IDB Restructuring: What Does It Mean?

22 January 2007 | Washington, DC

An overview of the "why" and "what" of the recently announced IDB reorganization and realignment. Analyzes the risks and opportunities based on the best information BIC has obtained through extensive interviews with IDB staff and leadership.

Why reorganize?

President Alberto Moreno, a Colombian and former ambassador to the United States, assumed control of the IDB in the fall of 2005. By the date of next IDB Annual Meeting at Belo Horizonte, Brazil in April of 2006, Moreno had put forward a significant proposal to "realign" the Bank. This proposal built on changes initiated with the "New Lending Framework" introduced at the 2005 Meeting in Okinawa, but ultimately went much further, suggesting a fundamental institutional restructuring of the IDB.

Why change now? For context we must recognize that Moreno inherited a 46-year-old institution that had only three Presidents in its history. Enrique Iglesias had just resigned after presiding for 17 years. The IDB had last been retooled in 1994, during the waning days of the high season of structural adjustment and in the same year NAFTA came into effect. President Moreno surely desires to leave his own mark on this uniquely Latin American IFI.

More importantly, however, the IDB is facing severe questions about its relevance as a lender to Latin America. Subregional lenders like the Corporacion Andino de Fomento (CAF), national institutions like the Banco Nacional de Desenvolvimiento Economico e Social of Brazil, governments like the Chinese, as well as revenues from hydrocarbon and mineral exports, are increasingly financing development projects in the region. These other institutions, often with lax environmental and fiscal controls and only slightly higher interest rates, are directly competing with the IDB. Meanwhile, a new crop of socialist and left-leaning governments in Latin America are dubious of the merits of doing business with the international financial institutions and their neoliberal blinders. Presidents like Evo Morales in Bolivia and Hector Correa in Ecuador have made clear their disdain for the IFIs. With Chavez in Venezuela willing to lend a hand, the IDB is being pushed to the margins.

Key points of the reorganization

In the months since it was first suggested, the details of Moreno's realignment have been fuzzy. What was clear from the very beginning, however, was that it was designed primarily to help preserve the IDB's relevance by helping it get funds out the door quickly to the borrowing countries. Key buzzwords repeatedly used to describe the process are "agility," "flexibility," and "decentralization."

The IDB Board of Directors officially "approved" the reorganization at its meeting on December 14, 2006, which combined with previous information, provides more clarity that under the new structure the IDB will:

• institute a multi-year institutional budgeting process for the institution;
• create quicker mechanisms for preparing and disbursing loans, with the aim of cutting loan preparation times in half and shortening time between approval and disbursement;
• renew emphasis on large infrastructure projects, supported by a new "InfraFund" for feasibility studies;
• increase lending to sub-national entities, like provincial or large municipal governments and quasi-governmental companies (i.e. parastatal enterprises)
• be permitted to lend to a broader array of borrowers not backed by sovereign guarantee; whereas previously private sector loans could only be made for infrastructure, capital markets and trade financing, sectoral restrictions have now been lifted (such lending can for now not exceed 10% of the IDB's portfolio);
• raise the maximum loan amount for the private sector (PRI) department in a single project from $75 to $200 million - and up to $400 million in "extraordinary" circumstances;
• introduce new financial products, such as sector-wide approaches (SWAPs);
• delegate more responsibility to the country offices;
• create civil society advisory councils (CASCs) in all the countries of the Bank;

New IDB structure

The new proposal also includes an organization restructuring of the Bank. The institution had been organized around sectoral lines until the Eighth Replenishment of 1994, the last major resource infusion to the IDB. After 1994, the three geographic regions -- known as Regions 1, 2, and 3 --  became the primary structures through which lending was channeled, with departments such as Sustainable Development (SDS) and Trade and Integration (INT) playing a supporting role. The 1994 reorganization also created the Private Sector Department (PRI). (The IDB's current organizational structure can be viewed online).

