// 1 Investment, transformation, uncertainty and financing: the strategic role of national development banks João Carlos Ferraz Executive Director IPD/JICA Task Force on Industrial Policy and Transformation Meeting New York, Feb , 2015

Development stalemate Uncertainties and investment financing Reflections about transformation and development institutions Guide

// 3 We live in a world of low interest rates… Source: OECD

// 4 …with effects on banks and firms’ preferences Source: Financial Structure Database, 2013 Banks hold quality assets (other reasons being regulatory changes) Firms reduce debt and increase liquidity Source: J.P.Morgan

// 5 Investment rate – OECD countries and China Sluggish investment prevails… Source: OECD Statistics

// 6 … but, “potential” demand is very large… Source: McKinsey (2013) For infrastructure to remain at 70% asset-to-GDP ratio => at least $67 trillion of investments between 2013 & 2030 Estimates of infrastructure investments, ($ trillion)

Developed and developing economies are in much need of ways out of current stalemate Monetary and fiscal policies, in themselves, do not suffice. “Transformational” policies are in much need. For the economic transformation of countries, at different stages of development, in good and bad times, innovative development agendas, including priorities and adequate institutional frameworks, must come out. Transformation, almost by definition, demands and implies investments under the condition of uncertainty It is argued here that National Development Banks have a strategic role to play in this “ambiance” Development stalemate and transformation

Development stalemate Uncertainties and investment financing Reflections about transformation and development institutions Guide

The complexity of a project in itself; The timeframe of the investment; The prevailing economic conditions; The unexpected: development challenges. If uncertainties are inherently embedded in projects leading to structural transformation how are they to be financed? Capital markets and private banks? Development banks, the sole agent? A combination => resilient and development prone financial industry? Uncertainties

Scale Outstanding Loans/GDP and Outstanding Loans/Total Credit Selected Development Banks, 2012 Source: Annual reports, BNDES Assets/GDP total assets: US$ 3.2 trillion 2012 total assets: US$ 3.2 trillion Source: Annual reports, BNDES // 10

Number of segments supported X number of instruments and asset size: Select International Development Finance Club (IDFC ) members (2012) Scope Source: Annual reports. Each and every priority requires specific expertise, financing instruments and compatible funding // 11

Macro related uncertainties: the anti-cyclical role of development banks Annual growth (%) of credit portfolio of selected development banks Source: Annual reports. // 12

Time related uncertainty: long term financing at development banks & BNDES ActivityUnit Installed capacity 2007 (A) Country projects (B) Growth 2007/2013 (B/A) BNDES supported projects% BNDES Large Hydro MW 74,937 12,25316% % Medium Hydro MW 1,820 3,260179% % Wind MW 247 1,997809% % Ethanol million tons % 7532% Pulp ton/year 7,530 6,20582% % Sources: ANEEL, EPE, BRACELPA, BNDES.. Energy: capacity 2007: interlinked systems as defined by the planning agency EPE Bloomberg Renewables 29/09/ : US$ billion investment in energy by Development Banks (2007: 38.7; 2009: 69.7; 2011: 93.6) 2013: US$ 84.9 billion Nat Dev Banks: 73.4%; Multilaterals: 26.6% Brazil, selected industries: expansion of capacity & BNDES “financing” share Source: BNDES // 13

Technical progress related uncertainty: EIB, KfW & BNDES KfW financing for innovation, environment and SM + start ups (E$ billion) EIB financing of innovation Shiva Dustdar at Mission Oriented Finance for Innovation Seminar, London, 23/07/14 Vivian Lo at Mission Oriented Finance for Innovation Seminar, London, 23/07/14 Source: BNDES // 14

Unexpected development challenges Caetano Penna & Mariana Mazzucato, presentation at Minds Seminar, Rio 28/07/14 based on data from Climate Policy Initiative (2013) // 15

Development stalemate Uncertainties and investment financing Reflections about transformation and development institutions Guide

Transformation implies uncertainties of different natures In order to increase chances of overcoming them, they must be properly understood and be dealt with by proper institutions Development banks, with certain features, are one of them: they can have a strategic role in inducing transformation- oriented investments, in economies at different stages of development Transformation and development banks

Tenacious pursuer of priorities defined at the political domain and by challenges associated with the stage of development of a country As servant of public interests efficiency and effectiveness must be high in their agenda Stable resources (funding, people, ICT) are critical assets As development is a dynamic process, flexible competences are required to mobilize resources and instruments adequate to mandates and to country's needs The substance of mission oriented development banks // 18 Development Institutions: not the vanguard nor the rearguard … the co-guard of development Development Institutions: not the vanguard nor the rearguard … the co-guard of development

Roles? Patient institutions Co-developing financial markets. Contribute to systemic stability “Policy supporters” Concepts? => Analytical frameworks Economics: market failure, credit rationing, financial repression, investment and financing under uncertainty. Political economy: mission-oriented, bureaucratic insulation, private/public interactions, State and market mediations In depth analysis and/or comparative studies? The extent to which they play mission-oriented role Economic and financial capabilities and performance Capabilities and sources of institutional and economic strengths and weaknesses Efficiency and effectiveness // 19 Ideas for a research agenda on development banks

// 20 Investment, uncertainty and financing: the strategic role of national development banks João Carlos Ferraz Executive Director IPD/JICA Task Force on Industrial Policy and Transformation Meeting New York, Feb , 2015