Development bank expands BRICS platform

The BRICS development bank will take shape at the fifth BRICS summit to be held in the eastern port city of Durban, South Africa, next month.

The governments of Brazil, Russia, India, China and South Africa will each make an initial capital injection of $10 billion to fund the bank, which will not only symbolize the unity of the world's five most dynamic economies and showcase the rise of emerging nations, it will also become a global tool for "mobilizing resources for infrastructure and sustainable development projects in the BRICS and other emerging economies and developing countries".

Despite their political and cultural differences, the five countries share many common economic and trade interests and similar views on global and regional political issues. The bank can play a constructive role in multiple arenas by capitalizing on the fact that between them the five members of BRICS have 26 percent of the world's land, 42 percent of the world's population, 20 percent of the world's GDP, 15 percent of the world's trade volume, and contribute about 50 percent of the world's economic growth.

Infrastructure projects give people access to opportunities. Even in China, which is the strongest of the five countries in infrastructure, more roads, airports, bridges, sewers, power plants, schools and hospitals need building or upgrading.

To ensure more people, especially the poor, in developing countries benefit from the bank, it should lend to both private and public companies as well as governments in and outside the BRICS if the proposed projects promote sustainable economic and social development and reduce poverty. These projects should include green technologies, biofuels, dams and nuclear power plants that the World Bank will not fund due to environmental and social concerns.

Additionally, the bank will be a platform for the BRICS to push for reform of the international financial system.

The five countries are major borrowers from the World Bank, as well as contributors of increasing funds to the International Monetary Fund, but they are discontent with their marginal role in the decision-making process in these Western dominated multilateral financial institutions. That was what was behind the joint declaration at the fourth BRICS summit in New Delhi in March last year that voiced their determination to "supplement the existing efforts of multilateral and regional financial institutions for global growth and development".

Indeed, the bank can act as a responsible player in forming the new world order. But to become influential, a larger capital base than the initial $50 billion is necessary, which can be partially achieved by admitting some developed states as minority shareholders.

The approach of the Asian Development Bank may also be considered. Founded in 1966, the bank, headquartered in Manila, the Philippines, has 67 members and received paid-in capital of only $8.2 billion at the end of 2011. But the members had subscribed $162.5 billion in capital accumulated in the last 45 years, and the remaining $154.3 billion was "callable capital" that can be called anytime if required to meet its obligations incurred on borrowings or guarantees. No such calls have ever been made.

Then an interesting issue arises: in the ensuing capital expansions, should the five BRICS members inject pro-rata funds or allow some degree of variation? Since the five states' economic sizes vary remarkably, especially given China's $3.31 trillion in foreign exchange reserves at the end of 2012, and also because equal capital contribution, whose merit is to install an equal voting mechanism different from the World Bank's structure, will confine the bank's scale and the significance of the role it will play, the amount of future capital injection may vary accordingly.

Meanwhile, China may use an extra portion of its massive foreign exchange reserves to provide debt financing as the bank's additional source of funding, since the bank will issue debt instruments for fundraising from the market to meet its investment needs anyway.

Do not expect the BRICS bank to be a significant profit-maker. As a source of comparison, the Asian Development Bank recorded a net income of $609.5 million in 2011, with return on equity 3.74 percent. Its bottom line was even in the red in 2009 with a loss of $27.5 million. However, although yields from funding by the BRICS bank will be low, they are still higher than investing in US treasuries, currently at 0.15 percent per year for one-year maturities and 0.85 percent for five-year maturities.

The author was a senior economist and head of the Financial Institutions Group at China Merchants Bank head office and is now a partner at Asia Capital Link Equity.