National Development Banks in Sustainable Financing: addressing market failures

1. National Development Banks in Sustainable Financing: addressing market failures Simon Roberts Competition Commission and the University of the Witwatersrand

2. Thinking about Sustainable Development and NDBs • Government’s role in influencing the development path firmly recognised once more • Market ‘failures’ are widespread and intrinsic • Imperfect information means path dependency in development, particularly affecting role of finance • Sustainable development means influencing the nature and way in which expanded economic activity occurs • I argue that NDBs: • Have crucial functional role in sustainable development, through provision of development finance • Have important information role in shaping investment patterns and facilitating coordination • NDBs are lead developmental actors, as evident in late-industrialising states, as autonomous, professional organisations

3. Rationale for Development Finance for Industry • Sustainable Development means increased freedom, expressed as real opportunities for countries’ citizens • ‘Concern with positive freedoms leads directly to valuing people’s capabilities and instrumentally to valuing things that enhance these capabilities. The notion of capabilities relates closely to the functioning of a person.’ (Sen) • Finance is about realising positive freedoms (relaxing self financing constraints, realising potential) • Finance affects distribution: of returns to net savers & borrowers • Finance is at the centre of countries’ development paths, as the ‘brain’ of the economy – determining the flows of resources to investments

4. But: • Intrinsic features of financial system: information problems; imperfect competition etc mean allocation of financial resources by financial system is backward looking, reflects their existing info and experience base not opportunities • Increased investment, long-term and diversified, is generally not provided by private financial system, especially in developing countries • Are dynamic and ‘creative’ failures: Unfettered market oriented development chases existing opportunities • Example: exploitation of natural resources, but Sustainable Development requires: • Increased participation, ‘shared growth’: using resources as platform for broad-based, more equitable growth • Without this, development will be fragile, as rising inequality and contestation over resource rents increases instability, short-term orientation, fractured societies, crime, unemployment and environmental degradation • South Africa? finance directed to housing, motor vehicles, property, resource-based industry and consumption Firms forced to invest out of retained earnings Inhibits investment of growing firms, in new activities

5. Challenges & experiences of late industrialisation • Sustainable development requires industrial ‘catch-up’ • Understood broadly to be adoption and adaptation of production methods, technologies, improved infrastructure, to increase value creation • Crucial for realising the potential gains from international integration: • global value chains, dominance by transnational corporations and the enforcement of standards by industrialised countries • Development finance institutions & mechanisms have been at heart of successful late-industrialisation, from Japan, South Korea and China, to Brazil and Nordic countries • Moving beyond resource-exploitation? • Leverage earnings to provide platform for broad-based growth • Invest in diversified economic activities • Realise linkages • Requires strategic engagement – where finance is crucial part

6. The roles of NDBs • National Development Banks are key actors in developmental states, but roles are often under-played • NDBs are long term players • Korean Development Bank accounted for over half of long-term lending in 1960s • Brazilian National Development Bank (BNDES) accounts for almost all long-term finance for industry and agriculture • NDBs have knowledge and strong analytical capacity: • Can set the agenda, and act on it • Can play a coordinating role – across government • Can make policy objectives tractable in practice, removing bottlenecks • Professional staff, with direct contact with real economy

7. Lessons from the IDC and BNDES? • IDC & BNDES central to rapid industrial growth (est in 1940 & 1952) • Attests to the strategic importance of NDBs in pursuing government goals – in South Africa historically those of the apartheid govt • IDC: • major contribution to private fixed investment • heavy industry orientation: mining, metals, chemicals; highly capital-intensive • continued into 1990s: 1992-1997 IDC projects in non-ferrous and basic iron & steel accounted for 25% of total manufacturing investment • BNDES: • Major investments in infrastructure, electricity generation capacity, linked with capital equipment industry inputs • Steel and heavy industry • Developing aerospace, pharmaceuticals • Both play continent-wide role • Providing important role in reducing risk

8. BNDES & IDC recent transition • BNDES: Wide range of programmes for different industries (machinery, software, pharmaceuticals, agriculture, film etc.) • Increased support for SMMEs • Programmes allow for lower interest rates, higher BNDES participation, longer-term loans and less collateral • Development goals are transparently priced-in; with more favourable conditions: • Up to 3.5% discount on identified criteria: geography sector, priority activity • Continued support for machinery & equipment: • Local content requirement of BNDES when it extends finance for fixed investment (requirement of 60%) • Low (and fixed) interest rate schemes • Financing of major projects in South America linked to Brazilian value-added exports and employment

9. BNDES & IDC recent transition • IDC reorientation to support for broad-based development • Emphasis on employment • Development goals: R1bn financing for new development schemes with low interest rates in 2006 • Expansionary BEE • More diversified sectoral profile, increased services • SME financing • Poorer provinces • Financing in other African countries • So: approval amounts may be lower, but impact is greater • Requires focus and effort – the nature of activities being supported • Maintaining strong financial performance

10. IDC total approvals : July 1994 to March 2006 R'million Number 8000 560 Total value of approvals 7000 490 Total number of approvals 6000 420 5000 350 4000 280 3000 210 2000 140 1000 70 0 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Financial Year * 9 months to Mar

12. Conclusions • NDBs can be the backbone of real economy development • Strong development orientation: • BNDES: ‘Development with social inclusion’, • IDC: ‘Leadership in Development’ • NDB’s role extends beyond ‘correcting’ market failures: • Leadership role in sustainable development • Information & knowledge, from ongoing engagement with industry • Insider status with regard to government policy • Professionalism and autonomy, with key challenges: • Monitoring of performance, against well defined goals • Ensuring internal efficiencies • Moving forward? Recognising common interests of African NDBs • Developing capacity • Sharing information and learning • Links and partnerships in projects • Complementarities rather than competing players in African development • Strong – growth across continent will be mutually reinforcing – integration is an outcome of improved linkages and higher growth, not merely removal of barriers