After the Crisis: What Should be Expected from Multilateral Development Banks
Fred Bergsten: Let me welcome all of you this morning to the Peterson Institute for International Economics. I'm Fred Bergsten, the Founding Director until 2012, and now a Senior Fellow and Director Emeritus. I'm delighted to welcome all of you today.
The topic today is the lending programs of the development banks and, more broadly, development finance in a rapidly changed and changing world economy. I'm delighted to be able to introduce two of the greatest experts on that topic, Luis Alberto Moreno and Bertrand Badré, to speak from different perspectives, MDB perspective, private sector now development perspective to talk about that issue. They'll each lead off with some remarks and then we'll have a discussion with the group.
Our first speaker is Luis Alberto Moreno, an old personal friend, who's now serving his third term as President of the Inter-American Development Bank which, with all due respect to the World Bank, many experts think is the most effective of the development banks. I see Luis Alberto nodding vigorously. He agrees with that view as do some other top experts in the field.
Luis Alberto has achieved an enormous number of things during his tenure as head of the IDB. The large capital increase in 2010, which occurred in the wake of the global financial crisis and enabled the bank to contribute even more to the response to the crisis. He has established the first environmental safeguards unit in an MDB. He's put in place an operational program for gender equality and administered a record increase of women in leadership positions at the institution. They did historical financial program for Haiti.
So I think it's fair to say that Luis Alberto has had an enormously successful and hugely important period as head of the IDB, which has contributed hugely to development prospects and successes in the region. Prior to being head of the IDB, he was Colombia's ambassador to the United States for seven years, which is back when I met him. He was very heavily involved in creating Plan Colombia, which now seems to be reaching final fruition. And important to us in this building, he was one of the key architects of the free trade agreement between Colombia and the United States, which now looks like being one of the last set of US FTAs for a while. They got it under the wire. And Luis Alberto had a lot to do with that.
He had been Minister of Economic Development in Colombia before coming to Washington. He had been Executive Producer of a leading TV news program in his country for which Harvard awarded him a Nieman Fellowship, which he spent there. So Luis Alberto has had an enormously varied and distinguished career. And we look forward to hearing from him.
Our second speaker is Bertrand Badré. Bertrand is the founder of a brand new financial institution, BlueOrange Capital, which he will tell us about, which seeks to link his enormous background in development finance on the public side, but also the private side to bring private capital to bear even more effectively more extensively in support of development around the world.
He had been Managing Director for Finance and CFO at the World Bank up until early this year. Prior to that, he'd been CFO at both Société Générale and Crédit Agricole in Paris. He was a lieutenant of President Chirac's back in the early 2000s in preparing the G8 summit in Evian being President Chirac's deputy personal representative for Africa. He had a number of years in the French Ministry of Finance as well. So he brings a mixture of private sector and public sector experience.
Most important, he spent six months as a visiting fellow here at the Peterson Institute after leaving the World Bank before setting up his new institution that he will talk to us about. And he has just published a book which is out in French and will shortly be out in English. The translation in my English equivalent of it is Money Honey. That's not quite right because it's Money Honnie, but I like to call that Money Honey which for those of you who have the same age I do will recognize as one of the great rock and roll hits of the 1950s. Money Honey. But the subtitle is, "What if finance could save the world?" So that will tell you what Bertrand is all about and that's what he's going to talk about in his presentation this morning.
So no further ado, Luis Alberto, it's great to host you. We look forward to hearing you, Bertrand. Then we'll take the stage for some discussion and discussion with the audience. Luis Alberto.
Luis Alberto Moreno: Well, good morning everybody. And first of all, let me especially thank Fred who as he said we've been friends for a number of years. And Fred has always been a key defender of really a lot of the institutional framework that we know in international finance and certainly a big defender of what multilateral institutions can do and the role they can play. So for that really thank you very much, Fred, and for your friendship and, for of course, the great job you've done here at the Institute and always been a flagship of the good analytical work that is constantly done around not only the US economy, but the global economy at large.
Let me just pick up one number. I mean we could stay talking about everything about multilateral institutions. But I would like to know and this is a good provocation and, of course, a pleasure to be here with Bertrand as well who provided a lot of intellectual leadership in how one can mobilize more resources across development institutions. But I will get into that a bit later.
But certainly perhaps the best place to begin is that last year as we all know we had both the Paris Climate Agreement and the SDGs. And I think this puts at the center the how to deliver on those two very big world ambitions. And certainly, all multilateral development banks are the unique institutions to be able to help deliver precisely on those two very ambitious goals. But to deliver on those goals, our biggest challenge is going to be how in a report that we were a together all the multilateral institutions there is. How do you move from billions of dollars of lending to trillions of dollars of lending or at least resources that can go to countries to help deal with these challenges?
And at the center of this is how not only do you use your balance sheet better, but more importantly how you crowd in the private sector? And I think this is probably going to be a continuous challenge and something that we all have to work in a very creative way. I mean the UN alone, for instance, estimates that just the shortfall in funding is about $2.3 trillion per year just on this period of 2015 to 2030 during the Sustainable Development Goals. So this is a really big, big challenge.
We all know that development institutions provide, basically two kinds of services. Certainly, one is the financial capabilities that we have and put resources at the best possible rates and tenors to countries. But the real value is really what we can do in terms of technical assistance, in policy advice, in capacity building that helps anything from a tax reform to spending regimes to helping strengthen financial markets to deepening financial inclusion, all of these challenges that are central to any developing country and, of course, to improve the investment climate. And this is really, in my view, the real value.
How we deliver on that, I think, is a constant change that we need to address. As I like to think about it, when you have a matrix system like most financial institutions do, you constantly have to be in a process of change. Of really bringing down not only the efficiencies by doing zero-based budgeting, but also on how you work in the 21st century and is largely around collaboration and how you use the tools of modern technology to do delivery of this.
I often think back when you look at the history of development in Latin America which, of course, is the region of the world I occupy all my time on is that we really missed the Industrial Revolution. And we came late into the Industrial Revolution. And I think to me the biggest challenge today is how we do not miss the technological revolution. But to do that, I think as an institution we have to be very much ready to understand these changes and understand them internally first if we are able to talk about this with the rest of the countries in terms of our regular work.
