How does Inter-American Development Bank finance?
- 14 minutos de lectura
Since 1959, the IDB has approved $128 billion for projects that represent a total investment of $291 billion. The Bank’s operations cover the entire spectrum of economic and social development in Latin America and the Caribbean, with an emphasis on programs that benefit low-income populations.
The Bank finances both public and private sector projects in the region.
In all, Bank operations include investment loans, policy-based loans, technical cooperation programs, private sector loans, guarantees, flexible lending instruments, Social Entrepreneurship Program, emergency loans and project preparation facilities.The Bank’s public sector program includes investment projects, sector and policy reform programs, and emergency operations for natural disasters and financial crises. The Bank also administers grant funding for a variety of technical cooperation programs.
The sectors targeted for IDB funding in the public sector vary according to the shifting development needs of the region. Current lending priorities include support for programs that encourage global competitiveness, poverty reduction and social equity, state modernization and sector reform, and economic integration.
In 1995, the IDB began lending up to 10 percent of its ordinary capital resources directly to the private sector, without government guarantees. It also provides trade financing through its private sector department. In addition, investment financing is available for private sector projects through the Multilateral Investment Fund and the Inter-American Investment Corporation.
The Inter-American Development Bank provides loans for public and private investment projects in Latin America and the Caribbean.
- Loans for specific projects are designed to finance an investment project that is wholly defined at the time the Bank’s loan is approved. These projects usually focus on one development sector or sub-sector. Examples may include an education reform program, an electricity distribution and transmission program, or a citizen security program.
- Loans for Multiple Works Programs are designed to finance groups of similar works that are physically independent of each other and whose feasibility does not depend on the implementation of other works projects.
- Global Credit Loans (sometimes also called “Multi-sector Credit Loans”) are granted to intermediary financial institutions (IFIs) or similar agencies in the borrowing countries to enable them to on-lend to end-borrowers (sub-borrowers) for the financing of multi-sector projects.
- Time-Slice Operations are loans in which the investment program for a sector or sub-sector is adjusted from time to time, within general criteria and global objectives that the Bank and the borrower agree upon in advance.
- Conditional Credit Lines (CCLIPs) are performance-based instruments that are available only to borrowers that have successfully implemented similar IDB-financed projects. To obtain a CCLIP, borrowers must demonstrate satisfactory results with previous projects as well as show that the executing agency hasn’t changed and that it has a solid performance track record.
The IDB typically finances between 60 percent and 90 percent of the total costs of an investment project in a proportion that is inverse to the size of the nation’s economy, according to the following table:
up to 60%
up to 70%
up to 80%
up to 90%
These percentages can be increased by up to 10 percent when the program is geographically targetted to poor beneficiaries or when the majority of a project’s beneficiaries are poor. However, the IDB will not finance more than 90 percent of an investment project.
The borrowing country provides counterpart funding to finance the remainder of the project. There is a 36-month minimum disbursement period on investment loans. Public entities eligible to borrow from the Bank include national, provincial, state and municipal governments, and autonomous public institutions.
Investment loans are available from the Bank’s Single Currency Facility (SCF) in US dollars, euros, Japanese yen and Swiss francs. In each currency, the borrower can choose between two lending options: Pool-based adjustable lending rate option (ADJ SCF) and LIBOR-based lending rate option (LIBOR SCF).
- ADJ SCF: The interest rate is tied to the average cost of a pool of medium to long-term borrowings in each loan currency plus the IDB’s standard lending spread for that semester, which is reset semiannually on January 1st and July 1st. The amortization period may range from 15 to 25 years, including a grace period equal to the originally scheduled disbursement period, plus six months.
- LIBOR SCF: The interest rate is based on three-month London Interbank Offer Rate (LIBOR) in the loan currency, plus a cost margin (which includes the IDB’s weighted average cost margin net of any risk mitigation costs and/or gains), plus the IDB’s standard lending spread. The Bank resets its LIBOR SCF rate quarterly. The amortization period is the same as in the ADJ SCF option.
The Bank’s Lending Framework of 2002 allows it to use up to $4.5 billion of its Ordinary Capital (OC) resources and $300 million of its Fund for Special Operations (FSO) resources to Policy-Based Lending (PBL) programs over the 2002-2004 period. These new limits revise the previous ceilings, under the 8th Replenishment of Resources, of 15 percent of cumulative lending.
Policy-Based Loans (sometimes also called “Sector Adjustment Loans”) provide flexible support for institutional and policy changes on the sector or sub-sector level, through fast-disbursing funds. At the request of the borrower, a sector adjustment loan may include an investment component, in which case it becomes a Hybrid Loan.
Policy-based loans do not require counterpart funding. They are available from the Bank’s Single Currency Facility in US dollars, euros, Japanese yen and Swiss francs. In each currency, the borrower can choose between two interest rate options: Pool-based adjustable lending rate option (ADJ SCF) and LIBOR-based lending rate option (LIBOR SCF).
