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Monday, 04 March 2013 12:17

The BRICS development bank: cautious optimism

Written by Simon Freemantle, Jeremy Stevens

The fifth BRICS summit will be held in Durban, South Africa between 25 and 27 March, guided by the theme “BRICS and Africa—partnerships for integration and industrialisation”. Prominent in pre-summit discussions has been the establishment of a BRICS development bank— an agenda item which is sure to feature strongly in Durban. We expect detail around the BRICS bank to emerge.

The main ambition of the bank will be to direct development in a manner that reflects the BRICS priorities and competencies. Therefore, the bank will focus on infrastructure development and providing auxiliary support for project preparation, such as feasibility studies. Later, a working group will be tasked with establishing the necessary technical commitments and governance structures.

The BRICS bank provides an institutional underpinning to the group. There is clear diplomatic and commercial momentum underpinning the BRICS grouping (see EM10 & Africa—BRICS trade is flourishing, and Africa remains a pivot, 12 February 2013). The proposed bank contributes constructively to the development of more robust and inter-dependent ties between the BRICS members.

The bank is not a counterweight to multilateral development banks—notably the World Bank. Yes, the dominance of the US and Europe in Bretton Woods Institutions is a source of contention for BRICS. However, on this specific score, the envisioned BRICS bank is an auxiliary funding institution—albeit more aligned to BRICS’ development agenda.

The BRICS bank’s relevance will depend on its effectiveness and specialisation. Rather than posture as a common denominator or create overlapping agendas with other development finance institutions and BRICS state policy banks, including Brazil Development Bank (BNDES), China Development Bank (CDB), and Export-Import Bank of India, the Bank will need flesh on its bones before we shift from cautious optimism.

The best departure point is the task of financing economic development inside the BRICS, on projects linked to intra-BRICS bilateral multipliers and shared interests, like job creation and urbanisation. Therefore, the bank must begin with easy wins (such as low risk and high quality projects) and later widen its geographical footprint.

However, a host of pragmatic issues require resolution, including the funding source, ideal borrower (sovereigns or will it include the private sector), types of projects, geographical reach, bank headquarters, and many others. Unless pragmatically managed, strains will emerge and a highly visible failure would be damaging for the nebulous assembly.

We expect each of the five member states to initially contribute USD10 billion (bn) in seed capital to the bank. The bank would then borrow from global capital markets, becoming a non-resident borrower in the US, Europe, Hong Kong and elsewhere.

Naturally skewed economic might may lead to skewed influence. The seed capital will pressure some members more than others. It seems as though the eventual contribution to the bank, and the distribution of the associated risk, may vary and, in so doing, influence the fund’s decision-making process.

The above are highlights from:  The BRICS development bank: cautious optimism, by Simon Freemantle and Jeremy Stevens, Standard Bank, Johannesburg. Click here to access the five page report.
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