1. João Carlos Ferraz Executive Director Financing development The 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

2. 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

3. 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 // 3

4. Market failures and/or incomplete financial systems are only partial justifications for an active role for development banks. Even more important is the prevalence of and the need to tackle uncertainty (technical change, climate change, growth cyclicality, etc) by patient, mission oriented institutions. Analytical references Finance scarcity Market failure Uncertainty

5. 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

6. 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 // 6

7. 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) “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 UK 2012: 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 UK 2012: Foster environmental and energy efficiency investments

8. 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

9. 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. // 9 Assets/GDP - 2012 2012 total assets: US$ 3.2 trillion

10. 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

11. Anti-cyclical role Annual growth (%) of credit portfolio of selected development banks Source: Annual reports. // 11

12. 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

13. // 13 Credit and corporate bonds, % of GDP, 2011 Brazilian financial markets: robust but shallow Outstanding Loans/GDP and Outstanding Loans/Total Credit Selected Development Banks, 2012 Role of BNDES due to limitations of Brazilian credit market? Source: Annual reports, BNDES

14. // 14 2/3 of long term loans in Brazil (US$ 85 billion, avrg annual disbursements) Instruments Direct Operations Indirect Operations MSME (financing and guarantee) Exports Project finance Grants Investment bank Source: BNDES BNDES scope and priorities Infrastructure Competitiveness Productive inclusion Priorities Estimated market value (US $ b.) 45.4 Nº firms with direct support 203 Nº Investment Funds 44 Equity Portfolio

15. // 15 BNDESKFWCDB Assets 367.8657.31,191.6 Outstanding Loans 254.0526.41,016.9 Net Profit3.03.19.9 ROE (%)12.511.513.4 NPL (%) 0.06 0.210.30 2012 (US$ billion) Source: BNDES Source: Banks' balance sheets. BNDES relative performance and funding Funding By 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

16. // 16 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 BNDESInduced by BNDES Asset growth in 3,000 industrial firms, 2010: Firms supported x non-supported by BNDES Jobs created and/or maintained during the investment phase of a project (direct, indirect and income effects Source: BNDES Sources: Seasa and BNDES

17. // 17 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 Source: BNDES

18. // 18 BNDES contribution to policy priorities (2/2) 41 53 104 172 231 261 275 8 11 12 23 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 2007200820092010201120122013 Support for MSME: disbursements + number of firms Number of MSME, 1,000 Disbursements, US$ billion)

19. // 19 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

20. 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 // 20

21. 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: not the vanguard nor the rearguard … the co-guard of development Development Institutions: not the vanguard nor the rearguard … the co-guard of development

22. João Carlos Ferraz Executive Director Financing development The 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