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Banco del Sur: A reflection of declining IFI relevance in Latin America

April 1st, 2007

by Vince McElhinny
Bank Information Center

The announcements of the inauguration of the first Latin American office of the planned Bank of the South and the adhesion of three new member countries have come as a direct challenge to the Northern based IFIs struggling to remain relevant to the region.  The advances of Banco del Sur, closely aligned with discussions on regional energy policy and the larger project of building a Union of South American Nations, has also tested the South America rhetoric of integration proclaimed most recently at the Cochabamba Summit last December, 2007.  This note provides a brief update and analysis of these recent announcements about Banco del Sur, focusing on the implications for the ongoing crises of relevance in Latin America confronting the IMF, World Bank and IDB, as well as the challenges for deeper South American integration.

Banco del Sur promises to raise $7 billion in paid-in capital from member countries that now number six (Venezuela, Bolivia, Argentina, Ecuador, Brazil and Paraguay, with Nicaragua, the Caribbean and possibly some Asian countries conveying interest).  This is $2 billion more than the Latin American contributions to the Inter-American Development Bank, but a still tiny fraction of the IDB’s whopping $100 operating “callable” capital raised largely through non-regional member contributions and frequent bond issues on international markets.  For Banco del Sur to begin to crowd out the lending flows to Latin America, particularly for middle income countries, the new Bank of the South would need to leverage these same international markets.

So far, Venezuela has offered to put in $1.4 billion and Argentina ($350 million (or 10% of its reserves).  Brazil has announced that it will join the initiative, but more in the spirit of South American integration and to steer the process toward Mercosur than to access a new source of finance.  Many pertinent questions top the new Bank of the South’s work agenda.  These include the Bank’s governance structure, lending framework, membership criteria, the type of loan guarantees expected, the appointment of senior managers, and safeguard policies.    Estimates for when the Bank will be operational have ranged from four months to three years. Beyond what has been announced, much will be learned in the coming 90 days – a deadline given to establish some basic internal operational rules.

The Venezuelan Minister of Popular Power of the Treasury, Rodrigo Cabezas, stated that Banco del Sur will set a precedent by creating a multilateral financial institution free of non-regional shareholder veto power over projects and policies.  The bank would provide an alternative to borrowing from the Inter-American Development Bank, the International Monetary Fund and the World Bank, to which Venezuela recently expedited the pay off of $3.3 billion debt it owed when Mr. Chávez was elected in 1998.  Subsequently, Venezuela announced that it would be withdrawing from the World Bank and IMF.  In related moves, Ecuadorian President Rafael Correa expelled World Bank Country Representatives, Eduardo Somensatto, for failing to explain Bank restrictions placed on approved credits to the country.  Venezuela, along with Bolivia and Nicaragua, will pull out of the World Bank’s International Center for Settlement of Investment Disputes, a body that mediates disputes between governments and foreign investors with which Southern governments never seem to win their disputes against transnational companies.

Minister Cabezas took explicit aim at the IDB and the U.S. in his remarks at the most recent IDB Annual meeting questioning the institution’s credibility among a growing number of borrowers.   “No one, by themselves, will be the owner of Banco del Sur,” Cabezas claimed, informing that the government of Venezuela is proposing that in the Bank’s statutes a clause will be incorporated “that prevents any country from possessing a majority stock ownership,” as well as other clauses that prevent the application of adjustment mechanisms employed by the World Bank, IDB and IMF.

Others close to the process of constituting the Banco del Sur have indicated that although the membership and lending rules will take some time to negotiate, a voting structure tied to need rather than financial or political power may become the norm for Banco del Sur.  Under such a system, member countries that have the greatest need for development finance would have the proportionately greater voting power on the Bank’s board.

This explicit criticism of the benevolent despotism of U.S. hegemony on the Boards of U.S. based IFIs has joined the chorus calling for greater scrutiny of the prevailing systems of IFI governance.  With Paul Wolfowitz under siege and growing demands for deeper structural reforms in the governance structure of the World Bank, the U.S. is carefully considering its options. With its dominant 30% vote share on the IDB Board, the tide of criticism toward the U.S. is echoed by other borrowing (and some non-borrowing) Bank members.  President Bush himself raised serious questions about the IDB’s development effectiveness as he criticized Latin America for its inability to lower the region’s seemingly impenetrable 40% poverty rate. At the IDB, the Latin American dissent behind the realignment at the IDB has also reportedly moved the U.S. Treasury to offer its non-objection to the relocation of the IDB headquarters to a Southern country.