And this is something hard for traditional economies to look at. But we've begun to do some very innovative things. For instance, in Brazil, there are countries that have federal systems like the United States, in Latin America with Argentina, Brazil, and Mexico. But in Brazil for instance, in terms of tax collection and a lot of leakages that exist from state to state. By doing not only electronic invoicing which is something that, in contrast where there's a lot of cash economy is a great way to capture rents. But also in understanding how trucks and credit card transactions are done is a way to begin to capture a lot of rents that otherwise states were losing.
And it's being so successful that I remember recently talking to a state that is in a lot of trouble which is Rio that they needed the machines to be able to do in the border between São Paulo and Rio the reading of the actual merchandise that was moving from one state to the next. These are the kinds of innovative things that one can us, big data and technology, to be able to apply to really a lot of reforms inside governments to strengthen institutions.
The other part that I like to mention is how do you optimize your balance sheet? And there definitely was a big statement on this around the G20 around capital efficiency. I think this is a very important issue that the Canadians took on. And I think most G20 countries followed, which basically led to something that Bertrand worked when he was there and was very helpful to have exposure exchanges. Because for regional banks, we'll always have a concentration risk and the way that rating agencies look at us in in essence are punishing us for the concentration risk in terms of how we deploy our capital. And, therefore, if we were able to have these exchanges of exposure which in essence help us do exchanges with the World Bank and the African Development Bank, we basically borne the risk. And that gave us more points of rack. And that was simply by doing this exchange is something Bertrand help us put together.
The other collaboration that we're doing across MDBs is everything around the infrastructure. And I think this is probably when you think of climate change, the other area where I think there is the tremendous connectivity in terms of climate change risks. And so what we did was basically begin to be fit for purpose and created a whole department of sustainability that works across all areas of the bank where we are looking to do things that are related to climate.
And here the global infrastructure facility is a good example where we basically pool all our resources, all the MDBS to understand how to help the risk projects, how to advance in private-public partnership, and all the metrics. So eventually, as time goes on, you can begin to develop infrastructure as an asset class. It would be very interesting what happens in the next administration if these numbers that are being talked about come to bear. I think this is going to be again a way forward in terms of being able to really move in the direction of creating infrastructure as an asset class. And I think this will help a lot of ways to crowding more and more private sector resources.
But to do that, you also need to have blended resources. You need to have some instruments that can basically help the risk some of these projects. Many times when you look at PPPs at least my experience all over Latin America, typically there are elements of risk that sponsors are now willing to take, be there regulatory risks, be there foreign exchange risks because many times you need to have in these projects long-term finance in local currency. So those risks are not taken. And then there are the direct construction risks. And as you begin to understand those and how to have this blended finance is the only way, I think, that many more of these projects will go from being projects to as you call here shovel ready type of projects.
Finally, one of the key things in development, I think, is the whole question of country ownership country systems. And this is something we all different institutions have been working on to help ways to expand a financial capacity and the qualities of interventions that we do working with partners. And at the end of the day, we are called to do the more difficult projects.
And one of the things that we're looking to do every day more is how do we develop our private sector arm in the case of the bank which we basically crowded in four different private sector windows of the bank into one, put more capital. And this is really allowing us to grow to take more risks to have a different appetite for risk, but within the same group. And learning from the experiences of the IFC and the World Bank, we're taking many of the good lessons and learning from the bad lessons. And we're hoping that more and more we get into agro industry, which is a very important piece in what we can do in Latin American and certainly infrastructure.
The other area that we were able to do which was really a lesson from the Asian Development Bank was how they were able to again merge in there concessional lending their IDA equivalent. And we did the same. We got huge support from US Treasury, which had some challenges with your Congress and more illegal challenges more than their desire to help which was great. And 100 percent of our shareholders voted on doing this. And so starting January 1st, again, we were able to now put that as part of our capital. And again this, I think, was perhaps for us the biggest help in that have we not done that we would be in really constrained on capital.
So these are some of things that we have been doing. I think these kinds of institutions if you didn't have them you will have to create them. I know we are always kind of in the spotlight. There are always challenges around this. I think the unique case of regional development banks is the specific focus on regions. And the work that we do across institutions is very interesting.
For instance, there are a lot of lessons to be learned certainly Latin America from Asia in terms of what their advances in education, their advances in logistics, their advances on trade. But equally, Asia in many ways especially looking at both China and India are regions which are being urbanized. Yet Latin America is the most highly urbanized region of the world and we have a lot of bad lessons and good lessons there. At the same time, the social safety nets that have been created in Latin America the so-called conditional cash transfers that was really an innovation that we started the IDB and that is today in over 20 countries in the region.
So there's a lot of cross-fertilization that can come across regions. And therefore that coupled with the fact that we have a unique thing at the IDB whereby the borrowers have over 50 percent of the shares. And that makes them feel the ownership of the bank in a very big way. It's of course always a tension, but I think it's a good tension because at the end as I see it that the IDB is the only place and the only institution where you have 48 countries around the world, the key developed countries in the world, of course the United States included, and Latin Americas where there's an ample discussion about economics and about economic challenges in our region.
So with that, I would like just to stop there and, again, thank Fred for this invitation. And more importantly for the focus always on the development institutions as we enter this new administration we will lead a lot of this discussion but especially, Fred who's always been a friend to help us navigate the new waters. Thank you very much.
Bertrand Badré: Thank you. Thank you very much, Fred. Thank you, Luis, for your kind words. Yes, we have new waters to navigate and not just because of the new administration because many things have changed in the world in the past years. So I'm happy to be here this morning for many reasons.
First, it's just been a year since I've announced that I would be leaving the World Bank. So it would give me time to think about it to write as you kindly say about it half in French half in English, and also to combine this experience at the World Bank with my past experience as CFO of two which are now called global [inaudible 0:20:14]. Those are large banks which are supposed to threaten the world in a systemic manner. And also as I was a partner at Lazard before, so I've seen the city in London in 2000 and Wall Street at the moment of the bubble.
So I've tried to combine all of these in my thinking. And I came to the conclusion that in particular when we discuss development issues as Luis rightly said, we need new tools and new approaches. And we need really to think sometimes out of the box to break the silos and really to try and test new ideas.
