BRICS NATIONS LAUNCH NEW DEVELOPMENT BANK

The Sixth BRICS (Brazil, Russia, India, China and South Africa) Summit will take place on 15 July in Fortaleza, Brazi. Leaders of the five BRICS nations fueling global economic growth will discuss strengthening ties within the bloc and rallying emerging economies to play a greater role in world affairs, economic and political. The theme of the 2014 summit is “inclusive growth: sustainable solutions”.

 During the BRICS summit, agreements for the establishment of a new $100 billion Development Bank and the creation of a $100 billion Contingency Reserve Arrangement (CRA) will be signed. The CRA will provide an additional line of protection to the BRICS countries during difficult balance of payment scenarios and the New Development Bank will finance infrastructure and sustainable development projects. Russia, Brazil and India will contribute $18 billion to the BRICS currency reserve pool, while China $41 billion and South Africa $5 billion, for a total of $ 100 billion . The ‘New Development Bank’ project will see each of the founding countries contribute $2 billion to the bank’s funds over the next 7 years, with the bank’s maximum capital set at $100 billion. Non-BRICS countries will be invited to join as members once the New Development Bank opens for lending in 2016. The pool will become available in 2015 and will see each BRICS country putting in as much of a proportion of the total capital as it would be allowed to withdraw, except for China and South Africa, the largest and smallest contributor, respectively. China will only be able to access half of its $41 billion, while South Africa will be able to withdraw twice the amount of its $5 billion investment. Russia, India and Brazil will each chip in $18 billion from their foreign exchange reserves and be able to withdraw all of it back.

The new bank’s headquarters could be in either Shanghai or New Delhi.  Russia has stated no preference but will aim to retain involvement by dominating at the managerial level.

The BRICS leaders summit will be preceded by a number of events which will see finance ministers and central bank governors meet. In addition there will be meetings of the BRICS Business Forum and Business Council; as well as the BRICS Financial Forum, which groups the existing development banks of BRICS member countries.

The BRICS countries represent a considerable force in terms of the world’s finances. Trade within the group amounted to 16.8% of global commerce at $6.1 billion. The strength of the BRICS is amplified by the fact that BRICS countries account for 43% of the world’s population, around 18% of its GDP and 40% of its currency reserves, estimated at around a trillion US dollars.

Mission, Nature and Principles of the BRICS Development Bank

1. Mission: Jointly funded by the five BRICS countries, the BRICS Development Bank is founded for the purpose of promoting south-south cooperation. The Bank is intended to provide funds for large infrastructure construction, energy and resources development, energy conservation and emission reduction, environmental protection and other prioritized areas, promote and deepen cooperation among the five countries in economic, development, financial and monetary fields, boost and strengthen the establishment of global partnership among these five countries and promote their sustainable development.

2. Nature: It will be a sub-regional policy bank operating under commercial mode. This development bank will be mainly contributed by government-backed financial institutions, and participated by private capital. Through capital allocation in a market-oriented way, it represents the following features: 1) collective investment, 2) professional management, 3) market management, 4) risk sharing and 5) benefit sharing.

3. Capital Scale: The capital scale will be mainly in line with the total GDP of the BRICS countries and in reference to the actual investment need. The capital includes paid-in capital and uncollected capital.

4. Equity Distribution Principles: Equity distribution shall take into account GDP of the five nations, their foreign exchange reserve, total foreign trade volume and growth rate. The majority of the shares will be controlled by the BRICS governments, while non-BRICS countries and other international financial institutions may also become shareholders. The shares will be mainly held by government-backed financial institutions in the BRICS countries, and private capital will be introduced at the same time. Equity distribution among the BRICS nations shall take into consideration GDP, foreign exchange reserve, total foreign trade volume and growth rate of the countries, which will be calculated with the comprehensive weighted method.

5. Selection of Board Chairman and President: After the location of the head office is settled, Board Chairman shall be selected by shareholders in light of the interests of the head office’s country and other countries. President candidate will be recruited openly on a global scale and engaged on a tenor basis.

Operation Management of the BRICS Development Bank

1. Working capital: The initial-stage funds will mainly come from the subscription of shareholders. If the condition permits, it will accept contribution from all sorts of long-term funds and other funds with long-term nature in the shareholders’ countries. Money will also be raised through issuing bonds secured by multi-BRICS state credit, funds and direct loans as well as attracting private capital.

2. Business Operation: By means of lending, equity investment, syndicated loan, investment by funds, technological assistance and donation, the BRICS Development Bank will provide such financial services as forecast, prediction, information and consultation, as well as long-term financial support for infrastructure projects and R&D and transfer of high-technologies and environmental technologies. It aims to realize the agreed development goals of the international community, especially the UN MDGs concerning poverty alleviation, education, food security, public health and sexual equality.

3. Investment Portfolio: 1) donation (about 25% of the total investment) will be mainly used for technological assistance projects such as soft knowledge, technological transfer and capacity building, or initial feasibility studies of lending projects; 2) short- and medium-term loans free of interest (about 75% of the total investment) will be mainly extended to mature SMEs engaged in infrastructure construction, development of high-technologies, renewable energy, environmental and energy saving technologies etc. in the BRICS countries and other developing countries.

4. Operating Model: The government of any BRICS country or developing country in want of funds may file a project application to the secretariat of the BRICS Development Bank, which will submit a written project application to the Board of Directors based on evaluation. Once the project is approved, a project contract will be prepared by the Board Secretariat in conjunction with potential project implementer, international institutions, country-specific institutions or the local government, which will be responsible for pushing the establishment and operation of the project.

5. Regulatory and Risk Prevention Systems: Risk guarantee systems and mechanisms should be set up. According to the Basel III Accord, the “tier-one core capital” and “capital conservation buffer” systems should be established, and the risk analysis and pre-warning mechanism shall also be built.