Chapter 4 The Inter-American Investment Corporation and Private Sector Development in Latin America
- Robert Effros
- Published Date:
- June 1994
The IIC’s Resources and Mission
The Inter-American Investment Corporation (IIC) is a multilateral investment bank, created under the auspices of the Inter-American Development Bank (IDB), to support the private sector in Latin America, especially the small and medium-sized projects. The IIC started operations in November 1989. Its mandate is to promote the economic development of its regional developing member countries by encouraging the establishment, expansion, and modernization of private enterprises, especially those of small and medium size, through long-term loans, equity, and advisory services. The IIC’s projects must be commercially viable undertakings for which traditional financing would otherwise not be available under adequate terms and must be majority owned by nationals of Latin America or the Caribbean.
The IIC is legally autonomous, and its resources and management are separate from the IDB; however, its activities are coordinated with a view toward complementing the activities of the IDB, especially with the bank’s new emphasis on structural change and enabling environments for the private sector in the region. In this respect, the IIC’s role, which focuses on the smaller segment of the market, is complementary to that of the World Bank’s International Finance Corporation (IFC), which focuses on larger projects.
The IIC’s $200 million share capital is owned by 34 governments, of which 24 are Latin American and Caribbean, and the remaining 10 comprise the United States, Japan, Israel, and 7 European countries. In addition to its $200 million in share capital, the IIC has authority to borrow $200 million plus the amount of its revenues. The initial IIC borrowing will take place at the end of 1992 for $210 million, which will be provided by the IDB.
The IIC has a staff of approximately 100 members in place, with mostly private sector experience in the region. The IIC is also compiling a network of consultants with industry-specific expertise in each of its member countries.
In the execution of its mandate, the IIC basically offers financing through long-term loans, equity, or both. It also acts as facilitating agent in the mobilization of third-party resources and provides certain advisory services. In many instances, the IIC will provide more than one of these products to a client.
Debt, Equity, or Guaranties
The IIC’s core line of business is to act as a principal in transactions providing dollar-denominated loans and/or equity, as well as issuing guaranties. The total IIC exposure to any one project may not exceed at this time $10 million, which is 5 percent of the IIC’s net worth. The average IIC investment is $3.7 million. Eligible projects include greenfield or start-up ventures, as well as the modernization, expansion, or privatization of existing companies. All sectors, in all of the regional member countries, are eligible for IIC investments or services.
For new enterprises, the IIC can finance up to 33 percent of each project’s costs; for expansions, the IIC can finance 50 percent of the capital costs of the expansion provided that its participation in the entire project does not exceed 33 percent of the project assets.
Loans granted by the IIC are generally priced at market rates, of LIBOR (London interbank offered rate) plus a margin spread between 3 and 5 percent. The guidelines allow terms up to 12 years, including up to a five-year grace period. Typically, IIC financing is provided via a combination of term loans and equity investment. In its investment projects, government guaranties are neither sought nor required. Furthermore, in the case of partially government-sponsored projects, the IIC generally only invests when the government is in the process of reducing its ownership of the project company.
The IIC deals directly with project sponsors or through local financial institutions. Around 81 percent of its current portfolio consists of long-term loans and the balance of equity investments. This 81-19 percent ratio may change to reflect an increase in equity once the IIC’s portfolio matures. Typically, once an IIC project has developed, the Corporation will exit the project by selling its interests either by putting its shares to the original owners/shareholders or, preferably, by selling its shares to third parties, including taking the company public onto the stock market, thereby expanding the project company’s ownership base. This nevertheless will prove to be a major effort since the IIC’s market of small to medium-sized enterprises generally comprise family-owned or “group-owned” operations.
Role as Facilitating Agent and Resource Mobilization
A key factor in the future of Latin America and the Caribbean will be the enhancement of its attractiveness to international investors. Given the IIC’s limited capital base, particularly in light of the enormity of its tasks, it is clear that an important measure of the IIC’s success will be its ability to act as a facilitating agent in the mobilization of third-party resources to the region. In this capacity, on December 1991, the IIC initiated its co-financing activities with a transaction with Banca Serfin, S.A., to which the IIC mobilized $22 million in long-term loans from five international commercial banks. This transaction represented the first long-term voluntary lending for some commercial banks to Mexico. The IIC is also working on a Latin American venture capital fund, which will invest in non-listed equity participations in various countries. It may soon consider embarking on co-investments, syndications, and underwritings.
In addition, the IIC has developed teaming arrangements, to extend its outreach, with the European Community, JAIDO (the Japanese International Development Organization), the IDB, the Caribbean Development Corporation, and the Andean Development Corporation (CAF). These arrangements are intended to facilitate direct contact between the IIC and entrepreneurs, trade associations, and industry associations, and to encourage the exchange of information about the region. This global approach to financing should enhance the opportunities for investors in Latin America and the Caribbean.
The IIC’s financial advisory services can be divided into two broad categories: government advisory and corporate advisory. Government advisory services aim at providing a regulatory structure conducive to the development of the private sector and entrepreneurial initiative with a primary focus on improving capital flows. They also advise governments and state-owned companies in the structuring and execution of privatization efforts of parastatal companies. The IIC has undertaken 29 advisory service engagements to both governments and corporate clients.
