The New Development Bank (NBD) is a “multilateral development bank”, which was considered to set us by the BRICS nations at the BRICS Summit in New Delhi in 2012 in order to provide financial support to green development projects for its member countries, and became officially operative from 2016. The term BRIC was firstly used in 2001 by Goldman Sachs traders for the emerging Brazil, Russia, India and China, and became BRICS in 2010 with the inclusion of South Africa. Between 2003 and 2008, the BRIC countries grew very rapidly, and decide to ask for more influence in the IMF and World Bank institutions.
For example, China has only 4% voting power in the IMF, despite having more than 16% of global GDP and over 19% of global population. For this reason, the BRICS countries have decided to establish their own institution creating the NBD, in which the 5 founding members would have 55% voting power between them, with equal shares, while the other possible member countries would split the other 45%.
The New Development Bank was established at the 5th Summit in Durban, South Africa, in 2013, while at the sixth BRICS Summit in Fortaleza (2014), the member states signed the Article of Agreements. In the Fortaleza Declaration, the member countries put effort on the fact that the cooperation is among BRICS, and established an initial capital of US$ 100 billion. They also stated that: “The initial subscribed capital shall be US$ 50 billion, equally shared among founding members. The first chair of the Board of Governors shall be from Russia. The first chair of the Board of Directors shall be from Brazil.
The first President of the Bank shall be from India. The headquarters of the Bank shall be located in Shanghai.
The New Development Bank Africa Regional Center shall be established in South Africa concurrently with the headquarters.” The Bank was officially created in 2015 with an inaugural meeting, but became operative in 2016, when it was signed the Headquarters Agreement with the government of China and the Memorandum of Understanding with the Shanghai Municipal People’s Government. For the year to come, the Board of Directors has already approved a revenue expenditure of US$ 72 million and capital expenditure budget of US$ 4 million, considering the constant increase in Bank’s operations.
The New Development Bank is one of the most recent multilateral financial institutions (MFIs) and for that, it has been created in a global context that is different from the one of the previous MFIs. Today’s world is characterised by many technological changes and innovation in energy, transportation and urbanization, with a particular “green view” at the exponential problems of pollution and climate change. In order to help the already bad situation, the costs for solar and other renewables have reached parity with those of fossil fuel-based energy. The so called “green energy” is expanding in many countries to deal with the environmental problems. Another important point is that the world is on the verge of a fourth industrial revolution characterised by technological progress.
In this context, many emerging market countries, as the BRICS, have grown rapidly, reaching the equal of 80% of the world GDP, and are taking on greater roles in global decision-making. At the same time, also the number of people is rapidly increasing, with fertility rates falling and people always aging more in most advanced economies, while in Africa the population is expected to double in 35 years. With these numbers, by 2030, five billion people will live in cities. This population growth, combined with massive migration, represents a wealth of human capital, even if it requires job provision and basic services that are not always available. The prospects for BRICS countries are very hopeful, with Russia and Brazil in positive growth since 2017, South Africa that was projected to rebound in 2017, and India and China growing at high rates since decades. What is important in a context of increase in economic and population growth is to provide a sustainable growth to protect water, air and mitigate the impact of climate change, which is one of the priorities of the Bank.
The first document that was signed is the Articles of Agreement in which the governments of Brazil, Russia, India, China and South Africa have agreed on the establishment of the New Development Bank, which should operate in accordance to this article. This article of agreement is divided into nine chapters, regarding: purpose and functions, membership, voting, capital and shares, the headquarter, the operations, borrowing, immunities and privileges, suspensions of members and amendments.
In accordance to this article, the main functions of the bank should be, as already mentioned, “to support infrastructure and sustainable development projects, public or private, in the BRICS and other emerging market economies and developing countries, through the provision of loans, guarantees, equity participation and other financial instruments; to cooperate as the Bank may deem appropriate, within its mandate, with international organizations, as well as national entities whether public or private, in particular with international financial institutions and national development banks; to provide technical assistance for the preparation and implementation of infrastructure and sustainable development projects to be supported by the Bank; to support infrastructure and sustainable development projects involving more than one country; and to establish, or be entrusted with the administration, of Special Funds which are designed to serve its purpose.”
Concerning the membership, it specifies United Nations’ members are welcomed to join the bank, even if the share of the BRICS is still 55% of voting power and IFIs (international financial insitutions) can only observe Board of Governors’ meetings.
