as April next year. Judging by remarks from the Bank's President, KV Kamath, the first loan could already have been identified. It will be issued under a public-private partnership and is likely to be renminbi-denominated.
Many questions are unanswered and a lot of crucial specifics around operations need to be put in place in the short period before the first loans are determined. These questions include the acceptable level of public disclosure concerning the decisions made and the information that led to them, environmental and social safeguards policies, and locations and participants in projects.
The initial US$100 billion capital base will likely be gradually phased in over multiple installments. The NDB will need to be innovative in the way it raises and disburses funds and in how it partners with private and public institutions if it is to make a significant contribution to global investment shortfalls.
Yet innovations carry risk, particularly if under pressure of rapid processes. There will be high-profile successes and failures in this experiment. The international community will judge the effectiveness of the NDB based on results, and will compare it to the lessons that have been gleaned in the 70 years of Bretton Woods. Like the AIIB, the Bank is aware that its standards will be under a lot of scrutiny.
Photo courtesy of Official Russian Presidency of BRICS.