And more importantly, I'm very happy to be here because I mean I've spent these past few months with you, Fred, and Adam and some of the colleagues here at the Peterson. That was just an amazing experience. There is no equivalent to this in France. So I didn't know. So just to enter the think tank world was something which I had never experienced and I'm very happy to have experienced it. I'm very happy also to be able to discuss with Luis. Because as you said, we've been discussing the role of development banks over the past few years.
When I was at the World Bank and since I've left the World Bank and I will not enter into the game to see who is the most effective development banks. But I think you are extremely effective and you are extremely innovative. And I'm very happy to have partnered with you in the past that we could succeed in making this exposure exchange agreement that you described work. There is more to come. And in my small capacity as CEO of BlueOrange Capital I hope that we can work together and I have good hopes in that perspective.
But more importantly, I think the topic of the conversation today is crucial. The adoption of the Millennium Development Goals back in 2000 seemed very far away. Good and bad lessons are taken from them. Then we have rest the old system in 2015 with Sustainable Development Goals with COP21 and now COP22 and with financing for development conversation.
So it's a nice world map, but it still raises a number of questions. Could we be up to the expectations that we raised 18 months ago? And on top of that as you rightly say, we have to navigate new political waters. And two of the countries which have a critical role in development, the UK and the US, have changed views on these topics or might change views in these topics. So what do we do with that? How do we enter into a fruitful conversation with these people? And there might be more to come actually in other country next year.
And on top of that, we have also to compete with new needs. I mean the UN recently mentioned the needs for humanitarian support, which has grown. And in Europe, I mean a number of countries are struggling to get money both for refugees and ODA. And sometimes it's really competing in the same bucket. So this is a brave new world. So let me highlight three points.
First, just to come back very briefly on the sea change that we've seen development since 2000. Second, discuss the 2015 agenda and how we can move it forward. And third, what is the world today that can be expected from development banks? And I agree with Luis' conclusion on [inaudible 0:23:18]. Yeah actually if they did not exist, we should invent them. We have our duties to make the best out of the tools that have been given to us because they are extremely necessary.
So first sea change since year 2000 so that's when I kind of fall in the water of development with Michel Camdessus at that time. So year 2000 this is the is a Millennium Summit, the adoption of the Millennium Development Goals, I mean this was the first ever when basically all people agreed to a set of objectives. It wasn't a human rights declaration or whatever. It was an objective the first time that everybody agreed we should get there so that was great. On top of that at that time, we are still in the so-called great motivation. So everybody was pretty excited about everything coming together. And so we had a bright future ahead. That also is a good time—I mean that's how I started as a banker— of the new economy. So everything was new. Everything was exciting. And it seemed pretty good.
But of course, as we all know, the movie was not exactly according to the previews that we are in 2000. Of course, we had the rise of the large emerging markets. I mean the BRICS—the word was coined in 2001—that's a big change including from a political perspective. And there are struggles in all institutions. How does multilateralism work in this new world? And that's exactly the same as 1944-1945.
The second thing, which Luis highlighted, is the role of the private sector. When you look back at what was discussed in 2000, it was mostly about public money, public [inaudible 0:24:43]. Corporation and partnership came a little bit later. But at that time, it was really about rising ODA, more public money for the South. That was really the name of the game.
And as we have seen over the past 15 years, I mean private flows have totally outpaced public flows. That's the first point. So you have more private money moving both directions, actually north to south, south to north, and south to south. And the second thing is also more and more people realize that development is related to the development of private jobs. . We do not develop countries by creating civil service. So, again, it seems obvious today. It was not totally obvious 15 or 20 years ago.
So the role of the private sector is critical. But since there is still this issue, that public and private are still seen as sometimes complementary and sometimes opposed. And in the public-private cooperation to come back to that is a difficult thing and people suspect [inaudible 0:25:35]. To make it simple, the private sector thinks that the public sector is slow, bureaucratic, lack innovation, and sometimes incorrect. And the public people think that the private sector has basically won the reward without taking the risk. And very simplistic, but if you poll people in many countries including my country in France, you will have that type of answer. So we have to work on that because public-private cooperation should be the name of the game going forward.
On top of that, one of the other changes since 2000, of course, is the emergence of new global issues. You mentioned climate, but the refugees and others are still there. And of course as you also say, there's a digitalization of the world. Technology is changing everything. Who could have imagined in 2000 that you could have the mobile banking developed in Africa, which has been developed in the last 15 years? So that's something very new. I mean we cannot apply development policy today the way we did 20 years ago. Agriculture today is not the same as 20 years ago particularly in Latin America. It's the same for banking. It's the same for energy, for health, education, et cetera.
And, of course, a major change since 2000 was the global financial crisis. So [inaudible 0:26:40] has been debated many, many times in this very same room by many people. Let me just highlight a few of the consequences which might have an impact on development and development banks.
First, I think, we have lost some trust in system. Again, what happened in 2007, 2008, 2009 has had a very big impact on the trust people had in market economy in the trust people had in democratic functioning of our society. And I think we have to regain that trust. And from that perspective, development banks can be an actor to restore trust between the various components of this system. So I think it's very important to not ignore that, not just for the electoral consequences that we've seen in different countries, but also for our job.
Second, the impact on regulation. Again, I've been the CFO of two large banks. I've seen the impact of the new regulation, but also the regulation with market expectations what do shareholders expect from the banks they are invested in. This has changed dramatically as a way in particular banks operate, but also insurance company, asset manager, et cetera. So I think there is a shift actually, which has happened, which I've seen firsthand prior to the crisis of banks, which is the center of the financial world. I think we're moving to a world now where institutional investors are more and more critical compared to banks.
I mean we'll see what this administration would do with that frame. That might change the game. But as of today, I mean most banks are incapable of reaching decent ROE. Most banks are incapable of growing their balance sheet because it's just too costly. So, banks are moving away from long-term. They are moving away from [inaudible 0:28:15] increase. They are moving away from everything, which they were doing before. That people expect institutional investors to step in and do that, but they're not prepared yet. So how can we help this shift in the system not to be detrimental to development? That I think is something, which is absolutely critical.
And in a context where as I said, the system has been hit particularly and there are still pending questions on banks. How can they be profitable? They still don't know. They are struggling. And we had some conversation at the Peterson about that. Institutional investors are at a loss. Even if you have a peak in interest rate, people are debating whether it's kind of the end of the bull market and the bear market. Nobody knows. It's being debated. But institutional investors are struggling. For the businessmen, how do you pay pension in a zero rate environment?
