NDB impact on infrastructure financing

a. How does the NDB differ from existing financial sources?

From the outset, the NDB has not sought to operationally deviate radically from the business model employed by traditional MDBs. Instead, they have focused on ensuring greater efficiency in their operations by speeding up operations, ensuring greater South-South cooperation, eliminating currency exchange risks, and building partnerships with countries and other financial institutions. Thus far, they have made significant strides towards achieving these goals. In terms of speeding up operations, the NDB has managed to extend seven loans within two years of operations, while the adoption of a UCS approach is likely to facilitate loans faster. Greater South—South cooperation has been achieved through issuing bonds within domestic markets, rather than on international bonds markets, to lend to other developing countries. By raising bonds in domestic currencies and financing projects in domestic currencies (with China being the first and only country thus far, but with the intention to extend this approach), countries are also able to better mitigate for currency exchange risks. Last, the NDB’s intent to build partnerships has been illustrated by their willingness to work with other stakeholders, including public and private and those from both developed and developing countries.

Despite the NDB’s aptness for partnership, more can be done in this regard. One clear example is greater cooperation with domestic DFIs. In the case of South Africa, there remains significant scope for the NDB to cooperate with national DFIs. The DBSA, for example, has in addition to its expertise built up in project preparation, over the years also developed a niche within the renewable energy sector. In early pronouncements from the NDB on where they see the bank improving on the services provided by MDBs, both renewable energies and a more efficient project preparation phase were mentioned as target areas. This clearly aligns neatly with the DBSA and whereas it might introduce an element of competition to the local financing landscape, there is a large potential for collaboration and for the DBSA to scale up with NDB support through, for example on-lending. DBSA’s total assets, in 2014, were roughly $2.7 billion for its national operations and just under $1.1 billion for its international operations, bringing total assets close to S4 billion, which makes the DBSA an estimated 60 times smaller than the NDB, resulting in the likelihood of competing for funding similar projects less likely. Although the NDB would likely be able to raise capital cost-effectively, the DBSA has the local know-how, networks and presence to facilitate loans more efficiently. Similarly with regard to the Industrial Development Corporation (IDC) in South Africa, there appears to be a divergence in the types of activities undertaken and projects likely to receive funding from the NDB. The IDC’s particular area of expertise has been in financing manufacturing activities. In 2015, 45% of funding approvals were to the manufacturing sector. While these two examples are particularly related to South Africa, similar examples could be drawn from other countries.

As noted earlier, beyond mere financing, finding actual bankable projects remains critical. Getting a project to a bankable stage can cost between 5% and 10% of actual projects costs, with little to no guarantee that the project will actually come to fruition. Many financiers, and most notably private financiers, are unwilling to carry this risk. Within the Articles of Agreement of the NDB, provision is made for the establishment of special funds outside the normal capital of the bank. The first of such funds mooted has been a project preparation facility, which would assist countries in developing bankable projects. The NDB is yet to set up this project preparation facility, but this will be crucial to African countries.

b. Expanding the NDB - which African countries could join?

As noted earlier, some of the key considerations likely to come into effect when the NDB invites other member countries to join the bank include political commitment, high credit ratings from international CRAs and countries with considerable borrowing capacity.

Initially, it appears the bank will target 15 countries for membership. However, the attractiveness of NDB membership might be compromised by the arrangement that 55% of the shares will always be reserved for the founding members. It remains unclear how attribution of shares to other developing countries will operate (e.g., on an equal basis or in line with capital commitments) and if countries would be willing to play second fiddle to the founding members who will each individually retain an 11% shareholding.

Typically there is also a steep learning curve in engagement for a county with an MDB. Given that each MDB has its own processes that public officials might not be familiar with, many countries tend to, once they have borrowed successfully from an MDB, return for repeat business. Provided that the NDB would rely greatly on the DCS approach, this learning curve should be easier for most countries. At the same time, given that member countries are required to make a meaningful capital contribution to the bank to benefit from its services, it should instil significant confidence to the bank and CRAs that countries would have the political buy-in to actually use the NDBs’ services.

TABLE 3.3 International CRAs - BRICS and select African markets

Source: Sidiropoulos and Rawhani. http://www.saiia.org.za/opinion-analysis/credit-rating-agencies-the-problem-or-part-of-the-solution, accessed 25 April 2017.

The number of African countries with investment-grade credit ratings (i.e., above ‘sub-investment’ grade) are fairly limited. The following Table 3.3 notes that among the top three international CRAs, only Botswana and Namibia have received investment grade credit ratings from at least two of the major international CRAs.⁴⁰