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The BRICS’ New Development Bank: Shifting from Material Leverage to Innovative Capacity Andrew F Cooper Professor, Balsillie School of International Affairs and the Department of Political Science, University of Waterloo. Associate Research Fellow-UNU CRIS (Institute on Comparative Regional Integration), Bruges, Belgium. (Forthcoming in Global Policy, not for citation in draft form) Abstract

This article argues that the BRICS’ New Development Bank (NDB) deserves more attention not because it is equivalent to the Asian Infrastructure Investment Bank (AIIB) but because of its differences. Unlike the AIIB the NDB does not possess impressive material capacity or overt connections to a wider state-led geo-political strategy. What distinguishes the NDB is its creative design with four significant elements of novelty. Unlike other multilateral financial institutions, including the AIIB, the NDB is committed to a principle of equality across its core membership. Product innovation is advanced by its promotion of sustainable development with an exclusive focus on niche clean renewable energy projects. The expressed aim of the NDB with regard to resources is to use green bonds denominated in BRICS’ national currencies. And the focus on delivery centres on the need for speed. Although each of these elements face severe tests, the ability of the NDB to navigate around serious internal tensions through improvisation and trade-offs points to an original emerging pattern of collective policy making and global goverrnance.

Paper presented at ISA International Conference 2017, Hong Kong, The Pacific Century? University of Hong Kong (HKU), Hong Kong June 15th - 17th, 2017

The New Development Bank (NDB) has not received the attention it deserves. The

launch of the NDB has been overshadowed by the China-backed Asian Infrastructure

Investment Bank (AIIB). While the AIIB is consistent with a model of structural-driven

change in global politics, the NDB necessitates a more nuanced analysis around

collective agency. With 20.06 % of voting rights and a 30.34% or US$29.78 billion stake

of the US$100 billion capital base (AIIB, 2015), China possesses a de facto veto in the

AIIB. In sharp contrast the initial subscribed capital of US$50 billion in the NDB is

equally shared among its five members, China along with India, Brazil, Russia and South

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Africa (Agreement on New Development Bank, 2014). While the NDB has so far

restrained from expanding beyond the BRICS, the AIIB opened up to 57 founding

members thereby driving a wedge between those countries willing to follow Beijing’s

lead and those (notably the United States and Japan) resistant in doing so. Although the

extent of the global reach of the NDB is still very much in doubt, the AIIB is tied more

explicitly to the ‘One Belt, One Road’ (OBOR) initiative designed to advance

infrastructural development both on the westward land route from China through Central

Asia and on the southerly maritime routes from China through Southeast Asia and to

South Asia, Africa, and Europe (EU, 2015; Callaghan, 2016; Chin, 2016).

If the image of AIIB is one of the assertion of power associated with the on-going

rise of a single actor as a regional and global power (Dollar, 2015; Smith, 2015; Whyte,

2015) the NDB is seen by many observers as burdened by the fragility of the BRICS’

shared identification. Originally created by Jim O’Neill and Goldman Sachs in 2001 to

highlight the parallel trajectories (and investment opportunities) of the four original big

and fast growing BRIC entities, the concept took on institutional life with the creation

first of BRIC as an official summit process in 2009 and subsequently (with the addition

of South Africa) BRICS in 2011. Notwithstanding this progress, however, pervasive

skepticism remains about how this transition from artificial acronym into diplomatic club

plays out in terms of operational effectiveness. Although proving resilient to the

immediate shocks set off by the 2008 global financial crisis, since 2013 the economic

performance of the BRICS has been less stable. Goldman Sachs’ closed its BRICS

investment fund in 2015, and the growth record for all of the BRICS members slowed

appreciably (Sharma, 2012).

Altered images about the ‘rise’ of this cluster of countries is reinforced by doubts –

including those emanating from Joseph Nye - concerning the BRICS members’ ability to

sustain meaningful forms of common action (Nye, 2013. See also O’Neill, 2013). Were

there enough commonalities to allow a morphing into a sustained organization? Certainly

building a culture of cooperation necessitates overcoming serious constraints in terms of

national interest and identities (Stuenkel, 2015; Cooper, 2016). On top of fundamental

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differences in economic profile, and domestic political systems, there are serious geo-

political sources of competition among the BRICS countries. China and India, as well as

Russia and China, have embedded legacies of territorial disputes. Institutionally, there is

a marked contrast between the advantages enjoyed by Russia and China in the global

system as veto-wielding insiders within the United Nations Security Council (UNSC) and

India, Brazil, and South Africa as aspirants outside the Permanent Five (P5) membership.

