Russia Direct sat down with Leslie Maasdorp, vice president and chief financial officer of the BRICS New Development Bank, to discuss the mission of the bank, its current structure and focus, as well as the key priorities for the next phase of the Bank’s development.
Leaders of BRICS at the G20 Summit in Antalya, November 15, 2015. Pictured left-right: then-Brazilian President Dilma Rousseff, Indian Prime Minister Narendra Modi, Russian President Vladimir Putin, Chinese President Xi Jinping, South African President Jacob Zuma. Photo: AP
This summer the Board of Directors of BRICS New Development Bank (NDB) held their first Annual Meeting in Shanghai. The Vice Premier of the People’s Republic of China, Mr. Zhang Gaoli, delivered the opening address of the annual meeting. The NDB highlighted three key milestones it has achieved since the establishment of the bank in 2015.
These include the achievement of an AAA domestic credit rating in China, the announcement of the inaugural project loans in all five member countries as well as the completion of its first bond issue, which was a Green Bond of 3 billion yuans (about $449 million) in China.
Furthermore, in line with its Articles of Agreement, the NDB will explore the possibilities of expanding its membership after it has completed the detailed preparatory work to define the conditions for the entry of new members. Despite increased volatility and uncertainty in some of the emerging market economies, the NDB is confident that the demand for infrastructure projects in each of the five member countries are robust and that a solid project pipeline is emerging.
Russia Direct interviewed Leslie Maasdorp, vice president and chief financial officer of the BRICS New Development Bank, to discuss the mission of the bank, its current structure and focus, as well as the key priorities for the next phase of the Bank’s development.
Russia Direct: How have the bank and its goals been evolving since the idea of its creation appeared for the first time?
Leslie Maasdorp: In 2011 the idea of a new development bank, focused on emerging markets more broadly and BRICS countries in particular, was born. Prominent economists such as Professors Nic Stern and Joseph Stiglitz became early advocates supporting the idea of the institution. The New Development Bank opened its headquarters in Shanghai, in July 2015.
Leslie Maasdorp, vice president and chief financial officer of the BRICS New Development Bank. Press Photo
The establishment of the World Bank in 1944 marked the first of the multilateral development banks, with many others formed subsequently over the past several decades. In terms of voting control and governance, these institutions were all historically dominated by the United States and Western Europe and later joined also by Japan.
Emerging markets, led by China, India, Brazil and others came to play much bigger roles in the global economy over the past three decades. However, despite the increasing size in economic contribution to the global economy, the representation of emerging markets in the governance and control of multilateral development banks did not fundamentally change in any way. As a consequence the large emerging markets began to campaign, without much success, for reform in the governance of these institutions.
Emerging markets wanted a bigger voice and representation. The reluctance of institutions to give such opportunities led to the idea and need to create new ones. The idea of the BRICS New Development Bank therefore came out of growing frustration from emerging markets about the slow pace of reform of the Bretton Woods institutions [such as the World Bank and the International Monetary Fund, which were established as a result of the meeting of 43 countries in July 1944, Bretton Woods, New Hampshire, the U.S. — Editor’s note].
The model on which the NDB is premised includes the concept of equal participation of all its members in all aspects of the institution including its governance, capital contribution, staffing and the composition of its loan book. No single country therefore has veto power over the decisions or has a dominant role in the governance of the institution. The bank aims to seek consensus or at least sufficient consensus in its decision-making.
The Bank has an authorized capital base of $100 billion of which $50 billion is subscribed. Of the $50 billion subscribed capital, $10 billion is paid-in capital and each member country is paying a $2 billion contribution in installments over a seven-year period. The remaining $40 billion constitutes callable capital in line with the structure of all multilateral development banks.
RD: What are the main principles behind the bank?
L.M.: The first key principle of the bank is our focus on emerging markets. Our Articles of Agreement makes provision that 80 percent of the equity of the Bank will be under the control of emerging market countries. Over time however, as the Bank opens its doors to new members, the BRICS countries will dilute to 55 percent equity in the Bank and 25 percent of the equity will be set aside for other emerging market. Finally, a further 20 percent equity will be set aside for non-borrowing member countries, which will be drawn from the industrialized world.
The second key feature of the NDB is the focus on sustainability. The mandate of the Bank has been crystallized as the provision of sustainable infrastructure or contributing to sustainable development. Sustainability considerations drive the activities of the Bank both on the lending as well as the asset size.
As a demonstration of this commitment, the first five projects, which the Bank announced during 2016 to the tune of $911 million, are all in the renewable energy sector. In addition, we have issued our first bond in the Chinese market as a green bond, which essentially means that the proceeds will be devoted to lending to projects, which contribute to environmental sustainability.
The third key aspect of our strategy is to explore the possibilities of providing, where feasible, local currency funding. Essentially we intend to raise local currency funding in many of our member countries in addition to our capital raising activities in the hard currency markets. The traditional model of multilateral banks is to raise and lend in U.S. dollars to member counties. By doing this we hope to reduce the cost of borrowing and contribute to the development of local capital markets.
Finally, the bank is focused on maintaining a lean and agile character as we grow and expand. By leveraging new technology and adopting modern innovative best practices in financial services, we hope to improve the speed of execution and reduce overall loan processing times and provide a better and more efficient service to our clients.
Also read Russia Direct report: "BRICS 2.0 and the Metamorphosis of Globalization"
RD: Is there a minimum or maximum bar for investment in a certain project?
L.M.: There is no minimum as such, but we will not do small projects. We will typically fund and lend for larger infrastructure projects. The smallest loan in practice that we would do would probably be around $50 million. So far the smallest one was $80 million and the biggest one was $300 million. That is likely to be the range of our loans. We do have a borrower concentration limit of 30 percent, which is because we don’t want to have a concentrated portfolio. It would therefore be very rare that we would have a project below $50 million dollars and above $500 million.
RD: If there is a potentially interesting project for investment, what is usually the timeframe for decision making on it?
L.M.: As I mentioned, one of the areas in which the bank hopes to differentiate itself is in speed of execution. Since most multilateral banks have developed large internal infrastructures and systems, the processes of decision-making and approvals can become time-consuming. In practice, the length of time for approval of large infrastructure loans can take up to two years or even longer. We believe that scope must exist to fast-track the approval processes given that some existing banks have succeeded in doing so.
The NDB has a last mover advantage in the sense that it is a young and new institution at this stage. We do not have cumbersome procedures or governance arrangements, which may delay the approval processes. It was largely this factor that contributed to our ability to conclude our first five projects within six months.
Our aim is to significantly reduce the loan processing time. At this stage the structure of the bank includes five countries with five members – the president of the bank and four vice presidents, a board of governors which are five ministers of finance and a board of directors consisting of five members. Additionally to being effective because of the structural simplicity, we are seeking to maximize the use of technology and innovation to fast track the process of delivery.
RD: Technology and innovation are the tools particularly used for increasing sustainability worldwide. What are the ways the NDB uses them?
L.M.: Regarding innovation, we are also talking about financial product innovation, looking at financial instruments that can be beneficial. So we don’t just look at funding of the infrastructure, we want to make greater use of the collaboration of the private sector to create the bridges between public and private sectors.
RD: Is the priority of the bank mostly loans, or do you consider equity investments and funds?
L.M.: At the moment it is mostly loans. Our article of the agreement states very clearly that the bank has full flexibility and the full range of financial instruments. We are not restricted in any way, but we are starting with loans. As the bank grows and we develop a deep enough capability, we will expand and work with equity as well.
[In the fall Mr. Maasdorp will travel to Moscow and look at the Russian bond market to explore the potential for a local currency bond issue - Editor's note].