National Development Banks in South America: Governance, Financial Performance and Development Impact (Wirtschaft und Politik) 3658347279, 9783658347277

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Wirtschaft und Politik

Raphael Zimmermann Robiatti

National Development Banks in South America Governance, Financial Performance and Development Impact

Wirtschaft und Politik Reihe herausgegeben von Gerhard Wegner, Universität Erfurt, Institutionenökonomie und Wirtschaft, Erfurt, Thüringen, Deutschland Guido Mehlkop, Universität Erfurt, Erfurt, Thüringen, Deutschland André Brodocz, Staatswissenschaftliche Fakultät X, Universität Erfurt, Erfurt, Thüringen, Deutschland

Die Schriftenreihe „Wirtschaft und Politik“ vereint empirisch wie theoretisch orientierte Forschungsarbeiten aus der Volkswirtschaftslehre, Politikwissenschaft und politischen Soziologie, die Fragen der Wirtschaftspolitik und Institutionenökonomie sowie der Konstitution und dem Wandel ökonomischer und politischer Ordnungen thematisieren. Darunter fällt insbesondere die Behandlung politischer Themen mittels ökonomischer Erklärungsansätze und umgekehrt die Auseinandersetzung mit ökonomischen Phänomenen aus Sicht der Politikwissenschaft oder der Soziologie. The series “Economy and Politics” combines empirically and theoretically oriented research from the fields of economics, political science and political sociology, which analyzes issues of economic policy and institutional economics as well as the constitution and the change of economic and political orders. This includes, in particular, the treatment of political issues by means of economic approaches and, conversely, the examination of economic phenomena from the perspective of political science or sociology.

Weitere Bände in der Reihe http://www.springer.com/series/16152

Raphael Zimmermann Robiatti

National Development Banks in South America Governance, Financial Performance and Development Impact

Raphael Zimmermann Robiatti Erfurt, Germany

ISSN 2524-5945 ISSN 2524-5953 (electronic) Wirtschaft und Politik ISBN 978-3-658-34727-7 ISBN 978-3-658-34728-4 (eBook) https://doi.org/10.1007/978-3-658-34728-4 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2021 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Responsible Editor: Anna Pietras This Springer Gabler imprint is published by the registered company Springer Fachmedien Wiesbaden GmbH part of Springer Nature. The registered company address is: Abraham-Lincoln-Str. 46, 65189 Wiesbaden, Germany

Acknowledgments

Producing this research has been a far more challenging and exhausting process than I have ever anticipated. The final product is a result of a collaborative process, which would never be completed without the support of very important people: I thank my first supervisor, Prof. Gerhard Wegner, for taking an interest and believing in this project from our very first meeting back in 2016. I am eternally grateful to my second supervisor, Prof. Geert Bouckaert, whose intellectual mentoring and encouragement have been instrumental in keeping me focused and determined to improve and finish my work. I thank the University of Erfurt for the funding and, particularly, the Willy Brandt School and my dear colleagues for bearing with me while I tried to balance the pursuit of a doctoral degree and my professional duties. I especially thank the colleagues at the Public Governance Institute and at the KU Leuven, who have so warmly welcomed me in their country, city, and university. Your feedback and support during my research were immensely appreciated. I sincerely thank Robert, Jerome, Marco, and many other doctoral students who shared their time and feedback to make sure I would do well. To my closest friends, who took more than their fair share of complaints and had to deal with, at times, my desperation. I am forever indebted to my parents for paving the way. I thank my grandparents for always believing. I thank Tati for the love, encouragement, and patience.

v

Contents

1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 Sample and Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 1 6 7 8

2 Theoretical Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Investment, Finance, and Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.1 Access to Finance and Financial Development . . . . . . . . . 2.1.2 A Role for the State in Broadening Access to Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.2.1 The Interventionist Model . . . . . . . . . . . . . . . . . . . 2.1.2.2 The Laissez-Faire Model . . . . . . . . . . . . . . . . . . . . 2.1.2.3 The Pro-Market Activism Model . . . . . . . . . . . . . 2.1.2.4 A Way in Between . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 National Development Banks and the Contested Role of the State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.1 Development View . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.2 Social View . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.3 Political View . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.4 Agency View . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.5 Where Do We Stand? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Public Organizations, Organization Theory, and Institutions—Why do Institutions matter? . . . . . . . . . . . . . . . . 2.3.1 Institutions and Public Organizations . . . . . . . . . . . . . . . . . .

