An overhaul of the approval criteria for IDB loans, put in place by the board in February, has seen many deals sent back for more rigorous evaluation before they are approved, the bank’s new executive vice president Julie Katzman has said.
Today, projects need to include much more written detail and better evaluation of effectiveness, Katzman told Emerging Markets in an interview.
The more rigorous process comes in part in response to criticism of the bank’s previously highly number-based evaluation methods.
Katzman recognizes that previous methodology was flawed and says new criteria include a description of the project’s impact, keeping the quantitative scorecard but adding a qualitative overview. “People have to work much harder to get their projects to the board stage these days,” she notes.
The required information includes an estimated economic rate of return and baseline (the starting point of a project, for example how many people already have access to clean water in a sanitation project). She admitted that previously many projects lacked such elements.
“If you’re putting out money, it has to be something you can evaluate,” she said. The bank is already publishing the data and every loan that goes to the board has to have a qualitative score.
IDB President Luis Alberto Moreno had underlined in an earlier interview with Emerging Markets that the bank’s evaluation procedures were being improved as part of its development effectiveness framework.
“We are today probably, in terms of evaluability, from being almost nowhere, to being close to 75%, with the aim of reaching 85% by 2015. We really ramped that up not only in the ex-post evaluation, but also in the results framework, the ex-ante evaluation,” he said.
The methodology used was developed by the OECD’s Development Assistance Committee, and is “the standard practice of all development institutions”, in contrast to old methodology used by the bank’s Office of Evaluation and Supervision (OVE).
Management had been congratulated on its project evaluation procedure by non-regional member countries that met in Israel in January, Moreno added.
“It’s incumbent on us to prove to shareholders and legislators that we are doing a better job,” Katzman said. The Bank is using a number of avenues to get its view across on Capitol Hill.
She declined to comment on the likelihood of Congress approving the IDB’s capital increase but noted that US Treasury Secretary Tim Geithner has expressed confidence that legislators will approve the increase.
In her interview Katzman also explained that the IDB is working to put the $1.9 billion that it lost in the first year and a half of the financial crisis behind it. It has recovered some $900 million of the $1.9 billion in mark-to-market losses, racked up primarily in investments in asset- and mortgage-backed securities.
That has come from selling down some positions and holding onto others for a recovery, Katzman said. She refuted media coverage suggesting the IDB lost far more than any other development bank, saying these did not compare like with like.
The portfolio losses have acted as a wake-up call for the IDB, which has since reinforced many elements of its risk framework. The bank has carefully and systematically looked at risk policies and shareholders accompanied the process, Katzman said.
Investment guidelines percentages have been changed and the bank has also tightened its policy on liquidity. “We have a very diversified portfolio. It’s very different-looking from the one before,” she added.