Yet the NDB merits detailed examination precisely because it has moved to

creating new institutions despite the challenges of doing so. Although the creation of the

AIIB is testimony to China’s material and diplomatic leverage, its design borrows heavily

from the foundations of established multilateral financial institutions above all the World

Bank/The International Bank for Reconstruction and Development (IBRD) and the Asian

Development Bank (ADB). For example, in a linguistic analysis of the founding

declarations of the three bodies, a detailed academic study demonstrates that that they are

virtually identical, save for two articles (Article 15 on technical assistance and Article 36

on references) in the AIIB that diverge from the template (Wan, 2016). Moreover, the

pull towards reproduction of established practices is reinforced by the extension of

membership to core actors in the international financial order and the use of co-financed

projects with the World Bank and the ADB. As Wan concludes: ‘The newcomer AIIB is

strikingly nested to the IBRD and the ADB’ (Wan, 2016: p84).’

In contradistinction the NDB departs not only from the embedded model of these

core multilateral financial institutions (Economic Times, 2015; World Economic Forum

2015) but from earlier initiatives promoted by components of the global South. From this

perspective the NDB has a claim of originality that belies the suggestion that it represents

a continuation of ‘familiar initiatives by newly arrived economies’ such as the creation of

development banks by the Middle Eastern oil producers in the 1970s (Kahler, 2016). If

indeed there are similarities with this category of initiatives such as the Islamic

Development Bank or the OPEC Fund for International Development - due to the

combination of material weight, geopolitical purpose, a push to recycle surplus savings

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into investment, and an asymmetrical distribution of power among members - this

semblance is with the AIIB not the NDB.

This article argues that the NDB should be cast in a revised manner due to the

prominence of a number of distinctive features. The first is the substitution of the

principle of equality for the inequitable representative structure of the traditional MDBs.

Although this form of innovation in terms of decision-making has been subject to lengthy

negotiations and is far from complete in operational practice, the principle of equality

with respect to the NDB’s members’ rights and obligations marks a distinctive shift in the

application of the tenets of global governance. A second feature that distinguishes the

NDB is the departure from the emphasis on major infrastructural projects at the core of

the established model. Whereas the AIIB reproduces the traditional template, the NDB

signals its intention of advancing product innovation, as witnessed by the preference for

sustainable development via green infrastructure. If at the initial stages of

implementation, this turn is indicative of the NDB’s focus on niche projects. A third

feature of note is the expressed aim of the NDB to build up its capital base through

innovative means by the issue of bonds denominated in BRICS national currencies, and

with a focus on green bonds. How this test of resource innovation plays out is still before

us, but its pursuit has serious implications stretching into interactions with credit rating

agencies. Finally, a fourth feature of the NDB is its concern with catching up on delivery

innovation. Given the delay in launching the NDB, this emphasis on speed is in part a

form of compensation about the need to catch up in terms of performance. A nimble and

focused style of delivery has the potential for differentiating the NDB from the other

multilateral financial institutions.

All of these features underscore the NDB as signaling a shift from material leverage

towards an association with ideational capacity. Such a recalibration does not mean a

process in which a collective form of innovative leadership smoothly overcomes the

constraints of divergent positions among the NDB’s members. Whereas the AIIB was

animated dramatically as part of China’s ‘striving for achievement’ grand strategy (Yan,

2014), the implementation of the NDB was marked by intricate and time-consuming

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negotiation. Each of the features central to the identity of the NDB has been contested.

India in particular remains wary of China’s operational domination of the NDB,

especially as it originally took the lead in the creation of the institution (Mathur, 2016).

While such disagreements cannot be ignored, however, they should not be exaggerated to

the point where the NDB risked failure. While significant tensions – and displays of

power politics – continue to be on display, these attributes have been contained by

improvisation and trade-offs indicative of a strong and resilient club culture (Cooper and

Farooq, 2015; Cooper, 2016). In overall terms the NDB constitutes a distinctive model in

the design of collective global policy.

The Principle of Equality in Process Innovation

A strong impetus for the creation of alternative multilateral financial institutions was to

create a structure based on equity of membership. The commitment to the principle of

equality in governance decision-making stands out as one of the most striking

characteristics of the NDB (Zhu, 2015). Significantly, however, the details of how this

principle was to be implemented proved to be one of the major sources of tension among

the BRICS, with China willing to bend the principle, by offering to make a larger

financial contribution to initial subscribed capital on grounds of efficiency and India in

particular holding the line that the NDB should maintain its uniqueness through a strict

form of equity of contribution.