11 11 13 16 16 18 20 22 23 25 26 28 29 31 33 36

vii

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Contents

2.3.1.1 Early Institutional Approaches to Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.1.2 Neo-Institutional Theory and Organizations . . . . 2.4 A Theory of Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.1 The Emergence of Corporate Governance . . . . . . . . . . . . . . 2.4.2 Superior Corporate Governance Practices . . . . . . . . . . . . . . 2.4.3 The Road Ahead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 The National Development Bank Governance Index . . . . . . . . . . . . . . 3.1 Understanding Corporate Governance in National Development Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.1 Governance Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Key Improvements to Corporate Governance Arrangements . . . . 3.2.1 Legal Framework and Organization of the Ownership Function . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.2 Boards: Structure, Powers and Procedures . . . . . . . . . . . . . 3.2.3 Transparency, Disclosure and Control Mechanisms . . . . . 3.2.4 An Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Benchmarking Governance: National Development Bank Governance Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.1 National Development Bank Governance Index: General Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.2 Unpacking the NDBGI: Legal Framework and Ownership (D1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.3 Unpacking the NDBGI: Board Structures, Powers and Procedures (D2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.4 Unpacking the NDBGI: Transparency, Disclosure, and Control (D3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.5 A Global View . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Economic-Financial Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Measuring the Performance of National Development Banks . . . 4.2 Economic-Financial Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.1 Governance and Financial Indicators . . . . . . . . . . . . . . . . . . 4.2.1.1 Return on Equity (RoE) . . . . . . . . . . . . . . . . . . . . . 4.2.1.2 Return on Assets (RoA) . . . . . . . . . . . . . . . . . . . . . 4.2.1.3 Nonperforming Loans (NPL) . . . . . . . . . . . . . . . . 4.2.1.4 Cost to Income Ratio (C/I) . . . . . . . . . . . . . . . . . . 4.2.1.5 Overhead Costs to Total Assets . . . . . . . . . . . . . . 4.3 Reframing the Debate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

37 39 42 45 52 54 57 57 59 62 63 66 68 70 71 73 77 81 85 91 95 95 102 103 105 108 111 113 115 118

Contents

5 Development Impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 Beyond the Economic-Financial Nexus: Assessing Development Impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.1 Nuts and Bolts: Measuring Development Impact in Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.2 Defining, Measuring and Reporting on Development Impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.2.1 BNDES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.2.2 COFIDE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.2.3 BICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.2.4 FINDETER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.2.5 BDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.2.6 CFN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.2.7 CND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.2.8 BANDES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Governance and Development Impact . . . . . . . . . . . . . . . . . . . . . . . .

ix

123 123 125 128 133 136 141 147 150 154 159 163 165

6 Consequences vs. Appropriateness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1 An Analytical Model for National Development Banks . . . . . . . . 6.1.1 Logic of Consequences: Development Banks as Financial Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1.2 Logic of Appropriateness: Development Banks as Development Organizations . . . . . . . . . . . . . . . . . . . . . . . 6.1.3 Conciliating the Logics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1.4 Mapping National Development Banks . . . . . . . . . . . . . . . . 6.2 Consequences, Appropriateness, and Governance . . . . . . . . . . . . .

173 173

180 182 189 196

7 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

203

Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

209

176

Abbreviations

ALIDE BANDES BDP BICE BNDES CFN CG C/I CND COFIDE FINDETER IADB NDB NDBGI NPL OCTA OECD PDB PPP RoA RoE SOE WB WFDFI

Asociación Latinoamericana de Instituciones Financieras para el Desarrollo Banco de Desarrollo Económico y Social de Venezuela Banco de Desarrollo Productivo Banco de Inversión y Comercio Exterior Banco Nacional de Desenvolvimento Econômico e Social Corporación Financiera Nacional Corporate Governance Cost to Income Ratio Corporación Nacional para el Desarrollo Corporación Financiera de Desarrollo Financiera de Desarrollo Territorial Interamerican Development Bank National Development Banks National Development Bank Governance Index Nonperforming Loans Overhead Costs to Total Assets Organization for Economic Cooperation and Development Public Development Bank Public-Private Partnership Return on Assets Return on Equity State-Owned Enterprise World Bank World Federation of Development Financial Institutions

xi

List of Figures

Figure 4.1 Figure 5.1 Figure 6.1 Figure 6.2 Figure 6.3 Figure Figure Figure Figure

6.4 6.5 6.6 6.7

The Sisyphus Syndrome in NDBs . . . . . . . . . . . . . . . . . . . . . . Nonfinancial Indicators Used by DBs to Monitor Economic Effect of Operations . . . . . . . . . . . . . . . . . . . . . . . . Simplified Production Model of Performance . . . . . . . . . . . . . Logic of Consequences vs. Logic of Appropriateness . . . . . . Application on a Hypothetical Organization (2008, 2013, and 2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NDBs’ Relative Positions: 2008* . . . . . . . . . . . . . . . . . . . . . . . NDBs’ Relative Positions: 2013 . . . . . . . . . . . . . . . . . . . . . . . . NDBs’ Relative Positions: 2018 . . . . . . . . . . . . . . . . . . . . . . . . NDBs’ Evolution: 2008–2018 . . . . . . . . . . . . . . . . . . . . . . . . .

