Public Developent Banks: Their new role in the Development Financing Landscape

Fernando de Olloqui Financial Markets Lead Specialist

IADB

Background*

Recent events over the past 10-15 years have led to renewed interest in PDBs in LAC as instruments of public policy, given their potential for promoting socio-economic development, and due to a better performance in recent years. *Public Development Banks: Towards a New Paradigm?, De Olloqui, IADB, 2013 http://www.iadb.org/en/publications/publication-detail,7101.html?id=69324 http://www.iadb.org/en/publications/publication-detail,7101.html?id=69380

Public Development Banks State financial institutions whose mandate is to promote

socioeconomic development through financing specific economic sectors or segments left unattended by private financial intermediaries.

“Pure”

Commercial with significant

development activities

56 entities in 22 LAC countries

Potential as public policy instrument

Contribute directly to development goals Complete markets Generate positive

externalities

Mobilize private resources

(leveraging or risk taking), generate

demonstration effect

Structure demand and provide information

Counter-cyclical policy support

What has changed?

BPD

Greater fiscal responsibility

Financial market

development

Government recognition of its

additionality

What has changed?

BPD

Second tier institutions

Adoption of banking

technology

Regulation and

supervision

Focused mandates

Greater fiscal responsibility

Financial market development

Government recognition of its

additionality

i) Improved financial results

Credit growth: 16% annual

Profitability: ROA 2.25%

ROE 14.15%

Leveraging: Capital/assets

28%

Portfolio quality: Defaults rates ≤ 4%

73%

Assets US$1.4 tr

Participation in financial system

ii) Increased relevance

�Counter-cyclical instrument during 2008 crisis �Emphasis on its contribution to socio-economic development

�Productive development policies

�Climate change mitigation

Main challenges

More effective instruments

Institutional strengthening

1.

2.

PDB and climate change mitigation*

• A sector that exemplifies the new opportunities and challenges facing the PDB is green financing.

• The lack of resources dedicated to finance investment projects for the mitigation of climate change constitutes one of the most important market failures and with clear positive externalities, and has warranted the attention of many Governments.

• The lack of private financing is attributed to not only the long period of maturation of projects, but also by the risk from lack of information on clean technologies.

*The Role of National Development Banks in Catalyzing International

Climate Finance, Buchner et al, IADB, 2013

Leveraging MDB and private resources

Enhancing the role of PDB could go a considerable way to filling the investment gap, estimated to be between an additional US$140-175 billion annually by 2030: �They have special knowledge and long-standing relationship with the private sector puts them in a privileged position to have access to the local financial markets and understand local barriers to investment. �They are part of the public sector and hence can interact with different government agencies, influence policy and administer non-reimbursable budgetary resources granted by those public sector actors to support national or subnational priority programs. �They can blend market and concessional resources from different sources, including MDBs. �Compared to commercial banks and investment funds, they have the potential to take risks these may not be able to, in addition to being able to finance long term investments.

Mobilizing through two main activities

� Catalyzing the “demand” side for investments and finance in climate friendly projects by addressing sector- and country-specific constraints, building capacity to analyze and structure climate-related interventions, as well as bringing projects and firms to a state of investment-readiness.

� Providing the necessary incentives to mobilize the “supply” of climate friendly investments from the private sector, by offering financial instruments at adequate terms and conditions for this type of projects.

PDB Instruments

PDB leverage Potential Category of Instrument PDB Theoretical

Leverage Factor

Tier 1 Non-concessional debt 2-5 x

Debt financed via grants 8-10 x

Tier 2 Non-concessional debt 1 x

Debt financed via grants 4-8 x

Tier 1 Direct Equity 12-15 x Equity financed via grants 20 x

Tier 2

Direct Equity 12-15 x Equity financed via grants N/A

Guarantee at non-concessional rates 4-8 x

Guarantees financed via grants 25 x

Sectors supported

Sectors PDBs Countries

Energy Efficiency BNB, Bancoldex, Findeter, Fira, Sociedad Hipotecaria

Brazil, Colombia, Mexico

Renewable energy Bandesal, Nafin El Salvador, Mexico

Sustainable Transport Bancoldex, Findeter, Cofide,

Colombia, Peru

Waste Management BNB Brazil

AFOLU BASA, BNB, Banco Agrario, Financiera Rural, Fira, AFD,

Brazil, Colombia, Mexico, Paraguay

CTF US$ 70m

CTF concessional loans

Debt and Private Equity

IDB lending to

NAFIN US$ 70m

NAFIN US$ 250m

US$ 1,190m

- US$

1,540m

IDB co-financing NAFIN Resources

Mobilized

Technical Cooperation and Grants

IDB US$ 1.3m

Example CTF-REFF and NAFIN