An Introduction to Regional Financial Institutions in Latin America

By  |  12 / August / 2008

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For many years now particular attention has been paid to the large International Financial Institutions (IFIs), such as the World Bank and the International Monetary Fund. Their repercussions in Latin America as in other regions are notorious, ranging from financing various infrastructure projects with serious social and environmental impacts, to support for private investment; from reforms in social policies (such as health and education) to the conditionalities that these IFIs imposed on national development strategies.

In Latin America, attention has focused on three IFIs: the World Bank (WB), the Inter-American Development Bank (IADB), and the International Monetary Fund (IMF). Today the credibility and legitimacy of these institutions has been deeply eroded. Their programs have become the target of many critics and citizen action campaigns, leading to an overall consensus regarding their serious limitations and the problems triggered by their actions. Moreover, many of these organisms have been the victims of their own mismanagement (particularly the IMF’s mishandling of financial crises and the World Bank’s internal corruption scandals).

Meanwhile in Latin America, a substantial political shift has taken place with the appearance of progressive governments in several countries (Argentina, Bolivia, Brazil, Ecuador, Uruguay, and Venezuela in particular). In some cases, these new governments have criticized certain IFIs, are restructuring their relations with them, and have begun to search for alternative financing of their own.

For these reasons, little by little, other regional financial organisms have been exploring the niche vacated by the IFIs in the region. Their focus is Latin America and their roles are similar to those of the IFIs. Many of them are less well known than the IFIs and their activities not always so evident, but they manage enormous funds and they are highly influential. Most of these new institutions are Latin American, and their management is in the hands of Latin American governments. Also notable are two national banks that play a key role as regional financing agencies on a continental level.

This article describes this group of Regional Financial Institutions (RFIs), identifies its members, and analyzes their main characteristics.

The Regional Financial Institutions

The RFIs have specific features that distinguish them from conventional IFIs. First of all, they are "regional," in the sense that they focus on and are designed to be active in Latin America, or in sub-regions within the continent. Secondly, their officials and decision-making processes are in the hands of governments in the region. Thirdly, their primary focus is on conventional finance, funding infrastructure and energy projects, private enterprise growth, or technical cooperation.

The Latin American RFI field is made up of at least the eight institutions listed below, many better known by their Spanish initials (in parentheses): The Andean Development Corporation (CAF), the Financial Fund for the Development of the River Plate Basin (Fonplata), the Central American Bank for Economic Integration (CABEI, BCIE in Spanish), the Latin American Export Bank (BLADEX), the Caribbean Development Bank (CDB), the Latin American Reserve Fund (FLAR), the National Bank for Social and Economic Development (BNDES), of Brazil, and the Bank for Economic and Social Development (BANDES), of Venezuela. The Bank of the South (Banco del Sur) is currently in negotiations, and will become part of this group when it begins to operate. Lastly, strictly speaking the IADB also has many attributes of an RFI.

The following sections briefly elaborate on some of the key features of these institutions.

The Larger Regional Institutions

As it currently stands, two institutions operate on a continental level: the Latin American Export Bank (BLADEX), and the Latin American Reserve Fund (FLAR). The Andean Development Corporation is also expanding its operations into new regions.

The Latin American Export Bank provides continent-wide coverage. It was established by an initiative of the Panamanian government in 1978 and approved by the presidents of the central banks in each country, although it now operates more along the lines of a private bank. BLADEX specializes in export loans, financing foreign trade, and as a middleman for IADB funds. Its ownership is distributed between the central banks and governmental agencies of 23 countries in the region, some international banks, and even investment funds, which categorizes it as a mixed organization. With its headquarters in Panama City and a very diversified client base (about half of which are companies), in its operations it disbursed $8 billion in 2007.

The Latin American Reserve Fund was created in 1991 as a vehicle to extend membership in the Andean Reserve Fund to other countries. Member countries include Bolivia, Colombia, Costa Rica, Ecuador, Peru, Uruguay, and Venezuela, and it has its operational base in Bogotá (Colombia). Its objectives are to support the balance of payments of member states, authorizing credits or guaranteeing third-party loans; contribute to the harmonization of exchange rates, monetary and financial policies; and improve conditions for the investment of international reserves.

