#4 Summer 2015

Wanted: A public sector institution with private sector discipline

Public sector with private sector discipline

Photo: The press service of the President of Russia.


Much is riding on the ability of the BRICS New Development Bank to mobilise industrialisation and economic development on the African continent, and, following a direct challenge from President Jacob Zuma, MCom in Development Finance students at the GSB are working on a plan to maximise its chances of delivering.

THE BRICS bloc (Brazil, Russia, India, China and South Africa) of leading developing countries hosts more than 40% of the world’s population and generates 22% of global gross domestic product, a figure that has been on an upward trajectory for more than a decade.

Yet efforts to reorganise the governance structures of the major international development finance institutions – specifically the World Bank and International Monetary Fund – to give developing countries a corresponding increase in influence have been fruitless.

This was undoubtedly a significant factor motivating the launch of a new institution that would be financed by, and therefore focused on, developing nations. The New Development Bank (commonly known as the BRICS Bank) duly opened its doors in Shanghai in July, with the stated aim of financing the construction of essential infrastructure as a means of encouraging industrialisation and economic development.

With an authorised capital base of $100 billion, the Bank is small by comparison to its established peers. However, newly-appointed vice-president Leslie Maasdorp, a former South African public enterprises department deputy director-general whose most recent position was in the private sector as Southern Africa president of Bank of America Merrill Lynch, does not see that as a problem.

He says the objective has never been to “challenge or replace” the Bretton Woods institutions, but to “improve and complement” the existing international development finance system.

“In 2013, a McKinsey Global Institute report found that ‘globally, $57 trillion in new infrastructure investment would be required in the period up to 2030, simply to keep up with projected GDP growth. This estimate suggests a requirement of $3.2 trillion investment a year’,” Maasdorp wrote in Business Day recently.

“When assessed against current infrastructure spending by all the multilateral development banks combined, this leaves a huge financing gap. The New Development Bank and other new institutions such as the Asia Infrastructure Investment Bank are contributing to closing this funding gap. As opposed to being competitors or rivals, the World Bank and others are viewed as partners in development.”

It is encouraging that the bank’s new leadership has taken this approach, because, as UCT Graduate School of Business (GSB) Master’s in Development Finance (MCom) student Refilwe Moloto points out, the scale of infrastructural investment required just in Africa to address backlogs and keep pace with the economic development of the rest of the world is estimated by McKinsey at $118 billion a year.

The continent is not only going to need to tap every available source of finance if it is to come close to realising its potential in the coming decades, it would also benefit from far better cross-border coordination of development activities and some out-of-the-box thinking that is better tailored to African realities.

The GSB MCom in Development Finance programme is one of just a handful in Africa that seek to train a new generation of professionals to enhance the design and implementation of development initiatives on the continent. The programme has evolved in recent years from being attended primarily by public sector enterprise employees to attracting a wide range of senior investment and infrastructure professionals seeking to sharpen their expertise within the policymaking framework, specifically as it pertains to Africa. The class has grown to almost four times its size at inception.

Moloto and her classmates have been putting a great deal of thought into the question of Africa’s economic development, both as part of their course – which this year attracted students from Kenya, Ghana, Mozambique, Zambia, Zimbabwe, Namibia, Lesotho and South Africa, as well as the Middle East and North America – and in pursuit of a special project that arose following an impromptu visit from President Jacob Zuma earlier in the year.

Zuma, who was at the GSB for prescheduled political meetings of the ANC’s National Executive Committee in March, was invited on the spur of the moment to engage with the class and the conversation turned, naturally enough, to Africa’s development and specifically the role of the BRICS bank. After mentioning that he personally pushed to have a second satellite office of the New Development Bank (NDB) located in Johannesburg, Zuma expressed concern that the bank would merely adopt the antiquated lending models of the developed world and create yet another conservative lending institution.

His parting challenge to the MCom class to come up with ideas for how the bank might produce innovative financial solutions, collaborate with local stakeholders and address the credit challenges facing African small- and mediumsized enterprises (SMEs) was not taken lightly: the group resolved to do the research and present the presidency with a comprehensive paper addressing these issues before the end of the year.

Moloto says considerable progress has been made to this end, with a working draft already in circulation among the participants. She is understandably reluctant to give too much away before the final version is presented to the president, but agreed to outline its overall thrust for this article. The document will not dwell on the major challenges facing the continent, she says, as these are already well known, but rather on how the BRICS Bank’s Africa Regional Office can differentiate itself from the existing development finance framework in actually seeing through solutions to the myriad problems facing the continent.

She warns that while the political and structural conditionalities attached to development finance provided by established institutions have been problematic in the past – as even European countries such as Greece have discovered in their attempts to escape recession while forced to implement growth-sapping austerity measures – the NDB should not be seen as a panacea.

“A hundred billion dollars is less than the Public Investment Corporation’s assets under management, and as an equal partner in the bank, Africa only qualifies for 20% of that. We must recognise that South Africa is viewed by many as the ‘baby brother’ in the NDB. While contributions to core bank capital are equal, the contingency reserve exists to allow cyclical topups and is 41% contributed to by China, 18% each by Brazil, Russia and India, and just 5% by South Africa. Each of these countries has its own developmental agenda.

“In addition, it’s important to approach this unemotionally: the conditionalities imposed by Western development finance institutions can, in fact, be supportive of development at a national level when implemented appropriately. Importantly, sovereign developmental lending – even south-south and from Eastern lenders –always carries with it some kind of conditionality, perhaps not at national level, but rather at project level.”

Moloto welcomes Maasdorp’s insistence that the bank will be driven by pragmatism rather than any ideological doctrine such as the socalled ‘Beijing consensus’, especially where he says the aim will be to complement the existing efforts of multilateral and regional development banks, since this is likely to be one of the MCom group’s central recommendations. Their research has revealed that almost $1 trillion in development finance is available on the continent already via a range of existing national and regional savings and development institutions, before even considering the private sector capital that can be mobilised; from within the Economic Community of West African States, East African Community, Southern African Development Community and beyond. The missing ingredient in ensuring these funds get bang for their buck is actually coordination and efficient implementation.

“This lends itself to the bank being a regional mobiliser of this capital, forgoing in-country projects to rather focus on regional links and intraregional investment where the bank’s member countries can provide focused sector expertise to address policy gaps,” she says.

“The success of the continent as a whole depends on the simultaneous success of its parts – to foster intra-regional markets, mutually beneficial industry and crossborder social stability – all in the quest for developmental growth.”

The role played by the Asian Development Bank is a good example to follow, Moloto adds, in that it has successfully leveraged the finance available from national development institutions in the region to produce outcomes that amount to more than the sum of what each could have achieved on its own.

Another problem facing development finance institutions in Africa is a lack of quality data, which goes hand-in-hand with a dearth of technical expertise. Moloto says the BRICS Bank’s Africa Regional Office has the potential to be a really great attractor of talent. “One of our recommendations is that it develop its own research capability so that it can price risk appropriately. The operating model we would define talks to ‘win-win’ partnerships with leading institutions and best-in-class talent from across the world, defining what we call a public sector institution with private sector discipline.

“With the right cooperation mechanism African governments could successfully link their national infrastructure developments to form regional networks, the likes of which the continent has never seen before.”

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