There is a need for a BRICS ratings agency
May 5, 2015, 5:39 pm

In addition to focusing on the New Development Bank (NDB) and the $100 billion contingency reserve fund, the five BRICS leaders who will soon meet for their 7th Summit in Russia will also discuss the idea of establishing an independent ratings agency.

The $100 billion NDB, or BRICS Bank, was formally launched at the 6th BRICS Summit in Fortaleza, Brazil last year. Its main purpose is to finance infrastructure and sustainable projects in BRICS countries and other emerging economies and developing countries.

There is wide consensus that economic growth in developing countries has been restrained by the lack of good infrastructure.

Amar Bhattacharya and Mattia Romani in a 2013 paper for the Center for Climate Change Economics and Policy (CCCEP), estimated that the annual expense in infrastructure development ranges from $800 billion to $990 billion in developing countries (the list includes “emerging” ones).

This will have to increase to $2.3 trillion annually in ten years to ensure critical infrastructure building in these countries, the experts argue.

It is here that the new BRICS bank assumes such a central role.

The success of the BRICS bank, however, depends on other factors than financial resources.

The need for an alternative system

Infrastructure plans involve long maturation projects that discourage the private sector, especially in the case of less developed countries. Adding to these woes, the share of resources from multilateral banks is small and almost inconsequential.

Furthermore, these banks also limit the investment portfolios of countries due to guarantee requirements, and do not have adequate instruments to leverage projects that encourage private sector participation.

The multilateral banks’ investment portfolios often follow policy criteria that tend to overlook critical infrastructure projects, the ones that could make a real impact on billions of citizens.

This is where the need for an alternative ratings agency comes into play.

But two critical issues must first be considered.

For one, the NBD must strictly adhere to the principles of good governance of development banks if it is to be sustainable in the long run.

Rigorous analysis of the cost and benefits of the development projects must be carried out before finances are awarded.

The BRICS bank must guarantee a positive rate of return of its lending portfolio. This new bank must strive to operate not only with government resources, but also try and garner private resources.

Leaders of the BRICS nations met with South American leaders at the 6th BRICS Summit in Brasília on 17 July 2014 [PPIO]

These countries have difficulty obtaining financing because they cannot offer the amount of guarantees the private sector or even the existing multilateral agencies demand.

Moreover, and this needs repeating, ‘outsiders’ may deem some ‘national’ development projects as ‘unimportant’.

But it is these projects that could generate positive externalities that will improve the prospects for the development of a country or a specific region in the medium and long run.

A positive externality is an often unforeseen or unintended benefit, accompanying a process.

(The OECD definition says “a positive externality or external economy may arise from the construction of a road which opens a new area for housing, commercial development, tourism, etc”.)

Other methods of evaluation

Currently, the world’s three big credit ratings agencies Moody’s, Fitch and S&P, which together account for a 90 per cent share of the ratings market, rule the roost.

Although the 2008 financial crisis has indeed reinforced the growing list of people unhappy with these three primary western credit rating agencies, it is not our aim to criticize the way they evaluate countries.

We do acknowledge that the criteria used by the big three agencies can answer the way some sectors/institutions evaluate a state’s economic “health”.

Nonetheless, other methodologies of evaluation can and must consider new indicators and aspects.

This assumes criticality when the main priority is to guarantee the financing of infrastructure and sustainable projects in developing countries.

The Asian Development Bank also estimates that in the next decade Asian countries will need $8 trillion in infrastructure investments to maintain current economic growth rates.

The driving motive to propose an alternative ratings agency is, therefore, to make sure that the NDB (BRICS bank) will conciliate the two issues raised above.

A new agency made up of specialists with deep understanding of the modus operandi of BRICS and developing countries – with the aim to rate infrastructure and sustainable projects – can contribute to the inclusion of projects that generate “positive externalities”.

But a warning must be noted here: The criteria used by the new BRICS ratings agency must be well documented and transparent in order to garner technical support for the project financing of the NDB.

Here, of course, we are assuming that the BRICS Bank will not rely only on government financial resources forever.

The emphasis on the role of new alternative ratings agencies is linked to the financing of developing countries which are usually outside the portfolio of the private sector and sometimes the multilateral agencies.

Proposals to create a BRICS independent ratings agency must go beyond this motivation.

In this case, the ratings agency will not just rate BRICS and the rest of the world but incorporate new indicators and aspects; these are crucial for a new multipolar world.

A ratings agency must be independent to be reliable. A ratings agency controlled by the BRICS governments will face difficulties in proving its independence.

At the same time, it is not yet clear that Russia and China want a totally private ratings agency. We have to wait and watch what direction the BRICS rating agency will follow.