Leslie Maasdorp: BRICS bank – bringing development finance to the 21st century

The Vice President of the BRICS Bank Leslie Maasdorp tells Tim Modise that the New Development Bank to be established in South Africa will be global in character and will compliment the developmental funding institutions in the region. He says the Bank will operate differently from the Contingency Reserve Arrangement that will be run by the member Central Banks. The CRA will deal with liquidity challenges and has a differentiated funding model with China being the biggest contributor. He envisages the New Development Bank opening up membership to other countries. – Tim Modise

Mr Leslie Maasdorp, congratulations on your appointment as Vice President of the BRICS New Bank. What is it called – New Development Bank?

That’s correct. Thanks very much, Tim.

Right. The bank launched on Tuesday in China. What are you busy with now, there in Shanghai?

The thing about the BRICS New Development Bank is that it’s actually, a new institution. When I say ‘new’, it’s literally new as in we’re opening up a service. We are recruiting staff. We are establishing the procedures and operationalising the bank, so it’s a rather detailed and elaborate exercise. It would take, at least, the following three months to have all of these basic, essential procedures and policies in place in order to be fully functional. I have to say that the Chinese Government has been incredibly impressive. The speed, with which things are executed and done, really boggles the mind. I guess that’s one of the advantages of having a planning system, which is controlled from some centre.

Now how is the bank capitalised at this time? There’s a figure of $50b mentioned. There’s a figure of $100b, so currently how are you capitalised?

Yes, so the bank has $100b authorised capital, so what that means – you have the member countries that will each contribute and eventually you’ll have $100bn facilities available to advance on. In the first instance, we have $50b authorised, in equal amounts from the member countries. What makes the New Development Bank unique in that sense, is whilst we have very diverse economies amongst the BRICS countries, China (as you know), and has a massive economy, about to become the biggest in the world. Brazil is a huge economy, in GDP terms and in population size, so is Russia and so is India. South Africa has a much, smaller economy, as you know, with just over 50-odd million people, and a GDP that’s considerably less, in each of our BRICS member states.

What makes the New Development Bank unique is that the decision-making, the structures, makes provision for members to contribute in equal fashion. There’s a second institution, which is parallel to the New Development Bank called the CRA (the Currency Reserve Arrangement), where there’s another $100b where the contributions vary per country. Sometimes these have been spoken about, interchangeably and created a bit of confusion (I would say). In that second $100b, China is contributing $41b – by far, the largest share. Russia – $18b, India – $18b, Brazil – $18, and we, the remaining $5bn.

In the Currency Reserve Arrangement, which is a facility for countries to access should they have liquidity problems or payment problems. If you take Greece, let’s say South Africa experienced a Greek-type situation we would have access to that fund, called the CRA, and that fund is controlled and governed by the combined Central Banks of the five member States. To come back to the New Development Bank, as I said, we are countries, contributing each, ten billion Dollars, to the initial capitalisation of the authorised capital of the bank.

The beneficiaries or the clients of this bank – who are they likely to be? Is it members only bank or will it extend credit to or make investments in other countries that are not members of BRICS?

Yes, now the article system makes provision that the bank will grow over time. The article says very clearly that the bank will be open to all members of the United Nations. What that effectively means is that at the bank, as our distance becomes established and it becomes fully operational. It is pretty, likely and already a keen interest from other countries to become members of the BRICS Foundation.

Originally, the BRICS concept, BRICS was conceived as a political, economic alliance of these countries of the South and, in the initial stage, the BRICS member states will definitely be the ones who will be going on the New Development Bank. However, it is not defined at this stage yet, under what conditions and how. For example, the modalities – how will we allow Indian members, at what stage, and so on but very soon, we are going to be confronted, at the bank, with applications from other countries. We are going to be tasking the board or the board of directors to give strategical overall direction, because that is really a political judgement call (if you like).

We are a bank, literally and the decision around broadening the formation will be taken at that different level, but it is conceivable also, Tim, I should say that we could, for example, fund a large infrastructure investment, let’s say in Southern Africa. That is a power project for the region, and not just South Africa specifically. There is nothing that limits us from, (in the first instance), working on cross-border investment, but I suspect that in the first phase, it will be BRICS specific. It will be projects – a pipeline of projects, which will come from either Brazil, or Russia, or India, or China, or South Africa.

How different are you from the IMF, the World Bank, the Asia Infrastructure Investment Bank, and how are you going to work with those other banks?

The first decisive variable is the one that I’ve already mentioned, which is that we have an equal voting and a decision making structure, within the New Development Bank, or a bank can be IMF – there are very distinct measures that are put in place way back, after the Second World War, when the Bretton Woods system was setup. These institutions were created in 1945, in a place called Bretton Wood, in the United States, and it entrenched a much stronger role of influence and quotas for then, the biggest economies of the world. Here I am referring to the United States and United Kingdom and so on.

