New Development Bank: Being the Agent of Growth for BRICS
In 2015, Kundapur Vaman Kamath, India’s veteran banker, was named by India the first chief of the $100 billion New Development Bank, established by five BRICS nations. Within a year of operations, the NDB shaped its operations around policies and goals, and announced the funding of five projects in the area of green energy and sustainable infrastructure. BRICS Business Magazine spoke to K. V. Kamath about its goals and achievements, short-term and long-term plans, and the role of the Bank in promoting knowledge exchange and investment flows between BRICS economies.
Mr. Kamath, the New Development Bank has completed its first year of operations. What are its main achievements so far? What are the short-term and long-term plans of the Bank?
In our first year of operations, we have signed our headquarters agreement, formulated policies and procedures for the Bank, approved our first set of loans, and issued our first green bond in China. We have also signed cooperation agreements with other multilateral development banks (MDBs) and national development banks. To sum up, the NDB so far has met the goals envisioned by the leaders of its member countries, and we look forward to further building on this foundation.
Currently, we are exploring possibility of raising funds in local currencies in other members of the Bank, including India and Russia, in addition to raising funds in traditional hard currency markets, such as USD. At the same time, the NDB is working on the expansion of a network of partnerships by engaging with various institutions, both in our member states and in other countries. We are currently appraising a project pipeline provided by our members and will be operating our Africa Regional Center in the next two months.
As for our long-term plans, we are continuing to build up our project pipeline and considering expansion of the Bank’s membership to extend our reach and increase our capital base.
Can you elaborate on the current structure of the NDB? At what stage of team building are you now, and how big is the team? What kind of challenges do you face considering the differences in cultures, language, and experiences?
There are five founding members of the NDB, and each of them has an equal voting share, which gives them equal voice in the Bank’s governance. The Bank began its operation with temporary staff comprising of secondees and consultants deputed from member governments, national development banks, and global financial institutions. Our recruitment process has begun, and we plan to onboard 100 personnel by the end of this year and increase our staff strength to 350 personnel by 2018. In today’s world, technology is changing incredibly fast and the adoption of technology – especially in developing countries – is even faster. Multilateral development banks (MDBs) need to define roles for themselves in this coming new world. They need to attract new skills and talents – people who understand this new world and can design projects and programs, incorporating technological advancements, to meet people’s aspirations.
Could you briefly tell about the first set of projects that got NDB’s financing?
Within just one year from the start of our work, the Board of the Bank has approved the first set of projects with a total commitment of $911 million, one project in each of our five member countries.
The NDB will provide a loan of $300 million to BNDES, Brazil’s National Bank for Economic and Social Development. This assistance will be used to support renewable energy and transmission projects. A diversified set of sub-projects in solar, wind, hydropower, and other areas, with an additional capacity of 600 megawatts will be financed by BNDES on an on-lending basis.
The project in Russia involves a loan of $100 million for the construction of two small hydroelectric power plants in Karelia, with a total capacity of 50 megawatts. It will be provided through multilateral development banks: Eurasian Development Bank and International Investment Bank.
As for India, the NDB will provide a sovereign guaranteed financing facility of $250 million to Canara Bank. It will be used for on-lending to renewable energy projects in solar and wind energy, hydropower, and other areas, with a total capacity of 500 megawatts of clean energy.
In China, the Bank will provide the local currency equivalent of $81 million to Shanghai Lingang Hongbo New Energy Development Co. for a distributed solar power project in Lingang Industrial Area. In this flagship development zone, rooftop solar power installations will have a total capacity of 100 megawatts.
In South Africa, the NDB will provide a loan of $180 million to Eskom Holdings for financing grid connection infrastructure for renewable energy projects. This company will build transmission lines to evacuate 670 megawatts of generation as well as facilities for transformation of 500 megawatts of renewable energy generation by independent power producers.
K. V. KAMATH BIO
K. V. Kamath is one of India’s most accomplished and acknowledged business leaders. He started his illustrious career in 1971 with ICICI, India’s largest private sector bank. In 1988, he joined the Asian Development Bank in the private sector department. His principal work experience at ADB was in various projects in China, India, Indonesia, Philippines, Bangladesh, and Vietnam.
Mr. Kamath returned to India in 1996 as MD & CEO at ICICI Bank. In the following years, ICICI expanded its boundaries and became India’s first ‘universal bank’. Mr. Kamath retired as MD & CEO to become the non-executive chairman from 2009 to 2015. Mr. Kamath served as chairman of Infosys Limited and co-chair of the World Economic Forum’s annual meeting in Davos. He also served on the board of Schlumberger Limited.
Mr. Kamath graduated as a mechanical engineer and completed his post-graduate in business administration from the prestigious Indian Institute of Management, Ahmedabad. He has received widespread recognition, including as CNBC’s Asian Business Leader of the Year (2001), Businessman of the Year by Forbes Asia (2007), and Business Leader of the Year by The Economic Times, India (2007). In 2008, Mr. Kamath was conferred the Padma Bhushan, one of India’s highest civilian honors.
