The New Development Bank — more popularly known as the BRICS Bank — proposes to be different from other multilateral funding institutions in its focus, speed and risk appetite, and earmark as much as 60 percent of its lending for renewable energy. “Our focus is on sustainable development and sustainable infrastructure,” said President K V Kamath in an interview at the bank’s headquarters in Shanghai.
The bank approved almost a billion dollars in loans for its first set of projects earlier this year, and expects to sanction another half-a-billion dollars by the end of the year for projects in its five member countries — Brazil, Russia, India, China and South Africa.
“For next year, funding could be slightly north of $2.5 billion", Kamath said. The bank will raise funds in local currency and on-lend in local currency too. In July, it sold 3 billion yuan ($442 million) of green bonds in China. A rupee-denominated bond issue is next in line.
Kamath said that the rapidly falling cost of solar power presents a significant risk of retroactive changes to projects already built. “The biggest risk I see in alternative energy is the rapidly dropping price curve which, by itself, should be very good for the next project, but could impose risks on projects which are funded and underway. A solar project done three years back is honestly going to be a challenge today because if it is in India, at some stage, somebody will question: why should that subsidy continue?”
The BRICS Bank has not financed any coal projects yet, but does not rule out doing so at some stage. The policy of the World Bank, and other multilateral financial institutions like the Asian Development Bank, is similar: they are open to funding coal projects, though expect to do it only rarely.
How does the New Development Bank propose to be different from other multilateral financial institutions?
— The founding members had an intent in naming it as a “new” development bank. The newness comes from having to take in the learnings of the past 70-odd years in the multilateral development bank business and then applying them to today. Our focus is on sustainable development and sustainable infrastructure.
Take this city where we are: Shanghai. For the last six months, we have not had a single day of foul weather. You can visibly see the clean-up efforts. Ultra-super critical [power plant] is the norm here, which has dramatically reduced pollution levels. In the infrastructure field, we have seen so many things that are done differently to take advantage of what is possible today and leave a smaller footprint in terms of damage. The newness comes from learning all these things and taking these learnings to countries that are now trying to go through the same process.
So, a part of that learning is essentially what not to do?
— A large part of that learning is what not to do.
So is one of the learnings not to do coal?
— Not to do coal that is harmful, that is done in a traditional manner. We will examine [such projects] very closely. Three or four years back, we would have still said the only solution is ultra-super-critical plants, but there dramatic developments have taken place, for example the dropping price curve on renewable energy sources, particularly solar. I would then raise the question: which is the appropriate path for the future? If the initial capital cost of setting up an alternate power generating system is equal to that of thermal plant, then I think it becomes an open and shut case. I think it is heading there.
The question that could come up for developing countries is the burden of that heavier initial capital cost. I am reasonably sure costs will drop and efficiencies will improve to make this a feasible option.
Other multilateral financial institutions also seem to be speaking the same language: they have funded coal in the past but are moving towards clean energy investments. Since sustainability is in your articles of association, how does that translate into actual dollars and cents?
— Sustainability is the key, and climate is something we have to be conscious of. We build that into our approach, in everything we do.
In developing countries, the effective cost of finance when you borrow in hard currency is in teens, 12-14 percent, despite the low interest rates you see on paper. The financing cost makes borrowing in hard currency unsustainable. The alternative source we are looking at is local currency financing. The first bond issue was in China — a renminbi green bond. We want to then go on to issue in India. We are exploring whether that too could be a green bond issue. The difference is we will on-lend in rupees too. During this year, we then want go to at least one country among our members, either Russia or South Africa, to raise funding. We want to open a strong window where we can meet local funding needs using local currencies where you know the rate of interest is what you pay.
The third thing is speed of response. You need to respond in 3-6 months.
I believe there are some concerns about that timeline. If you go for a proper environmental…
— That is a complete false proposition. We are saying 3-6 months, and they need to have all the government approvals, and we are saying we are not going to second guess what countries are doing. Today what is happening in a lot of multilateral development banks is that oversight is somehow assumed by the banks. We are saying we will go by country standards. That is one part of the delay. The aim is to work at the speed of a commercial bank.
The first set of projects are done. Is it a lot of work to get the projects for a new bank? Are there enough projects waiting to be funded?
— Starting a new bank has two challenges: it is a start-up activity. You need to set up basic processes of running the bank. The second part is getting the projects. For the first set of projects, our member countries were very helpful; they had projects that were in an advanced stage and ready to go and we said that we would like to look at renewable projects first. Now we are getting into the stage where the pipeline will start building on its own, without us having to chase projects.
What part of your lending will be earmarked for renewable energy?
— Everything that we do has to be sustainable. Broadly we have said that 60 percent should go to renewable projects. About $1-1.5 trillion per year is the funding need of the sector. All the multilateral development banks do not do more than 15 percent of this. So there is a very large pie out there which you can fund. I don't think there is a shortage of projects and there is no situation where you are overcrowding in trying to lend. The biggest risk I see in alternative energy at this point in time is the rapidly dropping price curve, which by itself should be very good for the next project but could impose risks on projects that are funded and underway. A solar project done three years back is honestly going to be a challenge today because, if it is in India, at some stage somebody will question: why should that subsidy continue?
It is inevitable the NDB ends up being compared with the Asian Infrastructure Investment Bank, and the latter seems to get all the attention. How do you compare the two?
— My strategy is very simple: if we have a story, then we will communicate the story. Honestly, it is too early to talk about a story at this stage. We will collaborate with AIIB and work with them. There are a lot of opportunities across Asia which we can work together on.
How does your funding scale up?
— We expect that by year end, the $1 billion should go up to $ 1.5 billion. For next year, funding could be slightly north of $2.5 billion. A large proportion would be alternative energy projects. Every year, we will take an approach that any prudent banker would do. Given that there is capital coming in, you can leverage that about 3-3.5 times, though a question could arise: why not more? This question we will raise in due course of time.
What are the red lines for the bank? Are there sectors or projects that the bank would not like to touch?
— Broadly we do not want to get into any area which requires a policy dialogue with a borrowing country. We don’t want to say: if this is what we want you to do, this is the policy you need to adopt and then we will lend. We don't want to get into lending with strings attached.
Is it your intention to keep your portfolio almost equally divided between countries?
— Yes, broadly that is the idea to start with and we will see how we progress. There is no hard and fast rule but we will try to see that there is a broad equilibrium.
Does a lot change at the bank when the chairmanship of the bank changes?
— China takes over as chair of board of governors, which is the final authority for the bank. The members are finance minister of member countries. I would expect that there is always continuity in approach and policy because that is enshrined in the Articles of Association. I do not expect much change though of course there could be views that the chair could have.
Will your team grow significantly in the near term?
— In the first year, we were handheld in a way by our host country. They provided us the space and the start-up people. We will scale up in a measured way. We don't expect to cross 300-350 people over four years. Thereafter, the government is in the process of building us a new facility down-river, which will take over 2,000 people, but that is four years down the line.