Because of its concerns about Chinese domination of the NDB India maintained

its stance on the equality principle through the various stages of negotiation (Sahu, 2013;

Krishnan, 2014). The intensity to which India held this position is testimony not only to

the frustration that it felt about the lack of fairness in dealing with the IFIs but also to the

sensitivity that its ideational leadership on the NDB initiative was threatened by China’s

financial clout. Looking back it is important to note that it was India and not China that

took the lead in exploring alternative strategies for development financing in the

aftermath of the 2008 global financial crisis. Prime Minister Manmohan Singh built on

his own extensive background as chief economic adviser, reserve bank governor, and

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head of the Planning Commission, as well as his role as Secretary General of the South

Commission, to champion such efforts. At the Seoul G20 Summit in November 2010, for

example, Singh argued for the use of a different sort of tool to foster infrastructure

development (The Hindu, 2010). Faced with the challenge of massive imbalances, he

proposed a new institutional instrument for recycling surplus savings into investment.

Given this context, it was not surprising that India made the establishment of a

New Development Bank the pivotal agenda item at the March 2012 BRICS summit it

hosted in New Delhi. The finance ministers’ meeting held just prior to the summit

endorsed this initiative as a priority. And, signaling the extension of the BRICS from an

exclusive state-centric club to a wider network, the 2012 BRICS Academic Forum—

which included leading Indian think tank Observer Research Foundation (ORF)—

recommended the summit study ‘the establishment and operational modalities of

financial institutions such as a Development Bank and/or an Investment Fund that can

assist in the development of BRICS and other developing countries’ (BRICS Academic

Forum, 2012).

China did not block the establishment of the NDB, but its initial ambivalent

reaction to India’s proposal slowed the process of negotiation and institutional creation.

Throughout the protracted negotiations, Chinese commentators questioned whether the

principle of equality undercut institutional performance. As Zhu Ning, a professor at the

Shanghai Advanced Institute of Finance, was quoted from an interview with China

Central Television: ‘If the five countries have an equal share in the same entity, there will

be coordination problems’ (Krishnan, 2014). The main concern remained instrumental. If

the NDB was to be successful China took the point of view that it needed the requisite

resources to deliver in terms of institutional performance.

Ultimately, with the help of the other members, India was able to mobilize a

successful defense of the broad principle of equality, a condition embedded in the

declaration of the NDB. But China pushed back on two other issues that although they

undercut the image of equal treatment among the members were also driven by concerns

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about efficiency. The first of these centred on the location of the headquarters of the

bank. India made its claim to this function by playing up its role as the inspirational force

behind the bank (Chand, 2013). China instead took the view that the headquarters should

be in Shanghai, a position that was championed as well by key Chinese think tanks

(Shanghai Forum, 2013) on the basis of comparative advantage.

A second issue related to the principle of equality was on the question of whether

or not the NDB could lend to BRICS members only or to non-members as well. China

pushed to open up the client base beyond BRICS members; while India—looking to meet

needs at home—wanted a more concentrated focus. Put another way, while India

prioritized building its own infrastructural capacity, China with its advantage of an

enormous current account surplus sought alternative and less sensitive means to finance

development projects on a global basis.

To its credit the club culture of BRICS – with the initiative symbolizing an

assertion of political sovereignty of the five members - enabled the members to remain

cohesive even under stress. Yet maintaining organizational cohesion was predicated on a

somewhat awkward equipoise on the major issue under debate. While the BRICS adhered

to the original model on initial subscribed capital, with the allocation of $50 billion from

contributions from each member (divided into paid-in shares of $10 billion and callable

shares of $40 billion), it was also decided that over time the NDB would move toward

achieving a maximum authorized capital of $100 billion.

In an even more evident sign of a balancing act within the club culture, China

secured the location of the bank in Shanghai. As a form of trade off India in return

received the first term of the presidency for five years, followed by five-year terms for

Brazil (which in the initial distribution received the first chair of the board of directors)

and Russia (which received the first chair of the board of governors) (Agreement on the

New Development Bank, 2014). On the issue of eligibility for receiving loans China won

out as well, with the acceptance of the idea that the NDB should be able to lend on a

global basis. If China gained most of the advantage from this extended reach in terms of

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delivery, India received some compensation on the resource dimension. For an

endorsement of the principle to allow a minority voting share (between 40 per cent and

45 per cent) to other countries including industrialized nations supported the position that

India had long advocated. This opening up not only allowed some possible diluting of

Chinese dominance, it contributed to the possibility that the NDB could add to its capital

resources from other countries with top tier credit ratings (Sahu, 2013).