And I had a conversation with one of the largest, if not the largest, European insurance companies this weekend. And they say it's not just an asset problem. It's also a liability problem. How do you value the damages? Which type of discount rate you use in a zero rate environment and so on and so forth? So they are struggling in this world, which is I mean a brand new world for them. And, of course, we have the question of multilateralism which is critical for the future of development banks. If every country thinks my country first, my country in order myself, , I mean, what do you do with all these tools which are so precious? So everybody's under pressure and everybody struggling to see, "Okay. What do we do after there's a global financial crisis?
So I do believe that we need a reset that for the time being we have patched up the system in a way that we have some regulation and a number of changes we are still alive and that's good. And the system is working, which is good. But we need to think the next step and I think this is really what is important. And [inaudible 0:29:57] precisely Peterson also is critical in thinking of new system that we still see to emerge in the coming years.
So to a certain extent, one could argue that part of the answer to this reset was provided in 2015. So in 2015 we had the conference on Financing for Development, the adoption of the billions to trillions approach, which basically say public money is scarce. It's in the billions. And the needs are in the trillions. How do we get there? Part by increasing taxation in each developing economy and part by combining public and private money. That's okay on paper, but it requires a lot of efforts to get there. So we agreed to do that. Now the point is, can we deliver on that?
Then we have the adoption of the Sustainable Development Goals. It's extremely ambitious. I mean you mentioned the figures, $2.3 trillion. I mean maybe it's $3 trillion, maybe it's $2 trillion, but it's enormous in a world where basically the name of the game is more contraction and everybody focused on his domestic issues or its close domestic issue.
And then the last point, of course, is climate with COP21 and COP22. We have the roadmap. It's not the point of the roadmap. We know what we want to do. We have agreed. It's been signed by all heads of state. But there are big issues. I mentioned the question mark on multilateralism, the question mark on the global economy. I mean we discussed here in the very same room secular stagnation. You know about new mediocre. I mean there are big questions on where we're heading to.
We have the pressure on public process. So people start to rehabilitate the fiscal policy. But the immediate issue is then the rates are rising. So how do you move being more aggressive from a fiscal perspective if the rates are rising? I mean it's going to be a big issue also in my country and many European countries very soon.
We still are in a monetary policy environment, which is still very complex. I mean that's the announcement of Mario Draghi in Europe. People are still struggling to see. What does it mean exactly? So quantitative easing is really an issue for a number of large institutional investors. What do they do out of this? And we have all these tensions on the public-private partnership models. On the one hand, everybody agrees that this is a new name of the game. Public-private, they should work together. It's great. On the other hand and Latin America is a good example, it's difficult to do a successful public-private partnership. We have really to support this in an appropriate manner.
So we have the roadmap where it identifies the issues. So the point is can we be up to the expectations that we raise at that time? That comes to my last point which is I think there is a critical role for multilateral development banks today.
First of all as Luis said and I don't want to repeat what you said, I mean each bank has a duty to maximize its capacity, its financial capacity, individually. So every bank individually should make sure that they are properly managed. There is no waste, no waste. They should really understand and again we've discussed that many times that they're not development agencies. They are development banks. So the way they can grow their business is by building up their capital base. And once they've demonstrated they've build up the capital base okay, then they can engage with the shareholder to see whether there is an opportunity to increase your capital or not. But that really is the name of the game. So you really have to work on your cost. You have to work on your revenues. You have to work on capital and stretch it et cetera. I think that's priority number one.
Priority number two and you enter with that that's what some of the banks including you have done. Try to combine your various instruments and see whether you can do more. And that's what I've been pushing at the World Bank with the so-called IDA class. So IDA as you know is an association. It was not really considered as a bank. So it was really managed very simple as a pool of money, which flows in, flows out, and then the money coming back.
But technically if you have these assets because they come back without liabilities, you have capital. So the idea was really to use IDA assets as an equity base and leverages, so borrow against these assets. And I'm very happy that in the coming days and some people in this room work on that we'd be capable of raising several billions every year and increase this over time. So this is really what I call the duty of each bank to maximize its resources. That's what they owe to the world and that's what they owe to the shareholder.
But they also can work collectively. And you mentioned the exposure exchange agreement. At the end of the day, I mean the shareholders are more or less the same. The objectives are more or less the same. The policies are more or less the same. So we should really work more and more as a system. And as a system, you have pockets of productivity everywhere.
And I'm very happy that we move on this exposure exchange agreement. At zero cost for shareholder, we have created more than 20 billion capacity in the system at zero cost. And I think we can do more. We should probably engage under the same line with also the bilateral agencies, which are exactly the same issue. And the French AFD is a bank and is regulated by Basel. So that's part of the conversation that needs to be pushed a little bit further. And of course, it should not prevent people from innovating and trying new ideas. So that's the first point, maximize your financial capacity individually and collectively.
The second point is also mentioned by Luis. It's really that these institutions should be as much mobilizing institution as financing institution. At the end of the day, we are in $100 trillion GDP world. And combined, I mean all ODA is $175 billion, all the intervention of IMF, World Bank, IDB, et cetera $150 billion to 200 billion per annum. So it's pretty small. It's decisive because this is a signal. This is a way you can mitigate some risk be catalytic, but still it's small. So trillions are not there, and they would never be there into this context. But they can really pull the money from others if they provide the right support.
I remember I spoke to the head of GIC few years ago. He said, "What do I expect from development banks? I expect them to help me select the right thing to do. I don't have the people on the ground in Africa and Latin America. So this is your job. Tell me what is good to do. Then I want to make sure this will be done okay. I don't want to be trapped in some reputational risk, child labor, biodiversity attacks, et cetera. I trust you will do a good job. And if there is a problem, you can help me solve the problem because I, GIC cannot solve the problem. I cannot discuss with [inaudible 0:36:00] or Kinshasa. I just can't do that but you, but you can do that. And that's what I need from you. If you bring this to me, I'm very happy to work with you and then we can work together.
