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Parliamentary Portfolio Committee Briefing BRICS:

CLASSIFICATION: EN CLAIR. Parliamentary Portfolio Committee Briefing BRICS: “ HOW SOUTH AFRICA’S PARTICIPATION IN BRICS ADDRESSES DOMESTIC CHALLENGES” By DAVE MALCOMSON CHIEF DIRECTOR-REGIONAL ORGANISATIONS DIRCO 24 February 2016. PRESENTATION OVERVIEW. RATIONALE FOR BRICS ENGAGEMENT

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Parliamentary Portfolio Committee Briefing BRICS:

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  1. CLASSIFICATION: EN CLAIR Parliamentary Portfolio Committee Briefing BRICS: “HOW SOUTH AFRICA’S PARTICIPATION IN BRICS ADDRESSES DOMESTIC CHALLENGES” By DAVE MALCOMSON CHIEF DIRECTOR-REGIONAL ORGANISATIONS DIRCO 24 February 2016

  2. PRESENTATION OVERVIEW • RATIONALE FOR BRICS ENGAGEMENT • BRICS STRATEGIES • BRICS EVOLVING ARCHITECTURE • NEW DEVELOPMENT BANK: ADDRESSING DOMESTIC CHALLENGES • GROWTH PROJECTIONS FOR BRICS • OVERSIGHT QUESTIONS

  3. A. RATIONALE FOR BRICS ENGAGEMENT Global dimension: • The context and rationale of South Africa’s BRICS membership was described by Minister Nkoana-Mashabane as follows: “The world we live in today has changed significantly since the end of the Cold War. A new group of economically influential countries such as Brazil, Russia, India and China (BRICS) are on the ascendancy, and are remapping the contours of political and economic power in the global system. South Africa’s membership of BRICS should be located within this context” • “The rationale for South Africa’s approach was in consideration of a matter of crucial importance to BRICS Member States, namely the role of emerging economies in advancing the restructuring of the global political, economic and financial architecture into one that is more equitable, balanced and rests on the important pillar of multilateralism”

  4. A. RATIONALE FOR BRICS ENGAGEMENT cont. Global dimension: • The Bretton Woods system was adapted to reflect the weight of major new economic powers with the US congress approving the 2010 IMF Reform Package. In this regard China’s voting share will increase from 3.8% to 6% (China will have the third largest IMF quota and voting share after the US and Japan) while the US would see its share shaved from 16.7% to 16.5% albeit preserve its veto • Despite the increased quotas, BRICS countries will still only have 14.7% voting share; South Africa did not obtain any tacit gains and still needs to engage its BRICS partners for notably, support for a third seat for Sub-Saharan Africa on the Executive Board of the IMF • China’s internationalisation of the RMB achieved a major boost with its acceptance into the IMF SDR basket (third largest after the US dollar and Euro)

  5. A. RATIONALE FOR BRICS ENGAGEMENT cont. Regional dimension: • BRICS serves as a catalyst to promote the African Union’s regional integration programme as well as related continental infrastructure programmes (the Programme for Infrastructure Development in Africa: “PIDA” and Presidential Infrastructure Champion Initiative: “PICI”) • President Zuma was mandated in 2012 by the African Union (AU) leadership to strongly support and pursue the creation of a “BRICS Bank” • Subsequently, President Zuma hosted the first BRICS “outreach” on the occasion of the Fifth BRICS Summit in 2013 together with the AU leadership to discuss the issue of infrastructure together with the BRICS Leaders; President Zuma was designated by the AU as the nodal point between BRICS and African leaders in this regard • South Africa was designated to host the New Development Bank (NDB) African Regional Centre (ARC) at the Sixth BRICS Summit held in 2014 • The NDB will approve its first projects in April 2016

  6. A. RATIONALE FOR BRICS ENGAGEMENT cont. Domestic dimension: • BRICS partners were identified as strategic bilateral partners, notably considering their economic exponential growth potential • South Africa and its BRICS partners face similar developmental challenges which provides opportunities for sharing policy advice and exchanges of best practices • Comparative GDP per capita income for BRICS countries is: Russia - $14 612 ; Brazil - $11 208 ; China- $ 6 807; South Africa - $6 618 and India - $ 1 499 (source: World Bank 2013 data) • South Africa has the worst Gini-coefficient / inequality index within BRICS with a value of 76 (source: World Bank 2014 data) • BRICS partners now constitute the key trading partners for South Africa as well as important new investors

  7. B. BRICS STRATEGIES • South Africa’s engagement with BRICS is informed by three Strategies, namely: • South Africa’s national BRICS Strategy (classified top secret) which was commissioned by Cabinet and adopted on 19 September 2012 as a result of extensive consultation with Government stakeholders. This Strategy guided SA’s strategic engagement in BRICS and is currently being reviewed; • Strategy for BRICS Economic Partnership (open source) which BRICS Leaders adopted at the Seventh BRICS Summit in 2015 and is now being implemented through the development of a Road Map (for joint projects) and Action Plans for the various sectors included; and • Towards a long term Strategy for BRICS – A proposal by the BTTC (open source) which the BRICS Leaders commissioned in 2012 and was then prepared by the BRICS Think Tanks Council and tabled in 2015

