Despite expectations that it would begin operating in early 2016, the New Development Bank (NDB, or BRICS bank), a new lending institution set up by member countries Brazil, Russia, India, China and South Africa, remains something of a mystery.
Founded with the aim of developing infrastructure, the bank has no official website or even a contact email address and no one seems to knows which projects the bank will allocate funding to.
Perhaps even more concerning is the fact that there is no clue as to whether the bank will establish environmental, social, labour, or human rights safeguards to protect against the impacts of the projects that its loans support.
Announced with great pomp at the 6th BRICS Summit in Fortaleza, Brazil, in July 2014, the NDB currently only has one office in Shanghai, where representatives from each country are located. Yet the bank’s initial US$50 billion of subscribed capital should make it a major new player in development finance.
There are great expectations from member countries that this new source of financing can help develop sectors crucial for their growth, such as energy, telecommunications, and logistics.
However, trying to get definitive answers from representatives of the NDB is a fruitless exercise. Even the private sector, represented through the BRICS Business Council, does not seem to have a clear idea of how the bank will be governed.
Wishing to remain anonymous, an important Brazilian business figure made it clear to Diálogo Chino that negotiations on how the bank will be run are taking place on a government-to-government basis, with little transparency or participation by civil society. “It is very tightly closed. Nobody knows anything,” said the high-ranking source.
In November of last year, the Brazilian NGO Conectas held an event in São Paulo which was intended to discuss the NDB and associated human rights and sustainability issues arising from the granting of loans.
The NGO’s lawyer, Caio Borges, who has met several times with representatives from the Brazilian Ministry of Finance to discuss such matters, says that despite the openness of government technicians in welcoming him to participate in meetings, there is still nothing concrete with respect to environmental policy.
Borges adds his voice to that of Diálogo Chino’s source in suggesting that, unlike the World Bank, the NDB does not have a proper set of rules and guidelines and he expects it to examine social and environmental risks on a ‘case-by-case’ basis. “The tendency is for each project to come to the bank with the environmental and social issues contained within the project itself,” he says.
The private sector representative to the BRICS Business Council says that there is a big discrepancy between founding countries’ attitudes to environmental impacts in infrastructure projects. “Brazil has environmental and social legislation that is globally unsurpassed.
The Brazilian Development Bank (BNDES) has very advanced practices in this regard and is one of the largest development banks in the world,” the source said, adding; “Russia and China, however, want nothing to do with it. They are not interested in having complex environmental criteria.”
Part of the problem lies in creating a coordinated environmental policy framework that accounts for different regulations in each country. For example, a hydroelectric project in China may not follow the same rules as a similar venture carried out in Brazil, and either could be financed by the BRICS bank.
Projects co-financed by Brazil and Russia could breakdown because Brazilian companies would not back down on environmental problems caused by ventures in Latin American or sub-Saharan African countries where environmental standards are less stringent.
Paulina Garzón, director of the China-Latin America Sustainable Investment Initiative also met with representatives of the Brazilian Ministry of Finance. She said that technicians admit that there is great concern about the costs of preparing projects. It is possible that the bank could include a special fund for project planning, which would factor in socio-environmental risks.
According to these officials, Garzón said, the costs that the World Bank imposes on loan recipients to calculate these risks are presently too high. Garzón also said that Brazil pressured the NDB to use Brazilian environmental standards, which have been highly praised around the world despite problems with local communitiesand environmental infractions committed by big infrastructure projects.
Former director general of the Asian Development Bank (ADB), Rajat Nag, said recently that the NDB will establish environmental criteria for the projects it finances. “As far as I know, the NDB is working on social and environmental safeguards, and some people from the ADB are helping,” he said.
“I would be very surprised if they ran contrary to some fundamental social and environmental principles. I think they will be much more pragmatic. How they will do this, I don’t know, but it is exactly this that we have to monitor,” Nag added.
HEADS of state of the Brics countries will gather in Ufa, Russia, this week for the grouping’s seventh summit, which comes at a particularly challenging time for Russian diplomacy. Precipitated by the conflict in Ukraine, Russia is barred from Group of Seven/Group of Eight processes and increasingly estranged from the West.
It intends to use the Brics summit to project itself as a major global power.
By holding the summit at the same time as the annual meeting of the Shanghai Co-operation Organisation (SCO), Russia is attempting to impress its Central Asian neighbours and highlight its growing strategic co-operation with China, co-organiser of the SCO. This also sends a message to the West that Russia has other platforms on which to challenge for global power. Russia’s agenda preferences can be conceived along two axes: global security and politics; and economics.
Brics national security advisers are meeting regularly, discussing a range of international issues such as the rapidly evolving situation in the Middle East. To the extent that the Brics can agree on co-ordinated positions on such difficult issues, this will presumably build the group’s coherence over time.
Offsetting this potential is their disagreement on how to reform the United Nations Security Council — a key gap since it is at the apex of the global security architecture. Accordingly, Russia emphasises economic co-operation.
Discussions at the Ufa summit are broadly divided into two parts: the financial co-operation package and the evolving Strategy for Brics Economic Partnership.
The strategy is too general and vague and unlikely to grow in substance at Ufa. Perhaps, for this reason, the Russians are pushing for a move beyond a strategy “on paper”, to identify concrete trade and investment projects up to 2020.