And that's where basically you move from the billions to the trillions by mobilizing money and not just financing and do these things on your own. But I think this is really for me critical. And this is a paradigm shift because it's really a natural tendency of every organization to be focused on, okay, I'm doing this on my own and it's okay and it's easier. It's very difficult to open to us. And I really want to pay tribute to Luis and James Scriven who's working with you on the way you're opening the doors and engage with the private sector. And there are also some IFC people in the room that's been doing for a while actually. We have to move in that direction. It's not enough and we have to move to scale it up. That's my second point.
The third point is really, as I said, engage with the private sector and recognize that it's not easy. Don't fudge the issue, I mean, public sector and private sector are not the same. So we should not just say, "Oh let's work together. It's okay. We have to define rules. I mean how do you manage conflicts of interest? How do you manage suspicion, I mentioned, et cetera? I think this is important.
First point, you really have to be innovative. You have to take on the technology, I think, you mentioned it. It's critical. But you have to really embrace -- I mean the green bond is a very good example. I mean green bond was around $0 for five to six years. And that was $100 billion market. It was supported by the World Bank initially, and by other development institutions.
We have to work more on the impact bond on the social impact bond world, which I think are innovation. We have to use more insurance. Insurance is totally under-utilized in the developing world. I mean most of the issues with development is a recurrence of shock; economic shocks, climate shocks; pandemic shocks, et cetera. Insurance is a right tool. Again, we discussed that in the very same room, I think, with Larry Summers a few months ago.
And fifth point, I think the development banks have a particular role in leading the discussion on the financing of public goods and the fighting against public bads. I think this is really the place we're using the convening powers and can really make a difference and bring people around the table and find new ways to address. And I think COP21 from that perspective was an extremely interesting experience where it was a combination of the efforts of, I would say, the gains and [inaudible 0:38:14] on the corporate world, the investors' world, the development banks, the diplomacy, et cetera. I think this is really a new type of agreement that I hope it's just not one of its kind that there would be more to come.
So in conclusion, I think development banks should first be banks. They have a balance sheet. This is a balance sheet of the world. This is a balance sheet that you can use. It's flexible. You can engage in partnership you can build for the future. You have access to markets. You have access to insurance, et cetera. So we have to use this. We have to be the toolbox of an inclusive globalization, which is desperately needed today.
And the third point that we insist on, there shouldn't be any competition between development banks. They should work together as a system and the World Bank as its role as being global and, as you rightly said, unique regional institutions. And this is a combination of both which makes a difference. Why compete? I don't think it makes any sense. And we have really to fight against this.
So I would say this is really where I'm coming from. So last commercial page as this is why I'm creating BlueOrange Capital. So BlueOrange vision is really to engage with partners like IDB and others to see how we can bring money from the GIC of this world, which are a little bit nervous about engaging with institutions they don't know well and want people which can speak both languages, and they are ready to mobilize money. Because at the end of the day, if you're life insurer in Europe today, the alternative is to buy zero rate German bonds or Swiss bonds or Dutch bonds or French bonds on very little rate, which is of no interest for the insurer because we [inaudible 0:39:44] are not incentivized to do the reform. No interest for their clients because they cannot pay the pension and the insurance premium. No interest for the world.
So if we can find a system so they can mobilize part of the savings into projects which makes sense like agri-business, health, and education in Latin America that would be helpful for Latin America, helpful for the clients, and incidentally helpful for the world. Thank you very much.
Fred Bergsten: Well thanks very much to both of you for putting an enormous range of very important issues on the table. I would just ask one question and then open it up to the group.
You both focused on billions to trillions and rightly say that the great bulk of that is going to have to be private sector. And therefore, the development banks will have to play this catalytic role in addition to its direct lending role. But you also both hinted and, I think, Bertrand even said that the actual programs of the development banks will themselves probably have to grow some as well.
So if we look at to 2030 target date of Sustainable Development Goals, what would you envision, in broad terms, the magnitudes of your own institution relative to where it is now? Is it going to double again? Is it going to remain? What's it going to be and Bertrand's comment about the World Bank, but also the whole network of development banks as you see it? And in turn, if you're going up as I suspect you are, what will be the sources of that capital? To what extent will be the traditional recapitalizations by the member states and to what extent would there be other and new and innovative devices?
Luis Alberto Moreno: That is a very good question. And, of course, I think eventually all institutions especially as you look out to 2030 I would say for us at least in the next two or three years, we're going to have to get to a place where we are able to solve precisely that issue. Now as always and what I learned of this is the more you plan it, the better. And the more you make your shareholders aware that this is coming, the easier it is to get there.
How is it done? Well we went through in the midst of the crisis and I think this was thanks in part to the G20 because the first G20 meeting actually asked all of the development institutions to at least review their capital base to see if we were ready to support countries during the. And that led within the next, I would say, 18 to 24 months about all of the banks have, in essence, increased their capital base.
Now as we did our crowding in of our private sector windows, there were some shareholders that were not ready to put money and others that were ready to do it. Then largely, of course, the lending countries or the borrowing countries are always interested in the institution becoming bigger. And what we did was selective capital increase that we accommodated as best as we could our existing shareholders by doing income transfers from the bank into this IFC equivalent and then a fresh capital coming largely from our borrowers and some countries like China and Korea, and Spain, which basically increase their shareholding.
And that kind of worked. That's a way forward. But at the end of the day, you have to have a minimum consensus across your shareholding base to be able to accompany such an effort. And you got to earn it. And to earn it, you got to demonstrate that you're being every day more efficient that you're looking at your bottom line that you're making the best use of the resources. And it's not only what Bertrand was talking about the efficiencies of the balance sheet. But how you think and how you're organized especially what we're doing both on the public and on the private side where you are measuring in every project that you're doing how you are bringing along other co-financing partners and other private sector partners if it's the case in the private sector.
And I think we should, over time, be able to actually demonstrate not only that. But for those projects where you're doing exactly that multiplication is critical. Now that becomes very difficult in the more vulnerable countries. And those are the countries that need more help from you. So that's where I think the biggest trick is where we're at.
Bertrand Badré: Yeah and I think Luis said it all. The difficulty is that we have a combination of a technical approach, which is basically as you said do your homework. Make sure that you can demonstrate that you've done your job properly that you've pushed the limits that you've engaged where you are most needed et cetera. And then, of course, comes a political discussion, which sometimes does not 100 percent rely on the technical approach. And that's where I think it's very important that this is properly handled in the coming years with this new administration, with the UK, with the European countries, and also with the new people emerging.
