Current Legal Issues Affecting Central Banks, Volume III.
Chapter

Chapter 4 Developments at the Inter-American Development Bank

Author(s):
Robert Effros
Published Date:
August 1995
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Author(s)
JOHN M. NIEHUSS

Introduction

The Inter-American Development Bank (IDB) is a sort of a mini-World Bank with a focus on Latin America and the Caribbean. The IDB has 46 members. Its mandate is to contribute to the social and economic development of Latin America,1 and it does this through the provision of funds on relatively favorable terms.2 Similar to the World Bank, the IDB obtains its funds through capital contributions from its shareholders and from borrowings in the international capital markets based on the callable capital of its member governments. Callable capital is, in essence, the guarantee of its more creditworthy members. At the end of 1993, the IDB had a total capital of approximately $64 billion. In 1994, the IDB completed a negotiation in Guadalajara, Mexico, for a new capital replenishment. It obtained a commitment for an additional $40 billion from its member governments over a five-year period. At the end of 1993, the IDB had outstanding loans of around $28 billion, had borrowings in the international capital market of around $23 billion, and had disbursements of around $4 billion to its Latin American and Caribbean members.

IDB loans are essentially of two types. First, there are standard market-related loans that have close-to-market terms.3 In May 1994, the rate of interest—which is based on a basket of currencies of which approximately one third is dollars, one third is yen, and one third is European currencies—was 6.95 percent. These loans are for relatively long maturities (15 to 20 years) and are tailored to the needs of the specific project. Second, the IDB has a soft loan window with a rate of interest in June 1994 of 2 percent. It is called the Fund for Special Operations and is similar to the International Development Association facility of the World Bank.4

The IDB’s areas of lending are very similar to those of the World Bank. The IDB has focused on infrastructure of all sorts, education, and agriculture. A few years ago, it began sector lending, primarily for creating favorable investment climates and helping to support the financial sector in many countries. The IDB does lend indirectly to the private sector through global loans to financial intermediaries in Latin America and the Caribbean. Direct lending to the private sector is addressed in the final section of this paper.

Role of the Legal Department

The IDB’s Legal Department is divided into three areas: (i) lending operations; (ii) finance, which basically deals with all of the legal aspects of mobilizing funds, both borrowings in the international market and the obtaining of subscriptions from its member governments; and (iii) internal operations. With respect to lending operations, the Legal Department spends roughly 50 percent of its time on such matters, with project design and appraisal (to identify legal issues that may affect ultimate implementation) requiring most of its attention. The Legal Department also participates in the loan documentation, and its lawyers prepare the resolutions and other documents necessary to make the presentations to the Board of Executive Directors. Finally, the Legal Department spends a good deal of time on loan administration, which is heavily oriented toward procurement problems involving IDB loans.

The Legal Department spends roughly 20 percent of its time on internal institutional matters, including personnel policies for the institution; procurement for the institution itself, including procurement of software, licenses (to run its Securities Trading Room), acquisition of buildings, and leasing of operations in country offices; and employee grievance matters. The IDB does most of its own internal labor relations work through a special conciliation panel and administrative tribunal, which is one of the factors that exempts it from labor laws in most of its member countries.

The Legal Department spends about 15 to 20 percent of its time in mobilizing funds for the IDB. The Bank raises approximately $3 billion to $5 billion each year in the international capital markets through 10 to 20 bond issues. There is a great deal of legal work associated with these issues, including work on the prospectuses and the other documentation needed for closing.

The Legal Department also spends time interpreting the IDB’s charter, the Agreement Establishing the Inter-American Development Bank.5 Similar to the World Bank, the IMF, and all international organizations governed by a charter, the IDB faces weekly issues as to whether something can or cannot be done pursuant to its charter. Therefore, a lot of time is devoted to providing advice to the Executive Directors on what is permissible.

Privileges and Immunities

First, some of the more persistent and difficult legal problems of the IDB arise out of its offices, which are located in 27 countries. The issues mainly relate to the IDB’s privileges and immunities and its status as an international organization. As an international organization, the IDB’s charter grants it certain privileges and immunities from taxation and from certain types of lawsuits.6 Furthermore, its assets are immune from seizure. These are standard immunities accorded to other international organizations like the IMF, the World Bank, and the Organization of American States.

The IDB has taken the position, along with its sister international organizations, that it is immune from suit in local labor relations cases. This position is based on the principles of customary international law, which grant certain functional immunities to international organizations; the specific provisions of its charter; and the individual agreements that it negotiates with its members. This position has been accepted in the United States, where the IDB has its headquarters, and through court decisions in a number of other member countries, including France, Italy, and Argentina.7

The IDB was involved in a very difficult series of cases in Brazil. These cases were brought in the Brazilian labor courts by former employees of the IDB when it moved its office from Rio de Janeiro to Brasilia. The IDB argued in the Brazilian courts that, as an international organization, it was immune from suit in the Brazilian labor courts. It had argued a similar position in the U.S. courts a number of years previously and that position had prevailed. The IDB had assumed that this position would be accepted by all of its members. Unfortunately, it was not, and the IDB is still in litigation in the Brazilian labor courts with around 13 employees. The Brazilians analogized the IDB to the embassy of a sovereign nation, rather than to an international organization. The law relating to the immunities of sovereign governments is somewhat different from the law relating to international organizations.

A similar problem relates to the implementation of the IDB’s pension plan for the country offices. The IDB is trying to give all of its employees the benefit of an integrated pension plan. One of the issues that arises is to what extent do the pension plan provisions conflict with local social security and pension laws? In the vast majority of countries, the authorities have said: “Fine. We have looked at your plan. We think it is adequate for our citizens and, therefore, it is okay.” In a number of countries, however, the authorities have said: “No. You have to participate in our own plan.” The latter view has created some very difficult conflicts of law. As with labor issues, some members seem to be treating the institution as an embassy and applying the law that relates to sovereign governments to the IDB, instead of applying the rather well-defined body of law that relates to international organizations.

