By Tony Arnold
As demand for multilateral lending wavers across Latin America, Luis Alberto Moreno hopes his overhaul of the IDB will get results quick. But in key respects, Andean development bank CAF has been leading the way
Since he took the helm of the institution in October 2005, Luis Alberto Moreno has given himself to one fundamental task: overhauling the Inter-American Development Bank to make the world’s biggest regional lending institution more relevant.
The former Colombian ambassador to the US threw himself at the brief, according to his colleagues, with a sweeping resolve to shake up the institution in a manner hitherto unseen by most Bank staff.
The result – the most significant institutional reform since the last donor replenishment in 1994 – has as its hallmarks a decentralization of the Bank’s functions to get closer to borrowing countries; faster loan disbursement; and, increased lending – especially for energy and transport infrastructure and private sector ventures.
Compelling vision
None of this, of course, was without warrant: in recent years the role the bank and other multilaterals should play in financing what has traditionally been one of the world’s most volatile regions has been brought into sharp relief as private sector capital flows have grown to dwarf official lending to the region.
Moreover, as the dynamics of Latin America have changed beyond recognition over the past decade, the market for the IDB’s services has also shifted.
“The region has changed so much it was necessary for the bank to be more aligned with the interests of the region,” Moreno tells Emerging Markets.
To change the bank, Moreno pushed for an overhaul of the bank’s organizational structure with a view to strengthening its strategic capacity, deepening its leadership, increasing its flexibility and transparency in decision making.
The two basic goals of the effort are to make the bank more relevant to the region by granting it greater country focus, deeper sector expertise and improved management; and to boost organizational efficiency better integrating operations and strengthening key functions. The new structure was officially put into place in July of last year.
“This is a cultural change,” says Moreno. “You don’t issue it by decree, but you construct it on a daily basis.”
If numbers are anything to go by, efforts are beginning to pay off. In 2007, the IDB approved over $9.6 billion in new operations. The IDB alone approved $9 billion in financing for 97 projects – the largest volume in operations since 1999 and well over the $6.4 billion approved in 2006.
“Notwithstanding the high liquidity in the region, we view these 2007 figures as demonstrating the region’s increased demand for our products and service,” Moreno says. “We also believe this reflects our partnership with and understanding of our borrowing countries – their needs and the opportunities they present.”
Yet on a more fundamental level, Moreno acknowledges that the IDB has, in many respects, been caught for many years between conflicting constraints. One problem has been the historically slow disbursement rate of IDB loans – an issue that the realignment is meant to solve. But historically, social and environmental safeguards are perceived by many to be the primary cause of slow loan turnaround.
Competition
On the other hand, the bank faces stiff competition – intentional or not – from other sources of lending in the region, among them Andean development bank CAF (Corporacion Andina de Fomenta). The Caracas-based institution is largely free of procedural red tape and can, for instance, disburse a loan in roughly three months, according to its president, Enrique Garcia.
Garcia, like Moreno, goes to great lengths to say that what’s needed is more, not less, cooperation between the multilaterals – including the CAF, the IDB and the World Bank. “All the institutions are needed,” says Garcia. “Who says you only need Citibank and not the others?”
Similarly, says Moreno: “there’s space for everybody. We’ve worked with all the regional banks and we’ll continue to work with them.”
But Garcia is quick to point out the special significance of nimble, regional-based institutions in today’s environment. “Many people were thinking that perhaps the multilateral institutions aren’t useful anymore,” he says. “But my view is that regional institutions have a special significance today.”
Indeed, Garcia wants to transform his bank into Latin America’s first home-grown, continent-wide development bank. As he puts it, “one of the most important things that has happened is the transformation of CAF from a sub-regional bank to a Latin American bank.”
One reason for CAF’s efficiency, says Garcia, is that its shareholders, with the exception of Spain, come exclusively from the region. The five Andean countries – Colombia, Venezuela, Peru, Ecuador and Bolivia – control 90% of the shares, with the rest divided between Spain, Brazil, Argentina, Mexico, Costa Rica, Uruguay, Panama, Chile, Trinidad & Tobago and Jamaica, as well as a handful of private banks.
The result is that CAF is subject to less disclosure requirements than the IDB or the World Bank and faces fewer committees with which to negotiate. Garcia – who is also able to take decision more like a CEO – maintains that it’s been possible to keep political interference at bay.
This structure stands in contrast to the IDB, owned by its 47 member countries from around the world, with the US taking the largest share at 30%. As a group, the borrowing members in Latin America have slightly more than a 50% stake in the bank, while the lending members have slightly less than a 50% share.