I mean what is the role that China wants to have? Now it has created AIIB. You have the BRICS banks. What does it mean in the engagement with IDB, with the World Bank, and others? So we really have to work on that and make sure that we did not dissipate the benefit of what has been created initially in the spirit of 1944 and 1945 and then extend it to other institutions. That's, for me, why it's so critical today to demonstrate that these institutions are needed. They do a good job. And they can do even more by, as you rightly said, engage of the tactics and situation and also being capable of bringing outsiders into the system.
Fred Bergsten: Let me just ask one more question and I'll open it up because I'd like to elaborate a little bit on one thing you just said quickly. One way, of course, to increase the contribution of the development banks to global finance is to create new development banks. And you mentioned two that have just been created, the BRICS Bank and the AIIB.
Do you see them as making big additional contributions? Do they bring new donors into the picture in an important way? Is that a quantum change in the structure of global finance? And will it make a big difference both in terms of what resources it brings. But also the challenges that hopefully the innovation it brings to the existing institutions? Luis.
Luis Alberto Moreno: Well, clearly at least until now, both the new development banks or so-called BRICS Bank and the AIIB are largely relying from what I can see for the most part on the pipeline and the projects that are being brought to them both by the World Bank on the Asian Development Bank. In the case of the BRICS Bank, we've kind of looked at a couple of projects. But they're largely going to be done in Brazil because so far they're concentrated across their shareholding.
The other thing that I thought they were going to do which I have not seen yet and it's probably because the way rating agencies are looking at risk in our institutions is that they could perhaps be more innovative in their financial instruments. But much to my surprise, at least so far, I have not seen that.
Fred Bergsten: Would you elaborate kind of what you had in mind as a possibility?
Luis Alberto Moreno: No, I don't have in mind anything specific other than to imagine that since they were starting from scratch they could perhaps introduce a set of financial products that we typically cannot do for the exchange rate raised the fact that we cannot encourage. I mean there a number of areas. So I figured that they could be able to at least attempt to do something along those lines. But they'd be very much as conservative perhaps as we are.
Bertrand Badré: Well if I may just answer. First of all, I was an early supporter of the creation of the new banks, first of all, because I think competition is healthy and it's good. And I'm still expecting innovation pressure of the system. So I think it's good per se. But again if we put things in perspective, the capacity of these two banks will be 10 plus billion per annum in the steady state even if you go to 15 billion. We still compare this to 2or 3 trillions of this. So there is room. So I think it's absolutely okay that these institutions exist.
And actually, I went to Peterson where the seminar in in the spring [inaudible 0:49:04] new of school of public policy where we discussed that. And I remember what I said that time. I said if AIIB is just a World Bank with a Chinese flavor it doesn't add much to the world. It adds 10 billion. That's it. If they are capable of bringing new tools and bring innovation that would be helpful for everybody. And in particular in Asia, they could really partner with an ecosystem, which is extremely interesting in Singapore and Hong Kong and elsewhere but with the private sector [inaudible 0:49:33] infrastructure.
I think that the jury is still out. I was there two weeks ago, and they are really thinking along these lines. But the truth that for particular reasons have been pushed to do co-financing fast just to show that they were doing something that they're lasting on their own for the time being and I don't think that will do anything before 6, 12, or 18 months like we saw. I would say the jury is out. We'll see. But it's an important question for the system, yes.
Fred Bergsten: Okay. The floor is open. I'd ask you to go to the mic. We've got a hand mic too, but you can go to the standing mic, introduce yourself, and fire away.
Luigi Ruggerone: Good morning. My name is Luigi Ruggerone. I represent a commercial bank, a European, an Italian commercial bank here in Washington DC. We are quite a big bank. Our balance sheet is in the tune of 700 billion euros. So we do a lot of project financing around the world in emerging markets. But honestly, we would like to do much more, but we are unable to do that. And this is an issue that Mr. Badré has touched upon. But I would like you, the two distinguished speakers, to elaborate a bit more on this.
The main reason for us having to decline a lot of project financing which we may have a role is because on top of the usual credit and construction risks that banks like commercial banks are used to tackle and to analyze and to assess. There is now in the picture a lot of other risks. I can mention, for example, reputational risks. Imagine, we have had to decline a few projects in Latin America because we didn't want our name to be associated with large corporations, which have been involved in big scandals in a large South American country. Guess what country I'm talking about. Same thing happened in some Middle Eastern countries where we had important projects we had to decline. So, reputational risk is something that we find it difficult to assess to manage.
Other risks are legal risks. The typical question of the credit department is who's going to pay us if something goes wrong? And it's not clear what [inaudible 0:51:42] are relevant. So my point is I believe you've touched upon this, Mr. Badré. I think we should try from the private and the public and the multinational multilateral development bank sector. We should try to devise financial structures by which there is a more precise allocation of risks to those institutions, which are good at assessing that.
So commercial banks are better at assessing—not better—we are used to assessing credit risk, construction risk. Perhaps multilateral institutions are more able and better to assess this kind of legal, regulatory, and reputational risks with emerging markets. So that's the first part of my question, I would like you to elaborate on that.
The second is you mentioned impact bonds and social bonds and green bonds. I have been in talks with the IDB and I give full credit to the institution represented by Mr. Moreno today. I've been talking to them about a circular economy bond. I was your guest. I gave a speech at your Montego Bay event and it was terrific. That was fantastic.
But then, when I talk to my people at the debt capital markets department, they always have doubt about issuing this kind of bonds because they say if you look at the market price there is no material difference between a green bond and a non-green bond issued by the same issuer. So what drives price, what drives yield, is not the social and the global impact content of a bond, but still the credit risk inherent with the issue of the bond. So shouldn't we be doing something to make the markets more aware, investors more aware that social green and circular economy bonds may have a role in improving environment in helping the development and support emerging economies? These are my two questions.
Fred Bergsten: Good questions. Why don't you each tackle whatever parts of it you want?
Bertrand Badré: Yeah. On your first question that's exactly my point. I mean corporation is the name of the game. Public-private partnerships are very difficult. And it's not so much a financial arrangement than a risk arrangement. Who is carrying which risk? And anybody which has been in that business knows this is part of the issue, not the finance. Finance, you find it. But the way you split the risk and it's difficult. And it's difficult both in emerging markets and in advanced economy.