In the proposed new structure, which seems to represent something of a return to the "good old days" the Bank will be organized under four powerful vice presidencies who will report directly to the President and to the Executive Vice-president of the Bank:

• Vice-president of Countries;
• Vice-president of Sectors and Knowledge;
• Vice-president of Private Sector and Non-sovereign Guaranteed Operations; and
• Vice-president of Finance and Administration

The offices operating under the Vice-president of Countries are expected to be the most powerful, as they will lead the country programming process. This implies deep control for the operational budgets designated for public sector lending, especially if the IDB continues an apparent trend toward modeling more closely the structure and practice of the World Bank (more on this below).  It is also expected that the elevation of the Private Sector to one of the four critical vice-presidencies, despite representing under 10% of lending, will give this unit new power and prominence. The Private Sector Vice President will now be able to better coordinate and legitimize the work of private sector actors, including combining activity of the current PRI department with lending by the Multilateral Investment Fund (MIF - public lending mostly for small enterprise) and Inter-American Investment Corporation (IIC - small private sector loans and capital markets).

No IDB insiders yet have a grasp on possible candidates for the Vice Presidencies. There is expected to be healthy competition between the US, Europeans, and major South American countries including Argentina, Brazil, and Mexico, for control of these positions. Rumor has it that the United States is seeking the Vice Presidency of Finance and Administration, presumably to continue to exert the type of operational control it maintains by its historical control of the Executive Vice President's office in the current structure.

Sectoral expertise in the new structure

On the positive side, the new structure should allow the IDB to consolidate its knowledge base, bringing reinvigorating sectoral expertise that has lapsed significantly at the IDB in recent years. The Regional departments currently operate like independent fiefdoms and specific knowledge is not distributed or disseminated throughout the IDB structure. For instance, there are quite literally only two or three experts on Taxation and two or three experts on Electricity in the entire organization. Under the new structure, as an example that has been suggested, what is currently an ad-hoc group on Biofuels could now find a permanent home. It is also expected that more sectoral experts will be placed in the regional offices, to talk back regularly to DC, in what is part of a process of decentralization and delegation.

However, it is unclear how these intellectual nodes of "Sectors and Knowledge" will relate to the centers of lending and budgetary power. As described above, the Countries Vice president and his Directors of countries will steer the lending process, and they will have to invite the sectoral experts in. There has been some mention of "matrix teams," but it is unclear what specifically this will mean for project preparation and design. There is a real danger that the current stove-piping of the IDB will simply be transferred into the new structure.

Decentralization

The IDB realignment also makes consistent mention of increasing decentralization. This is considered a key demand of the borrowing countries, especially as it related to fiscal controls, internal procedural controls, and procurement. Currently, the IDB insists on its own oversight systems, but borrowing nations are pushing for approaches that utilize country systems. By and large, the U.S and Europeans are against ceding these Bank risk reduction measures to the borrowers, and letting the proverbial fox run the hen house.

In addition, decentralization suggests that new powers vested in the Country directorates in Washington and especially the Country Offices in the region. One of the significant differences between the IDB and World Bank to date has been that the World Bank maintains a more meaningful presence in country, with relatively senior-level Country Representatives who are engaged in the programming process and sectoral experts who are responsible for significant project oversight. It seems the IDB is trending in a similar direction, though there will surely be institutional difficulties in moving personnel out of the IDB's cozy DC confines and back into the countries from which they came.

Implications for the Environment

President Moreno has led the IDB in setting a goal of $12 billion in infrastructure financing over the next five years, which would represent 40% of typical lending flows. This renewed emphasis on making the IDB the "Infrastructure Bank" is part of an attempt to salvage the IDB's flagging relevance to its borrowers in the region. It confirms a trend away from smaller, empirically-grounded development projects toward the type of massive, works-based projects that sitting governments enjoy building and that enable the IDB to move large loans quickly. 

