IDB reforms, new funds have been approved. What's next?

The Inter-American Development Bank’s board recently approved a new direction, and fresh money, which will lead to a shake-up of the organization’s culture and a different way of doing business. That process of change and reform is now underway. Central to the new strategy is a change to how the bank defines success. No longer will it be measured primarily by the number of projects completed or dollars out the door, but development impact will be the driving metric for the bank, IDB President Ilan Goldfajn told Devex. “We are going to make the institution care deeply about what is the ultimate result of our work and less about how much we lend, what is the envelope,” he said in an interview. That means success will be measured by whether a project lifts people out of poverty, gives them access to clean water, or lowers carbon emissions. “This may seem easy, but it’s very difficult because it means that we have to change the culture, that we have to change incentives,” he said. In March, IDB’s board approved $3.5 billion for its private sector arm, IDB Invest, and $400 million for IDB Lab, its innovation and venture branch. In addition to new capital from shareholders, the bank has said that by easing capital requirements it could invest another $50 billion over 10 years. It has already begun injecting $1-2 billion more every year as a result of those reforms, Goldfajn said. “We’re quite ambitious, we want to have a very different IDB,” he said, adding that despite all the proposed changes there is no need to do a “major restructuring.” IDB has used the current shareholder attention to reform and modernize multilateral development banks to get buy-in and help push through the changes. Its leaders hope to set an example for other MDBs and help create a new operating model that responds to current needs and can better attract private investors. “The private sector is screaming and shouting asking for multilaterals to take more risk,” IDB Invest CEO James Scriven told Devex, referring to the role MDBs should play and the types of products they should offer to spur private investment in challenging environments. Institutional reforms The bank’s new institutional strategy has three core objectives: Reduce poverty and inequality, address climate change, and bolster sustainable growth. To get there, IDB will work across seven operational focus areas including biodiversity and climate action, gender equality and inclusion, institutional capacity, rule of law, sustainable infrastructure, and regional integration. A first step in the reform effort is a new development effectiveness plan, which outlines key moves to change the way the institution operates. The plan was approved last week by Goldfajn and includes creating indicators and incentives to push a focus on impact. Employees will be compensated and promoted in line with the new metrics and not just on the volume of deals they do. The plan requires board approval. IDB will also create a new impact evaluation framework that is measurable throughout the project’s lifecycle. This approach to continuous monitoring will allow the IDB Group to identify when things go wrong ahead of the end of project review and adapt accordingly. “We cannot be ashamed of changing course. We can course correct, we have to have the courage,” Goldfajn said, adding that part of reform is cultural, encouraging employees to discuss what’s not going well and learn from those experiences. It’s about rewarding people when projects go well, but also when they admit a change is needed, Goldfajn said. He wants staff “identifying critical projects that made a difference that will be remembered for decades. Not the easy ones, not the ones that the political cycle tells us to have, but the ones that really make a difference.” “The private sector is screaming and shouting asking for multilaterals to take more risk.” --— James Scriven, CEO, IDB Invest The overhaul includes a change to how IDB works with individual countries, especially on the public sector side of its business. The bank is known as “banco amigo,” or “friend bank,” in part due to its presence throughout Latin America, but also because it has sometimes supported projects tied to government priorities. While that close relationship will remain, Goldfajn said, it also needs to change. IDB doesn’t want to alter its priorities each time a new government comes in, he said, adding that “is not impact, impact is not about just spreading your efforts, spreading your resources.” Instead, it will look for the intersection of IDB objectives and those of the government and work together in those areas, including climate resilience, poverty reduction, regional integration, and infrastructure. IDB Invest The IDB Invest capital increase roughly doubles the amount of paid-in capital from shareholders, allowing it to expand and change its business model to take more risk, James Scriven of IDB Invest told Devex. While the broader strategy aims to bring more collaboration between the different parts of the IDB Group, its