Banco del Sur fills a gap created by the stagnant lending flows by the IDB to the region.  Flat overall lending at about $6 billion has resulted in the IDB taking a net $5 billion out of Latin America last year. After facing a sustained public questioning of the IDB’s reaction to Banco del Sur as a measure of its own slipping relevance at the Guatemala Annual Meetings in March, President Moreno rushed to Buenos Aires to sign some $4 billion in new loans and reassure the Bank’s largest client in 2006.

For most of 2006, internal jockeying between large borrowing and non-borrowing countries over the helm of the IDB effectively stalled the pace of the enthusiastically announced reorganization.  Unveiled by incoming President, Luís Alberto Moreno over a year ago, most bank staff have been left in the dark, wondering whether their positions in Washington DC would survive.   Uncertainty has reportedly contributed to an exodus of staff from the Washington headquarters compensated only in part by a rapid increase in consultants contracted in the country offices.  Informally, the appointment of the first of four newly formed Vice-Presidencies to a Mexican, Carlos Hurtado, (relieving a Brazilian) has only intensified the competition by Brazil, Argentina and the U.S. for influence over the appointment of the other three VPs (Countries, Sectors and Knowledge and Private Sector/Non-Sovereign Lending) and the informal recruitment of staff. These appointments are expected by early June.

Others that view Banco del Sur less as a threat, also share the same paternalistic view of the IDB as the U.S. Treasury, arguing that the institution’s reluctant acceptance of modernizing reforms, slow to implement as they may be, would never have happened without the guidance by a firm U.S. hand and representation in some 400 of the Bank’s 2,000 total number of jobs.  IDB officials quietly claim their superiority in terms of accountability, citizen participation and transparency to the CAF and Brazil’s BNDES.  A similar U.S. criticism can be expected for Banco del Sur.

However, IFI directors are clearly responding to the share of the international development finance market lost to relatively newer institutions.  For the five Andean countries, the CAF now lends over 50% of all multilateral development finance.  IDB and World Bank have seen their combined share of $5-$7 billion in MDB lending drop to $25% and 20% respectively.  In 2007, the CAF is on track to eclipse the IDB as the region’s largest MDB lender.



A decisive influence in the future of any alternative Latin American institution will be Brazil.  Under Lula’s Presidency, Brazil’s influence at the IDB and in particular for the last year as chair of the Board of Directors has been relatively unremarkable – offering little evidence that greater Brazilian control would substantially change the direction of IDB policies.  Indeed, the annual lending of nearly $30 billion by the National Bank of Economic and Social Development of Brazil (BNDES) makes the IDB financing somewhat obsolete in Brazil.  As a relatively non-transparent and unaccountable institution, the lending prowess of the BNDES poses a formidable barrier to any alternative institution that seeks to raise standards for development finance in the region.

Roberto Teixeira da Costa, board member of Banco Itau Holding Financeira S/A and Sul America SA recently characterized the view of Banco del Sur held by the Brazilian private sector.  “My initial reaction to the creation of Banco del Sur was negative, and this perception hasn’t changed. I still have the sense that such an institution is going to overlap other channels dedicated to finance the region. Not only the IDB, as indicated, but also the Andean Development Bank (CAF), that is fully committed to finance the region, particularly in the so badly needed projects for infrastructure. Apart from the IDB and CAF, BNDES, and Fondo Plata of Argentina are also in position to finance the region. What the region needs are sound and viable projects to be financed. I think overall there are available resources, not a lack of funding. Thus, I continue to think that Banco del Sur is a project moved mostly by the political aspirations of President Hugo Chavez to have stronger influence in the region based on his petrodollars. Since he is seen as great for the region, I wouldn’t be surprised if it receives support. If the Bank does get off the ground, I don’t think that it will pose a threat to the multilateral lenders. I question the success of financial institutions that are politically managed.”

Upon announcing Brazil’s official support for the Banco del Sur, Brazilian Treasury Minister and former President of BNDES Guido Mantega emphasized Brasil’s preferred adherence to conventional banking standards. “The Banco del Sur has to be a development bank with the norms of the market, that demands guarantees and has very clear principals for the allocation of resources the application of which, in the end, we are all responsible.  The resources belong to the countries …and will be supervised financially just like any other resource of the public treasury.”