In institutional building terms living up to the idea of process innovation based on

equality proved a struggle. In declaratory terms the dominant theme continued to be that

the NDB epitomized a new form of democratically oriented financial institution.

Significantly though, the incoming Indian president (with experience at both ICICI Bank

and software services exporter Infosys as well as the ADB), KV Kamath acknowledged

the need to navigate around the different interests and identities of the member countries

(Wildau, 2015).

In comparative terms the success of the NDB in maintaining the strong club

culture resonates because of the differences with the AIIB. In terms of membership of the

AIIB’s board a degree of fairness was institutionalized, with China receiving only one

seat among the 12 (non-resident) board of directors (AIIB, 2015). However, in a variety

of other ways, Chinese control over the AIIB systematically reproduces the structural

power provided for the US and Europe with respect to the post-1945 IFIs and within

regional organizations such as the ADB (where China and India have relatively small

shares of voting rights, 5.5% and India 5.4% respectively, in comparison to Japan and the

USA which each hold 12.8%) (Vestergard and Wade, 2013; Reisen, 2015). Along the

lines of the IFIs, the basic votes and founding members votes are set and the share vote is

distributed based on the size of each member’s GDP, providing China with a built in

advantage. Considerable autonomy is given as well to the executive management team of

the AIIB and in particular to the president, the selection of which China has a dominant

say. Through this lens the design of the NDB, with its variety of compensatory trade-offs,

marks an important departure in the model of collective global policy making.

Advances in Product Innovation

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A second element that united the BRICS was a deep frustration with the way the

traditional financial institutions delivered development. In terms of product innovation

the core grievance centred on the inability of the World Bank and other institutions such

as the ADB to meet the infrastructure financing needs in the global South (Griffith-Jones,

2014). In tandem with the reluctance of private investors along with pension funds and

sovereign wealth funds to take on long-term projects the gap stretched out to some $1

trillion annually (Bhattacharya and Romani, 2013; Chin, 2014).

The AIIB sought to address these deficiencies by a degree of institutional

parallelism to the traditional financial institutions. Responding to the sheer size of the

deficiency the AIIB sought to scale up its activities. With the prospect of obtaining a

AAA bond rating (due to the presence of a number of major economies), a scenario by

which the AIIB could build its capital to $100 billion or more by 2025 is quite likely,

giving it a sizeable presence albeit still one considerably lower than the size of the $400

billion combined capital base of the World Bank and ADB (Humphrey, 2015a; Elgin-

Cossart and Hart, 2015). An optimistic scenario suggests that the AIIB in five years

would be able to lend $20 billion per year, a figure roughly equivalent to the annual

lending by the World Bank’s IBRD window (Dollar, 2015).

What stands out in this approach is the degree of orthodoxy attached to it. Akin to

established economic development theories the approach places primacy on major

projects focusing on transport links and energy. The former was placed in the most

prominent position with the major projects announced in its initial cluster of projects

being the China-Pakistan Economic Corridor, an expressway connecting Dushanbe, the

capital of Tajikistan to the border of Uzbekistan, and a ring road in Almaty, Kazakhstan’s

largest city (AIIB, 2016) The latter component aroused special controversy as the

president of the AIIB, Jin Liqun, suggested in an October 2015 speech that the AIIB

could consider investing in coal-fired power plants - along the lines of the World Bank’s

support for projects such as Medupi coal-fired power plant project in South Africa- where

there was no other forms of access to power (Brookings, 2015).