- ADJ SCF: The interest rate is tied to the average cost of a pool of medium to long-term borrowings in each loan currency plus the IDB´s standard lending spread for that semester, which is reset semiannually on January 1st and July 1st. The amortization period may go from 15 to 25 years, including a grace period of five and a half years.
- LIBOR SCF: The interest rate is based on three-month London Interbak Offer Rate (LIBOR) in the loan currency, plus a cost margin (which includes the IDB’s weighted average cost margin net of any risk mitigation costs or gains), plus the IDB’s standard lending spread. The Bank resets its LIBOR SCF rate quarterly. The amortization period is the same as in the ADJ SCF.
The IDB finances technical cooperation programs for institutional strengthening, transfer of knowledge and studies, including diagnostic, pre-investment and sector studies that support project design and preparation. The programs can be aimed at projects specific to a single country or for trade, integration or regional initiatives.
Technical cooperation programs can be non-reimbursable (grants), reimbursable (loans), or contingent-recovery (reimbursable if the program gets additional funding).
Countries with relatively low per capita incomes are eligible to receive financing from the Fund for Special Operations (FSO), the Bank’s soft-lending window. The FSO was established in 1960 to provide loans on concessional terms for special circumstances in certain countries and for specific projects. The Bank also administers over 50 trust funds that finance technical cooperation grants. Each fund has its own eligibility criteria.
Types of Technical Cooperation Programs
The Bank finances technical cooperation activities to transfer technical know-how and expertise for the purpose of supplementing and strengthening the technical capacity of entities in the developing member countries. The financing is determined largely on the basis of the field of activity into which a project falls and the relative development status of the region, country, or countries involved. It may take one of the following forms:
- Technical cooperation with Non-Reimbursable Funding is a subsidy granted by the Bank to a developing member country to finance technical cooperation activities. This cooperation is particularly targeted to the least-developed countries of the region and to those that have insufficient financial markets.
- Technical cooperation with Contingent-Recovery Resources, whereby the Bank finances technical cooperation activities where there exists a reasonable possibility of a loan either from the Bank or another lending institution. If the beneficiary should obtain a loan from any source for the project for which the technical cooperation was provided, the borrower is obligated to reimburse the funding received from the Bank.
- Technical cooperation with Reimbursable Resources consists of an IDB-financed loan to carry out technical cooperation activities.
Private sector loans
Up to 10 percent of the IDB’s non-emergency outstanding loans and guarantees may be made directly to private businesses without government guarantees. These loans are approved on the basis of market-based pricing, typically for infrastructure– energy, transportation, sanitation or communications, projects, capital market development and export financing.
Private sector operations include partial credit and political risk guarantees for projects financed with private debt. Loans or guarantees cannot exceed 25 percent of total project costs or $75 million, whichever is less.
For projects in smaller economies with limited capital markets access, the Bank can provide up to 40 percent of project costs, with the same $75 million cap.
Additionally, the IDB has a $1 billion pilot Guarantee Disbursement Loan program that allows a public or private-sector borrower to take all or a portion of a loan disbursement in the form of a guarantee, and use that guarantee to enhance the terms of borrowing from private sector sources—i.e., by extending available tenors, reducing interest rates, and increasing borrowing capacity from market sources.
IDB loans and guarantees can be complemented by co-financing and guarantees from multilateral organizations, commercial banks and other investors in what is called an A/B loan structure.
Bank multi-sector global loans to financial intermediaries that are backed by government guarantees finance credit programs for a wide range of businesses, including microenterprises and small and medium sized firms.
Multi-sector global loans are available in US dollars. The borrower can choose between two interest rate options:
- A fixed rate (at disbursement), with a 12-year amortization period, including a 5-year grace period.
- An adjustable LIBOR-based rate with a 20- year amortization period, including a 5-year grace period.
Private sector projects can also get financing from the two other members of the IDB Group –the Inter-American Investment Corporation (IIC) and the Multilateral Investment Fund (MIF)– through loans, grants and investments.
The IDB can guarantee loans made by private financial sources to the public and private sectors in Latin America and the Caribbean to promote investment in the borrowing countries. The Bank can provide guarantees with or without counter-guarantees of the borrowing country’s government.
Public Sector Guarantees
The IDB has a $1 billion pilot Guarantee Disbursement Loan program that provides the option of disbursing loans in the form of a guarantee.
The program allows a borrower to take all or a portion of a loan disbursement in the form of a guarantee, and use that guarantee to enhance the terms of borrowing from private sector sources—i.e., by extending available tenors, reducing interest rates, and increasing borrowing capacity from market sources.
