BRICS New Development Bank To Expand Into Private Sector Lending

The New Development Bank has been called upon to make greater contributions to the economic and social development of the BRICS countries, as well as emerging market economies and developing world in general.

Chinese President Xi Jinping made the comments at the recent BRICS Brasilia 2019 summit, which was hosted by Brazilian President Jair Bolsonaro and also attended by Russian President Vladimir Putin, Indian Prime Minister Narendra Modi and South African President Cyril Ramaphosa.

The New Development Bank, which is headquartered in Shanghai and under the directorship of bank President Kundapur Vaman Kamath, is undergoing a strategic shift in its operations. In its the initial years, the banks lending activities were directed towards governments and state-owned enterprises. The focus is now moving towards lending to the private sector, and expanding the products beyond loans to include equity, guarantees and credit enhancement.

Just ahead of the BRICS Summit, the NDB board of directors approved a US$300 million loan to mining conglomerate Vale to support the Brazilian North Region Transportation Infrastructure Improvement Project. Concentrated in the northern Brazil states of Para and Maranhao, this project aims to enhance Vale’s railway and port capacity, and is the first project financed by the NDB for a private sector company in Brazil.

Vale’s northern system includes the Carajas Railway and Ponta da Madeira Port Terminal. The goal is to increase freight throughput by 10 million tons per year by 2023. Vale will contribute US$61 million in equity to the project.

“The north region transportation infrastructure improvement project is expected to help improve Vale’s capacity and ability to transport iron ore from its mines to its ports and to global markets,” the NDB said in a statement.

Vale was one of the five official private sector companies to represent Brazil in the BRICS Business Council meeting, and was also present at the BRICS Business Forum, an official event of the Summit attended by all five heads of state. On the sidelines of the Summit, Vale leaders participated in a meeting of the Brazil China Business Council, itself a key platform for private-sector economic collaboration between the two nations.

Vale’s northern operations include the giant US$19 billion iron ore mining facility known as S11D Carajas.

In addition to the NDB loan, Vale and the Industrial and Commercial Bank of China (ICBC) last week also signed a Memorandum of Understanding for cooperation on global financing arrangements.

With an aggregate limit of up to US$3 billion, ICBC will provide a strategic avenue of funding to enable long-term investments.

ICBC is already an important provider of finance to Vale, for example via ship leases signed between Vale and ICBC Financial Leasing for vessels transporting iron ore.

NDB was founded in July 2014 and has since built up a loan book of US$10.2 billion. The bank has a portfolio of 46 projects approved in the five countries, but up to now Brazil has had the lowest participation.

The stated goal of the NDB is to mobilize long-term funding for infrastructure and sustainable development in emerging markets.

The BRICS bloc is also a space in which China cooperates with India, which does not participate in the Belt and Road Initiative (BRI), and has often spoken out against what it views as a potential loss of sovereignty for countries that have signed up for loans on big BRI projects.

In addition to moving to support more private sector investment, the NBD strategy also includes beginning the process of expansion beyond BRICS countries. Under the current ownership structure, each BRICS country has an equal share, and no country has any veto power. The bank will soon be conducting a mid-term review of its general strategy.

The BRICS Summit Brasilia Declaration welcomed the opening of the establishment of the Americas Regional Office in Sao Paulo, along with its sub-office in Brasilia. A new NDB Regional Office will open in Russia in 2020.

It also noted the progress made towards expanding NDB membership, saying that the expansion of the NDB membership in accordance with its Articles of Agreement will strengthen the bank’s role as a global development finance institution and further contribute to the mobilization of resources for infrastructure and sustainable development projects in BRICS and other emerging economies. The Board of Governors is currently engaged in preparatory work with the aim of making timely decisions on the expansion of the membership. At present, each of the BRICS nations holds an equal 20% equity stake.

The declaration also mentioned other key cooperation initiatives for the NB, encompassing the BRICS Task Force on PPP and Infrastructure.

“The NDB is very much part of China’s Belt & Road Initiative” says Chris Devonshire-Ellis, the Chairman of Dezan Shira & Associates “and the proposed expansion of its role to include the private sector is a taste of things to come. Private sector businesses have long complained about not being able to participate in BRI projects, the NDB re-positioning may well signal a future move for Chinese banks to finally provide financial services to global MNCs from BRI countries to obtain financing for BRI projects. If this proves to be the case, it will usher in a new era for Chinese corporate banking on a global scale.”

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