TAKING ACCOUNT - JSE MAGAZINE

TAKING ACCOUNT

BRICS’ New Development Bank is an important sign of the geopolitical shifts in the world and the growing strength of emerging economies

TAKING ACCOUNT

At first glance, it appears to be a mechanism to direct the enormous domestic savings of China into deserving developing world infrastructure projects. While the bigger picture shows the New Development Bank’s (NDB) motives are more political than developmental – and suggests expectations should not be too high – there are potential benefits for Africa.

The so-called BRICS bank actually comprises two institutions and is a first step towards challenging – and perhaps eventually replacing – the US- and EU-dominated Bretton Woods institutions, devised by the Western Allies (excluding the former Soviet Union) as long ago as 1944. It challenges especially the World Bank and the IMF, and is a deliberate step towards a much larger Chinese role in the global economy, perhaps even eventual Chinese hegemony.

Headquartered in Shanghai with $50 billion in start-up capital, the NBD is intended to offer concessional infrastructure finance. This role is currently played by the World Bank and its regional counterparts, such as the African Development Bank and the Development Bank of Southern Africa (DBSA).

Alongside the NDB, the agreement (between Brazil, Russia, India, China and SA) also establishes a $100 billion Contingent Reserve Arrangement (CRA), intended to act as a ‘bailout fund’ or lender of last resort to countries in danger of default. That is precisely the space currently occupied by the IMF.

To understand what is happening here, it is important to recognise that these developments are not primarily about development finance. Martyn Davies, CEO of Frontier Advisory, argues that ‘in Africa, availability of money is not the problem’. Davies argues that he has never seen a viable project, anywhere in Africa, that has failed because financing was unavailable.

At the US-African Leaders Summit in early August, the figure of an infrastructure funding deficit of $100 billion was bandied around. But the figure is so imprecise that reports cannot agree whether it is the sum needed every year or in total over the next decade.

‘You can just about pick any country in Africa and you will find that there is a significant infrastructure deficit,’ says Peter Cook, infrastructure practice leader at Marsh Africa. ‘Huge investment is needed to address the deficit. The common threads are roads and rail, water, power and ports, both sea and air. Just the investment in refurbishment is massive never mind the potential for investment in greenfields projects.’

China has, of course, resented its margin-alisation for some time. Voting power in the IMF is based on a quota or monetary contribution that is supposed to reflect each country’s relative size in the global economy as measured by GDP.

China’s voting power sits at 3.81% although it now makes up 16% of global GDP. But changes to voting power in the IMF require an 85% super majority, which effectively gives the US Congress a veto. The US has been blocking reform since 2010 to the point where, in April this year, IMF MD Christine Lagarde, announced a Plan B to restructure the IMF and proceed without the US.

But Lagarde herself is evidence of another problem that BRICS countries have with the IMF. The fund has been run continuously by a European since it opened its doors in 1946. The deal is that an American runs the World Bank while a European runs the IMF. This, no doubt, made sense in 1946 when the focus was on the reconstruction of war-ravaged Europe. But it has been challenged in recent years, with protests reaching a crescendo when Lagarde, the then French finance minister, was elected in 2011.

Russia has an immediate motive as well as a longer-term ideological aversion to the Bretton Woods institutions. The IMF approved a $17 billion aid package to Ukraine earlier this year, a measure the Kremlin cannot but view as yet more meddling in its ‘sphere of interest’. BRICS’ problem with the World Bank is slightly different. They believe the institution has reinterpreted its mandate to focus on the poorest countries at the expense of the middle-income stratum, where they sit.

This view is articulated by former World Bank president Robert Zoellick. He supports the creation of the NDB and believes that excluding BRICS nations ‘would be a mistake of historic proportions’. Davies argues that the problem with BRICS member countries is that ‘they know what they’re not but not what they are’. The five countries are not linked by religion, language or political creed (democracy) but by opposition to the Washington consensus.

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‘In Africa, availability of money is not the problem’

MARTYN DAVIES, CEO, FRONTIER ADVISORY

What really riles BRICS, and many other countries, are the conditionalities the IMF imposes in return for bailouts. These invariably involve cuts in public spending, which carry political costs. 

Critics of the IMF say conditionalities are ideological – supporters insist they simply reflect the requirements of good pragmatic banking as well as governance. SA’s President Jacob Zuma’s public opinions of the new institutions reflect the critical view.

Speaking after the US-Africa Leaders Summit, he told reporters that the IMF has few success stories to show. ‘The existing banks … have not succeeded to produce an example country that was helped successfully and is now thriving,’ he said.

More to the point, perhaps, is Zuma’s argument that the new institutions will not impose conditionalities on bailouts. ‘No country will go to the BRICS Bank and say “I need to be rescued” and find itself not being rescued,’ he said.

‘I think that the days of donor funding for countries in trouble are all but over,’ says Cook. ‘New investment is now into specific projects where the loans are commercially based on a sound business case. We see many viable infrastructure projects that provide a decent return for investors and banks all over Africa.’

Speaking at UCT’s Graduate School of Business, SA trade expert Peter Draper pointed out that the conditions under which the NDB will release funds are not yet known. ‘They may be rather like the IMF’s,’ he said.

Draper suggests that the NDB ‘is really China’s bank’. There was never really much chance of being headquartered anywhere but Shanghai, he argued. Johannesburg will host an African regional centre. Although the first president will be Indian, the inaugural chairman of the board Brazilian, and the first chairman of the board of governors Russian, Draper argues that the strongest interest and capacity is Chinese.

Chinese dominance is evident more in the CRA’s plans than that of the NDB itself. Each member will contribute $10 billion to the bank but China’s full deposit into the CRA, over time, will be a disproportionate $41 billion against $18 billion each from Brazil, India and Russia and a mere $5 billion from SA. South Africans like to boast about how ‘we put Africa on the BRICS Bank agenda’, especially at the 2013 Durban Summit where the NDB was announced. But the fact that this was clearly something of an afterthought is not a particularly promising sign.

And what of India’s interests? There must at least be doubts about the likelihood of Africa being prioritised, argues Draper.

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However, if the NDB does treat each project proposal on its merits, it may open up possibilities for Africa. As Michele Ruiters, regional specialist in strategy and knowledge management at DBSA points out, projects such as the Grand Inga dam on the Congo river are so large that the only possible funder is the World Bank.

Competition would be welcomed as indeed would a co-operative relationship, which is by no means beyond imagining. The World Bank already works extensively with the African Development Bank. Draper suggests that the NDB may force its more established (and perhaps somewhat complacent) Bretton Woods rival to up its game.

Ruiters also argues that the financing available through the NDB could make a big contribution to project preparation costs. These fees, paid to financial and engineering specialists during the planning phases, can be 5% to 10% of the total project costs which, in the case of Grand Inga, means billions of dollars. They are typically paid upfront and are a pressing constraint on African infrastructure development.

Ten billion US dollars is about 10% of the SA government’s annual budget and could make a big difference locally if used for something like the recapitalisation of Eskom. There is some confusion on this score with National Treasury’s BRICS director, Andile Kuzwayo, insisting that SA’s upfront contribution is only $2 billion.

But that is the immediate CRA contribution – the actual NDB itself will be much more costly.

The ‘BRICS Bank’ may well have profound long-term implications for the financial architecture of the global economy. However, the reality is that it is not going to turn on the money tap immediately and there are opportunity costs.

By David Christianson
Image: Kendall-Leigh Nash/HSMimages