BRICS New Development Bank: input from Centre for Applied Legal Studies & Financial and Fiscal Commission

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Finance Standing Committee

27 May 2015
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

A sum of R50 billion is invested in bonds in foreign countries. The Director-General of the National Treasury revealed this during a discussion in Parliament during a joint meeting of the Standing Committee on Finance and Select Committee on Finance. The two Committees were listening to submissions regarding the New Development Bank (NDB) from the Centre for Applied Legal Studies and the Financial and Fiscal Commission.

The Director-General indicated the country had reserves and were kept in foreign currency. The reserves were invested in bonds in foreign countries, and that was the only way of managing those reserves. That money still belonged to South Africa. The Parliament did not need to know in which countries the money was invested. This meant the country had got insurance and that was why it was one of the participants of BRICS. The Contingency Reserve Arrangement (CRA) was a virtual pool.

The Director-General mentioned that the New Development Bank (NDB) made an upfront commitment of US$2 billion. This was a worthwhile investment because the value of assets was going to grow. He indicated there was nothing wrong in participating in something that was going to benefit the country and the continent. He noted there were companies in South Africa whose growth was attributable to having footprints in other countries. The same applied to South Africa. South Africa was in this for herself and for the rise of the continent.

The Director-General also revealed that lending would be on commercial terms. There were laws and regulations that would protect the money of the lender. Other costs would be incurred when the African Regional Council is set up. It was indicated it is important to be part of the BRICS in order to ratify the agreement and three countries have ratified already.

The Centre for Applied Legal Studies (CALS) stated that the purpose of its presentation was to make sure the ratification process of the NDB remains transparent and to ensure the NDB of BRICS complied with human rights.

The organisation stated that the existence of the NDB would assist with funding on infrastructural and sustainable development in BRICS, voting on subscription of shares and financing developing economies. It was noted that voting is skewed towards the global north and developed economies.

CALS indicated it would like the Committee to encourage the Treasury to put a policy in place that would provide environmental health; promote equality, transparency, consultation, accountability and inclusiveness; to encourage the Treasury to insist on grievance mechanism; and to encourage Treasury to make provisions for remediation so that communities can be able to take part in a remediation process.

The Committee also heard submissions from the Financial Fiscal Commission (FFC). The organisation informed the Committee that the establishment of the NDB requires an international and coordinated approach. An international dimension was critical because of the lack of private sector financing. The coordination is critical because of massive cross-country externalities.

On whether the NDB would use local or foreign currency, the new initiative was in favour of the local currency on the grounds that it reduces systematic risks associated with foreign exchange lending to unhedged borrowers and it encourages domestic saving and investment. Also, it promotes contingency reserve arrangement in order to protect against volatility and dependence on IMF.

The NDB would have an equity stake drawn from each member country, guarantees as well as some sort of credit line up to a threshold which would be more of a contingent liability. The equity stake would have to be budgeted for over the MTEF with some sort of arrangement to deal with the currency fluctuations. The contingent liability portion could be handled as other provisions are currently handled.

The FFC noted that the NDB, because of its international mandate, would fall completely outside the South African Reserve Bank jurisdiction, but it has to comply with Basel Standards. If there were to be a banking crisis in SA and the country were to make use of the BRICS currency reserve, the South African Reserve Bank would be involved as per draft Twin Peaks crisis resolution legislation.

Members, on CALS, wanted to know about its notion of beneficiation to communities; remarked that the proposals of CALS on grievance mechanism and remediation are not doable; and asked what is doable in the CALS proposal. Regarding Treasury, they wanted to find out about the kind of impact the loans that the New Development Bank would be issuing; wanted to know what the governance arrangement is between shareholder countries; asked if the operating capital of R100 billion to be shared among the participants is not going to pose a risk to the country and have an impact on fiscus and service delivery; and asked if there is a BRICS parliamentary forum.
 

Meeting report

Centre for Applied Legal Studies (CALS) Presentation
Ms Baone Twala, CALS Candidate Attorney, in her brief presentation, stated that the purpose of their presentation is to make sure the ratification process of the NDB remains transparent and to ensure the NDB of BRICS complies with human rights.