Regarding the voting power, every decision should be taken by a simple majority of the votes cast, in which the majority shall be understood as an affirmative vote of two thirds of the total voting power of the members. The initial capital of one hundred billion dollars is made up of one million shares with a par value of one hundred thousand dollars each. The subscribed capital is divided into paid-shares (shares with an aggregate par value of ten billion dollars) and callable shares (with a par value of forty billion dollars). An increase of the capital stock is decided by the majority of the Board of Governors, and any member has the possibility to subscribe (even if it is not compulsory) to the increased capital.
The Board of Governors is uncharged to revise the capital stock of the Bank at least every five years. The amount of the subscribed capital should be paid in seven instalments: the first in the six months following the release of this Agreement; the second after eighteen months, and the remaining five instalments after one year from the date of the previous instalment. According to the article 25 of the Articles of Agreement, in cases in which the loan made cannot be repaid, the Bank should modify the terms of the loan in order to help the country to pay, seeking the assistance of the authorities of the country where the operation has taken place. Regarding its status, the Bank has a full international personality and in the member countries has “full juridical personality”. Also, for the immunity, the article 29 states that “no action shall be brought against the Bank by any member, or by any agency or instrumentality of a member, or by any entity or person directly or indirectly acting for or deriving claims from a member or from any agency or instrumentality of a member” and that all the staff of the Bank has legal immunity and privileges as the ones that representatives and officials have. Other important documents that were signed are: the agreement regarding the setting of the Headquarters in Shanghai, China; the agreement which established the Hosting of the New Development Bank Regional Centre in the Republic of South Africa; and the Agreement on the Hosting of the New Development Bank Americas Regional Office in the Federative Republic of Brazil .
As already said, the Bank’s purpose is to finance green projects of the BRICS countries and other emerging economies in order to help the global growth and development. In addition to that, another important aim of the bank is the achievement of environmental and social sustainability, which are conceived as important the reach this goal. A key document to regulate such purpose is the “NBD Environmental and Social Framework”, which is divided into many sections: inclusive and sustainable development, country system, environmental and social interests, climate change, conservation of natural resources, gender equality, precautionary approach, and co-operative functioning and knowledge dissemination.
The first section concerns the importance of helping a sustainable development with some policies, avoiding environmental and social risks. The second one highlights that a strong state that is able to deal with those risks. The following three points regard policies and operations in order to finance and invest in infrastructures that have a minimal impact on the environment, that promote mitigation measures to address pollution and the conservation of natural resources. Another key point is gender equality, which is important to have a successful economic development. In the end, a precautionary approach to justify decisions where there has been a social or environmental harm is fundamental, as well as a cooperative approach with other institutions.
The Bank is composed by a Board of Governors, a Board of Directors, a President, 5 Vice-Presidents, and other officers and staff considered necessary. The Board of Governors consists on one governor and one alternate chosen by each member. He can delegate to the Directors authority to exercise any powers of the Board, except some as the powers to: “admit new members and determine the conditions of their admission, increase or decrease the capital stock, suspend a member; approve the General Strategy of the Bank every five years, and many others” . The board is uncharged to call a meeting every year (as well as other meeting required by the Directors) when requested by members, with a majority of Governors. The Board also determines the salary and terms of contract of the President.
The Board of Directors is the organ responsible for the general operation of the Bank and for that, it exercises all the powers of the Board of Governors, such as taking decisions about loans, and other procedures. Every member should appoint a director and an alternate, so that the Directors should be no more than 10. The non-executive chairperson has a mandate of four year, while the other directors have a mandate of two years and may be re-elected. The Board of Directors is a non-resident body. The Board of Directors of the NDB relies on the following committees to ensure seamless execution of NBD’s work: The President is a member of the Board of Directors, but has no voting power except in the case in which there is an equal division. The President is the leader of the staff of the Bank, and is the one responsible for the organization and meetings of the officers and staff. Regarding the last category of Vice-presidents, there is one for each member state, except the country that has the President elected. He is responsible for the administration of the Bank. Both the President and the Vice-president have a mandate of five years, non-renewable, except for the vice-presidents that can have a longer first term (and the mandate would be of six years).
In July 2016, the first NBD bond to China came into force for an amount of $450 million and a tenor of 5 years, in order to be used force for an amount of $450 million and a tenor of 5 years, in order to be used for, as previous mentioned, green projects. Terms and conditions of loans are regulated by a contract which establishes the payment of principal, interest (and other fees, charges, maturities, currencies), the dates of payment, and the equity investment. The loan is made up of a floating rate and a spread, calculated on the length of the loan, which is the sum of the contractual spread, the maturity premium, the market risk premium and the cost of funds over benchmark rate. It can vary on the basis of the average repayment maturity. Moreover, the Bank charges a front-end fee and a commitment fee. The front-end fee is on the basis of the approved loan amount, while the commitment fee is taken by the loan balance that was not used. The loan will be effective 60 days after the signing of the loan agreement. “The accrued balance will be 15% of net loan balance undisbursed in the first year, 45% of net loan balance undisbursed in the second year, 85% of net loan balance undisbursed in the third year, and 100% of net loan balance undisbursed thereafter.” In case of default loans, the bank should immediately take actions in order to cover the loss, and then, should modify the terms of the loan to help the country’s repayment.