Over time there’s been a, and especially more recent time, over the last 20 to 25 years or so, there’s been a persistent call by developing countries to have a greater say in global government, especially in the global development finance institution, but in a source of great contention. When the G20 was setup in the 1990’s, these goals became more ferriferous and I would say that it only culminated around the formation of BRICS. When developing countries had pretty much decided that we need to or commend existing institutions, and there’s no preordained order that we find the World Bank (IMF), should be the only leading development finance institution in the world that carry legitimacy back.

We need to create institutions that can complement the existing architecture. How we work with them? I would say there is no competitive relationship with the World Bank or the IMF, or any of the other banks, like Asia Development Bank, and so on. We will seek to work in a complimentary fashion with those institutions. I say that for a few reasons, Tim.

Firstly, there is, considering the expertise in these institutions. They’ve built up the institutional memory. They’ve built up huge business practices, and a way of upholding large infrastructure projects. Our aim would be to learn as much as we can from these institutions. However, we want to go beyond that. Our aim would be to develop, as the President of our bank we want to develop the next practices, and not just best practices, but next practices. Meaning we want to enhance and look at the new technology and look at innovation, and look at ways, for example fast tracking things.

One of the criticisms in developing countries, of the current World Bank structures, is that the procedures and policies, the implementation has become very cumbersome, so it takes multiple years for a large project to come to fruition. We want to explore and experiment with new ideas, with neater quality and innovate – to find ways to pass that project and do things differently.

As you know, Tim, it is very difficult for large institutions to turn course and to become more agile and more nimble. We have the advantage, at the New Development Bank, to start with much flexibility within our structures, and we have a much, for example, we aim to have a much younger staff with much bigger focus on new technology, etcetera. We are going to turn our newness into a source of strength, if you like. Then somebody and this is not a competition, we are adding to the pool of infrastructure finance available in the world. Therefore, we will work in a collaborative fashion, within the community.

Now, the role of rating agencies what is it likely to be – are you going to be using their research and their reports, as a point of departure, when you consider some of the applications for loans from members of BRICS or even other nations?

The role of rating agencies, Tim, over the last number of years, especially building up and during the financial crisis – they’ve come under specific scrutiny, if you like, right. The rating agencies are also, dominated by this one. This is one of the areas that we will also expect broader political guidance from our board of directors, and our board of governors. Naturally, we will seek the highest possible rating and there will be certain judgement calls that we will need to make over the next few months, as we establish ourselves, to ensure that we get the highest possible leading and AAA rating at the bank, to make us competitive – from across the funding perspective.

The last thing we want is to create this new $100b institution and our funding for these developing countries and that it’s easier and cheaper for them, from a funding perspective, to go to other institutions. We are very cognisant of the fact that we need to ensure that we have the best possible rating. It is around which rating agencies are we going to use? How are we going to ensure that we get the highest possible rating? We haven’t quite triggered those decisions yet, but it will be part of this initial establishment phase now, over the next few months.

You are head quartered in Shanghai, China as we speak but you are also going to setup regional offices here in South Africa. When is that going to happen, and what is the role of the regional office going to be?

One of the key agreements that brought the bank to life was finding the place for it, last year, at the BRICS Summit in 2014. Just after the World Cup actually, last year, there was a BRICS Summit with all the creditors and the technical team, and that’s where the bank was effectively born, through theory if you like. In those agreements, it makes provision for the Head Office to be established in Shanghai, China, and the second office that will be established at the bank, will be in South Africa. It is a pretty, important principle that was adopted in those meetings. The only other regional office contemplated (at this stage), is the one in South Africa. We might, at a later stage also consider other jurisdictions, as the scope of the bank (of our pipeline) grows.

The African Resource Centre will be housed in Johannesburg. Naturally, I was not involved in the discussions last year, but I am now getting myself up to speed with all the discussions that took place. The agreement that had been reached was that the establishment of this office is of the highest priority, which means that it is likely, in my view, within probably six months. The time line says that we will be establishing that office. Again, we would seek to draw on the existing capability in, for example, the Africa Development Bank, in the DBSA, Development Bank of Southern Africa because we can’t possibly, Tim, if you think about it go about now raiding these institutions of people.

South Africa has very, strong financial markets, due to skills in finance. We are respected globally actually, but it is also quite a limited pool, so we need to find a way or a formula to ensure that we, again can, maybe initially have staff or even become staff seconded from existing institutions, to support us. Obviously, we will need to recruit our own staff as well, but also that office will be global in character. This is not going to be the Africa or South Africa outpost, if you like, of the bank. It’s an original office of the New Development Bank, which is headquartered in Shanghai, so I visualise or conceptualise an office with staff that is quite international in character and that has all the capabilities that is required for the execution of large infrastructure projects. In other words, do we meet project identification, project appraisal, and fiscal appraisal and so on?

Mr Leslie Maasdorp thank very much for talking to us and, once again, congratulations to you.

An absolute pleasure, Tim, I look forward to chatting with you again. Take care.

Thank you.

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