National Development Banks in
Sustainable Financing: addressing
market failures
Simon Roberts
Competition Commission and the
University of the Witwatersrand
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 lateindustrialising states, as autonomous, professional
organisations
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
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 broadbased, 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
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
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
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 capitalintensive
– 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
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
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
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
Financial Year
* 9 months to Mar
2001
2002
2003
2004
2005
2006
Total number of jobs created: July 1994 to March 2006
Number
30000
Jobs created
25000
20000
15000
10000
5000
0
1995
1996
1997
1998
1999
2000
2001
2002
Financial Year
2003
2004
2005
2006
Conclusions
•
•
NDBs can be the backbone of real economy development
Strong development orientation:
•
NDB’s role extends beyond ‘correcting’ market failures:
•
•
•
Information & knowledge, from ongoing engagement with industry
Insider status with regard to government policy
Professionalism and autonomy, with key challenges:
•
Moving forward? Recognising common interests of African NDBs
•
Strong – growth across continent will be mutually reinforcing – integration is
an outcome of improved linkages and higher growth, not merely removal of
barriers
– BNDES: ‘Development with social inclusion’,
– IDC: ‘Leadership in Development’
– Leadership role in sustainable development
– Monitoring of performance, against well defined goals
– Ensuring internal efficiencies
–
–
–
–
Developing capacity
Sharing information and learning
Links and partnerships in projects
Complementarities rather than competing players in African development