The mandate of the NDB is investing in infrastructure and projects contributing to sustainable development. So, we assume, the main criterion of a project approved by NDB is its ability to be able to meet a country’s infrastructure needs? What are the other criteria?
All five projects approved by the NDB this year are in line with our focus on green energy and sustainable infrastructure. They all are aimed at augmenting the supply of renewable energy in the member countries and contributing to the transition towards green economy. The NDB is interested in projects in the areas of infrastructure (including transportation), sustainable development, and inter-member state cooperation.
Subsequently, the Bank will also support projects that could help make green technologies cheaper and more economically viable, with a broader aim of bridging the gap between development needs and capabilities.
Why is renewable energy is given such priority?
At the summit in Ufa, Russia, the leaders of the BRICS countries made the decision that the first set of NDB projects should be in the field of clean energy. Green infrastructure is a moral necessity that has been established, and developing countries understand this. It is now an economic necessity also. For example, the cost of renewable energy, in some countries, is in parity with cost of fossil-fuel based energy. Green is already here. With these technological advances, going green is not only environmentally friendly but also makes commercial sense today. Countries are leapfrogging in adopting green technologies due to sharp cuts in silica and solar panel prices.
Estimates are that the levelized cost of generation per megawatt hour for onshore wind will fall 41% by 2040 and 60% for solar photovoltaics, making these two technologies the cheapest way to produce electricity. And we must recall that estimates have always been conservative – costs have actually fallen faster.
We at the NDB understand these ongoing technological shifts and will align our policies and procedures to this infrastructure transformation.
Is the NDB planning to add more developing countries as potential borrowers? Will low-income developing countries be able to gain access to NDB resources?
Our Articles of Agreement specify that all members of the United Nations could be members of the Bank, and our founders envisaged increasing membership to expand our scope of activities and provide additional capital to the Bank. The Bank will be open to new members in due course.
The NDB is often compared with the China-led Asian Infrastructure Investment Bank (AIIB). Do you consider this new institution to be a competitor of the NDB?
Recent estimates suggest an annual funding requirement of about $1 trillion to meet infrastructure needs in developing countries, and multilateral development banks currently cater to about 10-15% of this demand. Thus, no single institution can meet this infrastructure demand acting alone. Therefore, we will collaborate and cooperate with other institutions, including the AIIB to meet the development agenda of our member countries. We will be in those areas where we are capable of adding value.
In July, the NDB issued its first financial green bond in China’s onshore bond market. Earlier, you had announced that the Bank is planning to issue bonds in Russia and India. Could you share some details about these plans? What are the advantages and challenges of lending in local currencies?
In July 2016, the NDB successfully launched its inaugural green bond on the Chinese onshore interbank bond market, with a coupon of 3.07% and issue size of three billion yuan. It was the first time that an international financial institution issued a green financial bond in the Chinese interbank bond market. This success reinforces our belief that in addition to accessing global financial markets, there is a considerable scope for the NDB to raise local resources and develop capital markets of our member countries. During my visit to St. Petersburg, my brief interactions with market participants reinforced the possibility of pursuing ruble-based financing in Russia. We are currently exploring this opportunity to raise money in local currency both in India and Russia.
Are you planning to expand your cooperation with institutions on the national level to facilitate access to local currency markets? In India, you are collaborating with ICICI Bank to “explore rupee-denominated bonds in the domestic and international markets”. Are you planning to build partnerships with other banks in India? What about other member countries?
This year, we started building up partnerships with international and national development institutions, as envisaged by our founders. The NDB is authorized to cooperate within its mandate with both international and national public or private entities, in particular with international financial institutions and national development banks. We are planning to further expand our network of partnerships by engaging with various institutions from all our member countries.
BRICS is currently chaired by India. When talking about your home country’s tremendous growth, the numbers are stunning, but some experts, including the former RBI chief, are quite critical of figures like GDP growth rate, for example. Would you agree that there is a lot of work ahead to justify those figures?
My current position as the president of the New Development Bank precludes me from making any comments on the economy or political scenarios of our member countries. However, with respect to India, the IMF and World Bank accept India’s GDP figures and have upgraded their GDP forecast recently. Thus, there is no reason for me to doubt those GDP figures.
What kind of role does NDB aim to play in stimulating growth and development in BRICS countries?
The BRICS countries are home to 25% of the world’s population and face similar challenges to any country that is moving up the development curve. In addition to supporting economic growth and development by financing infrastructure projects, the NDB is aiming to promote knowledge flows and stimulate mutual investment and trade between the BRICS countries.
We will raise local currency resources, as much as possible, to lend to our member countries, and insulate our borrowers from exchange risk. Separately, the current NDB model does not harness and leverage the enormous tectonic shifts that are taking place in technology. These shifts are dramatically changing the lives of individuals, small businesses, and indeed governments, and we need to understand them and incorporate them in our own development models.
We aim at building the next practice in the development agenda framework, being responsive and efficient, doing things at speed and scale.