Insider information suggests that just before his departure, President Iglesias and his team had decided to augment the staff and resources of the Environmental Unit, dedicated to environmental quality assurance. Changes would have elevated the staff and Unit positions within the IDB, streamlining reporting to one department director responsible for environmental issues, and thereby ensure implementation of the key recommendations of the IDB's Blue Ribbon Panel on the Environment. Unfortunately, this environmental momentum seems to have faded in the first year of Moreno's administration.

During the reorganization it is expected that Safeguards will become a separate unit; its relevance will then hinge on the degree this Unit is able to penetrate the programming process. Will environmental and social specialists be marginalized voices on "matrix" teams that are reviewing loans. Or will they be given new respect amongst colleagues when evaluating difficult projects? Only time will tell.

Regarding the two major regional infrastructure initiatives, IIRSA and Plan Puebla Panama, the implications of the reorganization are unclear. Critical staff believe that coordination for these two offices will continue in a similar fashion to the present, with a cross-unit team operating a small organizational center out of the Infrastructure corner of the IDB. However, it now appears that such initiatives will be managed under the Sectors and Knowledge Vice President, and more information on how exactly this will be configured is unavailable.

It has been suggested that the private sector department (PRI) will end up with its own environmental unit, a cozy companion to its new lending capabilities. This would isolate and compartmentalize environmental risk analysis, and given PRI’s high-profile failures to demonstrate core competency in environmental due diligence in recent projects, would represent a step in the wrong direction. Some significant penetration upstream in the process into medium-term planning frameworks on the private sector side will also be necessary if environment is not to be limited to smaller decisions about mitigation of particularly damaging projects.

Similar concerns apply to indigenous peoples' issues, where there is a danger of the Indigenous Peoples Unit losing critical mass (in terms of human and financial resources) and the accompanyting visibility required to influence institutional behavior. Rather, there is risk of an unfortunate shift to prioritizing mitigation over safeguards, simply trying to soften unacceptable impacts from a new generation of big infrastructure projects. It remains unclear whether "mainstreaming" will continue to be the trend at the IDB, or indigenous peoples and environment will both be pigeonholed, isolated as small teams within a Bank redesigned to push project lending out the door.

The IDB is increasing its policy-based lending (PBL), disbursing large chunks of money rapidly to support government priorities. This means that if environmental and social impacts are to be considered, they must enter into the dialogue upstream; that is, during the programming process.

Overall, the fate of social and environmental issues in the new realignment is unclear, but things aren't looking good.  When describing the new structure, sustainable development and poverty reduction are almost never mentioned by Bank officials; they seem to have been relegated to side topics, secondary to Infrastructure and Integration. Several bank officials familiar with drafts of Moreno's proposal have described what were formerly Sustainable Development - SDS - and Environment - ENV - as simply little boxes tacked onto the organizational structure. They have been clear that for Moreno and his planning team, environment is "at the bottom of list of priorities."

Comparison to the World Bank

Much of the restructuring underway at the IDB suggests movement toward increasing parity with the World Bank. The World Bank has 27 Vice-Presidential Units, which can be divided into three groups: Regional, Network, and other. The Regional vice-presidencies control a large-degree of decision making on Bank operations within their own regions; they will resemble the Country offices under the new IDB structure. The World Bank's Network vice presidencies are responsible for cross-cutting issue areas, and include private sector development and human development.

The IDB's renewed focus on infrastructure lending, combined with the increasing prominence of private sector lending and the lack of clear roles for the environmental experts, also bear resemblance to changes at the World Bank.  To accompany a significant return to "high risk / high reward" infrastructure lending World Bank President Paul Wolfowitz announced the merger of the former Environmental & Socially Sustainable Development (ESSD) and Infrastructure vice presidencies into a new Sustainable Development vice presidency and then named the Infrastructure vice president to head it.  This conflation of environmental and infrastructure functions took place in the summer of 2006, thus it is early to see results. However, civil society remains concerned that the loss of a central, independent voice on environment and social issues threatens sustainability Bank-wide. BIC has analyzed these risks in a policy brief, "Mainstreaming or undermining sustainability? The merger of the World Bank’s environment and infrastructure networks" (July, 2006). These include the possibility that "environmental and social development staff may simply be grafted onto an entrenched infrastructure agenda without being able to change its content or character."