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Concerns by India have emerged about the wider implications of China’s material

leverage in using the AIIB to drive the OBOR initiative, with particular reference to the

China-Pakistan Economic Corridor project. Through a strictly economic lens a strong

argument can be made about the promise of OBOR in allowing ‘India a new track to its

own attempt to integrate South Asia’ (Saran, 2016). Alternatively, through a geo-strategic

lens, the emphasis remained on the potential danger of the initiative adding to, not easing

regional tensions. Most significantly, the Indian government had sensitivies about the

China-Pakistan Economic Corridor because it included projects in territory that India

claims. Under these conditions India insisted that a provision be inserted in the charter of

AIIB that requires project financing in disputed territory to have the agreement of the

disputants, a restriction that ultimately shifted funding for this project from the AIIB to

the bilateral Silk Road Fund (Madan, 2016)

By this standard the NDB stretched the model of product innovation in a number

of important ways. Eschewing any desire to mirror the repertoire of the traditional

financial institutions, or for that matter the AIIB, the NDB set out to constitutionally

promote an alternative mode of development the foundation of which is sustainable

development via projects promoting green infrastructure.

From the perspective of product innovation the feature that stands out in the first

round of loans (announced in April 2016) amounting to US$ 811 million is not the

embrace of a large infrastructural model. Rather the design privileged small-scale

projects with between 12 and 20 year terms related to clean renewable energy in each of

the BRICS with the exception (at least in the initial announcement) of Russia. Brazil’s

Banco Nacional de Desenvolvimento Economico e Social received the biggest loan, to

the amount of $300m, to help build 600MW of renewable energy capacity. The NDB also

gave a $250m loan to India’s Canara Bank, with $75m earmarked for 500MW of

renewable-energy projects. South Africa’s Eskom secured a loan of $180m for power

lines that can transmit 670MW and transform 500MW of renewable energy generation.

China’s Shanghai Lingang Hongbo New Energy Development also got an $81m loan, to

fund 100MW of rooftop solar power (Sasi, 2015; BRICS Post, 2016b).

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As on the commitment to the principle of equality in terms of process innovation

India provided the ideational catalyst for this component of product innovation. In the

targeting of the clean energy sector the intervention of Prime Minister Narendra Modi

was decisive. At the Ufa summit Modi asserted: ‘I would like to see the first major

project funded by the New Development Bank to be in the area of clean energy. BRICS

bank’s first project should be green’ (Pashley, 2015).

Unlike on process innovation, it needs emphasizing, this push on sustainable

development by India with regard to the NDB did not accentuate tensions with China. On

the contrary it tapped into China’s own desire to pursue a green agenda, as evidenced by

both the central tenets of the 2016-20 five-year plan aiming to transition to a low carbon

economy and the more ambitious effort to develop an ‘ecological civilization’ (Zhang,

2015).

For all of its ambition a number of serious limitations stand in the way of the

NDB substantively advancing product innovation. In country specific terms the delay in

picking a project from Russia in the public announcement of the first round of investment

stands out as a deficiency on the principle of equality. Although this delay did not last

long – from April to July 2016 – with the announcement of NDB financing for the

construction of two small hydroelectric power stations in Karelia - Byeloporozhskaya

HPP-1 and Byeloporozhskaya HPP-2 with a total investment of 11.8 billion rubles

(TASS, 2016), the differentiated roll out is puzzling. Not only was Russia a strong

supporter of using the bank for internal BRICS development but had moved out ahead in

presenting a small-scale power generation project in Karelia as a candidate for support,

consistent with the statement of the Russian finance minister Anton Siluanov on the

sidelines of the G20 ministerial meeting that the NDB would have its ‘priority on green

energy developments’ (NDB, 2016). However, for reasons either because of the need to

confirm the green credentials of this project and/or complications due to the wider geo-

political environment (some hydropower operations in Karelia as in other parts of the

Russian federation have come under pressure from US sanctions over Crimea/Ukraine, as

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witnessed by the sale of the assets of TGC-1’s assets to the Finnish company Fortum) a

Russian project was left off the initial list.

Another problematic feature is one of continuity. To experiment with small-scale

projects focusing on green energy within the BRICS members does not exclude the

possibility of moving into major infrastructure projects beyond this locational

confinement. When the chair/presidents of the national development banks of the BRICS

– vital if a process of on-lending was to be instituted- met at the 2015 Ufa summit, the

challenge of proving green credentials was subordinated to the principles of equality,

mutual benefit, and responsible financing (Exim, 2015).

As it is there is pressure building up among the BRICS membership for scaling up

the quantitative ambition of the bank, so as to send a signal that the massive infrastructure

gap in Africa and Latin America would not go unfilled. Highlighting the tension between

the focused component of the first projects endorsed by the NDB and the much wider

need are the proposals by the South African government for a more ambitious set of

projects to be financed by the African (regional) Resource Centre of the NDB, a list that

includes the Inga hydro power station in the Democratic Republic of Congo (DRC), a

water project connecting it to Lesotho, electricity transmission lines in South Africa, and

a water pipeline project in Gauteng province [Xinhua, 2016).