Brazil, Argentina and Venezuela reportedly have different objectives for any new regional Bank.  Venezuela and others have suggested that Banco de Sur become the IMF of South America.  Such an institution would presumably play a significant role in regional monetary policy and provide some form of balance of payments finance.  Have less need for protection of its reserves, Brazil is reportedly more interested in steering Banco del Sur toward servicing the infrastructure investment needs of an expanded Mercosur.  Argentina is hedging its alliances with both to ensure that neither gains the upper hand in regional politics.  The smaller countries are most interested in an alternative, less bureaucratic or Washington biased source of development finance.

Energy is the key to deeper South American integration as well as the most likely factor that can divide the three principal leaders behind Banco del Sur.  Prior to April 17-19 energy summit on Venezuela’s Margarita Island, Presidents Chavez and Lula de Siva have sparred over whether the currency of regional diplomacy will be hydrocarbons or biofuels.  While perhaps overstated, tensions between Brazil and Venezuela were defused by the summit, which explored joint energy strategies both to deepen regional energy sovereignty but also open greater access for South American energy exports in U.S. and European markets.

According to Mr. Chávez, Venezuela would remove tariffs and resume imports of between 30,000 and 200,000 barrels of ethanol a day from Brazil.  In return, Lula da Silva was asked to intervene with the US so that Caracas could send ethanol made from sugar cane to its eight refineries in the US run by Citgo, which belongs to Venezuela’s state-owned oil company PDVSA. Brazil is pushing Venezuela to go farther with much higher rates of ethanol/gasoline  mixtures (25% compared to Venezuela’s stated maximum of 10%) and a much more ambitious plan for production.

The IDB has jumped into Latin American biofuels race by announcing a $3 billion multi-year credit line for a variety of ongoing and planned biofuels projects in the region.  The IDB’s Private Sector Department (PRI) is structuring senior debt financing for three Brazilian ethanol production projects that will have a total cost of $570 million. The PRI’s Brazil pipeline also includes loans for five biofuels transactions or projects with biofuels components that will have a total cost of nearly $2 billion. These investments will contribute to Brazil’s goal of tripling annual ethanol production by 2020.  Other IDB investments are planned for biofuels and biodiesel research and development in Colombia and Central America. Venezuela and others have cautioned the IDB that corn-based and some sugar cane-based ethanol is neither an efficient nor green energy technology that plays to the over-consuming interests of the U.S. economy and fails to recognize the negative impact on food security in producing countries.

The IDB biofuels initiative is part of broader $300 million clean energy initiative (defined as solar, wind and small hydro power and climate change preparation), that seeks to exploit Latin America’s comparative advantage in these resources. Historically the IDB has provided very little finance for clean energy, less than 0.5% of its total lending portfolio in energy.  The IDB’s clean energy commitments are even less if certain controversial projects such as Campos Novos ($ 550 million, 880 MW) and Cana Brava ($450 million, 450MW) hydroelectric dams are ruled out on efficiency or renewable grounds.  Despite the added relevance that the IDB could acquire through the provision of clean energy expertise, doing so will be an uphill challenge for the IDB given the steep technological and commercial barriers for developing country adoption of clean energy alternatives and the relatively low in-house technical capacity.

At the energy summit, Mr. Chávez also reiterated his call for a natural gas “alliance” that would construct more regasification plants in Latin America as well as three gas pipelines – one stretching from Venezuela to Argentina, another traversing the Andes, as well as a pipeline between Colombia and Venezuela, which will be inaugurated in August. To the chagrin of many in the environmental sector, the Banco del Sur may be called to fund the expansion of the Amazonian agricultural frontier behind the Brazilian quest for ethanol dominance as well the natural gas mega-pipelines that Venezuela is interested in building across the same Amazon savannah.  Highly dependent on gas imports, the Brazilian government has criticized the creation of any gas-based OPEC by Argentina, Bolivia and Venezuela.