Private Sector Guarantees
Up to 10 percent of the Bank’s non-emergency outstanding loans and guarantees may be made directly to private businesses without a government guarantee on the basis of market-based pricing, typically for infrastructure and capital market development projects and for export financing. On average, the Bank has a self-sustaining capacity to approve over $8 billion per year in loans and guarantees from the Ordinary Capital.
Guarantees are used for loans made in either local currency or U.S. dollars. Coverage is applied to all or selected maturities of a given loan. IDB guarantees can be complemented by co-financing and guarantees from multilateral organizations, commercial banks and other investors.
Conditions for guarantees to the private sector are negotiated on a case-by-case basis. Tenors typically range between 8 and 15 years, with fixed or floating interest rates tied to market conditions.
The IDB’s guarantee operations include partial credit and political risk guarantees for private sector projects financed with private debt.
- Political Risk Guarantees. The IDB offers several types of political risk guarantees for debt instruments: Breach of contract guarantees, currency convertibility and transferability guarantees and guarantees for other political risks. Coverage needs are tailored for each project to cover specified risk events related to non-commercial factors. Coverage extends up to 50 percent of project costs or $150 million, whichever is less.
- Credit Guarantees. Several types of comprehensive all-risk credit guaranteesare available. These consist of IDB coverage for all risks for selected terms of a loan made by a commercial lender. Credit guarantees cannot exceed 25 percent of total project costs, or $75 million, whichever is lower. For projects in the smaller economies that have limited capital markets access, the Bank can provide up to 40 percent of project costs, with the same $75 million cap.
Flexible lending instruments
The Inter-American Development Bank began offering flexible lending instruments to its borrowing members in Latin America and the Caribbean in 2000 to provide them with greater agility in project design and implementation and to respond more effectively and rapidly to their changing needs.
Flexible lending instruments are aimed at improving responsiveness to borrowers’ needs, rationalizing development efforts, and increasing delegation of authority. They strengthen the IDB’s ability to stay engaged in key sectors and issues, and to continue to provide pivotal assistance to member countries. Governments that want to finance modernization and growth programs can take advantage of these instruments.
The instruments include:
- Innovation Loans (ILs), which support the testing and piloting of new approaches and emphasize capacity-building and learning. They can help to: (a) demonstrate the potential of taking a specific approach to overcome a development constraint, (b) achieve consensus, (c) gather valuable institutional experience, or (d) boost institutional capacity prior to larger scale programs. Individual ILs can be for amounts up to $10 million.
- Multiphase Loans (MLs), which expand the Bank’s ability to provide continuous support for programs that require more time to achieve fruition. They aim to provide an overall goal and conceptual framework for phased and longer-term support of a far-reaching program, encompassing more than one project cycle, and to forge a sustained and systemic effort in a particular area, sector or group of interrelated sectors, by addressing pervasive development problems.
- Sector Facilities, which help support rapid and tangible action in specific sectors without the delays associated with a long preparation period. They aim to provide fast-track support to address problems of a sectoral or cross-sectoral nature. Emphasis is placed on carrying pre-defined low-cost activities, characterized by: (a) relatively high impact, (b) high sector relevance and urgency (c) less complex preparation; and (d) rapid execution. Concrete and sector specific issues are addressed. The Board has approved a total of $150 million for these facilities, as well as the establishment of six sector facilities for health, education, trade, institutional development, disaster prevention and transnational infrastructure.
- Project Preparation and Execution Facility (PROPEF), which amends the current Project Preparation Facility (PPF) to facilitate a more seamless transition from preparation to execution by financing additional project start-up activities. It also increases the amount available per project to $5 million.
Social entrepreneurship program
The Social Entrepreneurship Program (SEP) is intended to make credit available to individuals and groups that generally do not have access to commercial or development loans on regular market terms.
Under the Program, the Bank provides loans and grants to private, non-profit and local or regional government organizations that provide financial, business, social and/or community development services to target disadvantaged populations. The Bank normally finances these operations through intermediary institutions, which then channel the funds to the final beneficiaries.
The Program provides some $7 to $10 million in financing each year to projects in 26 Latin American and Caribbean countries. Institutions can receive up to $1 million in reimbursable financing (loans) and up to $250,000 in non-reimbursable technical assistance (grants).
In addition to financing investment projects and policy reforms, the IDB provides loans to help countries cope with financial or economic crises and natural or other disasters through its Emergency Lending Program.
In the case of a financial or economic crisis, the Bank requires the emergency loan to fit within a macroeconomic stabilization program that, at a minimum, has been endorsed and is subject to periodic surveillance by the International Monetary Fund. Disbursement periods are significantly shorter than for other IDB financial instruments and can range up to 18 months.
Unlike most IDB loans, emergency loans allow for extremely flexible counterpart funding from the borrower. Public entities eligible to borrow from the Bank include national, provincial, state and municipal governments and autonomous public institutions. Emergency loans are in US dollars with an interest rate tied to US LIBOR, plus 400 basis points. They have a 5-year amortization period and include a 3-year grace period.
