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João Carlos Ferraz Executive Director

Financing development The strategic role of development banks (and the case of BNDES). IPD/JICA Task Force on Industrial Policy and Transformation Meeting in Jordan, 5-6 June 2014. João Carlos Ferraz Executive Director. Guide. Development and development financing

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João Carlos Ferraz Executive Director

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  1. Financing development The strategic role of development banks (and the case of BNDES) IPD/JICA Task Force on Industrial Policy and Transformation Meeting in Jordan, 5-6 June 2014 João Carlos Ferraz Executive Director

  2. Guide • Development and development financing • The awakening of the Sleeping Beauty: Development Banks are back to the game • BNDES contribution to Brazilian development • Reflections about the future of development institutions: missions, assets, capabilities

  3. As a way of introduction // 3 • Market based financing can be relied only partially for development purposes, especially for the financing of industrial policies where uncertainty prevails • Development institutions are strategic instruments to support sustainable development in every country, at any stage of development • Each development bank is a singular institution.No role model exists

  4. Analytical references Market failure Uncertainty Finance scarcity Market failures and/or incomplete financial systems are only partial justifications for an active role for development banks. Even more important is the prevalence of and the need to tackle uncertainty (technical change, climate change, growth cyclicality, etc) by patient, mission oriented institutions.

  5. Development and development financing • The awakening of the Sleeping Beauty: Development Banks are back to the game • BNDES contribution to Brazilian development • Reflections about the future of development institutions: missions, assets, capabilities

  6. Development Institutions: common but very relevant institutions // 6 • Avery common institution: • OECD: institutions providing long term financing that are beyond the capacity or the willingness of others to do so. • BDC (2009): 235 DIs in 92 countries. • International Benchmark Study on Development Institutions. Business Development Canada, 2009 • WB (2012): 90 DIs in 61 countries. • Global Survey of Development Banks. Policy Research Working Paper, n. 5969. Washington: World Bank, 2012. • Different types of Development Institutions: Development Banks, Specialized Agencies (Credit, Guarantee or Equity), Development Financing Institutions (usually multilateral)

  7. The awakening of the Sleeping Beauty? // 7 “An Infrastructure Bank (IB) …There are good theoretical reasons for the creation of such a bank.(LSE Growth Commission, 2013) “Once a financial crisis hits, it is too late… institutions must already exist, with a clear mandate, experienced professional staff, and the financial capacity to respond to the financial needs when the private market fails.” (Conference Board of Canada, 2010) New Institutions…. in Developed Countries….. BPI France 2012. Merger of three existing institutions Korea Development Bank (KDB) Current government: The Korea Finance Corporation will be merged with KDB. Only subsidiaries not related with development activities will be privatized. Japan Finance Corporation (JFC) 2008. Merger of existing institutions. JFC funds other banks (with fiscal resources) during crisis, natural disasters and fosters national priorities (sustainability and innovation). Green Bank UK 2012: Foster environmental and energy efficiency investments

  8. Development Institutions: not one alike // 8 • Not a homogeneous group, differing in: • Ownership structure (fully vs. partially owned by government) • Target sectors and clients (narrow vs. wide focus) • Lending models (first-tier vs. second-tier) • Credit conditions (subsidized vs. market interest rates) • Regulation and supervision (special regime vs regime applicable to all banks) • Corporate governance (independent vs. government controlled boards) • Size (absolute and relative), loan portfolio, performance indicators…

  9. Economic relevance // 9 Assets/GDP - 2012 2012 total assets: US$ 3.2 trillion Source: Annual reports and IMF. * KDB – Korea: The new government of South Korea is reversing the previous government’s plan for KDB’s privatization. DBs Mexico: NAFINSA (SMEs), BANOBRAS (Infrastructure) and BANCOMEXT (Exim). BPI France: The institution was created in December 31th, 2012. Don’t include the CDC enterprises, merged in June, 2013.