  8. B. BRICS STRATEGIES cont. • South Africa’s national BRICS Strategy identified addressing poverty and inequality as a key objective considering that BRICS countries still face challenges of poverty and inequality. While BRICS countries have made economic, political and technological developments; poverty, inequality and job creation remain a challenge (triple challenges) • Partnerships for social development amongst BRICS countries present many opportunities and they allow different sectors of society to have access to the comparative advantages of their partners; new sectors include labour and employment; migration; industry; energy, peacekeeping, etc. • These challenges can also be met through the concerted efforts of strengthening second and third tier government cooperation initiatives within BRICS under its existing mechanisms of the BRICS Urbanisation Forum and the BRICS Friendship Cities and Local Governments Cooperation Forum • BRICS has also extended its track 3 engagements with civil society considerably, i.e. new engagements such as the Parliamentary Forum; Youth Forum; Civil BRICS Forum in addition to the Academic Forum; Business Forum; and Trade Unions Forum

  9. B. BRICS STRATEGIES cont. • Strategy for BRICS Economic Partnership • The eight priority areas for cooperation identified in the Strategy include: 1) Trade and Investment, 2) Manufacturing and Minerals Processing 3) Energy 4) Agricultural Cooperation 5) Science, Technology and Innovation 6) Financial Cooperation 7) Connectivity, which includes Institutional, Physical and People- to-People Connectivity and 8) ICT Cooperation • BRICS Sherpas agreed iro implementation that each BRICS member should take responsibility to; i) lead working groups on two issues; ii) develop sectoral action plans under guidance of the respective existing ministerial meetings (new sectors will be coordinated with relevant departments); iii) cross-cutting sectors could be jointly discussed by the relevant working groups; iv) the Road Map should be finalised together with the BRICS Business Council, Foreign Trade Offices, Sherpas and other relevant stakeholders; v) Sherpas would continue to coordinate the Road Map and Action Plan to facilitate the completion of the Strategy

  10. B. BRICS STRATEGIES cont. iii) Long-term Strategy for BRICS • The BRICS Think Tanks Councils (BTTC) met in Moscow on 21 May 2015 and finalised the document “Towards a long term Strategy for BRICS – A proposal by the BTTC” • It was presented to the BRICS Leaders in Ufa on 9 July 2015. • The BTTC presented in the Strategy, a diagnosis of the current situation and proposes a set of recommendations with regard to the five pillars selected in the document, namely: i) promoting cooperation for economicgrowth and development (China); ii) peace and security (Russia); iii) social justice, sustainable development and quality of life (South Africa); iv) political and economic governance (India); and v) achieving progress by sharing knowledge and innovation (Brazil)

  11. C. BRICS EVOLVING ARCHITECTURE • BRICS institution-building has formally resulted in BRICS launching its first financial institutions in 2014 namely the New Development Bank (NDB) and Contingent Reserve Arrangement (CRA) • BRICS Leaders also directed that the NDB ARC has to be concurrently established with the NDB Headquarters in Shanghai • South Africa will primarily engage the New Development Bank as a shareholder, as well as a borrower. As a shareholder, South Africa will play an active and equal role in the management and leadership of the Bank and as a borrower, South Africa will use the Bank as an alternative source of financing for our infrastructure build program/ infrastructure development plans, as well as, for regional integration initiatives and projects • South Africa also launched, during its chairship in 2013, the BRICS Business Council and BRCIS Think Tanks Council

  12. C. BRICS EVOLVING ARCHITECTURE cont. • India, in its capacity as the current BRICS chair (2016), is proposing to create a BRICS Agriculture Research Centre; a BRICS Railway Research Centre and a NDB Institute • Prime Minister Modi proposed to exchange experiences and practices in Water Management, including rainwater harvesting, re-use and re-cycling of waste water • India will also focus on people-to-people exchanges, such as a first ever BRICS Trade Fair; BRICS U-17 Football Cup; BRICS Film Festival and Awards; BRICS Wellness Festival; BRICS Infrastructure Development and Investment Forum; BRICS Digital/Financial Inclusion; and a BRICS Sports Council • The Russian chairship expanded the areas of sectoral cooperation significantly, now totaling over 70 sectoral tracks

  13. D. NDB: ADDRESSING DOMESTIC CHALLENGES • While BRICS countries are experiencing lower growth dynamism, the original long-term projections by Goldman Sachs for economic ascendency are still intact, namely that “barring a disastrous shock affecting all, particularly China, BRICS combined GDP, is likely to exceed that of the US by 2020, if not sooner” • The global economic situation impacts on all emerging markets and developing countries as well as advanced economies (compare next slides) and is expected to continue in the near future • The President of the NDB, Mr KV Kamath, paid his first visit to a BRICS member state to South Africa from 30 November to 2 December 2015 • He delivered a public lecture at DIRCO on 1 December 2015; among the issues highlighted, the following salient views pertain: • The NDB is expected to approve its first projects in April 2016