The Andean Development Corporation was formed in 1966, but began operations in 1970 to promote financial services and encourage development, with clients from both the public and private sectors. The CAF offers loans, guarantees, and endorsement, as well as other financial services. It plays a key role in receiving and directing capital flows coming from large developed-country banks.

The CAF initially focused on the Andean countries, becoming the main source of financing for several nations, overtaking both the IADB and the World Bank. Between 2002 and 2006, it provided $12 billion to Andean countries (48% of all funds approved in that region by multilateral agencies). Since then it has extended its shareholders and membership is currently made up of 17 Latin American countries, Spain, and 15 private banks in the Andean region. Its head office is in Caracas, with offices in several other countries.

CAF currently funds projects in various parts of the continent, ranging from infrastructure, such as water and sewage, to border security, and expansion of the use of alternative energies. The corporation has become one of the main finance agencies for the South American Regional Infrastructure Initiative (IIRSA). The IIRSA includes an ambitious list of transport connections designed to promote the insertion of the region into global export markets. CAF’s loan portfolio has expanded from $6,172 million in 2003 to $9,622 million in 2007. The principle beneficiary countries were Ecuador (22.3%), Peru (18.8%), Colombia (17%), and Venezuela (15.3%). The nature of the loans also varies, now including sectoral loans for contingencies (for example, a recent $400 million loan to manage the Uruguayan public debt).

The IADB can also be considered an RFI. Its area of operation is Latin America and the Caribbean, where it finances diverse government agencies but also provides funding to the private sector. One key difference is that the IADB is not held solely in Latin American hands; of the 47 members, only 26 are from the region. Indeed, member countries include many industrialized nations such as the United States, Canada, several European countries, and Japan, and they all play a key role in IADB decision-making.

The establishment of the Bank of the South (Banco del Sur) has progressed significantly. This proposal, which enjoys widespread support, particularly from the Venezuelan government, has experienced various advances and setbacks. In December 2007, Latin American presidents met in Buenos Aires (Argentina) and signed an agreement to create the Bank. Since then the discussion has revolved around the structure and financing of the bank, including capital participation by each member, voting mechanisms, and operations.

Subregional Funds and Banks

A number of RFIs focus on specific sub-regions within Latin America. They consist of two banks and a fund.

The Central American Bank for Economic Integration (BCIE) was founded in 1960 by five Central American countries. Its objectives were to support development projects and to offer technical cooperation and financial resources. The bank modified its founding agreement in 1992 to incorporate countries outside that region; current members include Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica, the Dominican Republic, and Panama. Recently Mexico, Taiwan, Argentina, Colombia, and Spain joined as extra-regional members. The main office is in the city of Tegucigalpa, Honduras. In 2006, the bank disbursed $1.647 billion, along three strategic operational lines: integration, globalization, and poverty. The main beneficiaries are Guatemala (36% of total dispersals) and El Salvador (24%).

The Caribbean Development Bank (CDB) operates in the Caribbean, supporting projects for social and economic development. Founded in 1969, it began its operations in 1970. The main office is located in Barbados, and has 26 members (18 of them Caribbean, along with Germany, Canada, China, Mexico, the United Kingdom, and Venezuela). The bank finances infrastructure investment, supports local development, and programs of regional economic integration. In 2006, the CDB granted a total of $131.8 million. The main CDB beneficiary country is Jamaica, which received 21% of the total.

Fonplata, the Financial Fund for the Development of the River Plate Basin, is made up of Argentina, Brazil, Bolivia, Paraguay, and Uruguay. Primary objectives include providing financial support for pre-investment studies and technical assistance, and it can also provide loans, guarantees, and endorsements. Generally, the fund supports pre-investment studies for large projects, although it also finances some works. Its base of operations is in Santa Cruz, Bolivia. At present, it has 14 projects ranging from business restructuring to paving highways, for a total of $303 million dollars. In addition, Fonplata maintains the Intergovernmental Committee for the Parana-Paraguay Waterway, an old infrastructure megaproject now part of IIRSA.