Finally there are an array of barriers between introducing the green energy

projects and devising a set of policies or procedures that take into account environmental

and social risks. Unlike the AIIB that formally set up an ambitious – albeit highly

contested - draft framework along with a process of consultation, the NDB has put off

setting up any social and environmental guidelines. As a representative of the NGO

Friends of the Earth put it: ‘How the bank defines green is something the bank should

clarify up front before issuing any finance…it is a red flag that the bank remains

immature as a financial institution and may not be ready for the international stage’

(Soutar, 2016).

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The Test of Resource Innovation

On the anticipated means of raising capital from markets beyond the subscribed level

initially allocated by the BRICS members states the claims of novelty by the NDB is

extended appreciably further. Akin to the World Bank and the other multilateral

development banks the AIIB indicated its adherence to the US-dollar dominated

international finance system. The structural leverage exerted over the AIIB, further,

facilitated China’s mobilization of its US dollar reserves through this instrument to invest

in regional infrastructure. If flagging the possibility that in the future it could denominate

some of its loans in other currencies such as euros or RMB, at the core of its model was a

business as usual approach.

There were some practical incentives for the NDB to raise capital through the

issuing of bonds denominated in the local currencies of the member states, in that to do

so could potentially create five capital pools (He, 2016). Building on the momentum of

the first round of loans allocated by the NDB President Kamath elaborated on the plan to

issue debt in local currencies, with a bond worth 3 billion Chaines Yuan/RMB ($455.93

million) in the Chinese market ‘in the next four weeks’, followed by an Indian issue of

approximately the same size, a potential Russian ruble dominated issue ‘in the next two

quarters’ focusing on pension funds and banks as the key investors, a rand dominated

issue in South Africa ‘slightly smaller’ than China, and into the distance a Real

denominated issue ‘of course’ (Golubkova, 2016).

The crux of the NDB plan was to turn material weakness into ideational strength.

Financing from the hard currency international markets, in the orthodox fashion as

anticipated in the AIIB, presented a difficult hurdle for the NDB. Although the NDB

wanted the big 3 rating agencies to give the NDB a rating before it issued the first round

of loans, this goal was not achieved (BRICS Post, 2015b; Humphrey, 2015b). This

deficiency opens up the NDB to the disadvantage of higher loan costs.

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Among the individual members only China has a credit rating (AA-) of an

investment grade high quality and low risk to enable international financing of the nature

necessary for infrastructure investment (Wang, 2017). Such limitations reinforce the

attraction to look to financing in domestic markets. Stretching the model of innovation

even further, the issuing of green bonds was made pivotal to this strategy.

As in other areas, the attraction of this type of bond was in large part instrumental

with respect to opening up a new finance flow allowing a successful confrontation with

the impact of climate change. Still a more deep-set attraction for the NDB to differentiate

its practices from other financial institutions was normative in nature. By utilizing green

bonds as the vehicle for raising capital to support its mandate of promoting sustainable

development the NDB wanted to make a statement about its new-fashioned model. As

Kamath put it: ‘All of this comes together to signpost something that is significantly more

than just economic change’ (Aneja, 2016).

Although lacking a rating from the big 3 credit agencies, the NDB made some

tangible progress in the implementation of this model. In China, where the bank had been

accorded an AAA investment rating from domestic agencies (China Chengxin Credit

Rating Agency and China Liaanhe Credit Rating) (Wang, 2016), the NDB moved quickly

so as to be able to issue five-year RMB bonds. In India ICICI bank positioned itself as the

initial partner with NDB, based on the notion that it would facilitate the issuance of

rupee-denominated bonds, along with co-financing, treasury management, and human

resources (ICICI, 2016).

This progress, nevertheless, does not disguise the extent to which the structural

barriers confront the implementation of the NDB’s strategy. Without the advantage of a

rating from the 3 big credit agencies the scale of the capital pool by the issuing of bonds

was smaller than initially intended. Although Kamath maintained an optimism that a

bond issuance worth 3 billion RMB or $455.93 million would take place in the Chinese

market (with Vice President and Chief Financial Officer Leslie Maasdorp taking the

figure to be between 3 and 5 billion RMB) (BRICS Post, 2016a), when the first bond

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float took place it was to the order of up to $384 million in green bonds – still a

substantive amount but one reduced from the original figures.

