In January 2016, the Inter-American Development Bank Group (IDB) consolidated its private sector operations in IDB Invest to better serve the region, customers and partners, and to maximise its impact on development. Was it worth the change in your view?
Absolutely. We are living in a new era for development finance. Our target markets and their end-beneficiaries are evolving faster than ever, changing the way they work and the products and services they need. This is most evident in sectors like energy, technology and financial services, which are advancing at exponential rates. For example, Chile went from 20 megawatts of renewable energy in 2008 to 4000 megawatts in 2017 – a two hundred-fold change. Blockchain is proving a secure, transparent and reliable alternative, and fintechs in 2017 transacted US$90 billion in the region, an amount equivalent to the entire GDP of Panama.
The region still has challenges though. Productivity in Latin America lags behind east Asia. Nearly four in ten are considered economically vulnerable. Shocks from hurricanes to rising crime rates could set them back into poverty. Climate change could also cost the region up to 4 percent of its GDP, while female-led businesses are still less likely to access financing than their male counterparts. So, operating in this fast-paced scenario of opportunities and challenges, we thought the only way to stay relevant was to position ourselves as the solutions bank for Latin America and the Caribbean’s private sector. We are looking for new frontiers and ways of doing business.
In 2015, we began a restructuring process that sought to consolidate and strengthen how we promote development through the private sector. In 2016, we opened for business, and in 2017, we completed the process with a new brand. IDB Invest unites the confidence and history of the IDB with the flexibility, agility and client-focus that our clients in the private sector seek.
Why do I say the change was worth it? Well, the first benefit is our enhanced synergies with the IDB. Leveraging the IDB public sector experience has allowed us to strengthen Argentina’s business environment upstream and then finance its most significant renewable energy projects, part of Renovar, downstream. We have had similar success in Colombia, El Salvador and Uruguay.
Secondly, we are developing new products that can tap into capital markets like never before. Institutional investors participate more and more in our deals through products such as B-Bonds. In addition, this year we offered more financing in local currency, so that borrowers can pay in the same currency that generates their cash flow. To complement our product offering, we provide blended finance to buy down the cost of certain risks and advisory services. IDB Invest seeks to leave behind our identity as a single-product, single-currency entity. We are tailoring this wide range of products to client needs.
Lastly, we are making a strategic shift to do more infrastructure and corporate lending. In 2017, we did over US$1.3 billion in business in the energy sector – US$2.5 billion if you count mobilisation – and US$500 million in corporates, which includes technology companies, agriculture firms and sustainable tourism.
IDB Invest supports initiatives committed to the UN Sustainable Development Goals (SDGs). How is the progress of these projects being measured against that objective, and what are the main obstacles to financing their implementation?
We have development effectiveness tools to assess the ex-ante impact on development and to track the annual progress and final results. For example, the DELTA (Development Effectiveness Learning and Tracking Assessment) allows us to measure the contribution of every operation to the SDG, both ex-ante and ex-post. The way in which the tool captures the contribution to SDGs is through the alignment of every project to the IDB Group Institutional Strategy, which is closely linked to the SDGs.
IDB Invest not only measures progress. We design a set of tools that help the organisation steer business origination towards priority areas that include the SDGs. For instance, the institution has already set targets related to the support for climate change and gender equality.
In 2013, the IDB published its report The Orange Economy: an infinite opportunity. The Orange Economy is the idea that cultural capital, or the talent of the people and wealth of their collective heritage, can have untold developmental impact if facilitated economically. Could you explain more how this may be argued?
Winston Churchill famously said: “The empires of the future will be empires of the mind.” We are witnessing precisely that. Power and influence are transferring from those that own the metaphorical land to those that own the ideas. In Latin America and the Caribbean, human talent, innovation and creativity are impacting even our most traditional industries.
At IDB Invest, the creativity and innovation of the region’s people impact us every day. They are the drivers of the technological adaptation upending industries from hotels, retail, taxis and financial services.
They are behind the renewable energy projects, blockchain technology, drone companies, internet-of-things solutions and the high throughput satellites that have us constantly learning and trying to finance these next frontiers.
For example, battery storage is one of the next disruptive technologies in the power sector. We see major players scaling up manufacturing to serve electric vehicles and solar power. Storage today is beginning to replace conventional power generators and support renewable integration. The reason: storage prices are plummeting faster than expected. This will impact utilities while creating potential for third-parties, such as distributed-energy-resource companies, technology manufacturers and finance players. Success will be based on new skills. Human talent will have to adapt to the new energy paradigm, to meet customer needs and to evolve with the technology.
At IDB Invest, the business models we invested in historically will be different to those of the future. And it will be up to the orange economy to drive our investments moving forward.
Where does the reduction of poverty in Latin America and the Caribbean seem most egregious to you, and what fundamentally needs to change in order that this be reversed?
While the poverty headcount ratio in the region has fallen significantly over the past 15 years, Latin America and the Caribbean continues to be characterised by significant rates of poverty and inequality. In addition, given that the improvement was caused in large part by the sustained growth the region enjoyed in recent years, a lower expected economic growth for the coming years poses a threat to the declining trend in poverty and inequality.
After two years of negative growth, the economic activity has recovered mildly in 2017, and the region is expected to grow 1.2 percent, and accelerate to 1.9 percent in 2018. Expected growth in the medium and long terms continue to be modest. The International Monetary Fund (IMF) projects a regional annual growth rate of the GDP per capita of 1.7 percent in the medium term. This rate is similar to the growth rate of the region during the last quarter of a century, and is considerably below the growth rate of other emerging economies. This rate is not enough to continue with the trend of poverty reduction.
The factors that explain the feeble growth rate include historically low commodity prices, low productivity growth, a declining fertility rate and a threat of increased protectionism. Another key factor holding back stronger GDP growth in the region is low fixed investment, in many cases a product of weak fiscal balances.
To boost economic growth, and reduce poverty, the region needs to improve productivity and boost private investment. IDB Invest supports this development agenda by lending to the private sector, in particular to finance infrastructure, small businesses through financial intermediaries, and to anchor firms, value chains and international trade. We mobilise other investors and provide advisory services. The broader IDB Group supports projects that seek to improve access to health and education, build human capital, promote financial inclusion, and address deficits in basic infrastructure.
What kind of year can we expect from IDB Invest in 2018, given its recent rebranding and the fresh face this gives the institution as an engine of growth for Latin America?
Our new name highlights what we most aspire to, which is a fluid dialogue with our colleagues at the IDB and a stake in the future. In 2018, you can expect a lot of exciting milestones from IDB Invest. We will continue to serve new sectors, especially in the technology, water, sanitation, health and education space. You will see us double our portfolio in sustainable tourism and telecommunications, media and technology.
You will also see us play a bigger role in smaller markets. I recently returned from Haiti where we have a promising pipeline and well-performing deals on our balance sheet. I had equally positive experiences on origination trips to Suriname and Guyana in late 2017. Doing more in the region’s most developing economies like the Caribbean and Central America is a commitment we made to our Board of Directors, our country representatives and our stakeholders.
Our field presence plan aims to bring more employees to the field – 40 percent of our personnel by 2020. This will allow us to be closer to our clients and to make our origination goals a reality.
Finally, we will test more financial products and launch more local currencies. Total credit guarantees are in pilot stages, and Colombian and Dominican currencies will soon provide our clients additional flexibility. To grow companies and allow them to create more jobs, we will do more with equity and quasi-equity products, such as mezzanine and subordinated debt. Thanks to our deployment of new products and structures, we will soon see more institutional and private investors become more comfortable with project risk in the region.