In the case of natural or other disasters, the emergency lending program is known as the Emergency Reconstruction Facility or Immediate Response Facility for Emergencies Caused by Natural and Unexpected Disasters.
The Emergency Reconstruction Facility can use up to $20 million of the Ordinary Capital or up to $10 million of the Fund for Special Operations to assist a country stricken by a catastrophic disaster with covering the immediate expenses of restoring basic services to the population. The facility enables resources to reach affected populations in the first few weeks after the disaster takes place.
The Bank also offers support to countries investing in reducing their vulnerability to natural disasters. This includes a Disaster Prevention Sector Facility of up to $5 million to assist countries with taking an integrated approach to reducing and managing their risk.
Project preparation facilities
The Inter-American Development Bank has two facilities that support project preparation: the Project Preparation Facility (PPF) and the Project Preparation and Execution Facility (PROPEF).
The PROPEF is one of several flexible lending instruments approved by the IDB’s Board in 2000. It is more flexible than the Project Preparation Facility (PPF), as it facilitates a more seamless transition from preparation to execution by financing additional project start-up activities. PROPEFs make more funding available per project–up to $5 million–than traditional PPFs, as well.
The PPF provides complementary financing to finalize preparation activities for projects in the Bank’s pipeline. PPFs aim to strengthen and shorten the project preparation stage, facilitating loan approval and project execution.
How are PPFs financed?
A revolving line of credit is given to each country through a loan approved by the Bank’s Board of Executive Directors to finance the preparation of one or more projects and/or programs. The credit contract allows the Bank to grant loans up to the total amount of the line of credit and does not require immediate allocation of the resources.
For individual PPF operations, resources are allocated through the revolving line of credit and/or a grant for the preparation of a specific project. The maximum amount for each individual operation is $1,500,000 or its equivalent. This amount includes the grant amount for Group C and D countries, which is limited to $150,000 per project.
Use of PPF Resources
PPF resources are used to hire professional consulting services and to procure goods required to perform studies and activities to finish preparing eligible projects. Items eligible for financing include:
1. Tasks related to project and/or program preparation, such as:
- Pre-feasibility studies, feasibility studies, and final designs of projects.
- Studies to evaluate the impact of the projects in terms of the environment, women’s issues, and resource distribution, among other areas.
2. Tasks related to strengthening the executing agencies responsible for project preparation, such as:
- Organizational adjustments.
- Contracting technical staff to develop, implement and monitor the agency’s systems.
- Procurement of minor equipment needed to carry out the planned activities.
3. Support for the initiation of activities prior to the first loan disbursement, such as:
- Training of local experts.
- Purchase of certain inputs or materials related to the preparation of the project.
- Contracting of initial technical assistance.
Eligibility for lending
The following entities within the region are eligible for IDB financing:
Public Sector Financing
- Governments and governmental institutions
For public sector project financing, a country’s “government” includes its central, state, provincial, and municipal government structures, as well as decentralized government organizations such as state banks, development corporations, public sector companies and universities. Civil society
- Civil society organizations having a national government guarantee are eligible for IDB lending.
- Sub-regional organizations
Four independent sub-regional organizations—the Andean Development Corporation, the Central American Bank for Economic Integration, the Caribbean Development Bank (some of whose country members are not members of the IDB), and the River Plate Basin Financial Development Fund—are eligible to borrow from the IDB.
- Financial intermediaries
The IDB makes multi-sector global loans, backed by government guarantees, to financial intermediaries to finance credit programs for a wide range of businesses, including microenterprises and small and medium-size firms.
Private Sector Financing
- Loans and guarantees may be made directly to private businesses without government guarantees on the basis of market-based pricing, typically for infrastructure– energy, transportation, sanitation or communications– and capital market development projects and for export financing.
- Among the private undertakings that may be eligible to borrow from the Bank are corporations, other commercial companies, cooperatives, foundations, and the like.
A complete list of eligibility requirements for loan operations is contained in the Bank’s Operational Policies manual.
Technical Cooperation Financing
The Bank provides technical assistance to its developing member countries. It also has regional and sub-regional technical cooperation programs, which are available when two or more countries stand to benefit from the assistance.
The following institutions of the borrowing member countries of the Bank are eligible to receive technical assistance:
- National governments and their political sub-divisions.
- The rest of the public sector, nongovernmental organizations (NGOs), civil society organizations and private entities with the legal authority to borrow funds and receive technical assistance. Regional and sub-regional organizations composed of member countries that are beneficiaries of Bank operations.
Technical assistance may be provided to different national economic sectors, with particular focus on areas such as human resources and the environment.
1. Interamerican Development Bank. www.iadb.org. Año 2005.