National Banks with Regional Coverage

Finally, among the RFIs, two banks merit mention because although they are national, their activities in different countries result in regional coverage. The Brazilian Development Bank is a public company of the federal government, under the Ministry of Development, Industry, and Foreign Trade. The development bank was created in 1952 and has its main office in Rio de Janeiro, with offices in other Brazilian cities, and recently announced it will open its first international office in Montevideo, Uruguay—seat of the MERCOSUR secretariat.

The BNDES resource portfolio is enormous; in 2006 it disbursed approximately $24 billion (with net earnings of $2.5 billion). Most of those funds are for projects within Brazil, like financing production, consumption, and export, and support for businesses. However, the bank has acquired regional relevance for several reasons: it finances the infrastructure projects under IIRSA currently underway in Brazil; it has various programs to support the enterprises of Brazilian companies in other countries of the region; and the funds available for loans is very large. The BNDES has signed agreements with CAF and Fonplata. Its Brazilian operations include financing key sectors like infrastructure and energy, incorporating projects such as rail corridors, gas pipelines, and dams on the Madeira and Xingu Rivers.

On an international level, the BNDES promotes the "internationalization" of Brazilian companies. To this end, the bank approves loans, creates investment funds, and even participates in acquisitions and mergers. The bank finances Brazilian construction companies that operate in various Andean countries, or provides loans for Brazilian companies to acquire local companies (as seen in the case of the acquisition of Argentine and Uruguayan agriculture/food companies by Brazilian capital). The BNDES 2006 report lists, for example, financing for several gas pipelines in Argentina for $690 million, two hydroelectric dams, an aqueduct in the Dominican Republic, and the Maddén- Colon highway in Panama that runs parallel to the Panama Canal. In addition, the bank served as comptroller and financier of acquisitions for the Companhia Vale do Rio Doce (CVRD), which has helped make this privatized iron firm one of the largest mining companies in the world.

Another example is JBS-Friboi that bought the Swift meatpacking company, headquartered in the United States, for $1.4 billion, making it the largest beef-processing company on the planet. JBS-Friboi obtained the funds for the acquisition by emitting shares, most of which were bought by BNDES Participações—a subsidiary of the bank that acts as an investment fund.

The Venezuelan Development Bank (BANDES) is under the Finance Ministry. It is a financial agent of the government used to support projects of economic decentralization and to stimulate private investment. Created in 2001, the bank was designated as a financial agent of Venezuela’s foreign policy. As such, it supports diverse programs and investments related to international cooperation, especially in the realm of energy. The Venezuelan Development Bank follows a strategy slightly different from the Brazilian bank. Although it requires that at least 50% of an enterprise be Venezuelan, it places more emphasis on complementary agreements. Also, its strategy differs between countries according to their position on the human development index.

The Role of Regional Financial Institutions

The above-mentioned RFIs have received little attention and have only recently become recognized. Whereas in the past economic support was provided mostly by the IADB, the World Bank, and the IMF, today the RFIs have joined these institutions and play an ever-increasing role.

The structures, mandates, and operations differ between RFIs; some are government institutions and others are mixed—with the participation of private funds. Many offer financial services, incorporating services of investment analysis, cost/benefit studies, funding in the form of loans, and back-up guarantees for funds originating elsewhere. They have acquired enormous importance in capital flows in Latin America’s incipient financial architecture. Nevertheless, in nearly all cases these institutions are part of, or operate in a similar manner to conventional IFIs.

Comparing assets, the BNDES eclipses all other institutions, with $14.07 billion in 2007. This places it just slightly behind the IADB, whose assets amounted to $20.353 billion in 2007. The BNDES is followed by CAF at $4.12 billion. Figures for the regional banks in 2007 are: BCIE $1.63 billion, BLADEX $612 million, and the CDB $506 million. BANDES assets top the rest at $4.56 billion. Finally, the reported assets of the FLAR are $1.797 billion (2007) and Fonplata $415 million (2006). The assets of all these RFIs amount to more than $27 billion.

The significant financial resources of the RFIs are essentially managed by their own Latin American governments, a significantly different state of affairs from that of the IFIs. In the case of the IFIs, the power to make decisions is sharply asymmetric, slanted toward industrialized nations, with roles for the United States and the European Union that shut out other nations. However, in the RFIs, responsibility for the decisions made—whether good or bad—lies squarely on the shoulders of the Latin American governments. It is obvious why Latin governments, especially the progressive ones, are trying to strengthen some of these RFIs, even creating the Bank of the South, to finance their own projects without relying on the global IFIs.

