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