I mean as you probably know I'd like to tease Germany when they question me about this and say, "What is the safest country on Earth?" And usually they come with three. They say Singapore, Switzerland, and Norway. And Norway because this is one—Norway wanted to do big PPP on gas distribution a few years ago and they changed the price like two years down the road. And now they are being sued by the oil [inaudible 0:54:33] would have destroyed PPP but Norway.
So, just my point is that it's difficult even in the most kind of boring, clean, safe country. So it's difficult. It's difficult everywhere. So we have to work on that. And that's why I think and Luis probably can add to that that the initiative in infrastructure is important. You have to facilitate the life of people and have people work together. It's not up to the development banks or the public institution to define something and then oh I miss the trillion. Let's add the private sector to join. You have to define upfront how you can work together and who is best to do what. I think that's the critical point.
The second point on the various risks, you mentioned the reputational risk. That's where development banks can help. That was exactly the point of the GIC person is I want to partner with development banks because I think they would be smart enough to avoid me being trapped into something bad because they would do the right selection for me. I cannot do this.
So this is part of the discussion. I think on project 5, et cetera—I think we have a big issue which is related to the regulatory framework adopted after the financial crisis. We have adopted very tough rules on banks which are not incentivized to move in that direction too fast because it's too costly. In parallel [inaudible 0:55:45] doesn't push the insurance company to move in that direction. So there is no real incentive for the system to move in that direction.
So I think if the G20 was serious and they've discussed that there they should put—I mean if they really want infrastructure to be central, you should address all these issues and you have everybody around the table. I mean those are regulators, ministers of finance, et cetera. So you should really focus and bring development banks, the regulators, and private sectors. Okay. What is needed to get to the trillions that are needed in infrastructure? We are not there yet. We're getting there. And I think the infrastructure is extremely, extremely important.
On the green bonds, I think this is the same issue. You cannot go and say, "Okay. You're going to do great things like being green and lose money." So I think the first thing is to demonstrate that whether it's green or non-green it's the same price. I mean I had this conversation with [inaudible 0:56:39] a guy managing more than $1 trillion. And he said, "Bertrand, I'm interested in these products because my clients ask." They don't care themselves. So we have to push to put pressure in the system so that the final end-users ask for green bond, social bond, et cetera. And then the people will deliver with that pressure from the clients.
Fred Bergsten: Luis. Yeah.
Luis Alberto Moreno: Yeah real quick. I mean as you know we have this structure, A/B loan type of structure where we basically extend our preferred creditor status. We manage—if you're co-financing with us, we do the management of the loan. We supervise the loan not only for the time that is being disbursed but rather for the life of the loan to make sure that we can measure the impact that we started at the beginning to kind of be the baseline and the metrics that we want in terms of outcomes. So that's one way to do it.
The other part that we've started to do a lot is to, of course, work with our shareholders. And it's fascinating how we lately have been working with our Asian shareholders. So we have directly from safe co-financing line that operates very quickly where we started with $2 billion. We are now hopefully increasing it and working with [inaudible 0:57:54]. It's different kinds of facilities that China has created to financing to Latin America. And it's great that their shareholding grew at our private sector window because that will get them more appetite to do more things with us.
And the way this works is they basically have like two weeks before we go to our board and they say go or no go. But we do the management. We do everything. And one is out of their own safe which is as you know the reserves of the Chinese government. And equally, we're doing the same with Japan now. They have a whole initiative that Prime Minister Abe launched, which is about smart infrastructure where you have a pool of resources that goes to project preparation. And again, we set up with them about $3 billion line to do co-financing. With Korea, we're doing the same. We're trying now to raise equity to be able to blend into this type of transactions.
European banks unfortunately, I'm now talking Latin America, because of their Basel requirements even on trade finance, they pull back of it. And trade finance is less risky. It's a self-liquidating transaction. But even there, I've seen in the European banks go back. But if you're having any problems with the IDB, let me know at the end that would work hard.
Fred Bergsten: All right. We've got three questions lined up. Let's take all three; one more over here. So let's take those four questions. And then we can answer them together.
Barry Wood: I'm Barry Wood. I would think that the greatest need in the region where the IDB could really make a difference is Cuba. Are there any discussions about Cuba joining the bank? What are the obstacles for them doing so? And what would you identify as the greatest contribution that you might make in Cuba or the needs of Cuba?
Fred Bergsten: Monica.
Monica de Bolle: So I have two questions, one for each, so Monica de Bolle here from the Peterson Institute. One is to Bertrand and it's a question about you spoke of the difficulties with PPPs which are, of course, very, very true. But there is one experience in Colombia that appears to be very successful, the experience with the Financiera de Desarrollo Nacional, the FDN. So I wonder if you could comment on that.
And for President Moreno, the question is you spoke of not missing the technological revolution in Latin America. So my question to you is, on fintech, what is the IDB's position on fintech and what's being done? And what could you possibly share with us about that? Thank you.
Gretchen Biery: Hi I'm Gretchen Biery with US Treasury Department. So I have a question on supply and demand. So, obviously, financing is fundamental to achieving the very ambitious development goals. But a key part of that as President Moreno has said is country ownership. What role can the MDBs play to help countries, I think, think differently and more comprehensively about these development goals and these agendas beyond what can often just be a project-by-project approach and requests of the MDB? So helping governments, I think, sort of lift up and think more strategically. Thank you.
Fred Bergsten: Okay. Luis, why don't you start out? I'm sorry. One more question. Sorry.
Male Speaker: My name is [inaudible 1:01:15] a former World Bank staff 10 years ago. I was fascinated during the creation of the Asian Infrastructure Bank by the focus on a very different governance structure. Do you have a belief that this model that is emerging will be much more adequate to encourage innovation and flexibility and also to remove to a certain extent the short-term political interferences in the operations of the institution. So in one line, do you think that model of governance is better than what was the case for the earlier MDBs?
Fred Bergsten: Do you mean primarily not having a resident board?
Male Speaker: Exactly that interferes with the quality of the investment process, the internal management in the institution. Does that structure make a difference in terms of the ability of innovating in the spirit of your discussion today?
Fred Bergsten: Okay. Luis, you can answer all of those.