focus on growth and productivity driven by the private sector will also translate to a greater share of work done through IDB Invest, the bank officials said. Today, about 44% of the IDB Group’s business is through its private sector arm, but with the capital increase it could be 50% or more, Scriven said. IDB Invest has called its new business model “originate to share.” The idea is that while it may structure an investment deal, it will put less of its own money in — say, 20% — and instead seek private sector funding to cover the bulk of the transaction allowing it to do more, Scriven said. IDB Invest has already used this model in projects. In 2023, it structured a $368 million loan to AES Dominicana Renewable Energy for three renewable energy projects in the Dominican Republic. It also refinanced the short-term debt of three other projects. While IDB Invest put the deal together, only $37 million came from its own funds, with the remaining contributions from 21 financial institutions, including JPMorgan Chase, Banco Latinoamericano de Comercio Exterior, and the Bank of Nova Scotia. The deal was the largest financing transaction for renewable energy for a Caribbean economy and demonstrated a 10-to-one mobilization ratio for IDB Invest. It’s the type of deal that IDB Invest wants to do more of, though Scriven was quick to say that mobilization rates will be higher in countries with better credit ratings, such as the Dominican Republic or Costa Rica. In contrast, in a place like Haiti, it may be zero. “The ratios of mobilization are second to no other multilateral institution and we’ve been able to prove that this model works and it’s scalable,” Scriven said, adding that the overall mobilization goal across its portfolio will be 2 dollars of private capital for every dollar IDB Invest spends. The money from the capital increase will start flowing next year, and a three-year implementation strategy will align with the new funds. As part of that, IDB Invest will make three changes: Increase its risk appetite, double down on different investment products — particularly those that get private investors involved — and hire additional staff, primarily within country offices. “You might look at the risk appetite framework of all the multilaterals and you’d be surprised that it is a development institution and you would read it as if it was a commercial bank,” Scriven said. That means IDB Invest must go “downmarket” and work with riskier markets, institutions, and clients and use products that are riskier or require more capital, he said. IDB Invest plans to quadruple its equity investments from $50 million to $200 million a year, do more local currency financing — in high demand given currency risks — and increase its advisory work to help develop bankable projects. A new risk appetite framework providing more details about how IDB Invest will take more exposure will be presented to the board later this year. While the threshold is much lower than any fund or commercial bank, “what we need to show the market is that we can profitably invest in a country,” Scriven said. The new funds will also allow it to expand its staff from 450 to about 700. Most of the new employees will be hired in the countries where it invests so they are closer to clients. The bigger MDB picture Goldfajn isn’t interested in signing an endless string of memorandums of understanding that lead nowhere — he wants specific and strategic partnerships and cooperation. “We’re not in the business of just signing stuff, declaring love for another institution,” he said, adding that an accompanying action plan is required every time an MOU is pitched. He also wants the heads of the multilateral development banks group, an informal forum for the leaders of MDBs, including the regional institutions and the World Bank, he leads this year, to be action-oriented rather than just a semiannual confab for leaders to share what they’re doing and then go on their way, he said. “We’re actually going to work together. We’re having a very tough time getting all the 12 MDBs to define a concept note and actual deliverables for this year,” but he believes they’ll get there. The goal is to announce the deliverables at the meeting of the group during the World Bank-International Monetary Fund Spring Meetings later this month. While Goldfajn declined to share details ahead of an agreement, the institutions want to improve collaboration on measurement, how they define goals around mobilization, and improve coordination at the country level. “The MDBs have not changed the way they operate to get to the trillions. What we are suggesting is that the model of how MDBs private sector invest is obsolete and it will never take you to the trillions so we might be testing a new model,” Scriven said. Trying to get the MDBs to agree on something is “tiring,” in large part due to the inertia of large institutions, Goldfajn added. “We are in a place where inertia is not the solution anymore. So somebody needs to take a risk. We’re willing to do it and we are willing to somehow lead in that regard,” he said.