At the same time some of the ideas designed to bind the BRICS together were

also curtailed. As originally conceived by Kamath the NDB’s model forecast an appetite

for new instruments including swaps (in which monies could be borrowed in one country

and lent in another country), but in practice exchange rate risk pushed the borrowing and

loans back to the national currencies of the BRICS (BRICS Post, 2015).

Even if the float was not quite as large as predicted, the move into green finance

held some considerable attractions. On a national basis China gained a number of

advantages from the issuance of green bonds on the domestic market. For one thing it

allowed China to embed the practice of issuing green bonds – a practice where China has

moved out in front in terms of official rules established by the National Development and

Reform Commission (NDRC) - as part of a wider strategy of financial diversification and

standard setting.For another thing Shanghai was strengthened as a financial hub,

piggybacking on the moves to liberalize the bond market and capital markets.

Additionally, it provided China with comparative advantage in terms of other financial

mechanisms. China’s domestic bond rating agencies – seeking credibility - were given a

boost in the absence of a rating by the big 3 agencies. And as witnessed by the

appointment of four Chinese banks and two international banks (with the Bank of China

in the lead) to act as the underwriting group on the bond issuance new types of

collaboration could be forged. To give just one illustration of the spillover relational

effect China Construction Bank (included in the underwriting group on the RMB bond

issuance) went on to sign a strategic cooperation agreement with the NDB designed to

forge a ‘long and mutually beneficial partnership’ (BRICS Post, 2016c).

Nonetheless these innovations opened the way for a wider set of benefits.

Although the NDB green bonds were issued initially only in RMB, the image of

collective decision-making was reinforced because – as highlighted by NDB Vice

president Zhu Xian - this was the first case of bonds being issued by a non-Chinese entity

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on the Chinese bond market (Sputnik, 2016) And as the NDB moves toward the second

round of loans in 2017, expectations have been accentuated that these will be delivered in

local currencies as a means to advance sustainable development projects. President

Kamath has talked for instance of the NDB raising $500 million through rupee-

denominated bond, although pointing again to the lack of deep capital markets beyond

China this would be done as a masala bond targeting overseas markets (Kumar and Singh,

2017. See also Bagchi, 2012).

Catching up in terms of Delivery Innovation

In addition to all the other modes of innovation central to its model, the NDB wanted to

do things differently with respect to delivery. Frustrated by the slow pace of

implementation from the traditional financial institutions the NDB stated repeatedly that

one of its foundational priorities was speed. As President Kamath stated at the time of his

appointment: ‘One of the areas that we will focus is that lenders want the borrowers to

follow a certain timeline. We need to see what innovation is required to ensure that this

timeline is meet or to try to reduce this timeline’ (Economic Times, 2015).

In some aspects these concerns cross over to the AIIB. The institutional features

of the AIIB and the NDB reveal an undercurrent of criticism towards the operating style

of the World Bank – and ADB- with the privileging of a resident board that approve all

loans. Such a format was deemed not only to be a large strain on budgetary resources, but

an impediment to efficient project management. Moving away from this mode of

operation both the NDB and the AIIB choose instead a non-resident board on the premise

that this format would allow decision-making in a timely and budget-conscious manner

(Dollar, 2015). The first round of NDB loans, for example, were announced at the board

of governors on the sidelines of the annual meets of the IMF and World Bank.

In an effort to quicken the pace of delivery, the NDB has become more risk

oriented than the AIIB in entertaining a different balance between speed and oversight.

The main point of differentiation with traditional financial institutions for the AIIB has

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been a break with practice of conditionalities. Where it accepted the culture of the same

financial institutions is on the requirement for legally transparency and social and

environmental protection, through the AIIB’s Environmental and Social Framework.

Confident that its projects will have little or no impact on the environment, the

NDB is far more robust in its break with forms of institutional oversight. The institutional

emphasis on catching up in terms of delivery innovation, though, came with a cost in

terms of wariness from civil society groups. As noted above in the debate about product

innovation, suspicions persisted that a faster pace in the delivery of the projects supported

by the NDB were inconsistent with sustainable development goals.

In any case, without the material heft of the AIIB the NDB had to improvise as it

went along. The mantra of the NDB became not ‘best practices’ reflective of a ‘too rigid,

inflexible, and slow’ orthodoxy but ‘next practices’ showcasing development as a

dynamic and flexible process (Financial Times, 2015).

