The Year in Review
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The Corporation
Developmental Impact
The IIC's activities to promote the economic development of Latin America and the Caribbean continue to yield positive results. It is expected that year 2001 approvals will lead to the creation of more than 38,000 jobs, generate annual exports worth $129 million, and contribute $430 million per year to the region's gross domestic product. The $128 million approved in 2001 will support the implementation of projects with a total cost of $673 million. For every dollar earmarked by the Corporation for year 2001 approvals, five dollars will go to investment projects.
Cumulatively, the IIC has channeled funding to more than 2,590 companies in the productive and service sectors in Latin America and the Caribbean since it began operations in 1989. Projects with an aggregate cost in excess of $8 billion have been undertaken thanks to the $762 million in funding provided by the IIC in the form of loans and equity investments, plus $400 million in funds that the Corporation has mobilized through cofinancing arrangements. For each dollar that the IIC has invested, six dollars are going to companies that have created about 205,000 jobs and generate $2.8 billion in foreign currency for the region each year. Operations in countries with larger economies amount to $622 million, while those in the smaller economies of the region total $416 million, i.e., 60 percent and 40 percent of the portfolio, respectively. Projects with regional coverage total $202 million. Of the IIC's committed investments, 87 percent had been fully disbursed by December 31, 2001.
Portfolio and Credit Risk Management
Effective, productive deployment of the resources subscribed by the IIC's shareholders involves sound portfolio management that takes into account primarily the two types of risk to which the IIC's project companies are subject: macroeconomic risk and credit risk.
Macroeconomic risk is largely beyond the control of the IIC and its clients. However, the appraisal process prior to project approval takes this risk into account and is geared to avoiding situations in which the potential risks would make it virtually impossible to attain the IIC's developmental goals or recover its assets.
Credit risk and asset quality management was given renewed impetus in 2001 with the creation of a Credit Unit and a Credit Committee. The Credit Unit's mission is to provide the Credit Committee with an assessment of each project company's credit risk and of the proposed pricing, structure, and security package for each transaction. The Committee, which is responsible for the final recommendation as to whether to present projects for Board consideration, thus focuses primarily on credit issues and on ensuring that loans and investments are structured in accordance with the project company's risk profile. Noncredit issues such as project developmental and environmental impact, international private sector and capital markets resource mobilization, and IIC policies, are central to IIC's mandate and are taken into account in the process of deciding whether to submit a project to the Board of Directors. To this end, input on these aspects of each project proposal is received prior to the final Credit Committee meeting. IIC Management believes that the Credit Committee, as a body focusing specifically on credit risk, will contribute to shaping a proactive credit culture within the IIC and, hence, further enhance IIC's ability to perform its developmental mandate.
Project Supervision and Problem Project Management
Project supervision is the task of the Operations Divisions. At least one annual review is carried out for every IIC loan and investment. Problem projects are transferred from Operations to the Special Operations Unit, which is responsible for maximizing cash recovery of problem loans and investments.
The Special Operations Unit also contributes to the prevention and early detection of problem projects by participating in the Credit Committee and the Portfolio Supervision Committee. The unit also advises project officers on projects that are experiencing initial problems and regularly reports to the officers on the lessons learned from problem projects.
On a higher level, a Special Ad-Hoc Committee of the Board of Directors provides a forum for discussing recovery action plans at an early stage. Through the Committee, the IIC keeps its Executive Directors informed and seeks their guidance at critical junctures of negotiations with impaired project companies.
Fiscal 2001
The Corporation is operating under the ten-year program that accompanied its capital increase approved in 1999. The Three-Year Business Plan for 2000–2002 was the first in a series of action plans to implement the ten-year program. The IIC's performance during the first two years of the original business plan has been satisfactory from the point of view of preparing the institution to meet the general objectives set forth by the member countries. The Corporation is striving to meet the operational and financial objectives in an adverse macroeconomic climate that includes lower international interest rates.
In terms of the quality of IIC assets, the Corporation has adopted a more conservative approach in the valuation of possible portfolio losses. This has resulted in a strengthened provisioning process to better identify and quantify the risks and value of the investment portfolio. To protect existing assets, the supervision function has been strengthened. In addition, the Special Operations Unit has been successful in recovering impaired assets. The ex-post evaluation function has been defined, and project evaluations are being carried out according to plan.
In 2001, the Corporation identified sixty-three potential projects in twelve countries; forty-four were not considered because they did not meet basic IIC criteria regarding size, additionality, or perceived risk, among others. The remaining nineteen passed on to the formulation and design phase. As a result, nineteen transactions were submitted for consideration and approval by the Board of Executive Directors.
This year, the IIC's Board of Directors approved nineteen projects in eleven countries totaling $128 million. Twenty-three percent of the funds approved were for equity investments and 77 percent were for loans. Two of the three equity investments went to developmentally oriented country or regional investment funds. These funds have a total capitalization of $350 million, providing a 17.5:1 leverage of the IIC's own equity investments for the year. Three of the loans will be cofinanced; these operations will use $25 million of the Corporation's own resources to mobilize a total of $35 million in funding from banks and other third parties.
IIC income from all sources in 2001 amounted to $32 million. Income from lending operations totaled $22 million ($20 million from interest and $2 million from fees). Capital gains and dividend income from the equity investment portfolio totaled $3 million for the year. Total expenses, including $26 million in provisions, were $47 million, producing a net loss of $15 million.
The substantial increase in loss provisions reflects the Corporation's prudent approach to the unfolding economic downturn affecting some of its member countries, as well as its strict adherence to conservative accounting practices.
IDB Group Cooperation
Combined action by the institutions that make up the IDB Group can be a powerful agent for development in Latin America and the Caribbean. The general thrust of IIC's coordination with the IDB is in the development of the private sector segments of country strategies and programming. To this end the IIC participates in the Private Sector Coordination Committee. IIC's Senior Credit Officer advises the IDB's Executive Vice President regarding IDB Private Sector Department projects. IIC staff members also serve on the Private Sector Department's Credit Review Group and on the Bank's loan committee for private sector operations. And the IIC's Credit Committee is also the “operations committee” for Multilateral Investment Fund operations in the latter's equity investment approval process.
Multilateral Investment Fund
The Multilateral Investment Fund (MIF) was established in 1992 to promote the economic and social viability of market economies in Latin America and the Caribbean. The MIF is administered by the Inter-American Development Bank and engages the IIC for investment project appraisal services. In 2001 the Corporation appraised one MIF equity investment initiative that is regional in scope and evaluated ten other MIF-supported investment funds in Brazil, Chile, Colombia, Ecuador, and Trinidad and Tobago.
AIG-GE Capital Latin American Infrastructure Fund
The IIC continued to lend its regional expertise as an adviser to the Emerging Markets Partnership for its fund investments in infrastructure companies in Latin America, chiefly in the power, transportation, and telecommunications sectors. Emerging Markets Partnership is the principal adviser to the AIG-GE Capital Latin American Infrastructure Fund (LAIF). During the year, the IIC provided advisory and monitoring services for nineteen projects.
Other Special Funds
In 2001 the Corporation conducted eight studies with support from the Swiss Fund, the Spanish Trust Fund, the United States Trade Development Agency's Evergreen Fund, the Italian Trust Fund, and the United Nations Program for the Environment. Some $585,000 in technical cooperation funds were channeled through the IIC during 2001.