  14. D. NDB: ADDRESSING DOMESTIC CHALLENGES cont. • The actual challenge iro loan payments for developing countries pertain moreover to that of the currency fluctuation which increases the loan repayment terms (usually in USD) rather than agreed interest rates for such loans • He emphasized the importance of raising loans in local currencies to lessen such a burden • He emphasized that the unique qualities of the NDB will pertain to shortening the project approval cycle from the traditional 2 and a half years to 6 months and also having parallel project phases (rather than consecutive) • He emphasized the importance of establishing real cooperation partnerships with clients (avoiding the previous borrower-lender approach) as well as local stakeholders (public and private financing institutions) • In respect of the ARC, he indicated that it would initially focus on project preparation and project implementation

  15. E. GROWTH PROJECTIONS FOR BRICS REAL GDP1 (change) (Growth Estimates)-2015 REAL GDP1(% change) (Growth Forecast)-2016 15

  16. E. GROWTH PROJECTIONS FOR BRICS cont. REAL GDP (change) (Growth Estimates)-2015 REAL GDP (change) (Growth Forecast)-2016

  17. F. OVERSIGHT QUESTIONS Specific oversight questions posed: • Is South Africa planning to fill its allocated quotas within the BRICS Bank structures? • Yes, subject to the agreed procedures as determined by the NDB Boards of Governors and Directors. The Vice President responsible for Operations, Mr Zhu met the BRICS Sous-Sherpa on 18 February 2016 and expressed appreciation for the DIRCO seconded officials to the NDB, i.e. Ambassador Magubane and Advocate Dwarika, whose secondment periods have also now been extended, upon request by the NDB Executive Management Team. He informed us that the DIRCO legal advisor, Advocate Dwarika, has further being allocated the interim responsibility to serve as Secretary to the NDB Boards of Governors and Directors • He added that the NDB Board of Directors approved that 100 professionals be recruited in 2016 and also endorsed budgetary provisions thereto; the first positions that will be advertised will be on the level of Directors-General, to underpin the positions of the President and four Vice Presidents, namely: President (India); Chief Operations Officer (China); Chief Financial Officer (South Africa); Chief Risk Officer (Brazil); Chief Administration Officer (Russia)

  18. F. OVERSIGHT QUESTIONS cont. Is South Africa planning to fill its allocated quotas within the BRICS Bank structures? (cont.) • Mr Zhu indicated that the formal process of recruitment will commence in the near future and that these positions would be advertised on the NDB website; an executive search (recruitment) agency (Russell Reynolds Associates) is also being used to partner with similar agencies in the BRICS member countries to identify suitable candidates as well as to assist with the initial shortlisting of candidates • Mr Zhu indicated that capable, qualified and experienced professionals would be required, considering the need for diversity and this process would be limited to the five NDB founding members; merit would be a primary consideration, however a broad balance was also required, also cognisant of equity and gender, etc. • Contract terms of staff will be for three years and contracts will be renewable • The BRICS Inter-Ministerial Committee (IMC) will deliberate nominations to positions that will be identified as strategic at its next meeting

  19. F. OVERSIGHT QUESTIONS cont. Specific oversight questions posed: • Has South Africa began to identify priority projects that will contribute in attracting investment in joint projects in a wide range of industries and areas? • Yes. Cabinet approved the first four project proposals to the NDB on 18 November 2015 as prepared by Minister Patel and the PICC Technical Secretariat and recommended through the BRICS IMC • When Mr Kamath visited South Africa, he also met with the BRICS IMC on 1 December 2015 and discussions were held in respect of the first tranche of projects submitted, as well as the next tranches of projects to be prepared as was directed by President Zuma. Mr Kamath welcomed a proactive approach to already develop further project proposals. Mr Kamath’s visit was immediately followed by that of a technical due diligence team from the NDB to evaluate South Africa’s first project proposals. Minister Patel also raised issues pertaining to the range of infrastructure projects which could later also include social infrastructure projects

  20. F. OVERSIGHT QUESTIONS cont. Specific oversight questions posed: • Is there a roadmap of trade and investment cooperation (manufacturing, mining, engineering, energy) and many other sectors under Operation Phakisa with all BRICS countries? • Yes. The BRICS Leaders adopted at the Seventh BRICS Summit, the Strategy for BRICS Economic Partnership. South African negotiators included references that would complement Operation Phakisa identified sectors into this Strategy, e.g. “encourage cooperation for the investments in energy projects in BRICS countries, including projects aimed at oil and gas exploration, energy infrastructure development …” • The Road Map of projects to be included will be finalised by the next Summit as well as Action Plans for the priority sectors that were identified in the Strategy • Relevant sectoral mechanisms such as the BRICS Friendship Cities also focused, in their meetings held in Russia in 2015, directly on cooperation in the ocean economy and to collaborate to identify bankable projects that the NDB could potentially support

  21. THANK YOU

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