Almost all RFIs place priority on supporting infrastructure projects, such as roads, bridges, and energy infrastructure. This too is a policy promoted by new progressive governments. In South America, many of these projects are part of the Regional Infrastructure Initiative-IIRSA, and as such the RFIs have become one of IIRSA’s main supports. Many of these projects have profound effects on land-use, which in turn produce social and environmental impacts.

Despite the importance of the activities of RFIs, the potential impact of the projects they finance, and the fact that they are mainly in the hands of Latin American governments, the RFIs lack transparency. Access to information is difficult; in many cases there are no clear mechanisms for obtaining information on internal procedures, project progress reports, or the criteria used to evaluate them. In several cases, there are more obstacles in gaining access to information and more doubts about social and environmental guidelines within the RFIs than when dealing with the conventional international financial institutions.

It should be noted that several RFIs incorporate both social and environmental commitments. For example, the CAF affirms that it integrates social and environmental variables, and includes criteria for ecological efficiency and sustainability in its operations. The CBD subscribes to the Millennium Development Goals and the BCIE has adopted combating poverty as a strategic goal. The BNDES has, for example, a code of ethics, environmental evaluations, and mechanisms for providing information about its operations. However, these statements are not always expressed in specific and detailed operative directives in each institution. Several projects financed by the CAF and the BNDES reveal clear tensions and contradictions on social and environmental issues. In other situations, as found in the BANDES, the procedures are unclear, information available on the internet is insufficient, and institutional objectives did not adequately take into account the stated goals.

There are major gaps in defining operational guidelines and evaluation procedures for key issues such as indigenous groups, the environment, free access to information, procedures for legal recourse or complaints, revision mechanisms, etc. Some attempts have been made to carry out civil society consultations, but most of them merely provide information, or play a subsidiary role that does not affect decision-making in allocating funds.

When it comes to social participation, it is worth noting that citizen-based campaigns against the IFIs have achieved some advances in access to information and cooperation with civil society. They also helped to establish new rules of operation. Though in many instances these rules are not followed, they do provide a framework for filing complaints from other perspectives. But most Latin American RFIs are behind in these issues, access to information is more difficult, and the use of multidisciplinary tools has not been adequately evaluated.

The task is yet more complex in the case of the national banks BANDES and BNDES. They lack mechanisms to enable citizens of other countries to access information and take part in the international projects that they finance. This is a delicate matter, since national sovereignty is invoked to defend operations in other countries.

Undoubtedly, the presence of Latin American financial institutions is a step forward in gaining autonomy, faced with the imposition of IFIs. It is therefore very important to improve and maintain Latin American control. In some RFIs nations from other continents are becoming members (particularly European nations and China). It is essential to assure Latin American control in the decision-making process despite extra-regional participation.

Moreover, civil society must influence Latin American RFIs to assure that the mistakes and shortcomings of IFIs are not repeated, that the RFIs are not simply channels for the intermediation of global capital, and that they don’t replicate practices of financing projects with high social and environmental impacts. The fact that control rests in Latin American hands is useless if institutions end up repeating the strategies of the World Bank or the IADB. It is therefore necessary to ensure that the projects financed really serve development interests and aid in the eradication of poverty, with tangible positive effects at local and national levels in all spheres, from economic to environmental.

The necessary tasks ahead are complicated. Nevertheless, some tasks can be outlined as examples. It is necessary to establish procedures for follow-up and evaluation of the Latin American government representatives to the governing councils of these institutions. It is important to determine the quality and efficiency of the evaluations made prior to allocating funds. Also important is to establish adequate supervision of compliance with conditions and requirements. It is especially important to attend to sensitive aspects that have traditionally been excluded, such as indigenous peoples, marginalized groups, and environmental impacts. Finally, it is necessary to assure working mechanisms of public information and channels for legal claims.

RFIs present great opportunities for autonomous regional development, but their operations require extensive reforms and updates. The fact that they are in the hands of Latin American governments is no excuse for avoiding reforms; rather it presents a mandate to carry out the necessary transformations.