Luis Alberto Moreno: IDB shapes up for the future

Meet Chile's Mr Dependable
A controversial choice?

Moreno: IDB needs to contiuously adapt

But more than that the former Colombian ambassador to the US, who took over at the IDB last month, has the task of maintaining the bank’s relevance. This will not be easy. There is still uncertainty about what role the bank should play in financing a region that is arguably more volatile than any other. Some market players, especially in the private sector, think it should be minimal, as they view the multilateral as at best an irrelevance and at worst a hindrance.

One fund manager in London, for example, says the best thing would be “to close [the IDB] down”. He asks: “What does it do? What’s the justification for it? Development banks have outlived their usefulness. Let the market allocate capital rather than the bureaucrats.”

Michael Gavin, head of Latin American research at UBS, takes a more sympathetic line. “If the IDB is making loans to help improve the business and political context for the private sector then that kind of intervention strikes me as being sensible,” he says. He adds, though, that the bank “may need to become more creative and focused and less bureaucratic”.

Moreno is aware that the IDB needs to adapt to the changing dynamics of Latin America. “The strategy for the bank is very much laid within the principles of its founders and charter,” he tells Euromoney. “[But] what you have are changes within the countries and changes in their demands. So the bank needs to continuously adapt to serve them better.”

One of the biggest changes is that the region’s economies are much healthier than they were three or four years ago. High commodity prices and sounder fiscal management mean that Latin America is poised for some good times ahead. One consequence is that as countries become better off (and by definition less risky) they develop alternative means of financing themselves, as the fund manager implied.

Next year, for example, private flows to Latin America are forecast to reach just under $50 billion, according to the Institute of International Finance, nearly twice 2003’s total. The IDB, in contrast, will lend less than $10 billion to the region annually. Although Moreno is pleased that the region is performing better and that countries have a choice in financing tools, he also understands what this means for the multilateral.

“It puts a bigger burden on institutions such as ourselves, in terms of our relevance and the need to continue working with middle-income countries,” he says. However, he adds: “Given the nature of our hemisphere we need to continue working with countries such as Chile, Mexico and Brazil. There are still areas where we can provide support.”

The implication is clear. While strong private capital flows into the region are a sign of greater maturity, what will happen if there is another crisis? Previous experience suggests that many investors would look for the exit door, leaving lenders such as the IDB to pick up the pieces. “There is a need for a different type of commitment [to private investment] to these countries,” says one bank source.

What form this commitment will take is the subject of much debate at both governor and management levels. Ironically, one of the things the bank’s shareholders want is to expand its reach in the private sector. “Every speech at the annual meeting [in Okinawa in April] had a reference to this,” Moreno says. “However, it’s easier said than done. It needs a structure. It needs to fit the overall development goals of the bank and we need to find a smart way of doing it. This is something I will spend a lot of time looking at.”

This is not the first time the bank has questioned what its role in supporting the private sector should be. IDB management has commissioned multiple reports over the past five years on the subject. One, published in 2002, was even entitled The challenge of being relevant – the future role of the IDB. Each report reached the same basic conclusion: action had to be taken to “significantly expand and augment the bank’s activities in support of the private sector,” in the words of the 2002 report. That’s something that still hasn’t been fully addressed, according to the bank source.

Internal constraints

“We’ve not reached where we want to reach and make a strong conclusive impact on the private sector,” the source admits. One problem is that the IDB is hampered by key internal constraints. For example, its investment in any private sector project is capped at 25%. That’s partly because the bank’s rationale is to support the private sector, not to compete with it. Certainly, though, there are areas where it can make a difference – in infrastructure, for example.

At least the bank has the right personnel on board to make it a credible participant in the private sector. Before Moreno became a diplomat he worked in private equity and banking. Another important executive who joined this year is Carlos Guimãraes, the IDB’s private sector coordinator and a former head of Latin American investment banking at Citigroup. Their experience and understanding of how the private sector works and what it needs should enable the bank to adopt a fresh approach.

There are other areas where the bank is making a change. In Okinawa, Iglesias outlined an ambitious agenda for a new $38 billion lending framework to cover the next four years. That is a big jump on the $23.5 billion of approved loans made between 2001 and 2004, and covers about $20 billion of investment loans, $10 billion in policy-based lending, a $6 billion provision for emergency lending and $2 billion in concessional loans.

The framework, though, is about much more than the amount the bank intends to lend. If properly implemented it could revolutionize how the IDB does its business. The overarching theme is that the bank is moving more towards sector-based, results-oriented lending. Greater country ownership of programmes is another important aspect. Broken down, the new framework has three specific aims: that borrowing countries should think more clearly about long-term development programmes rather than individual projects; that they should build the institutions needed to monitor their progress; and that they and their creditors should understand their targets.

The ideas are similar to those that the US government has laid down for the IMF and the World Bank. Although it’s too early for Moreno to make a clear judgement on the framework’s initial impact, he does think “it’s very important” to the bank’s future. “It gives the bank the possibility to adapt to the changing needs in the countries – it provides greater flexibility,” he says. “Clearly many of the discussions the regional managers are having are along the lines of the new framework.”

History

The bank’s staff is a third area demanding Moreno’s attention. This is not an issue of quality, he says. It’s about something much more mundane. “There are a lot of people who are getting close to retirement age within the bank so [a generational] change will take place within the next 24 months,” he says.

Will the bank take the opportunity to hire more people with a private-sector background? “I think that depends on the particular job,” says Moreno diplomatically. “I don’t think it necessarily has to be public or private sector. We want people with the best capabilities. I don’t see having a private sector background is a necessity per se. Of course if they are going to be in the private sector arm of the bank, it would be good to have experience and knowledge of the private sector.”

One thing Moreno is keen to maintain is the bank’s culture and tradition. “It’s a very large institution,” he says, “with a lot of history. It’s doing a lot of good in Latin America.”