The Inter-American Development Bank is in the process of forming a new entity to handle its private sector activities, according to a bank employee with knowledge of the plans.
Bank officials are discussing details around the new institution — which does not yet have an official name but is being referred to internally as New Corp. or IIC+ — this week at the annual meeting of the board of governors in Busan, South Korea, which ends Sunday.
It would be the latest in a series of moves by multilateral and bilateral aid agencies over the past few years to create new financing instruments and tap into corporate investments in the developing world which far outnumber official development assistance.
IDB has increasingly focused on private sector engagement as ODA to the region has steadily decreased and as Latin America has risen to middle-income status with healthy private sector competition.
With the new move, all private sector operations will be “merged out” and joined under the Inter-American Investment Corp., a member of IDB that promotes private sector development in the region.
The new entity would require new funding but would be a compilation of the bank’s four existing private sector windows — IIC, the Structured and Corporate Financing Department, Office of the Multilateral Investment Fund and Opportunities for the Majority Sector — according to the employee, who wished to remain anonymous since the bank’s press office did not respond for comment on the new venture.
“From early feedback we received from various private sector companies, we understand that it is of prime importance to have a dedicated entity that focuses on private sector operations,” the board stated in a document from last year’s annual meeting of the board of governors, where the “Renewed Vision Merge-Out High Level Implementation Plan” for the private sector was approved.
The bank’s governors at that meeting offered suggestions for the “new entity”: It would need new shareholder capital and efficiently use existing capital by not providing countercyclical budget support to borrowing member countries in order to avoid overlap with assistance provided by the International Monetary Fund.
The board asked IDB to explore the pros and cons of setting up an asset management company for the new entity, following the example of the International Finance Corp., a World Bank Group institution that offers investment, advisory and asset management services to encourage private sector development and to which the forthcoming IDB entity is being compared.
The governors also recommended the new institution enhance country focus, strengthen cross-sectoral collaboration and increase delegation of authority to field offices.
When asked for comment this week, Latin American development policy analysts showed some skepticism and had many questions about the plans.
Ariel Fiszbein, director of education at the Inter-American Dialogue and who was previously chief economist for the World Bank’s Human Development Network, said that based on his experience with the World Bank, he would expect IDB to face challenges lending to both firms and governments.
“It is tricky to make compatible the logic of a body focused on lending to for-profit firms and one focused on lending to governments,” Fiszbein told Devex. “The WBG has struggled to act as a group rather than as the combination of two separate organizations.”
IDB governors wrote last year that “if the IDB Group were to face a trade-off between lending to the public sector versus lending to the private sector, priority should be given … to private sector lending,” as safeguarding current credit ratings of IDB remains “of utmost importance.”
Standard & Poor’s rating agency, in an assessment of IIC last year, suggested it would assess the effect of a final private sector activity merge-out plan on the financial sustainability of both IDB and IIC once more detailed proposals became available after the IDB management developed transition and capitalization proposals for consideration by its governors at the meeting currently taking place.
The agency said it expects IIC to originate new loans; although IDB will transfer administrative supervision of its nonsovereign-guaranteed loan portfolio to IIC, the portfolio will likely remain on IDB’s balance sheet.
IDB’s consolidation of private sector operations makes a lot of sense, said Cynthia Arnson, director of the Latin American program at the Woodrow Wilson International Center for Scholars, since public-private partnerships are “a big new focus of development financing.”
“It’s important to go beyond government-backed loan guarantees to private companies and give different actors a stake in long-term outcomes,” Arnson told Devex.
Arnson cautioned, though, that the real question now is whether small and midsize enterprises will be on equal footing with large or multinational corporations so that they don’t become another example of what many have referred to as “corporate welfare.”
Dan Runde, director of the Project on Prosperity and Development at the Center for Strategic and International Studies, questioned how a merge out would affect MIF, which he called “one of the best and important things in the multilateral development system” for its flexible provision of grants, equity investments, loans, assistance and investment in Latin America.
“What will happen to the kinds of approaches that the MIF has led in the past 20 years at the IDB? Will the functions of MIF still exist at $100 million a year?” he asked.
IFC pays a tribute tax of several million dollars a year to the World Bank, Runde said, and given that this new IDB institution will create profit, a big question is what the IDB will do with those profits.
“Will it all go to increasing investment capital? I don’t think it should. Will the MIF-like mentality survive and will it be financed through profits? I think it should,” said Runde, suggesting profits should be split three ways into investment capital, funding MIF-like activities, and tribute tax for its work as soft lending window.
The governors last year stated they “recognize the value of the MIF for sustainable poverty reduction and stimulating innovation” but negotiations for its replenishment should be done hand in hand with the new private sector reform, taking into account decisions around capitalizing the new institution.
Moreover, Runde raised questions on big picture geopolitics, asking what size share China will have versus the United States in the new entity. The US currently has 30 percent of the share of the broader IDB, but it is unclear whether this will carry over amid China’s increasing presence in the region.
Is IDB’s decision to merge out all its private sector operations a sound one? Let us know by leaving a comment below.
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