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Building Renewable Energy in the Developing World, Brick by BRICS

A group of five powerful nations has just created a new financial institution that may very well have a major influence on the growth of renewable energy in the developing world. At their sixth annual summit in July at the Brazilian city of Fortaleza, the so-called BRICS countries (Brazil, Russia, India, China and South Africa) officially established, as they had promised during last year’s summit, a new financial institution, the New Development Bank (NDB), to be based in Shanghai. The NDB’s purpose is to provide loans, guarantees and technical assistance to developing countries. In that respect, it is not at all different from the World Bank and similar institutions.

There are, however, two crucial features of the New Development Bank that are indeed new. Unlike previous global lending institutions, the NDB will be run by (with the exception of Russia) southern hemisphere countries that are themselves in the process of very rapid development, rather than by wealthy northern hemisphere countries, such as the U.S. The second original aspect of the NDB is that it places an unprecedented emphasis on sustainable development, with a particular focus on the development of renewable energy. As the BRICS group’s Fortaleza Declaration states: “Considering the dynamic link between renewable and clean energy and sustainable development, we reaffirm the importance of continuing international efforts aimed at promoting the deployment of renewable and clean energy and energy efficiency technologies, taking into account national policies, priorities and resources.”

Prof. Kathryn Hochstetler, CIGI Chair of Governance in the Americas at the Balsillie School of International Affairs and professor of political science at the University of Waterloo, Ontario, perceives the track record, in regard to renewables, of the World Bank and other multilateral development institutions as less than stellar. She points out that, though the World Bank and other development banks have begun funding a number of renewable energy projects, these “don't come close” to the number of fossil fuel projects they have financed over the years. Over the last two decades, she said, these banks have provided less and less infrastructure funding of any kind, as their priorities have shifted to prioritize the Millennium Development Goals (MDGs) and similar targets.

“That change in focus is one of the motivations for creating the NDB,” Prof. Hochstetler said. She believes that the NDB is unlikely to insist on, with the countries to which it lends money, the same kinds of stringent policy conditions that the World Bank demands, so whether many renewable energy projects get financed will partly depend on whether other developing countries request such funding.

Stephany Griffith-Jones, Financial Markets Program Director of The Initiative for Policy Dialogue (IPD), Columbia University, agrees that the NDB will be less policy-oriented.

The NDB will be project-oriented, and it’s a good idea.” Prof. Griffith-Jones said. “Because of this, the NDB can put money into regional projects like hydropower, or large-scale solar projects that would serve several neighboring countries at once without needing to impose policies on each separate country. Policy decisions should be left up to individual countries.

In addition, she believes that World Bank projects generally take a very long time to come to fruition. However, she said, a more “agile” NDB might encourage the World Bank to become more efficient, so the latter might implement its renewables projects more quickly than before.

On the other hand, Nigel Purvis, President and CEO of the Washington, D.C.-based consultancy Climate Advisers, believes the differences between the old and new institutions are exaggerated.

While the BRICS countries want the new BRICS bank to be more streamlined and less constrained by policy choices than the World Bank, [the NDB] over time is likely to face the same institutional and political realities as the World Bank,” said Purvis. “It would not surprise me to find out that, in twenty years, the BRICS bank looks a lot more like the World Bank than many people envision today.

(At a press conference on July 23, World Bank Group President Jim Yong Kim indicated that he did not consider the NDB to be in competition with the World Bank: “Any bank or any group of institutions that are trying to tackle the problem of infrastructure investment to fight poverty, we welcome them,” Kim said.)

There has been speculation that the NDB may follow at least some of the policies of the BRICS’ member countries’ national lending institutions. For example, Prof. Hochstetler points out that all of Brazil’s BNDES bank’s loans and most loans by China’s Eximbank and China Development Bank are linked to their respective countries’ national firms, so she expects that the NDB will prefer to make loans available to projects that support its members’ firms.

“The fact that China, India, and Brazil all have successfully nationalized production of some components of wind and solar electricity, and South Africa aspires to [do so], means that the NDB will likely look favorably on renewable energy projects that will use those components, or the services of BRICS’ firms in installing them,” said Prof. Hochstetler.

The International Energy Agency has estimated that investments of a trillion dollars a year in clean energy will be required to meet climate safety goals. Given that challenge, wouldn’t the NDB’s funding be a mere drop in the bucket compared to what is needed? Purvis believes that the world needs to double annual investment in renewable energy and that therefore additional clean energy investments by the NDB should be encouraged, along with further investment by the World Bank and other existing institutions.

“The BRICS bank has the potential to mobilize significant resources and to use these resources to leverage far larger sums of private capital,” Purvis said. “While public financing of any type is not the silver bullet for climate action, it can play a vital role.”

In answer to the question, Prof. Griffith-Jones conceded that she would have preferred that the NDB be larger than it is.

“However, the NDB in twenty years could be lending, according to my estimate, about $35 billion a year, which is more than the World Bank lends in infrastructure development today; possibly, it could go to $70 billion a year with co-financing,” she said.

When it was pointed out that Russia, with its massive extraction and marketing of fossil fuels, was far from being the model “green” country in the BRICS alliance, Prof. Griffith-Jones indicated that she wasn’t sure what Russia’s role in the NDB might be in relation to renewable energy. But she was not concerned, as Russia’s interests would not outweigh the others in the BRICS group, and it might even be happy to help investment in renewables to countries that don’t import Russian fossil fuels, like the African nations.

Prof. Hochstetler believes that Russia is, in several ways, as she put it, the “outlier” of the group. “The other four BRICS countries all have much more complex national economies and aspirations that result in many dualisms,” she said. “These four are far from being model ‘green’ countries, but their recent improvements should not be missed, and I hope the NDB will help to disseminate those improvements to other developing countries, rather than disseminating their many environmental failures.”

Lead image: Brick wall via Shutterstock

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