The Bank can lend money to international organisations in order to finance one or more eligible projects, known as sub-projects. Both parties should agree on the criteria for the selection of sub-projects and on a “free-limit below which the international organisation approves sub-loans meeting the selection criteria without taking prior approval from NDB and submits to NDB only the necessary information as per the legal agreements governing the loan.” This free limit is determined taking into consideration the abilities of the international organisation, its experiences in this kind of loans, the size of the loan and the risks for the environment. The NBD and the international organisation, then, sign an “appraisal floor”, in which they agree on the independent dealing or not of the project by the international organisation. The bank establishes that: loans are released at floating or fixed exchange rates; the repayment period is determined on the basis of the requirements of the project supported; the pricing is made of the cost of funds plus an applicable lending spread, which covers operational costs and provides “risk adjusted return” on capital; and provides a fee for the costs of the administration.
In addition, the international organisation should: have a juridical personality in the country in which the project is located, give up in favour of the NBD its immunities from legal processes, and allow any proceedings in connection with the enforcement or execution against any property. The international organisation is responsible for the supervision of the sub-projects and will be provided with arrangements in order to manage environment and social impacts of the activities. The financing begins only if the government of the country in which the project takes place has no objection. The total loan given to the international organisation should not be more than US$ 500 million.
This policy will be applicable to loans given, also without sovereign guarantee, to designated NFIs (national financial intermediaries). The direct lending is given if the executive agency has a juridical personality, is able to borrow and pay, is provided with financial management, and if the country permits borrowings abroad. The loan is provided through the member country’s government. As in the previous type of borrowing, the interest rate is made up of the cost of funds and the lending spread applicable at the time of the approval. The NBD establishes: “for a fixed rate loan, the interest rate consists in the whole loan tenor; in the case of a floating loan with a fixed spread, the interest rate is fixed in terms of a fixed spread over a floating benchmark rate; if there is a variable spread, the interest rate is linked to floating benchmark rate, with rebates and surcharges.” This lending spread consists in: the cost spread to pay operation costs, the maturity premium to cover the additional risk of longer term loans with a maturity repayment no longer than 8 years, and the risk premium for the risk involved and the risk mitigating instrument offered. Both type of loans are determined by the Finance Committee .
After the approval, the borrower is provided with the draft PDB (project document for the bond) and the loan agreement, which are confidential. As soon as the loan negotiations are concluded, both documents will be given to the Credit and Investment Committee (CIC), who decides whether to give it to the BOD (Board of Directors) to take it into consideration for 15 days, deciding whether it has environmental and social impacts. Two weeks after the project concept paper approval, the “project summary” is published on the website and is updated daily.
As already said, the NBD has been made up in order to help the creation of green development in BRICS countries. In the first two years, the Bank has committed US$ 1.5 billion in loans, helping renewable energy, and by 2021 it expects to arrive at $10-15 billion of loans. The bank has been created in a context in which BRICS countries did not have a great power in international institutions, but, they have proved to increase their role in the global economy with a global GDP from 8% in 2000 to 24% today, with China as the second best in GDP size in the world. The financial model of the NBD is made up of a daily management and governance of the bank, no country has veto power and the bank is controlled by its members.
In the NBD Report of 2018, the President Kamath said he would focus on “…leaner, lighter, cheaper technology and a significantly lower staff footprint”. The aim of NBD is to implement the 2030 Sustainable Development Goals to achieve a full green development in the social and economic fields. In fact, the Banks’s first projects were all in the renewable energy field. In order to support these aims, the bank has approved 13 loans for US$ 3.4 billion at the end of 2017, and 17 more loans for about US$ 4.6 billion in 2018, in the fields of: transport (27%), clean energy (27%), water management and sanitation (18%), urban development (14%), environmental efficiency (8%) and social infrastructures (6%). The bank has also received a AA+ international credit rating, which is the recognition of the well-structure, the growth and the projects in which it was involved. Apart from this topic, the Bank is also engaged to enhance productivity, helping developing countries, that are members of the NBD, with their trade and investments, in order to develop their capital markets. The NBD has been seen as a success in multilateral development banks thanks to the evolvement from a concept into a solid institution, with a continuous support of its member countries, a decisive guidance from the Boards and the help of all the staff.