How IDB's private sector lending reform will play out

The Inter-American Development Bank is in the middle of a restructuring process that aims to help the Washington, D.C.-based institution better integrate and manage its private sector lending arm. While views differ on what that restructuring will look like, the bank’s management and shareholders are eager to make significant changes to how the bank operates. During a panel discussion at the Center for Strategic and International Studies on Monday, several current members of the IDB’s board of directors said the reforms are essential to the bank’s relevance in the region. “We’re asking ourselves, what’s the best way of maximizing development impact?” said Gustavo Arnavat, the outgoing U.S. executive director to the IDB. “All the shareholders recognize that we have to do a better job when it comes to how we deploy our capital in the private sector.” Integrated approach Latin America and the Caribbean have over the past few years seen a significant increase in economic growth, trade and investment over the past decade, and the region is home to a number of strong middle-income countries that have access to private capital, as well as to emerging donor nations like Brazil. But IDB — despite a major capital increase that has boosted the bank’s lending capacity significantly since 2008 — is still trying to find the right role to play in an increasingly crowded space. “I think that the space requires an integrative approach,” IDB President Luis Alberto Moreno told Devex last week, citing the range of public goods, from roads and energy infrastructure to schools and clinics that increasingly involve the private sector. Under the bank’s current lending structure, he said, “there are a lot of synergies that you are missing.” Moreno declined to elaborate on precisely what current plans for an integrated private sector lending arm look like, saying that he would be presenting a plan to the board of governors at the bank’s annual meetings next April. However, the restructuring will likely merge the bank’s multiple private sector arms like the Multilateral Investment Fund and the Inter-American Investment Corp. with the private sector portion of IDB’s “ordinary capital.” Moreno recently suggested the bank might use the International Finance Corp., the World Bank’s private sector lending arm, as a model. “The IDB has tremendous potential to play a catalytic role with the private sector and the policy framework for private sector growth in the region,” said Kurt Kisto, an IDB executive director for a number of Caribbean countries, emphasizing in particular the bank’s knowledge of the region. He also pointed out that a number of Caribbean countries have some of the highest levels of public debt in the world, and therefore are unable to absorb more public sector financing. “Necessity drives change,” said Kisto. In or out? Leo Kreuz, IDB executive director in charge of another group of countries including Germany and China, recommended “a reality check on what the IDB can realistically finance with the resources likely to be available.” Kreuz gave some insight into the areas that the bank may focus discussions, saying priorities for private sector lending should include countries with less developed financial markets, assistance to small- and medium-sized enterprises with no access to commercial lending, clean energy and environmental investments, long-term financing for venture capital, loans available in local currencies, and efforts to provide counter-cyclical lending. Arnavat agreed with Kreuz’s ideas, in general, saying that the bank should “only intervene where there is a market failure.” In addition to specific priorities, though, the bank will also have to build consensus on the big question of whether the new lending arm will exist within the bank’s normal lending structure or outside of it. In a recent policy paper for the Center for Global Development, Scott Morris, former deputy assistant secretary for development finance and debt at the U.S. Treasury Department, pointed out the many implications for shareholders — especially the United States — that the restructuring could bring. And it’s unclear, he said, if the bank’s management, which seems to favor private sector lending arm that is outside the bank’s ordinary capital window, has gotten its shareholders on board. Morris however believes it’s better to have the question of the bank’s role driving the discussion. “In general, IDB shareholders are right to prioritize the question, ‘What?’ at this stage,” he wrote in the document. “After all, it’s probably better to keep whatever jalopy you have than to build a new car that gets you to the wrong destination faster.” Read more development aid news online, and subscribe to The Development Newswire to receive top international development headlines from the world’s leading donors, news sources and opinion leaders — emailed to you FREE every business day.