Ms Twala stated that the existence of the NDB would assist with funding on infrastructural and sustainable development in BRIC, voting on subscription of shares and financing developing economies. It was noted that voting is skewed towards the global north and developed economies.
She cited examples in countries like Nigeria, Democratic Republic of Congo and Honduras where development projects resulted in the degradation of the environment, violence and resettlement of people to areas with no access to water and not benefiting from the projects.

It was noted that the right to development had a global impact. Development was a right to socio-economic development. Development has to be a choice, and this means it has to fund projects that people need to fulfill their developmental needs. At the same time, people need to have a choice on whether they need the project or not, and need to be consulted and give consent to the project.

If the project was about the socio-economic development, people should be given work opportunities in it and communities need also to be given a right to complain if the project is harmful to them.

In a nutshell, CALS indicated it would like the Committee to:

  • encourage the Treasury to put a policy in place that would provide environmental health; promote equality, transparency, consultation, accountability and inclusiveness
  • encourage the Treasury to insist on grievance mechanism
  • encourage Treasury to make provisions for remediation so that communities can be able to take part in a remediation process.

Financial and Fiscal Commission (FFC) Presentation
Mr Ramos Mabugu, FFC Head of Research, told the Committee that the establishment of the NDB required an international and coordinated approach. An international dimension was critical because of the lack of private sector financing. The coordination was critical because of massive cross-country externalities such as:

  • trade and financial integration carry the effect of both the crisis and the crisis response across borders
  • competition for a common pool of private resources (global savings and liquidity)

On whether the NDB would use local or foreign currency, the new initiative is in favour of the local currency on the grounds that it reduces systematic risks associated with foreign exchange lending to unhedged borrowers and it encourages domestic saving and investment. Also, it promotes contingency reserve arrangement in order to protect against volatility and dependence on IMF.

The local currency idea would remain a favourite because there has been a shift in global geo-economic power and relations; regulators are moving forcefully against foreign exchange.  The post-crisis macro conditions are starting to make local currency a more realistic proposition.

Mr Mabugu stated the NDB must still ensure its own commercial viability, and it must do so when a large part of the resources it lends would be mobilised from the market. On contingent liability, he stated that while guarantees from the governments of its shareholding countries would improve the rating of the institution and reduce its borrowing costs and those costs would have to be borne somewhere by the guarantor. All socially relevant concerns financed would have to yield at a return adequate to cover costs and deliver at least a nominal profit.

The NDB would have an equity stake drawn from each member country, guarantees as well as some sort of credit line up to a threshold which would be more of a contingent liability. The equity stake would have to be budgeted for over the MTEF with some sort of arrangement to deal with the currency fluctuations. The contingent liability portion could be handled as other provisions are currently handled.

South Africa is said to be liable for US$2 billion in respect of paid-in shares. There is no compelling reason why this equity funding should be a first charge of the revenue fund. It should be factored into the normal budget process which is the proposal. The FFC is of the view that funding should come from the national share since it is a foreign policy function.

Mr Mabugu further indicated that South Africa is liable for US$5 billion in respect of callable shares under CRA virtual pool The FFC is of the view that contingent liability could be funded by a ring-fenced fund or from the contingency reserve. Between these two, preference is for the latter as it is better suited to deal with unforeseen changes. Proposed arrangements are that the contingent liability would sit on National Treasury books.

In relation to the contingent liability side, the National Treasury did not ring-fence special funding arrangements. This is covered by the general policy reserve just like SAA and other parastatals. What Parliament should do is to ensure that the National Treasury reports on these contingent liabilities at least every six months to ensure that they are contained and risk is managed.

Regarding cost benefit analysis, he reported that benefits lower costs of domestic trade and result in larger domestic market and foreign direct investments, and it is important to invest in living with people with different cultures or races and competition from imports. The quantification of the cost benefit analysis is impossible to do unless the lending and project selection criteria of the NDB are known and if South African proposals have to compete with other BRICS country proposal for a limited pool of funds. The ability of South Africa to secure funding would still be dependent on the ability of the country to “package” these projects in a way which would be attractive despite the concessionary nature of the finance involved.