What offers some extra encouragement that the NDB can indeed catch up in terms

of delivery innovation is the evolution of the NDB’s management team as an autonomous

entity. From the outset the NDB had to carefully balance the national interests and

identity of its members. But through the use of the mantra of speed, the NDB

professionalized bureaucracy offers a means of cajoling the members to work faster to

meet the goals of the NDB and thus signaling that the NDB has an important point of

comparative advantage with respect to other institutions.

Conclusion

It is tempting to maintain the view that the NDB is simply a smaller, materially less

significant, replica of the AIIB. The mainstream literature continues to depict the NDB in

this manner. As one close observer notes: ‘Many questions remain unanswered about the

two banks… What is evident is that the AIIB is well positioned to become a major player

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in development finance in coming years, while the NDB’s future impact is much less

clear’ (Humphrey, 2015a).

Although acknowledging that the NDB has far less resources than the AIIB, there

is both a normative and instrumental purpose to the institution that departs from - and

improves - the model of other financial institutions. This originality is especially evident

in terms of the features of privileging of equality and the degree of product innovation.

To be sure, the commitment to the principle of equality in process innovation should not

be exaggerated beyond recognition. As Kahler points out the NDB cannot avoid touching

on sensitive governance issues (Kahler, 2016). The first choice of China was an

asymmetrical form of contributions, with the Chinese government willing and able to

make capital allocations at a much higher ratio than the other members. Yet the

implications of a sustained commitment by the NDB to a democratic culture should

neither be ignored. Institutionally it means that the NDB has to constantly negotiate

rather than react to the interests and identity of a single powerful country.

In terms of product innovation the decision to promote on an exclusive basis

green infrastructure with respect to energy projects serves as another attractive point of

departure for the NDB. Again this approach was not completely seamless one.

Nonetheless, an integral connection between the NDB and sustainable development has

been carved out. As in the case of the equality principle such a focus alters the image of

the NDB as a distinctive- institution. Unlike other initiatives including notably the AIIB

that are deemed be both a replica of the traditional multilateral model and a threat to the

embedded order, the NDB avoids being typecast as either. Through its exclusive

association with clean renewable projects it seeks originality of design. By what can be

termed its soft alternative approach of institutionalization it avoids an association with a

hard geopolitical challenge.

The toughest test for the NDB to deal with concerns resource innovation. At one

level this problem becomes obscured by China’s backstopping of the NDB. As the others

members fall back in terms of capabilities, China has stepped up notably by

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experimenting creatively with green bonds backed up by viability of Shanghai as a

financial centre and the use of national credit agencies. At another level, though, this

disjunction opens up further potential strains with respect to the solidarity of the BRICS

(Chin, 2014: 372. See also Cooper and Asif, 2016). A case in point is the suggestion that

the BRICS create a new credit rating agency of their own. Whereas India appears to be

pushing the idea – in a reprise of its earlier bout of leadership – China appears indifferent

or even opposed (India Express, 2016). A Memorandum of Cooperation for instituting a

BRICS credit rating agency, a draft of which was discussed by a technical group at

Udaipur in March 2016, was not signed at the Goa summit (Katz, 2016).

Catching up in terms of delivery innovation, a process where the management

team of the NDB has become as vital as the member states, could play out in different

ways. By moving the NDB forward there is the possibility that the separation between

China and the other members will be accentuated. Equally, however, an argument can be

made that it is only by pushing the other members forward although in an asymmetrical

manner that the NDB can come up to its impressive promise as an innovation-oriented

institution.

Far from being marginal, then, the NDB rests at the intersection of a variety of

key debates about global governance. Can a club model work when it moves from

informal activity to formal institutionalization? Can an initiative based on green

development be sustained on parallel lines by the BRICS? Can the NDB be instrumental

in upgrading their resource capacity without exacerbating a division between

asymmetrical partners? And can the NDB reinforce the image of speed through a

continuous process of fast delivery. While this article provides an initial assessment

about the trajectory of the NDB, each of these questions deserves ongoing review.

Note

This paper has benefited greatly from interviews (in June 2016) a number of NDB

officials including three senior members of the management team. Although I am

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extremely appreciative of this access the usual disclaimer applies. I wish also to thank

Gregory Chin and Zhu Jiejin for their insights on the BRICS and the NDB along with

their support on a number of related research initiatives. My colleagues Eric Helleiner

and Hongying Wang, as well as two anonymous referees, contributed a number of

insightful comments that improved the work.

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