Nonetheless, three top priorities appear to have been identified in the Brics economic strategy discussions.
FIRST is co-ordination on e-commerce, and Russia proposed the establishment of a working group. This was apparently downgraded to a limited agreement to convene a dialogue leading, possibly, to the establishment of a working group.
More cynical observers of the Brics believe Russia wants to use this discussion to market a cellphone operating system they have developed.
Second are ongoing discussions about trade facilitation. These centre on the creation of a virtual working group on trade and export promotion agencies. There have also been discussions about establishing a single window for electronic processes connected to trade.
Third, China has proposed closer collaboration on intellectual property rights regimes. Observers are understandably sceptical of the prospects and co-ordination possibilities, since the focal points in each country are not obvious. But agreement has ostensibly been reached to exchange information on member states’ systems.
At Ufa, there will be much discussion of the two signature Brics achievements to date: the Contingency Reserve Arrangement and the New Development Bank.
Given the closed nature of Brics processes, it is difficult to discern SA’s positions on the grouping’s economic agenda but some contours are apparent.
SA seems to regard the economic partnership strategy as being weak and less of a roadmap of how to get things done than a “ticking the check box” exercise for Russia to notch up some “success”.
For SA it is not clear how the strategy will promote more value-added exports and attract investment in minerals beneficiation or processing at source. The draft trade ministers joint communiqué is seemingly noncommittal and soft.
SA has some challenges with agreeing to create a single window for trade facilitation. It has to navigate through legal arrangements within the Southern African Customs Union, especially on external agreements SA has with third parties that may see the free movement of goods in the common customs area.
Although the government supports India’s proposed business travel card, modelled on the Schengen visa arrangement, SA views it as unfair that its liberalised visa arrangement for the Brics countries has not yet been reciprocated.
SEVERAL working groups have been set up under the auspices of the Brics Business Council: for manufacturing, ICT, small business and finance. The president of the South African delegation to the council, Brian Molefe, proposed new working groups for deregulation and agribusiness.
South African business is interested in common issues affecting Brics trade and investment and specific issues pertaining to particular companies and industries — such as pharmaceuticals — for which they want to identify important platforms for joint technology development.
They support the trade facilitation agenda in principle, but want progress in promoting transparency in the financial incentives each country makes available to its companies, and progress in approvals for businesses from other Brics countries.
They want to promote “fair” trade. The concern is that SA has the lowest average import tariffs of all Brics countries, but implements the fewest nontariff barriers.
South African business representatives to the Brics Business Council are concerned about how the government is managing the Brics process.
It is regarded as too bureaucratic and there is a strong feeling that the government is not prepared to tackle the real issues, such as “fair” trade.
There are problems within the council. Brazil has not been driving the process, and Russia and China are represented primarily by state-owned enterprises — unlike India, Brazil and SA — with the interests of the private and state sectors not being sufficiently aligned.
The Brics process seems to be of limited use to South African business.
Promoters of the Contingency Reserve Arrangement argue that it will provide “insurance” to SA in the event of investment status downgrades by the ratings agencies, and an ensuing capital flight — an increasingly likely proposition. SA could tap these resources during balance of payments crises, enabling the government to cover calls on forex reserves.
However, the Contingency Reserve Arrangement is not capable of providing more than an initial first line of support. The amount SA could call from it is capped at $6.5bn — 130% of its contribution of $5bn — a small fraction of the daily turnover in South African currency markets.
Clearly, a lot more money would be required to prevent a run on the rand, assuming the South African Reserve Bank wishes to intervene to prevent a slide in the currency, which it does not. In the extremely unlikely event that such funding was to be sought, it would come from the International Monetary Fund (IMF). The Contingency Reserve Arrangement rules explicitly provide for this. The idea put forward by some Brics promoters, that the Contingency Reserve Arrangement will enable the Brics countries to avoid IMF conditionalities, therefore holds no water.
SOUTH African officials have indicated they will seek to revive African infrastructure development as an important issue for the Ufa communiqué. They are of the view that this lost momentum during the 2014 Brics summit. There is much speculation about the New Development Bank’s Africa Regional Centre, whose agreed establishment is regarded as a diplomatic victory for SA.
The government is still working on the Africa Regional Centre’s articles of association. There seems to be agreement it will be located in Johannesburg. It could, in effect, be a “mini New Development Bank”, targeted at African markets, but it is not clear how it will relate to the New Development Bank’s head office in Shanghai, and what autonomy it will enjoy.
The Brics Business Council has expressed an interest in playing an advisory role in the New Development Bank, as it wants more say in project selection and the disbursement of funds. But there is no clarity on the interest rates that will be charged; how small and medium enterprises will be treated; the methodology to be applied in selecting projects; and how considerations such as sustainability will be integrated into project design and selection.
Further complicating matters, the government recently decided to join the Asia Infrastructure Investment Bank, which will be heavily focused on infrastructure projects in Asia. It is not clear what the strategic value of this move is — apart from earning kudos from China. But it could erode the effectiveness of the New Development Bank and the Africa Regional Centre.
The Brics agenda for Ufa is ambitious. It is important SA identifies its clear interests and thinks carefully about its allocation of resources vis-à-vis potential returns.