© The Financial Times Ltd 2015 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
November 13, 2013 9:04 pm
A key strategy of the Inter-American Development Bank (IDB), which provides development financing for Latin America and the Caribbean, is tapping into the efficiencies of the corporate sector to create jobs and provide essential goods and services.
But after a recent review, the bank is considering an efficiency of its own – streamlining its private sector activities. It is a move that could create job opportunities within the organisation.
The IDB’s private sector operations have expanded rapidly in recent years: combined approvals by its lending arms have averaged $1.5bn annually for the past five years.
Providing funding to companies increases the IDB’s ability to tackle poverty while allowing it to help enterprises in its region to expand and increase their profitability.
“The private sector can bring new, sustainable business models, along with innovations, technology, cutting-edge expertise and scale,” says Veronica Zavala, head of the IDB’s strategic planning and development effectiveness office.
To maximise this potential, the IDB is thinking of merging the units that manage its private sector activities.
Through its various arms, the IDB has developed innovative financing mechanisms. In Mexico, for example, the Opportunities for the Majority initiative, which supports projects aimed at lifting the region’s poorest communities out of poverty, gave a partial credit guarantee to Cemex, the building materials supplier, to help it expand its Patrimonio Hoy scheme. This provides the small loans, materials, labour and technical assistance needed for low-income communities to build or renovate homes.
But as the private sector operations have grown across the bank to meet the evolving needs of its member countries, each division has offered different types of financial instruments, with its own management and measurement processes.
Efforts have been made to improve co-ordination between the various units, but the fragmented nature of the IDB’s private sector activities still creates inefficiencies and reduces opportunities for cutting costs.
“Overcoming these limitations will unleash new potential and enhance our impact,” says Ms Zavala.
As well as increasing efficiency, a merger of the divisions would allow the bank to offer its clients a wider range of financing instruments, such as equity investments, which only the Inter-American Investment Corporation, an entity that provides financing and technical assistance to small and medium-sized companies, is currently able to make.
Expanding its range of financial instruments could mean hiring staff from the private sector, explains Ms Zavala. “We will probably require skills we don’t fully have now, since our charter at the IDB doesn’t allow us to do equity,” she says. “So once we are merged, we will be looking for other talent.”
She also believes that former private sector executives can bring useful perspectives to the bank. “We always need that balance between the experience of people coming from the public sector who understand multilaterals and people from the private sector who have developed new approaches.”
Changes include a shift in culture and adopting more market-driven practices. “The approach to risk is different in the public sector from the private sector,” says Ms Zavala.
Details of the merger have yet to be finalised. The next step for the bank is to present options to its governors, – finance ministers and officials from its 48 member nations – early next year.
However, once the merger is completed, Ms Zavala is convinced the benefits of having a single entity dedicated to private sector activities will allow the IDB to tailor financial products to the demands of the market and to work with other development finance institutions such as philanthropic organisations, foundations and sovereign wealth funds.
Ultimately, this will make the IDB’s funding go further. “The reorganisation will allow the bank to achieve a greater development impact per dollar deployed,” says Ms Zavala.
Copyright The Financial Times Limited 2015. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.