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Will Corporates Benefit from Two New Funding Powerhouses?

  • By Rebecca Brace
  • Published: 7/13/2015

Earlier this month, the New Development Bank (NDB) was launched during the seventh BRICS summit in Ufa, Russia. Headquartered in Shanghai, the new $100 billion bank is expected to be up and running by the end of this year, with a stated goal of approving the first loan by April 2016. But while the arrival of the NBD is noteworthy in itself, this development is even more significant given that it is one of two new emerging market-focused development banks set to be launched in the coming months. Where will these institutions sit in relation to other development banks, and should companies in the relevant nations expect to see any benefits?

The new institutions

Headquartered in Shanghai, the NDB was first agreed upon by the BRICS countries—Brazil, Russia, India, China and South Africa—in July 2014. According to the agreement, the objectives of the bank will be to “mobilize resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries, complementing the existing efforts of multinational and regional financial institutions for global growth and development.”

However, the NDB is not the only new development bank in the pipeline. Announced in 2013, the Asian Infrastructure Investment Bank (AIIB) is also expected to begin operating by the end of this year and is intended to address infrastructure needs across the region.

The AIIB, which is being spearheaded by China, has so far approved 57 countries as prospective founding nations—although notably, the U.S. and Japan have not applied to join the initiative. Fung Siu, Asia Analyst at Economist Intelligence Unit, said that as a Chinese-led initiative, one key challenge of the AIIB will be to prove that the institution can and will accord high priority to governance, environment and social standards. “Because China will have the largest voting share (25 percent), it will need to demonstrate that it will not use what is effectively the right of veto on a whim,” she commented.

Additionally, even though the AIIB is being set up against the expressed wishes of the U.S., many of the U.S.’s economic and military allies have broken ranks and signed up.  “This is another sign of China’s rise to contest the economic dominance of the U.S.,” noted the treasurer for an Asian company. “Of course, this has both positive and negative connotations: on the one hand, it will mean a global economy which is less dependent on what happens in one country; on the other, it is likely to give rise to increased tensions, as we are seeing in many other, related, areas.”

The arrival of these two new institutions is significant in terms of their ‘symbolic’ power—middle-income nations attempting to take a leadership role on matters of international development financing—as well as in terms of the challenge they pose to current international multilateral development banks, explained Raj Desai, associate professor of international development at the Edmund A. Walsh School of Foreign Service at Georgetown University.

Opinions vary as to where the new institutions sit in relation to various different institutions, including the following:

Asian Development Bank (ADB)

Siu says that AIIB is likely to be a competitor to the ADB and will hopefully provide a new source of finance for much needed infrastructure projects. “The ADB itself forecast a few years back that Asia would need $8 trillion in infrastructure finance up to 2020 to keep the region growing at a rapid rate,” she commented.

Nevertheless, Takahiko Nakao, president of the ADB, has said the ADB is committed to working closely and co-financing with AIIB to address the vast infrastructure needs facing Asia. And K.V. Kamath, the NDB’s first president, has said “there will be no competition at all” between the NDB and other multilateral development banks, adding that “the market is big enough for all of us.”

World Bank and IMF

Siu does not regard the AIIB as a competitor to multilateral donors such as the World Bank and IMF. “They are not competitors as the types of loans on offer are totally different,” she explained. “The AIIB will be offering loans for infrastructure projects and not to help prop up a country that might have run into balance of payments difficulties.”

Desai agreed that the new institutions will in no way compete with the IMF, which does not provide development financing as such. “Rather, it provides emergency assistance during periods of currency/balance-of-payments crisis in borrower countries, such as Greece,” he said.

However, Desai noted that the AIIB and NDF “do represent a potential challenge to the World Bank, which has a capital base of about $230 billion, and which must support a wide variety of lending programs.” He added that these institutions have arguably emerged “as a direct challenge to the existing Bretton-Woods institutions, and as a result of longstanding frustrations with the failure of principal shareholders (such as the U.S.) to implement reforms that would give middle-income countries a greater voice in their governance.”

Private sector benefits

The new institutions are likely to focus primarily on getting major infrastructure projects underway, rather than on private initiatives. Desai pointed out that unlike most types of private investment, infrastructure projects tend to have extremely high upfront costs and longer maturities. “This leaves infrastructure investors much more vulnerable to sovereign risk, regulatory instability, shifting political winds, and the threat of expropriation,” he explained.

“For this reason, multilateral development banks play a critical role in attracting private infrastructure investment to developing countries through ‘additionality’—that is, by contributing their own funding, bringing financing partners into specific deals (through syndications or co-financing), and by using risk guarantees and other tools. Importantly, multilateral development banks cannot offer support to investors from non-member countries.”

Could the new institutions also help companies in emerging markets which are in need of funding? “The answer here is yes—and no,” concluded the Asia-based treasurer. “No: these institutions typically fund long-term infrastructure projects. So the gestation period tends to be long, and the immediate benefits tend to be limited to certain industries—primarily the construction and heavy engineering firms. These guys usually have dedicated project financing teams which work with these policy banks: it is usually not simple or easy to comply with all the conditions which accompany this form of financing.

“Yes: obviously, in the longer term, we all benefit from the better infrastructure, and the cash released into the economy via these projects has a beneficial impact on everyone. But this is indirect, and it takes time.”

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