The IIC has also completed 14 diagnostic studies of the private investment climates of Bolivia, El Salvador, Guatemala, Honduras, Trinidad and Tobago, Uruguay, Colombia, Jamaica, Costa Rica, Dominican Republic, Nicaragua, and Paraguay to support, among other things, the expansion and strengthening of capital markets. These diagnostic studies are provided to the IDB and, based on these studies, the Bank initiates a new Investment Sector Loan Program for the host government, providing loans to fund policy reforms by such governments to remove impediments to private investment. Each loan will be tailored to the specific needs of the borrowing country, but all loans in the program will have an important financial sector dimension. The IIC will be responsible for providing the technical support on the capital market components of these loans.
Other examples of the IIC’s services are the engagements it is undertaking with Mexico’s Comision Nacional de Valores on the development of an over-the-counter stock market, with Chile’s pension fund system to facilitate a broad range of investments of such funds, and with the government of Colombia to review the legal impediments to the creation of a secondary mortgage bonds market.
On the corporate financial advisory side, IIC’s services include operational restructurings, financial restructurings, joint venture partner identification, and financial engineering.
Consistent with the IIC’s charter, a series of operating guidelines have been established to assist the IIC in the execution of its mandate. These include:
Commercial viability is a precondition for the IIC’s participation in a project. This reflects not only the IIC’s goal of fostering the development of companies that can compete in the marketplace, but also its need to maintain a high-quality investment portfolio. It is important to note that while the IIC is a developmental organization, it is structured to be self-sustaining. As such, it does not provide grants or concessional financing. Debt and equity investments are priced according to “market” rates that reflect the risks inherent in a project.
Majority Regional Ownership
The IIC considers providing financial or advisory support only to private sector enterprises in which regional investors hold a majority voting control position. This is a charter requirement, included since the IIC was created, to support emerging Latin American entrepreneurs, that is, the small and medium-size private sector of the region. Any IIC equity investment in a project is generally considered to be neutral.
Lender of Last Resort
The IIC supports only projects that cannot be adequately serviced by the private sector. The IIC can contribute significantly to the development of the region’s private sector by providing capital and services to enterprises to which such would not otherwise be available on adequate terms.
Finite Nature of IIC Involvement
Recognizing the expected increase in the commercial viability of a project upon completion, the IIC expects its role in each project to diminish over time, thus allowing the IIC to realize its capital gain and employ its resources in supporting other ventures.
The IIC’s development criteria are important factors in considering whether or not to invest in a project. In evaluating a project’s developmental impact, the IIC considers a number of criteria including: the development of material and human resources; the creation of new jobs; foreign exchange generation; technology transfer and the development of managerial skills; the impact on saving and investment rates; the democratization of ownership; and the project’s environmental impact.
By its very nature, the IIC has certain characteristics that uniquely position it to undertake projects that private financial institutions may not consider attractive.
Charter Immunities and Privileges
Based upon the Agreement Establishing the Inter-American Investment Corporation, it is granted immunities from expropriation, moratoria, and taxation with regard to its assets and operations in member countries. In addition, the IIC’s advance notification to the host government of an activity that the IIC intends to undertake serves to confirm that the host government has no objection to the project.
Another distinguishing characteristic of the IIC is the length of its investment horizon. Rather than a short-term investment horizon, the IIC’s loan will go up to 12 years, until the project is fully operational and its equity investments are in place, and its presence is deemed to be no longer required.
The Bank’s 25 years of experience in regional development, strong research and economic analysis, as well as its network of offices in each country of the region, have proven invaluable for the IIC.
Through June 1992, the IIC had approved 53 investment projects (of which 6 were canceled), representing a total investment of $735 million, of which the IIC contributed $175 million (81 percent debt and 19 percent equity ratio).
A summary analysis of IIC’s operations indicates that 60 percent of IIC financing was to small enterprises with assets and sales of up to $10 million and employing about 250 persons, and 35 percent of the IIC financing was to medium-size enterprises with assets and sales of $10-35 million and 250-750 employees; as such, 95 percent of the IIC’s funds supported small and medium-size enterprises in the private sector.
When completed, it is estimated that these projects will have (i) created more than 60,000 new jobs, (ii) generated more than $350 million annually in foreign exchange revenues for the region, representing $3.50 of foreign exchange generated for each IIC $1 invested, (iii) mobilized third-party funds totaling more than $500 million (or four times IIC’s investments in the region), and (iv) involved at least 26 transfer-of-technology cases. The projects have been geographically distributed in 18 countries and nine industrial sectors, ranging from a start-up aquaculture facility for the cultivation of scallops in Chile, to an Argentine company that will develop and operate the first private data communications satellite in Latin America. As stated, the average IIC investment is $3.7 million.
An important component of the IIC’s portfolio comprises financing to financial intermediaries, which reach a smaller target market than the IIC can reach directly. Up to June 1992, the IIC approved 13 transactions including lines of credit to and/or equity investments in financial intermediaries totaling $58 million for further on-lending to, or investment in, smaller-scale enterprises. The average subloan of a financial intermediary is $600,000 for an average project size of $2 million. The IIC’s financing to financial intermediaries represents 32 percent of its portfolio. Replenishment of capital resources is necessary for the IDB Group, of which the ICC is a part, to continue supporting development of the private sector in Latin America.