Multilateral Investment Fund

A very different area, in which the Legal Department was involved, has been the negotiation of an arrangement for the creation of the Multilateral Investment Fund.8 This Fund is part of the Enterprise for the Americas Initiative that earmarks, over a five-year period, $1.2 billion for technical assistance, training, and education to improve the climate for investment in IDB member countries.9 The main contributors are the Japanese Government and the U.S. Government, along with members in the region and a number of European governments.

There were some very interesting issues involved in the negotiation of this arrangement, because, under the Multilateral Investment Fund, the IDB is acting as a trustee for the donors in order to administer it on behalf of the donor nations. This created some interesting questions of immunity. Are the assets held in trust immune? Do the assets enjoy the immunity of the IDB?

Procurement Issues

Another problem, which illustrates the kind of conflict that the IDB as an international organization faces when it operates in its member states, is the conflict between its own procurement rules and local regulations of member states. It is an interesting interplay between the law of an international organization and local law. For example, when the IDB hires a consultant, its rules provide that the IDB must first evaluate the quality of the consultant, before considering the cost. After the best potential consultant has been identified, then cost is considered. The theory is to get the best person to do the job and structure the project. On the other hand, many members have local laws that provide that the cost, as well as quality, must be considered in the initial evaluation. Therefore, the IDB is constantly dealing with this problem in a number of countries. Several member governments have agreed that they will amend their local legislation to say that, in cases where international organizations, such as the IDB and the World Bank, have procurement rules, those rules will prevail for projects that are financed by those institutions.

One procurement issue that arose in the former Yugoslavia suggests that international organizations are not infallible. The IDB had a borrower who was engaged in building a power generation plant. The lowest bidder for the project was a firm in Yugoslavia. Under IDB guidelines, that bidder should be awarded the contract unless there is some special circumstance. The borrower wrote to the IDB and said, “I think that there is a special circumstance here. There is a lot of fighting going on in Yugoslavia, and we do not think the bidder is a reliable supplier. We would like to go to the next-lowest bidder who is in a safer haven.” At that time, the fighting was restricted to Slovenia and Croatia. The IDB noted that the lowest bidder was located in Bosnia-Herzegovina. Consequently, the IDB told the borrower to go ahead with the contract with the lowest bidder. The IDB had to live with the effects of that decision.

Replenishment

Another issue, upon which the Legal Department has been focusing and which arises every four or five years, is replenishment, or the major rearrangement of the shareholdings. The IDB has had a series of negotiations over a two-year period on this issue. As a result, the Latin American and Caribbean members are decreasing their shareholdings in the institution from approximately 54 percent to a little over 50 percent; the United States is moving from 34.5 percent down to 30 percent; the Canadians are moving down from about 4.5 percent to 4 percent; and the Japanese and the Europeans are substantially increasing their share in the IDB from approximately 7 percent to approximately 16 percent. Those changes have meant that the IDB has had to make substantial changes in its charter and in the voting majorities associated with a number of actions under its charter. Thus, the Legal Department was required to participate in a major charter revision.

New Areas of Activity

Administration of Justice

In the new area of the administration of justice, the IDB is focusing on what it can do to assist its members in improving their judicial systems. The project includes assistance in legal reform, updating laws, and introducing new bodies of law to deal with such areas as securitization and privatization. The IDB is also directing loans toward the management of court systems, including the training of judges and support staff. It is providing computers, software systems, and, on rare occasions, actual infrastructure in the form of buildings. It is also actively promoting alternative dispute settlement through the use of arbitration and mediation rather than lengthy court processes. The IDB expects this to be a major new focus of its activities over the near term. The IDB has about 22 such projects at various stages.

Direct Lending to the Private Sector

During the replenishment negotiations at Guadalajara, the IDB was given authority by its members to engage in direct lending to the private sector without government guarantees. The IDB charter permits this, but for years the Bank had not engaged in direct lending to the private sector because of policy reasons. Now, members have decided that the IDB can lend 5 percent of its capital replenishment over the next six years directly to the private sector. This translates into roughly $300 million to $350 million a year, which is very minor given the needs of the IDB’s members in this area. Nevertheless, it is a pilot project and may grow in the future.

The focus of this lending will be on large infrastructure and public service projects, with a primary focus on public utilities that have been privatized. In many countries that privatize such entities, there is an awkward period. This occurs when the entities move out of the government budget into the private markets, during which time they have difficulty finding financing. The purpose of IDB lending is to provide them some auxiliary support during this transition period. It raises many new legal issues for the Legal Department. The most important is a new form of loan contract. The IDB has traditionally lent to governments and used a standard contract. It is not accustomed to lending to private entities, raising a question of applicable law. Currently, IDB contracts are governed by international law, primarily ex aequo et bono, and the IDB dispute settlement mechanism is arbitration. A new situation, where the IDB may have to deal with national laws in a much more direct way, is being faced. Also, the IDB may have to participate in litigation in domestic judicial systems. This is new, and the Legal Department hopes to learn from the International Finance Corporation and others that have had to do so in the past.

Conclusion

In summary, the bulk of the Legal Department’s work is relatively routine and concerns ongoing matters, including loan documentation, loan administration, the legal aspects of mobilizing the IDB’s resources, internal personnel policies, and procurement. Every now and then, new challenges arise. Two new challenges are the administration of justice, in which the Legal Department will assist members in improving their legal systems, and direct lending to the private sector.

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