Despite the evident disagreements on the scope of these new South American institutions, there is a strong indication that these institutions are moving forward toward the construction of a Union of South American Nations (UNASUR).  Not only are these new institutions, such as Banco del Sur, proposed as replacements for Northern dominated behemoths, they have created parallel spaces for the rethinking and negotiating alternative models for integration.  To give one example, the Initiative for South American Regional Integration (IIRSA) has been the domain of the region’s transport and planning ministers convened by the IDB and CAF since 2000.  UNASUR offers a parallel convening space for governments without the IFIs that appears to be making greater strides in some of the sectors prioritized by IIRSA (such as energy integration) than IDB and CAF prodding have been able to achieve in seven years.  An IDB official asked to comment on the competition for leadership on the regional integration process raised doubts about whether the IDB would continue to place as high a premium or amount of resources on IIRSA in the coming years.

An open question is whether the emergence of Banco del Sur reflects upon the CAF as part of the solution or part of the problem? Does the CAF, a largely regionally owned and operated Bank fall into the camp of non-responsive, Northerner controlled public banks?  The current governance structure of the CAF is a Presidentialist structure, offering considerable decision making leeway to Enrique García to exercise policy and even approved loans independently.  The current board includes 17 members (all Latin American), plus Spain and 12 commercial banks.



The growing relevance of the CAF as the primary lender to Andean countries is indisputable, shown graphically above.  On average the CAF lends over half of its total portfolio ($3 billion) to Venezuela, Colombia, Peru, Bolivia and Ecuador.  As a group, the CAF represents of 50% of all MDB lending, and in some years (2002) as much as two thirds has come from the CAF.  While Venezuela has virtually ended borrowing from the IDB, World Bank and IMF since 2000, the government of President Chavez has maintained a healthy flow of $650 million annually from the CAF.

The lack of virtually any transparency regarding the most basic of CAF functions leaves final judgment about the probity of this institution to speculation.  Implicit in the remarks of the Finance Ministers of Banco del Sur members is a similar critique of the Corporación Andino de Fomento, which is actually the largest lender to more the five Andean countries.  Oddly, these same countries are some of the CAF’s largest, most unapologetic borrowers.  Some of the Andean borrowing members greatly value the CAF’s proximity to the region as well as the rapid disbursement process for large loans (as low as three months).

Clearly, the announcement of the Banco del Sur reflects the severity of the ongoing crisis of relevance in which the IDB finds itself. The stated goals of this new Bank— access to development finance that is not subject to US influence or non-borrower conditionality—only underscores a trend in Latin America distancing itself from multilaterals perceived as out of touch and often siding with the US against regional interests. This trend will continue with or without the Bank of the South.   Venezuela and its associates in this new venture are both correct and savvy to drive deeper doubts between the Bretton Woods institutions and their Latin American clients.  For the IDB, the run has lasted almost a half century, with the 50th anniversary coming in March 2009 in Cartagena.

However, beyond the politics of calling for new, sovereign Latin American finance institutions, the real work of creating them now underway will have many pitfalls.  The first and most obvious is the influence that the IDB and sister institutions retain in preserving the status quo.  This power ranges from new conditionality on existing and future commitments from Latin American borrowers to the cherished relationships with the gatekeepers of the international markets.  Particularly if the regional or global economy slides into a recession, as is expected by some economists within the next 2-3 years, this dependence on the IDB for budget support will have its cost.  The closest regional allies of Washington in the IDB Board (Mexico, Colombia, Peru, Central America and some of the Caribbean members) will almost certainly close ranks with the U.S. to oppose the Banco del Sur.

A second related pitfall involves the shortcuts that might be taken in the design of the Banco del Sur.  In his remarks to the IDB Board of Governors at the Annual Meeting in March, Ecuador’s Finance Minister Ricardo Patiño Aroca call for structural changes among public lenders showcased the unfulfilled expectations that a growing number of Bank members have had in the IDB after nearly a half century of lending to the region.  “A new financial system and a new international financial code must be structured – one that a) through new and existing multilateral institutions target lending at developing human potential to obtain, individually and collectively, the goods and services that are needed for a decent life; b) limit returns on financial capital so that society’s consumption capacity and productive activity are not throttled; and c) puts in place dispute settlement and arbitration mechanisms based on the criteria here presented.  In a word: a new financial system and financial code that place money in the service of life and not life in the service of debt.”