Luis Alberto Moreno: [Inaudible 1:02:19] is here. I think one of the greatest things that President Obama did was to break this history of cold war with Cuba and having the kind of relationship the United States today has with Cuba, but we still have the Helms-Burton Law. And it's very explicit in that it mandates the US government not to engage with Cuba.
So until that is removed and that's a congressional decision I don't see how we can do things. I would love to be able to do things in Cuba. I think the needs in Cuba are gigantic. Think for a minute just the need of having statistics, something as basic as statistics across any country which are fundamental for development for creation of institutions. There are many, many needs in Cuba that require a development bank whatever that development back is to be doing the work.
The only ones doing somewhat kind of support in Cuba are ECLA, which is the Economic Commission for Latin America. And they're starting to do things. CAF, which is a regional development bank is starting to do things. But everybody is being very timid so far on the Cuba question.
On Monica's question on fintech, probably the country today in Latin America that has the largest amount of innovation in the technological space is probably Brazil. We follow very closely all of the new ideas that are being developed in fintech, fundamentally those that are looking in areas of microfinance. In areas of remittances for instance, how do you simply move from cash-to-cash transactions into actually developing financial products on both sides from where that transaction is being made?
And I think this will do—I think fintech is really not only in terms of financial deepening but equally in helping move out of these cash economies that we have in our countries, the formal economy which we call, which still is 50 percent. I mean we still have on average 50 percent of our economies are cash economies. So that's a huge tax leakage that we have. But more importantly what that means in terms of productivity which certainly Latin America has been lagging, but productivity today is an issue for every country in the world.
And that takes me to the question from Treasury in terms of how governments can become more strategic. Certainly, the fundamental problem is how do you do structural reforms? And we spent a lot of time in thinking the sequencing of structural reforms and they're not going to be equal from country to country. So what we began to do is develop a set of indicators, our research department, whereby we can on the one hand look at a structural reform that is done, what impact it has because political capital is short as we know. And so do that by comparing other countries around the world not only Latin America, but comparisons with Asia and comparisons with Europe and what that all means and how countries can as a result lift up and look in a much more strategic ways.
And the other area and the same idea is on this huge climate agreement, you remember there were these so-called NDCs established, which are basically the notional reductions on climate admissions. That's about 10,000 or 20,000 feet. Then you got to bring it down to earth and that means turning that into actual projects. And there, you need concessional financing to precisely what we call technical cooperation to help those governments do just that. And we've created a set of tools precisely to help countries develop their own NDCs.
On the question of governance, look, this is a huge issue. I frankly believe that I wish we could come to an agreement in development institutions. This is the one thing. If you say anything that both the new Development Bank and the AIB brag about is precisely this notion that they don't have resident board.
And I have to tell you. I see it in the IDB. I see representatives from many of our shareholders who one day would say one thing and then another one comes and they say an entirely different thing. So I feel that we deal more with a parliament than we do with a real board where you should have—
Fred Bergsten: I will simply report that Bob McNamara back when he was the legendary head of the World Bank railed once a day and twice on Sundays about having to spend so much time sharing and working with his resident board. And I'm sure if he could have done a single reform at the World Bank he would have gotten rid of it. So for whatever that endorsement is worth, you could add it to the list.
Luis Alberto Moreno: Excuse me on that. Bob Selig did a report [inaudible 1:07:34] you led as you recall, which basically talked precisely about this issue. I was with our whole team. I mean the apparatus that we all have to have to deal with the board not to mention the staff time that is consumed. Yesterday, I was with all our secretariat. They did 200 meetings this year, the board, 200 meetings. Think of the staff time, the preparation, and the paper machine that is behind putting those meetings together.
Fred Bergsten: And compare it with private sector boards obviously. Bertrand, you get the last word.
Bertrand Badré: Yeah. On the board, there's also a financial cost. I've tried to address this, but it's even worse than with the political issue. But it's a lot of money actually.
On your question, Monica, it's exactly that I think Colombia is a very good example of the good things that can be done. And I think it's important. I think PPP is a good thing. Don't misread what I said. It is something that you have to push, but don't push it at all costs. You really have to prepare a real system. So you have to train the people. You have to have a good set of civil servants, which basically can negotiate with the private sectors with the right things, can engage with the development bank, can be trained with development banks, et cetera. But also that's sort of the life of the project can tell the government don't do that or you should do that et cetera because these things last 10, 15, 20, 30 years.
So you really need to train the people and to build the system. And I think that's what Colombia is doing and I think it's good. And there are other countries doing that. That really makes a difference. I mean in Africa, for instance, I've been working with [inaudible 1:09:07] one of the countries that was doing that right. And there are countries where they do it wrong.
So you can do it. You can make it work. And I think taking examples of countries like Colombia is a good thing. But don't sell it as a silver bullet. Don't say, "Oh PPP that's a solution." It's a very complex solution.
Fred Bergsten: You want to respond to any of the other questions?
Bertrand Badré: No, I think Luis did it very well.
Fred Bergsten: Okay. All right. We're at our witching hour. We could go on for hours. This is quite a comprehensive review of the development banks. But congratulations to both of you for the work you've done in the past. For the plans you have for the future, best of luck to you in carrying those out. Best of luck with you and your new venture. Thank you all for coming. Meeting adjourned.
Luis Alberto Moreno, president of the Inter-American Development Bank (IDB), presented the speech “After the Crisis: What Should be Expected from Multilateral Development Banks” on December 9, 2016, at the Peterson Institute for International Economics. Bertrand Badré, CEO and founder of BlueOrange Capital, shared his views on development bank financing.
Moreno assumed the IDB presidency in October 2005. He also chairs the board of executive directors of the Inter-American Investment Corporation and the donors’ committee of the Multilateral Investment Fund. Before joining the Bank, he served as Colombia’s ambassador to the United States for seven years. He also previously served as minister of economic development as well as president of the Institute of Industrial Development.
Badré has been CEO and founder of BlueOrange Capital since September 2016. He was visiting fellow at the Peterson Institute from March to September 2016. He was managing director for finance and chief financial officer for the World Bank Group and oversaw the finance and risk management units across the Group. Prior to joining the World Bank in 2013, he was the group chief financial officer at Société Générale. He also served as the chief financial officer of Crédit Agricole from July 2007 to July 2011.