João Carlos Ferraz Executive Director Financing development The strategic role of development banks (and the case of BNDES) IPD/JICA Task Force on Industrial

João Carlos FerrazExecutive Director

Financing developmentThe 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



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





Guide

As a way of introduction

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

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

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Market failures and/or incomplete financial systems are only partial Market failures and/or incomplete financial systems are only partial justifications for an active role for development banks. Even more justifications for an active role for development banks. Even more important is the prevalence of and the need to tackle important is the prevalence of and the need to tackle uncertaintyuncertainty

(technical change, climate change, growth cyclicality, etc) by p(technical change, climate change, growth cyclicality, etc) by patient, atient, mission oriented institutionsmission oriented institutions..

Analytical references

Finance scarcityFinance scarcity

Market failureMarket failure UncertaintyUncertainty









A very 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)

Development Institutions: common but very relevant institutions

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The awakening of the Sleeping Beauty? // 7

“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)

“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)

“An Infrastructure Bank (IB) … There are good theoretical reasons for the creation of such a bank. (LSE Growth Commission, 2013)“An Infrastructure Bank (IB) … There are good theoretical reasons for the creation of such a bank. (LSE Growth Commission, 2013)

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 UK2012: Foster environmental and energy efficiency investments

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 UK2012: Foster environmental and energy efficiency investments

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…

Development Institutions: not one alike // 8

19.4%

16.3%14.5%

12.7%11.2%

8.3%5.9%

4.7%2.6% 1.7%

KfW -Germany

BNDES -Brazil

CDB -China

KDB -Korea*

ICO -Spain

JFC + JBIC- Japan

DBsMexico*

VEB -Russia

BPI -France*

DBSA -SouthAfrica

Economic relevance

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.

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Assets/GDP - 2012Assets/GDP - 2012

2012 total assets: US$ 3.2 trillion2012 total assets: US$ 3.2 trillion

Number of segments supported X number of instruments and asset size: Select International Development Finance Club (IDFC ) members (2012)

Scale and scope matters

Source: Annual reports.

Each and every priority requires specific expertise, financing instruments and compatible funding

Each and every priority requires specific expertise, financing instruments and compatible funding

Anti-cyclical role

Annual growth (%) of credit portfolio of selected development banksAnnual growth (%) of credit portfolio of selected development banks

Source: Annual reports.

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Credit and corporate bonds , % of GDP, 2011

Brazilian financial markets: robust but shallow

7,4

11,3 12,4

15,5

4,6

21,0

8,0

12,7

KDB BNDES CDB KfW

Outstanding Loans/GDP Outstanding Loans/Total Credit

Outstanding Loans/GDP and Outstanding Loans/Total CreditSelected Development Banks, 2012

Role of BNDES due to limitations of Brazilian

credit market?

Source: Annual reports, BNDES

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2/3 of long term loans in Brazil (US$ 85 billion, avrg annual disbursements)

InstrumentsDirect OperationsIndirect OperationsMSME (financing and guarantee)ExportsProject financeGrants Investment bank

Source: BNDESSource: BNDES

BNDES scope and priorities

InfrastructurInfrastructuree

CompetitivenesCompetitivenesss

Productive Productive

inclusioninclusion

Priorities

Estimated market value (US $ b.) 45.4Nº firms with direct support 203Nº Investment Funds 44

Equity Portfolio

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BNDES KFW CDB

Assets 367.8 657.3 1,191.6Outstanding Loans 254.0 526.4 1,016.9

Net Profit 3.0 3.1 9.9

ROE (%) 12.5 11.5 13.4

NPL (%) 0.06 0.21 0.30

2012 (US$ billion)


Source: Banks' balance sheets.

BNDES relative performance and funding

FundingBy 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

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

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BNDES contribution to investment

*12 months, up to February/2014

23%

21%

10%

0% 5% 10% 15% 20% 25% 30% 35%

Supported firms

Non-Supported firms

Investment without BNDES Induced by BNDES

Asset growth in 3,000 industrial firms, 2010: Firms supported x non-supported by BNDESJobs created and/or maintained during the investment

phase of a project (direct, indirect and income effects


Sources: Seasa and BNDESSources: Seasa and BNDES

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Disbursements according to industrial policy priorities US$ billion

Disbursements according to industrial policy priorities US$ billion

BNDES contribution to policy priorities (1/2)

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

Activity Unit

Installed capacity 2007 (A)

Total projects

2007-2013 (B) (B/A)

Projects supporte

d by BNDES

% BNDES

Hydropower MW 74.937 12.253 16% 11.893 97%Small Hydro MW 1.820 3.260 179% 1.994 61%Windpower MW 247 1.997 809% 1.093 55%Termal power plants MW 21.229 23.418 110% 5.400 23%Automobile 1.000 cars 3.500 1.000 29% 465 47%Bioethanol million tons 385 235 61% 75 32%Pulp 1.000 ton/year 7.530 6.205 82% 5.515 89%Source: ANEEL, EPE, ANFAVEA, BRACELPA, BNDES.All energies: 2007 capacity based on EPE estimate based on integrated system


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BNDES contribution to policy priorities (2/2)

41 53

104

172

231261 275

811 12

2325 25

32

-5,0

5,0

15,0

25,0

35,0

45,0

55,0

65,0

0

50

100

150

200

250

300

350

2007 2008 2009 2010 2011 2012 2013

Support for MSME: disbursements + number of firms

Number of MSME, 1,000 Disbursements, US$ billion)

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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

Missions: inclusive, sustainable, competitive development

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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

Servant of 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

Assets and capabilities // 21

Development Institutions: Development Institutions:

not the vanguard nor the rearguard … not the vanguard nor the rearguard …

the the co-guard of developmentco-guard of development

Development Institutions: Development Institutions:

not the vanguard nor the rearguard … not the vanguard nor the rearguard …

the the co-guard of developmentco-guard of development

João Carlos FerrazExecutive Director

Financing developmentThe strategic role of development banks (and the case of BNDES)





Documents

João Carlos Ferraz Executive Director Financing development The strategic role of development banks (and the case of BNDES) IPD/JICA Task Force on Industrial