06
May
The multilateral New Development Bank (NDB) proposed by the BRICS countries – Brazil, Russia, India, China and South Africa – is becoming a reality. The proposal for the NDB was mooted by India only at the BRICS summit in Delhi on March 29, 2012, the fourth since its inception in 2009. So far, progress on the NDB has been impressively rapid.
After Fortaleza in Brazil in July 2014, the upcoming seventh BRICS summit is at Ufa in Russia’s Bashkortostan. On the sidelines of the Spring Meetings of the World Bank and the International Monetary Fund (IMF) in April, BRICS finance ministers and central bank governors agreed to launch the NDB and its twin, the $100-billion Contingent Reserve Arrangement, ahead of the Ufa summit on July 9-10. Russian Finance Minister Anton Siluanov, the prospective head of the NDB’s board of governors, recently confirmed the decision.
The agreement on the NDB, signed by the BRICS leaders at Fortaleza, will come into force once the instruments of acceptance, ratification or approval are deposited by all the BRICS countries with the Brazilian government. Russia and India have already completed the process of ratification. Hopefully, the three others will follow suit before the Ufa summit.
Once the NDB is set up, BRICS will face the enormous challenge of building up as a top-class multilateral development bank (MDB). The first challenge is to meet the purpose for which it has been set up, namely to “mobilise resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries” and to complement “the existing efforts of multilateral and regional financial institutions for global growth and development”.
The developmental logic behind NDB – the well-known infrastructure gap in developing countries – is a compelling one. In the 2014 national elections in India and Indonesia, infrastructure was high on the agenda of the winning leaders, Narendra Modi and Joko Widodo. The Asian Development Bank (ADB), for example, estimated infrastructure investment requirements in Asia in energy, transportation, telecommunication and water and sanitation at $8 trillion between 2010 and 2020. In the BRICS countries, recognised as some of the most promising in terms of growth prospects, the debilitating impact of the infrastructure bottleneck is particularly severe. Private investment and official developmental assistance continue to be woefully inadequate compared with the requirements.
After the Great Recession, there is a lot of money in search of a decent yield. The dollar one-month and 12-month London interbank offered rates are still around 0.18 per cent and 0.72 per cent, respectively. Many Asian infrastructure developers continue to lament the lack of good bankable projects. Admittedly, it is a chicken-and-egg problem. The lack of available funding sources is a reason for the lack of good bankable projects. To succeed, the NDB must goad the BRICS countries to recognise the importance of sound project fundamentals and prepare a pipeline of bankable projects and put some seed money in them.
Second is to match, and even surpass, the standards of the World Bank and the ADB in terms of professional expertise of the staff and how they deal with member governments. Fortunately, there is a large enough pool of experts in the fields of engineering, economics, finance, human resources management, law and media management in the BRICS countries to provide the necessary human resources. The Articles of Agreement of the NDB under Article 21 enjoins the NDB to “ensure adequate remuneration” in the operation of the bank.
Third is to have a healthy competitive cooperation with the Asian Infrastructure Investment Bank (AIIB). The AIIB will be born in Beijing almost simultaneously as the NDB comes to life in Shanghai. Though both will have the same paid-in capital of $50 billion, the NDB will have only five members compared with the AIIB’s 57. Though membership of the NDB is open to the UN members at such times and in accordance with such terms and conditions as the bank may determine by a special majority at the board of governors, an immediate expansion of membership is unlikely. Furthermore, while all five members are equal at the NDB in terms of shareholding, with China as its top player, the AIIB may suffer some residual risk of vulnerability to domestic political considerations. With China painting on a much larger AIIB canvas, the NDB will have the advantage of focusing on a few.
In the broader geopolitical context, the NDB manifests the discontent with the governance of Bretton Woods institutions. In December 2010, the board of governors of the IMF approved a doubling of the IMF quota to approximately $655 billion, with an increase in the quota share of emerging economies by six percentage points. The BRICS’s total gain under the proposal is 3.3 percentage points from 11.51 per cent to 14.81 per cent.
The governors of the IMF also proposed a reduction in the representation of European countries at the 24-member board of directors from 10 to eight and a commensurate increase in the representation of developing countries. The board restructuring, a prerequisite for quota reform, requires approval by three-fifths of the IMF member countries, representing 85 per cent of the voting share. This prerequisite is not satisfied primarily because the approval of the United States with 16.75 per cent voting share is stuck at the US Congress.
The broader geopolitical struggle of restructuring the balance of power among countries in the Bretton Woods institutions will continue. But it will be important for NDB to avoid getting too much involved in the broader struggle of, what some have called, building a “world without the West”. In its functioning, the NDB should focus instead on the tedious job of facilitating infrastructure investment. In recent times, such investments by existing MDBs have got mired in environmental and human rights issues.
Take, for example, coal-based power generation. In 2014, the United States produced 1,586 million megawatt-hours from coal, and with about a quarter of the population of India, consumed more than three times the amount of coal that India did. Coal is the cheapest and most abundant source of energy in many power-starved developing countries such as India, where, literally, millions suffer in darkness. Furthermore, supercritical and clean-coal technology has reduced the environmental impact of coal-fired power generation. Yet, because of global climate change concerns, the US government placed severe restrictions on coal-fired electricity generation in 2013. The existing MDBs, such as the World Bank and the ADB, now lend for coal-fired power generation only in “rare circumstances”.
Sceptics have questioned the viability not only of the NDB but even the BRICS as a political grouping because of the disparate political goals of its five members. The NDB must prove them wrong by focusing sharply, not on supplanting the existing MDBs, but on the more mundane issue of development on which there is complete unanimity among its five members.
Source: http://www.business-standard.com/article/opinion/ashok-k-lahiri-closing-the-infra-gap-115050501158_1.html