The extent to which the Banco del Sur comes to represent a true alternative to the flawed IFI policies of the past will depend upon demonstrable commitments to transparency, participation, and accountability.  While the IDB has failed to meet these standards after 50 years, the task for the Banco del Sur will be made even more formidable due to the pressure to begin disbursing and the lack of any similar policies at the CAF, BNDES, FonPlata or other state institutions that could become the new Bank’s principal borrowers.   The design of environmental and safeguard policies should raise the bar (rather than lower it) for competing institutions.  A consultative group on best practices in the design of such safeguard policies might represent an important first step in this direction.

Finally, distinction from the failed IFI policies and projects of the past will also depend on Banco del Sur clearly articulating in its lending framework its definition of effective development.  Implicit in this framework would be a public system to be held accountable to the stated principals and strategic objectives.  Demonstrable evidence of impact rather than lending volume will ultimately distinguish the Banco del Sur from its competitors.  Clear statements will be needed about how such impact will be assessed.

While these proposals to strengthen accountability and other safeguard polices at the Banco del Sur may seem excessive for an institution that is just forming, to avoid addressing these challenges at the outset would have even greater costs.  Among those costs, would be the acceleration of the ongoing race to the bottom in lending standards related to high risk infrastructure projects in Latin America.  By introducing these policies up front, the Banco del Sur has the opportunity to hold other lenders to the higher articulated standards and become the financial force for change the region so desperately needs.


Conclusion:  10 Questions from Civil Society for Banco del Sur

  1. How will the policy framework of the Banco del Sur distinguish the institution from its competitors (IDB, CAF, World Bank)?
  2. Will the Banco del Sur subscribe to the grand integration mega-projects associated with U.S. influence in Latin America (the various manifestations of free trade, Plan Puebla Panamá, and IIRSA)?
  3. Will the Banco del Sur subscribe to the various sustainability protocols?
  4. What will be the criteria for prioritizing future lending (poverty or inequality reducing impact, public sector institution, etc.)?
  5. Will the Banco del Sur offer balance of payments support lending?
  6. What are the plans for a monitoring and evaluation framework to compare the results of Banco del Sur with other institutions?
  7. What are the models for the Bank’s safeguard policies?
  8. What are the Bank’s commitments to transparency, citizen participation and accountability mechanisms, and beginning with the design of the Banco del Sur itself?
  9. What are the principles for the governance structure including the voting power of member governments?
  10. Will Banco del Sur’s membership be limited to Latin America or will it include Asia and Africa?

Chavez wants out of IMF, World Bank  (May 1, 2007) http://money.cnn.com/2007/05/01/news/international/bc.imf.venezuela.reut/?postversion=2007050109

“Nadie tendrá la hegemonía en el Banco del Sur” http://www.mf.gov.ve/

See Bank Information Center Wolfowitz Watch, /

“The fact is that tens of millions of our brothers and sisters to the south have seen little improvement in their daily lives.” Larry Rohter, (March 6, 2007) “Bush to Set Out Shift in Agenda on Latin Trip” New York Times.

See IDB (2005) Annual  Report on Project Management, Results and Execution (ARPRE) report http://www.iadb.org/IDBDocs.cfm?docnum=815185 and IDB 2006 Annual Report.

Argentinean President Néstor Kirchner signed Thursday with the head of the Inter-American Development Bank, Luis Alberto Moreno, and a $3.85 billion credit for infrastructure projects in the north of Argentina. [Agencia Diarios y Noticias (Argentina)/Factiva]

The Dialogue Reporter (April 2007) Inter-American Dialogue, http://www.thedialogue.org

Adriana García, Brasil desea integrar proyecto Banco del Sur, Reuters, April 16, 2007

The US produces 20 billion liters of corn-based ethanol a year, while Brazil produces 17 billion liters a year made from sugar cane.  Together, the U.S. and Brazil account for two thirds of the world’s ethanol production.

IDB targets $3 billion in Private Sector Biofuels Projects, April 2, 2007 http://www.iadb.org/NEWS/articledetail.cfm?Language=En&parid=2&artType=PR&artid=
3779

http://www.iadb.org/secci/index.cfm?language=EN&parid=1

Benedict Mander, “Chávez seeks to defuse Brazil rift on ethanol,” Financial Times, 4.18.07 http://www.ft.com/cms/s/3553a486-ed4a-11db-9520-000b5df10621,dwp_uuid=8fa
2c9cc-2f77-11da-8b51-00000e2511c8.html

IDB Annual Meeting Speeches, http://www.iadb.org/am/2007/speeches.cfm


Latin America