Whether the potential benefits are realised, this depends on operational efficiency and clear and rational lending criteria. This is seen as crucial  for achieving a net crowding in rather than crowding out of private investment. This concern may weigh heaviest with South Africa because she has the most developed financial system.

On how this would affect the provinces and municipalities in South Africa, he stated that because there is no province or municipality that can borrow in foreign currency, the borrowing would have to go through National Treasury and be on-lended in South African currency. The NDB Articles of Agreement also allow the option of financing certain projects in local currencies. This would be another source of capital grant funding but it would depend on the nature of the projects being proposed.

He concluded that the NDB, because of its international mandate, would fall completely outside the South African Reserve Bank jurisdiction, but it has to comply with Basel Standards. If there were to be a banking crisis in SA and the country were to make use of the BRICS currency reserve, the South African Reserve Bank would be involved as per draft Twin Peaks crisis resolution legislation.
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Discussion
Ms T Tobias (ANC) commended CALS for educating the Committee about what it does, but she wanted to know about its notion of beneficiation to communities.

Ms Nomonde Nyembe, Attorney: CALS, replied that the organisation went beyond creating jobs. The organisation focuses on socio-economic benefits and developmental benefits. It also does advocacy with banks regarding developmental projects.

The Chairperson remarked that the proposals of CALS on grievance mechanism and remediation were not practical.

Ms Nyembe said the World Bank and some other banks that focus on developmental projects have got the mechanism of grieving already. So, she disagrees with the Chairperson that such a proposal is not practical.

The Chairperson then asked what was doable in the CALS proposal.

Ms Nyembe said it was the formulation of a policy on lending.

The Chairperson commented that the Treaty was unlikely to be the vehicle where CALS wants to find its expressions. Its proposal is still yet to find a place in the Treaty.

Ms Tobias wanted to know how the FFC was going to quantify the cost benefits.

Mr Ramos Mabugu replied that it was going to depend on the package of the projects that are going to be financed.

Dr B Khoza (ANC) said the direct foreign investment was the main reason for the cost benefit. She reasoned that those investments are technological in nature and are not going to bring jobs for communities. She also noted that South Africa came late to BRICS and it is a small party, so it is going to be difficult for her to impose herself on BRICS.

Mr Mabugu indicated it was not helpful to have this conversation if the configuration of the BRICS arrangement was not known. If it were known, it would address the issues that Members were raising.

Ms Tobias asked about the kind of impact the loans that the New Development Bank would be issuing.

Mr Lungisa Fuzile, Director-General: National Treasury, said if the loans were for a regional project, the impact would be direct and indirect. It is going to have a positive spin-off for both countries. The loans that would benefit South Africa are those coming from South Africa to other countries and local.

Dr Khoza wanted to know what the governance arrangement is between shareholder countries.

The Director-General indicated that an executive member is elected. This member then answers to the Board representing the particular country, and the country influences through that executive member.

Mr V Mtileni (EFF) enquired who was seriously monitoring the projects the government was involved in.

The Director-General said the responsibility lies with the people they get sent to do the projects.

Mr D Ross (DA) asked if the operating capital of R100 billion to be shared among the participants is not going to pose a risk to the country and have an impact on fiscus and service delivery.

The Director-General said there would be no fiscal implications and he reported there would be no budget implications for CRA but for the New Development Bank there are. Appropriation would be done through Treasury. The funding request would come to Parliament first and then Treasury. He said care would be taken so that the requested funding does not affect service delivery projects. The requested fund would form part of the national budget.

The Chairperson asked if there was a BRICS parliamentary forum.

The Director-General answered in the negative but indicated there would be sessions with the Chairperson of the Session where the SA government, business and other stakeholders would raise issues that affect them and have an influence through. He also noted there is a concern from the South African Reserve Bank that the contingency reserve funds are going to be used for the New Development bank. He said this is about pulling the reserves the country has got and invest them in a short term liquid way. So, if it’s needed, it could be made available to other countries. The existing laws had allowed it to happen that way.

The meeting was adjourned.
 

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