The Washington DC headquarters of the Inter-American Development Bank (IDB) feel like a different place two years after Luis Alberto Moreno took the helm as president. There is less apathy and a tangible sense of industriousness as Moreno starts to deliver on his pledge to make the multilateral more relevant.
In Latin America, where the private sector has usurped the public sector as the driver of economic productivity, multilaterals from the IMF down have struggled to find a purpose. The IDB began in July the shift from a loosely affiliated group of three financial institutions to a streamlined matrix structure more typical of private sector banks. Moreno introduced a hierarchical structure, with an executive vice presidency and four vice presidents cementing a model that is less centralized. “We need to have a change of culture in the bank, and in a related way more accountability within the institution,” Moreno tells LatinFinance.
Moreno prides himself on accountability, merit and results within the new IDB. He is flanked by Dan Zelikow, a former investment banker from JPMorgan, as executive vice president, which Moreno likens to a chief operating officer. He also appointed Carlos Hurtado, former under secretary of budget at Mexico’s finance ministry, as the IDB’s vice president for finance and administration in March. Otaviano Canuto, previously Brazilian director to the World Bank, became vice president for countries in June. Moreno says the executive search for the two other vice presidencies should be completed by September.
With the management team in place, he will have senior managers overseeing the following four sectors: Countries; Sectors and Knowledge; Private Sector and Non sovereign Guaranteed Operations; and Finance and Administration
A parallel initiative launched in June encourages long time staffers from the IDB’s 2,000-strong workforce to consider mutually agreed separation packages. Moreno declines to offer any number or percentage of people he expects to leave, saying it is a process that is underway and should be completed in October.
Although the restructuring is about increasing efficiency at the bank, it is also about internal promotion, says Moreno. Hans Schulz took over as manager of the structured and corporate financing department on July 1. He was previously head of the financial markets group. Roberto Vellutini became manager of the infrastructure and environment department, also in July. He was head of operations within the private sector department previously. And an executive search is underway for a second management layer below them, with candidates from inside and outside the IDB being considered.
Carlos Novis Guimarães, former private-sector coordinator at the IDB and Chairman of Brazilian real estate firm Invest Tur, who has worked with both Schulz and Vellutini says the appointments underscore Moreno’s drive to recognize merit and reward results. “He has really focused on people with a proven track record, and promoted them over other people for those roles,” says Guimarães.
Raising the Lending Limits
The reorganization, which Moreno says he has worked on for two years, started in earnest in July and will be rolled out over a six-month period. Moreno wants the different segments of the IDB Group – the IDB, the Inter-American Investment Corporation and the Multilateral Investment Fund – to work together. Previously, the bank was divided among three regions – Meso-America, the Andean and Mercosur countries. “Each region had their own experts on sectors and knowledge and they had people who did client relations. The only way they could talk was through informal networks at the bank,” explains Moreno. He notes that the structure multiplied the banks efforts and delayed its response time to clients.
At the same time, Moreno has managed to get the IDB’s board to agree to a policy change allowing the bank to lend to sub sovereign entities without sovereign guarantees, extending its client base to corporates in the public sector and municipalities and allowing it to get involved in refinancings. The bank also raised the lending limit IDB loans and guarantees to private sector projects to $200 million from $75 million, and $400 million to projects of strategic importance.
Schulz says the private sector department also has a mandate to broaden the palate of financial instruments to include structures with mezzanine debt, for example. It plans a radical redesign of its local currency lending instruments. Schulz says the idea is to remove some of the rigidities that make them less appealing to borrowers such as receiving board approval first for a loan in dollars, followed by a request from the borrower to convert an individual disbursement into local currency and subsequently assuming the currency conversion risk.
Richard H. Frank, CEO of EM private equity investment firm Darby Overseas Investments, who has held several senior positions at the World Bank group, says the IDB could make its biggest impact in infrastructure finance. According to a World Bank report, LatAm is investing less than 2% of GDP per year in infrastructure and needs to invest between 4% and 6% over the next 20 years to catch up with South Korea. Frank says the bank would find great demand for its technical expertise if it could find a way to separate this from the subsidized loans that are its bread and butter.
“The money is there. The regulatory frameworks need work, the concession contract terms need work and the region needs multilateral development bank technical advice and assistance that is unbundled from their public sector loans,” asserts Frank.
He identifies information dissemination as another area the bank could pioneer. “How you widely share knowledge and experience on what has already been achieved in the area of infrastructure is an ideal agenda item for the IDB. Try building a Latin America infrastructure website,” suggests Frank.
Fewer, Larger and Speedier Deals
While the IDB strives to gain momentum with the new structure, it hopes to showcase its improved operating structure with fewer larger deals. Schulz says, “We are going to be much more selective going forward, picking highly visible and large opportunities rather than a lot of rather small diversified opportunities.”
For example, the IDB committed a local currency partial credit guarantee for up to $400 million for the local currency refinancing of infrastructure loans on the FARAC toll road concession granted to a Goldman Sachs-led consortium in July by the Mexican government. In April, the bank earmarked $3 billion to support biofuel projects in Brazil including $570 million in senior debt financing for three Brazilian ethanol production projects and $2 billion for five biofuel transactions or projects with biofuel components. In July, it approved its first private sector financing for a bioenergy project in Brazil, for a total of $120 million.
Schulz says clients should start noticing a dramatically faster processing time for projects as early as September. “We used to be very slow. It could take between nine months and three years. Now a straightforward loan should be turned around within 90 days from mandate letter to disbursement,” says Schulz, adding that more complex financing such as structured finance and project finance will take longer.
This in turn should accelerate approvals. The Bank hopes to move from $2 billion in approvals this year from a low point of $400 million in 2004, to $3 billion in three years and raise its use of loan capital from 3% to a 10% limit within three years, says Schulz.
The bank could do even more, say critics, who would like to see it eliminate altogether the 10% lending limit on capital outstanding. Moreno says the IDB must convince its shareholders that the reorganization has accelerated “additionality”, or the multiplier effect of its loans. He adds that the simple way to satisfy its 47 lending countries is through producing results.
“We must make a sufficiently strong case that we are doing the right thing. To be in areas where there are market failures and where we help bring in new lending.” He expects this to take time. “We are in a no rush to do it. We want to do it right,” Moreno concludes. LF