The Year in Review
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Looking Ahead
Within the IDB Group's broad goal of furthering the economic and social development of Latin America and the Caribbean, the IIC is seeking to enhance its own contribution as set forth in its business plan approved by the Board of Executive Directors. Housing and education—both of which are key to economic and social progress—are two areas in which private enterprises can make a significant contribution. A good example is the provision of housing for low- and medium-income families, using local, private savings as a source of funding by establishing long-term investment instruments that support the development of local capital markets.
The IIC can add value to projects in these areas and help them materialize. When it was developing its first Brazilian mortgage sector project (approved in 2000) the IIC worked very closely with the Comissão de Valores Mobiliários (Brazil's equivalent to the Securities and Exchange Commission in the U.S.) so that the Comissão would approve the structure of the mortgage-backed securities that the project involved. This made the project both viable and replicable and made it possible to issue such securities for the first time in Brazil. The Brazilian Mortgages and Brazilian Securities projects approved this year (see details in the following chapter) will help introduce Cédulas de Crédito Imobiliário—a newly created collateralized real estate loan obligation—into Brazil's expanding mortgage securitization market.
In the education sector, this year the Corporation approved its first project in the form of a loan to Universidade do Sul de Santa Catarina in Brazil. This private university has five campuses in Brazil. It charges low, competitive tuition fees and, in addition to processing federal financial aid for students that qualify, created its own student loan program. Besides supporting the expansion of basic and higher education in Brazil, with this project the IIC seeks to develop expertise in this sector and hopes to make the UNISUL project the first in a series. One of the Corporation's goals is to identify the major risks usually entailed in investing in this crucial sector and find ways to mitigate them. For more details on this particular operation, please refer to the section on the year's investment activities.
The Corporation also took on several issues that will help shape its policies and operations. These issues—additionality, governance, and fraud and corruption—are not easy to address because they are complex and sensitive. But the Corporation's duty to its constituency requires that they be attended to.
Additionality
In the policy debate on the role and policies of international financial institutions, a recurring concern is the need to keep the funding they provide from substituting privately available capital or otherwise distorting market incentives or the normal assumption of business risks by private investors, especially those who can tap other sources of finance and have access to foreign capital markets. In this connection, it is widely held that public funds invested in private sector projects are warranted provided that they can be shown to yield a demonstrable level of developmental additionality. This term is broadly understood to cover a large array of economic, environmental, and labor benefits. Among these benefits are job creation, human and material resource development, environmental protection, and promotion of international labor standards.
Fostering and measuring this additionality in IIC operations is at the core of the Corporation's statutory mandate and strategic orientation. In 2001, IIC Management opened a dialogue with its Board, project teams, clients, and other stakeholders in Latin America and the Caribbean. This ongoing dialogue focuses on projecting, measuring, and monitoring additionality in IIC operations. It is also exploring the potential tradeoffs between developmental impact and project risk. An instrument for appraising and monitoring IIC additionality is now under development for implementation at the beginning of 2002.
Governance
Governance is a broad concept that covers the management of issues on a corporate, national, and multilateral level. Developmental institutions like the IIC can further corporate and national governance in their member countries by disseminating and rewarding best business practices and helping strengthen domestic legislation in such areas as accounting standards, protection of minority shareholder rights, promoting transparency in government, and tackling the thorny issue of fraud and corruption. They must also ensure their own good governance by safeguarding the transparency of their own operations and accountability for their own financial and developmental performance.
A framework paper on governance submitted to the IIC Board in 2001 will serve as a basis for making policy decisions on the role of governance in improving company management and capital valuation.
Fraud and Corruption
Of the key issues taken up by the IIC this year, fraud and corruption may be the hardest to discuss. Moreover, there is a widespread tendency to associate fraud and corruption more with the public sector, which is outside the IIC's purview. But they do affect the private sector as well, so the Corporation submitted to the Board of Directors a proposal for establishing an independent oversight mechanism for investigating allegations of fraud and corruption. The proposal emphasizes zero tolerance for fraud and corruption and discusses prevention and dissuasion, accountability, and legal recourse and resolution mechanisms.
The IIC places great importance on the advancement of transparency in its operations through sound financial management practices. The IIC is also committed to maintaining zero tolerance regarding fraud and corruption and to ensuring the integrity of its operations. This commitment applies internally to the IIC's Management and staff as well as externally in its dealings with client companies. The IIC has internal and external procedures in place to assess the risks of corrupt practices in its operations.
At their heart, all three issues—additionality, governance, and fraud and corruption—have to do with accountability. Developmental institutions should be held accountable for their use of public funds, and for addressing these and other issues concerning the role of developmental multilaterals. In the light of these discussions, the Inter-American Investment Corporation will continue to fine-tune its policies and the tools it uses to make the best use of the funds that its member countries have entrusted to it.
Jacques Rogozinski
General Manager
Inter-American Investment Corporation
