Development Bank of Latin America

The Agreement Establishing the Andean Development Corporation (CAF, in Spanish: Corporación Andina de Fomento) was signed on 7 February 1968 by Bolivia,

Chile, Colombia, Ecuador, Peru, and Venezuela. In May 1969, the Cartagena Agreement was signed, creating the political framework for the Andean Community. The CAF was designed to serve a significant financial role in the Community, and it formally commenced operations on 8 June 1970. Bolivia and Ecuador received CAF’s first loans in 1971, investment projects financing rice storage networks and fisheries complexes. While initially a very small MDB, the CAF is a rare example of an SRDB that has grown over the decades to come to rival the annual approvals of the World Bank and RDBs (specifically, the IADB) operating in its region.

Between 2006 and 2015, the CAF redefined its mission and transformed itself from a sub-regional Andean financial entity into a Latin American institution. In 2010, CAF adopted a new name: Development Bank of Latin America (in Spanish: Banco de Desarrollo de América Latina). Despite the name change, the acronym CAF continues to be used. The new name reflects the growth of CAF into a Latin American - and no longer just an Andean - MDB, as well as the admission of new members beyond the Andean Community from a diverse grouping of Latin American shareholders.

As per its revised Establishing Agreement, CAF promotes sustainable development and regional integration in the public and private sectors of shareholder countries through credit operations, non-reimbursable services, and support in the technical and financial structuring of projects. While reflective of the Articles of the RDBs and other SRDBs, CAF’s mandate to finance projects in all shareholder countries is unique - its project financing is not restricted to certain members and its geographical focus of operations includes its Latin American stakeholders and loans to banks in Spain and Portugal. This means CAF is a powerful example of a DFI challenging the traditional North-South model, indeed in this respect it is more innovative than the New Development Bank (NDB) and Asian Infrastructure Investment Bank (AIIB), which replicate the donor-recipient MDB model rather than the financial cooperative model.

CAF commenced operations in 1970 with five shareholder countries from the Andean region: Bolivia, Colombia, Ecuador, Peru, and Venezuela. The five founding members today control over 64% of voting power. Beginning in 1990, it gradually expanded its membership to include 12 other countries from Latin America and the Caribbean as well as Spain and Portugal. Of the non-founding members, Argentina - which joined in 2001 - controls the largest shareholding: 8.9%. In addition, 13 private commercial banks from the Latin American and Caribbean region are also shareholders, although collectively they control only 0.05% shareholding and are regarded as one shareholder. So, CAF expanded from five shareholders prior to 1990-20 in 2015. The expansion of membership not only enabled it to increase its capital base significantly - important to its dramatic growth in annual approvals over the 2000s and 2010s - but also to become better representative of Latin America and the Caribbean and not just the Andean Community; with the admission of Uruguay in 2001, all members of MERCOSUR are shareholders.

The shareholder expansion from 1990 was a practical necessity, since the CAF commenced operations with little start-up capital - $25 million paid over several years - and, by ‘1981, the CAF’s finances were in a precarious state, with only US$15 million in loans committed that year’ (Humphrey 2016, 104)- After L. Enrique García Rodríguez became Executive President in 1991, the CAF underwent a significant restructuring to make it resemble more the corporate model of the World Bank and IADB, hiring consultants ‘from Coopers and Lybrand and a former World Bank vice president to review the CAF’s operations and make recommendations for overhauling internal process’ (Humphrey 2016, 106), geared towards improve the MDB’s reputation and obtaining its first credit rating. This demonstrates the conditioning influence of global capital markets and credit ratings to the effective operation of MDBs.

The CAF has tiered share types: ‘A’ shares are more influential in key issues such as corporate or capital structure changes, while ‘B’ and ‘C’ have less power and are represented by four directors of the 21. Despite the tiered structure, the CAF’s shareholding ‘gives all members representation on the Board and a strong influence on operations, as the Board votes by majority of members present (with no reference to capital contributions)’ (Humphrey 2015a, 9). Compared to other MDBs, the CAF’s shareholding structure allows the wealthy countries of Chile, Colombia, Peru, and Venezuela to supply higher levels of capital while still offering the poorer member countries ‘significant voting power’ (Humphrey 2016, 103).

An Executive President leads the CAF and it has only had two. From December 1991 to April 2017, Bolivian L. Enrique García Rodríguez led CAF, a very long tenure rare among the MDBs. The orientation of CAF as a Latin American MDB today is largely the consequence of Garcia’s leadership, including several credit rating upgrades, expansion of country membership, and increasing annual approvals from $400 million in the early 1990s to over $12 billion annually since 2015 (Garcia 2006). One of the final accomplishments of Garcia’s presidency was a general capital increase of $4.5 billion in 2015; huge considering it commenced operations with just $25 million in total capital. Prior to the CAF, Garcia worked for 17 years in the IADB, including serving as Treasurer. Peruvian Luis Carranza Ugarte succeeded Garcia in April 2017. Ugarte is a renowned economist and has experience working in the IMF and was chief economist for Latin America and Emerging Markets of the Banco Bilbao Vizcaya Argentaria (BBVA) in Spain.

During the 2010s, CAF came to exceed the World Bank’s Latin American annual commitments and rival those of the IADB. In 2017, the World Bank approved $5.9 billion to Latin America and the Caribbean and the IADB approved $13.4 billion, while the CAF approved $12.3 billion. To demonstrate the rapid expansion of CAF lending, consider the following: in 2000, CAF approved $2.3 billion in new loans, in 2005, the figure was $4.8 billion, and, in 2010, it was $10.5 billion. Of $13.7 billion approved in 2018, the largest sectoral allocations were transport (27.3%), energy (23%), and publication administration (17.2%), demonstrating a more traditional infrastructural focus for the Bank. Such a rapid expansion in annual lending commitments while maintaining a strong capital base and expanding its credit rating is an achievement unmatched by the other MDBs.

The CAF’s main lending instruments are medium- and long-term loans, credit lines, equity investments, syndicated loans, guarantees, trade finance, and grants. The focus on medium- to long-term rather than short- to medium-term loans is another sign of its strength, as smaller MDBs prefer instruments with quicker maturities. It provides technical assistance through its Fund for Technical Cooperation, which approved $30 million in 2016 representing 45% of annual advisory services. In contrast to other MDBs, CAF

loans are approved very rapidly, usually under three months, and face only two major review levels’ and the MDB itself ‘is highly decentralised, with local staff able to lead project development without needing to refer to HQ for many decisions.

(Humphrey 2015b, 17)

While ‘this model of MDB is very attractive to many borrowers,’ there are tradeoffs, including that ‘project quality has been questioned at times, with inadequate preparation and design leading to delays and problems during implementation’ (Humphrey 2015b, 17). Given the increasing size, scope, and therefore influence of CAF, problems of inadequate project quality will become more serious. Indeed, CAF’s credit rating was downgraded by S&.P Global Ratings (2019) to A+ with a negative outlook; it was the only MDB in 2019 with a negative outlook, though 2020 may see more join this category.

In summary, CAF is an anomaly as a SRDB. The expansion of its shareholder membership, revision of mandate to address Latin American and not just Andean development issues, and considerable growth of its loan portfolio arguably has made the CAF resemble more an RDB over the 2010s. Nonetheless, CAF is not without limitations. Ray and Kamal (2019, 194) conclude that it cannot be deemed a ‘potential substitute’ for the World Bank and RDBs yet, given that the more established MDBs ‘can boast decades of successful operations, the development of “knowledge banks” and the establishment and maintenance of global standards in environmentally and socially responsible lending.’ Instead, the CAF complements existing MDBs without yet replacing them.

 
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