New Development Bank

Updated on January 2018

Nature and Purpose

• Establishment: Agreement on the New Development Bank was signed during the IV BRICS summit (July, 2014) in Fortaleza, Brazil and entered into force during the VII BRICS summit (July, 2015), in Ufa – Russia.
• Headquarters and regional offices: In February 2016, the NDB signed an agreement with China to set the headquarters
  in Shanghai and announced the opening of a regional office in Johannesburg, South Africa.
• Objective: Mobilizing resources to “infrastructure and sustainable development projects in BRICS countries and other developing countries, in addition to existing efforts of multilateral and regional financial institutions to the global growth and development” (NDB, 2014).
  • Representatives of the NDB characterize the agility of lending as
  one of the key advantages in relation to other multilateral
  development banks (Devex, 2016).

Capital Structure

• NDB was founded with an authorized capital of US$100 billion and initial subscribed capital of US$50 billion, with contributions equally distributed between the five founding members (US$10 billion each) (NDB, 2014).
  • Among the total initial capital, US$10 billion corresponds to paid-in capital and US$40 billion to callable capital – not paid yet – also equally distributed between the members (NDB, 2014).
• Although the founding document indicates the intention of providing loans to allow the purchasing of stocks by other countries, 55% of them must be controlled by BRICS countries and 25% by emerging economies – confirming the orientation of the
  bank towards developing countries (Devex, 2016). Also, terms and
  conditions to the admission of new members to the bank were recently approved and will be soon available in the NDB website
  (NDB website, n.d.)

Capital Inicial (em bilhões de dólares)

Fonte: O autor, baseado no Acordo sobre o Novo Banco de Desenvolvimento

Green Bonds

• NDB also raises funds through the issuance of bonds in local
  currency, with reduced exchange risks to domestic investors.
  In July 2016, the bank issued bonds in the amount of 3 billion
  yuan (US$ 448 million) in China’s bonds market, with
  maturity of five years and interest rate of 3.07% (China Daily,
  2016). Representatives of the bank declared the intention of
  increasing the issuance of bonds in local currency in China and
  soon expand it to other founding members, particularly India
  (in rupees) and Russia (in rubles) (Business Standard, 2016).

Avaliação (Rating)

NDB received an “AAA” classification by the Chinese credit rating agencies China Chengxin Credit Rating and China Lianhe Credit Rating
(NDB Website, n.d.). According to these agencies, the main qualities of the NDB credit include:

(i) Great potential to further growth of businesses in developing countries;
(ii) Sophisticated structures of governance and risk management;
(iii) Operational efficiency and high qualified staff;
(iv) High level of paid-up capital, with punctuality in infusions.

The bank plans to initiate engagement with international rating agencies, even though representatives have denied rumors about the intention of developing a rating agency within the NDB (Business Standard, 2016).

Financed Projects

In 2016 the Bank disbursed around US$ 1.5 billion in infrastructure projects and sustainable development in BRICS countries. Until now, NDB has eleven projects with approved lending.

Disbursements by Country

Furthermore, the analysis of the allocation of the NDB disbursed loans by country reveals a strong concentration in China and India, which are the destination of 65% of the total 2016 disbursements, while only 6% was destined to South Africa. Representatives of the bank stated their intention
of expanding the grant of loans in the future to developing countries aside from the BRICS (Business Standard, 2016)

Graph 2

Fonte: o autor com base na Página de Proetos do NDB

Governance

Figure 1: NDB Organization Chart

Fonte: o autor baseado no Site do NDB, n.d.

NDB is managed by a Board of Directors and a Board of Governors, both composed of five seats, each occupied by a founding country. The presidency of the bank is rotating and it is periodically occupied by a representative of one of the BRICS members, while the others are responsible for the nomination of the four vice-representatives (NDB, 2014, p. 5-6).

Members of the Bank

NDB has only five members since its foundation: Federative Republic of Brazil, Russian Federation, Republic of India, People’s Republic of China and Republic of South Africa. Borrowing or non-borrowing membership, however, is open to any member of the United Nations, as long as the
terms and conditions set by a special majority at the Board of Governors are met. The Board of Governors may accept International Financial Institutions or countries interested in becoming members as observers at its meetings (Acordo sobre o Novo Banco de Desenvolvimento, 2014).

Voting Structure

Voting power is based on the number of one’s subscribed share in the capital stock of the Bank, and the share of the BRICS countries can never be below 55% of the total votes. Currently, each of the five NDB members has equal voting rights of 20% (NDB website, n.d.)..

In cases when the Agreement on the New Development Bank (2014) does not foresee a qualified majority (two thirds of the total voting power) or a  special majority (affirmative vote of four of the founding members concurrent with a qualified majority), to a certain matter, the decision is made based on a simple majority of the votes cast (Acordo do Novo Banco de Desenvolvimento, 2014).

Parcerias

De acordo com o presidente do NDB, K. V. Kamath, o mandato do banco inclui cooperação com instituições similares para troca de conhecimento. Portanto, desde sua fundação, o NDB assinou Memorandos de Entendimento e acordos de cooperação com vários bancos multilaterais e nacionais de desenvolvimento, além de bancos comerciais nacionais (NDB website, n.d.).

Socio-environmental Policy

The NDB disclosed, in August 2016, a document elucidating its socioenvironmental policy, which addresses questions as:

• Mechanisms to identify and manage socioenvironmental risks generated by projects funded by the bank, based on the “Equator Principles”;
• Criteria for the approval of projects, including requirements in three areas: (i) environmental, (ii) involuntary displacement and (iii) indigenous people;
• Statement of adoption of the strengthening of national systems’ approach, locating the responsibility for the conduction of socioenvironmental impact analysis to the legal system and institutions of the borrower country.

Responsibilities and the use of country systems

The burden of compliance with socio-environmental standards is transferred to the client. This reduces the bank’s liability and accountability to the affected populations;

Extensive use of country systems to achieve environmental and social protection. However, the mechanisms for strengthening such systems are not clear. Especially in the case of NDB and AIIB, the parameters to which the systems should be aligned are not specified.

Environmental Impacts

• World Bank safeguards restrict interventions with biodiversity loss.
  AIIB only requires interventions named as “acceptable to the bank”, with no greater detail.
• When the borrower undertakes measures to minimize adverse
  impacts and restore biodiversity, NDB allows interventions
  where adverse impacts cannot be avoided.

Labor

• The World Bank allows the development of alternative mechanisms by workers to protect their rights, prohibiting employers from restricting them in the case of the right to freedom of association and collective bargaining.
• AIIB safeguards require compliance with the national laws only, even when they are considered insufficient; AIIB also presents the guarantee of certain worker’s rights such as the access to grievance mechanisms and non-discrimination of private sector workers. According to Kim (2016), this access can reduce protection to the public sector workers.
• NBD considers requirements of national laws and conventions of International Labor Organization. The bank highlights the necessity of measures “(…) to ensure project workers have safe and healthy working conditions (…)” and to prevent, for instance, accidents caused by the project (NDB, 2016, p. 19).

Prohibited Projects

There is no inclusion of nuclear material in the AIIB and NBD lists of prohibited projects, opening the possibility of financing projects with high socio-environmental risk (Santos, 2015).

Involuntary Displacement

Victimizing the most vulnerable populations, AIIB and NDB grant financial compensation flexibly for displaced people without legal title to land (McCaul, 2016; Rosien, 2010).