At the end of last year, Brazil, Argentina and Uruguay signed up as full members of CAF. Chile increased its capital participation by $1.2 billion. And Garcia expects paid in capital to increase from $4.3 billion to $10 billion in the next decade.
The bank’s lending jumped to $6.6 billion in 2007, up from $5.2 billion in 2006 and $4 billion the year prior. Meanwhile, says Garcia: “We have been focusing on areas that are important to the region.”
The bank’s strategy now is to strengthen its international relationships and is in final partnership negotiations with Italy and Portugal, each of which will contribute $50 - $100 million. Spain has already committed $118 million and $200 million in callable capital.
CAF is also looking to strengthen ties with the EU and even to work with some Arab countries. Further afield, it is signing cooperation deals with Indian and Chinese trade and development institutions.
Relative value
“There’s always been a discussion of whether multilaterals should coordinate or compete,” says former IDB chief economist Ricardo Hausmann. “I think competition is good, but we should be careful not to collude.”
According to Hausmann, CAF is “a much more streamlined institution [than the IDB] and willing to do new things. At the IDB it’s impossible to do a new operation without first writing a new policy paper. With 47 different countries being afraid of 97 different things, it’s often a tricky situation.”
Hausmann says that CAF is “much more willing to experiment. It’s enormously more dynamic. We should all learn from the successes of CAF – and the first to learn should be the board of the IDB.”
“I think CAF is an impressive institution and it shows,” he says.
Garcia acknowledges that his bank is especially nimble.“The organization of CAF is such that the board doesn’t deal with loans. Most things are approved by management. It’s very easy to move quickly.”
“The philosophy of CAF is not to impose things – we give members what they ask for,” he says. “It’s about a sense of ownership.”
But unlike the IDB, CAF does not have AAA rated creditor members. Rather, it is owned entirely by borrowing countries, almost none of whom are investment grade. but itself is rated A1 and so must absorb a higher cost of funds – which it passes on to its customers.
Going private
Still, the issue of competition cuts deep, in part because of the stance taken by the private sector towards doing business with the institutions.
Scott Swenson, partner at Conduit Capital Partners, an energy focused private equity firm, is unequivocal: “We were involved with the IDB 10 years ago and the experience was so bad that we have not gone back. They did not understand the role or culture of the private sector, they tried to crowd us and did not appreciate our equity stakes in the project.”
In contrast, he says working with CAF was far more rewarding: “They are efficient, make good decisions and move quickly. I think they serve the region so well because they understand it. This is a point echoed by many private sector players of the years.
It is precisely this kind of criticism that has compelled Moreno to overhaul its private sector strategy. “We’re paying reputation-wise for mistakes we made in the past,” he says, noting that the today’s clients see things differently.
One of Moreno’s key moves last year was the appointment of Daniel Zelikow, previously head of JP Morgan’s government institutions group, as executive vice president. Aside from taking over responsibility for implementing the realignment, Zelikow said at the time that he would “focus on developing financial instruments that are appropriate for what our clients – both sovereign and non-sovereign – want.”
Indeed, one of the most widely touted changes has been a move to expand the kinds of loans and services it offers to help countries in the region hedge against economic downturns – to take on more financial risk than it has in the past, through increased sophistication across the products it has on offer.
According to Moreno, private sector lending jumped from $600 million in 2006 to $2.3 billion last year. The president also says that he has begun discussions with the board on a new lending framework in which he expects to see the bank ramp up its loan book by some 15-20%.
“You have to lend because the demand is so high,” says Moreno.
New challenges
Going forward much of that demand will come from the region’s infrastructure financing requirements. The bank has supported infrastructure projects and given them high priority for many years, but under Moreno, the drive has acquired a new impetus. In 2007, the Bank approved 21 projects valued at $3.4 billion, including 10 private-sector projects for roughly $1.7 billion.
“There are so many challenges but the trick is doing a few things and doing them well,” he insists. As part of the realignment, the bank has broadened the scope of its clients to include the private sector and sub-national entities, in light of increased demand at the state and municipality level. To reach them, the bank has established greater presence abroad, by beefing up its country offices.
In the past year, the bank has also increased its financing limits from $75 million to $200 million for projects without sovereign guarantees. “Our goal is to finance $15 billion in the next five years, in the public sector as well as in the private sector,” says Moreno.
And he points out that, competition or not, “people want a bank that is in the direction we’re going.”