  10. Scale and scope matters Number of segments supported X number of instruments and asset size: Select International Development Finance Club (IDFC ) members (2012) Source: Annual reports. Each and every priority requires specific expertise, financing instruments and compatible funding

  11. Anti-cyclical role // 11 Annual growth (%) of credit portfolio of selected development banks Source: Annual reports.

  12. Development and development financing • The awakening of the Sleeping Beauty: Development Banks are back to the game • BNDES contribution to Brazilian development • Reflections about the future of development institutions: missions, assets, capabilities

  13. Brazilian financial markets: robust but shallow Credit and corporate bonds , % of GDP, 2011 Outstanding Loans/GDP and Outstanding Loans/Total Credit Selected Development Banks, 2012 Role of BNDES due to limitations of Brazilian credit market? Source: Annual reports, BNDES

  14. BNDES scope and priorities • 2/3 of long term loans in Brazil (US$ 85 billion, avrg annual disbursements) • Instruments • Direct Operations • Indirect Operations • MSME (financing and guarantee) • Exports • Project finance • Grants • Investment bank Priorities Environmental sustainability Infrastructure Innovation Productive inclusion Competitiveness Regional development Equity Portfolio Source: BNDES

  15. BNDES relative performance and funding Funding By Constitution, 40% of proceedings from Workers’ Assistance Fund (FAT), a public fund financed by a levy on wage bills to provide unemployment benefits and retraining. No amortization schedule exists. Since 2008, very long term loans from Treasury adding up to US$ 200 billion 2012 (US$ billion) Source: Banks' balance sheets. Sources of funding for annual budget • Largely, funding and financing is referenced to the “TJLP”, Long-Term Interest Rate which is lower than the market based short term rate Source: BNDES

  16. BNDES contribution to investment Non-Supported firms 21% Supported firms 23% 10% 0% 5% 10% 15% 20% 25% 30% 35% Investment without BNDES Induced by BNDES *12 months, up to February/2014 Source: BNDES Asset growth in 3,000 industrial firms, 2010: Firms supported x non-supported by BNDES Jobs created and/or maintained during the investment phase of a project (direct, indirect and income effects Sources: Seasa and BNDES

  17. BNDES contribution to policy priorities (1/2) Disbursements according to industrial policy priorities US$ billion • Priorities are fine-tuned to policy priorities • Active contribution to the formulation and implementation of public policies, especially in the domains of industry, innovation and infrastructure • Provider of technical expertise for the modeling of complex projects Source: BNDES

  18. Support for MSME: disbursements + number of firms 32 350 65,0 300 55,0 25 25 23 275 250 45,0 261 231 200 35,0 12 172 11 150 25,0 8 100 15,0 104 50 5,0 53 41 0 -5,0 2007 2008 2009 2010 2011 2012 2013 Number of MSME, 1,000 Disbursements, US$ billion) BNDES contribution to policy priorities (2/2)

  19. Development and development financing • The awakening of the Sleeping Beauty: Development Banks are back to the game • BNDES contribution to Brazilian development • Reflections about the future of development institutions: missions, assets, capabilities

  20. Missions: inclusive, sustainable, competitive development // 20 • Directives • Patiently face and deal with uncertainty • Support policy development and long term planning • Finance expansion of capacity, capabilities and learning; fill gaps; fix failures; induce externalities. • Foster a long term financing industry • Contribute to systemic stability (anti-cyclical role) • Appropriate and distribute (to society, via the State) returns of (financial) investment decisions

  21. Assets and capabilities // 21 • Tenacious pursuer of priorities defined at the political domain and by challenges associated with the stage of development of a country • Mandate enforced at the highest political level • Servantof public interest must pursue efficiency and effectiveness • Stable funding for financial sustainability • Flexible competences to mobilize resources and instruments adequate to mandates and to country's needs Development Institutions: not the vanguard nor the rearguard … the co-guard of development

  22. Financing development The strategic role of development banks (and the case of BNDES) IPD/JICA Task Force on Industrial Policy and Transformation Meeting in Jordan, 5-6 June 2014 João Carlos Ferraz Executive Director

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