One additional important item to track is that the World Bank has vice-presidents of Human Development and Poverty Reduction & Economic Management, whereas these critical development foci currently missing in the proposed IDB structure.

Building Opportunities for the Majority

One of the functional changes to accompany the new reorganization was the launch of the "Building Opportunities for the Majority" initiative, meant to invert the investment pyramid and bring poorer segments of Latin America's population into the markets. This is a pet project of President Moreno's, and was launched with great fanfare in the summer of 2006 with the support of luminaries as Peruvian economist Hernando de Soto, Honduran Cardinal Oscar Rodriguez, and Mexican telecom mogul Carlos Slim, the world's third richest person.

The project was to involve a serious provision of new credit: the creation of a US$1 billion loan fund for small and medium-size businesses (SME); a 50 percent increase in lending for job training - to $2 billion -- over the next five years; and a doubling of financing for basic infrastructure projects aiming to benefit low-income communities, to $1 billion a year by 2011. Moreno also intends to create a network of research and pilot projects to test new approaches; supposedly, the network hub would be up and running by the end of 2006 and five or six regional centers identified in early 2007.

However, IDB sources now reveal that infighting at the Board has reduced the size of the budget for SME portion of the project to just $250 million over two years. Already the new President's drive for change is butting up against the institutionalized realities of the IDB. Meanwhile, the project itself, like the entire realignment, seems to be long on rhetoric on short on specifics, even six months after its launch.

Next Steps

The IDB Board officially approved an outline for reorganization at its December 14, 2006 meeting. President Moreno was given 60 days to report back with details, but has apparently been granted a 60-day 'extension,' extending the deadline to April 15th. Officially, the reorganization is now in Management's hands; however, the Board will have to approve any associated budget. Thus far it is unclear how different members of the Board will react to different components of the proposed changes.  In fact, some inside the bank suggest that Moreno may be unable to out-maneuver the forces that are "throwing banana peels in his way."

President Moreno seems to be holding his cards tightly, and the reorganization is being directed by a small team under the President's control and led by José Luis Lupo, Executive Advisor to the President. Members of the Board and senior managers remain cautious about the impacts on their programs; at the very least, it appears that many staff who currently hold "Director" level titles will be demoted with the collapse of Regional units into centralized structures. It is also expected that a number of aging employees will be encouraged to take early retirement.

One the full reorganization plan is presented, implementation is expected to take up to two years.  Moreno also wants to investigate the possibility of adding additional members to the IDB's current 47 member states, presumably to generate an influx of new capital to the IDB.

Meanwhile, the onslaught of private sector lending has already begun. In 2006 aided by the new policies (the raising of the private sector cap was instituted prior to the new realignment), the IDB approved $904 million in non-sovereign lending, compared with $456 million in 2004. That is, it doubled such lending in just a two year period. This is one indicator of where priorities in this realignment process truly lie.

President Moreno is expected to crystallize the details of his plan in the coming weeks, and will be prepared to speak with the Governors regarding the realignment at the IDB Annual Meeting March 16-20 in Guatemala. For concerned citizens, the Civil Society Consultation in Costa Rica on February 7 is an important moment to raise concerns and offer proposals. President Moreno is expected to be present to answer public questions for at least several hours.

The more clear civil society can be about what it wants to see out of a restructuring -- for instance, stronger budgets for social issues; standardization of procedures for consultation; mechanisms that address environmental impacts upstream -- and the more specific, concrete recommendations we can offer, the more likely the President is to incorporate these ideas into his model. The IDB, led by Luis Alberto Moreno, is attempting to reclaim its fading relevance by finding ways to lend more money, faster. This will have significant impacts on the orientation of the lending portfolio, the impacts of the specific projects, and the structure of the institution, which all suggest the need for ongoing attention to this process.