97 127 177 185 187 190 192 194 198

xiii

List of Tables

Table Table Table Table

3.1 3.2 3.3 3.4

Table 3.5 Table 3.6 Table 3.7 Table 3.8 Table Table Table Table Table Table Table Table Table

3.9 4.1 4.2 4.3 4.4 4.5 4.6 4.7 5.1

Table 5.2 Table 5.3

The National Development Bank Governance Index . . . . . . . . NDBGI Scores: 2008, 2013, and 2018 . . . . . . . . . . . . . . . . . . . NDBGI Scores and Variation . . . . . . . . . . . . . . . . . . . . . . . . . . . NDBGI: Legal Framework and Ownership (2008, 2013, and 2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal Framework & Ownership . . . . . . . . . . . . . . . . . . . . . . . . . NDBGI: Board Structures, Powers and Procedures (2008, 2013, and 2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Board Structures, Powers, and Procedures . . . . . . . . . . . . . . . . NDBGI: Transparency, Disclosure, and Control (2008, 2013, and 2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transparency, Disclosure and Control . . . . . . . . . . . . . . . . . . . . Dubnick’s Four Perspectives on Performance . . . . . . . . . . . . . . Economic-Financial Performance Indicators . . . . . . . . . . . . . . Average Return on Equity (%) . . . . . . . . . . . . . . . . . . . . . . . . . . Average Return on Assets (%) . . . . . . . . . . . . . . . . . . . . . . . . . . Average Nonperforming Loans (%) . . . . . . . . . . . . . . . . . . . . . . Average C/I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average OCTA Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BNDES’ Monitoring and Evaluation Framework: 2008, 2013, and 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . COFIDE’s Monitoring and Evaluation Framework: 2008, 2013, and 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BICE’s Monitoring and Evaluation Framework: 2008, 2013, and 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

72 74 76 79 82 83 86 88 90 97 106 107 109 111 114 116 137 142 146

xv

xvi

List of Tables

Table 5.4 Table 5.5 Table 5.6 Table 5.7 Table 5.8 Table Table Table Table Table Table

5.9 6.1 6.2 6.3 6.4 6.5

FINDETER’s Monitoring and Evaluation Framework: 2008, 2013, and 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BDP’s Monitoring and Evaluation Framework: 2008, 2013, and 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CFN’s Monitoring and Evaluation Framework: 2008, 2013, and 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CND’s Monitoring and Evaluation Framework: 2008, 2013, and 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BANDES’ Monitoring and Evaluation Framework: 2008, 2013, and 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NDB’s Monitoring and Evaluation Framework: 2018 . . . . . . . Operationalization: Logic of Consequences . . . . . . . . . . . . . . . Operationalization: Logic of Appropriateness . . . . . . . . . . . . . Appropriateness, Consequences, and the NDBGI: 2008 . . . . . Appropriateness, Consequences, and the NDBGI: 2013 . . . . . Appropriateness, Consequences, and the NDBGI: 2018 . . . . .

151 155 160 164 166 168 179 183 191 193 196

1

Introduction

1.1

Background

“To the extent that development financial institutions act as the government’s means to promote its social objectives, they seek to serve those segments that — as a consequence of their location, risk, poor and volatile income, or information opacity (all of which are associated with substantial transaction costs and information asymmetry problems)— are typically not financially attractive to private banks.” (Francisco et al., 2008, p. 2)

Organizations specialized in providing long-term capital for the public and private sectors exist since the middle of the nineteenth Century in Europe1 . However, it was not only until after the Second World War that the precursory organizations to modern development banks started to emerge (Bruck, 1998). The World Bank (WB) was instrumental in this process: once it started to divert its massive investments from the reconstruction efforts in Europe and shifted them to Latin America, Asia, and Africa, it provided developing countries with capital for sizeable investments in basic and industrial infrastructure with the precondition that a local development bank would be responsible for structuring the loans (Diamond, 1957). 1

Rondo E. Cameron wrote extensively about the experiences of two of them. The Crédit Mobilier in France (Cameron, 1953) and the Bank of Darmstadt in Germany (Cameron, 1956).

Electronic supplementary material The online version of this chapter (https://doi.org/10.1007/978-3-658-34728-4_1) contains supplementary material, which is available to authorized users.

© The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2021 R. Zimmermann Robiatti, National Development Banks in South America, Wirtschaft und Politik, https://doi.org/10.1007/978-3-658-34728-4_1

1

2

1

Introduction

That incentive rushed many countries to create their own versions of national development banks (NDBs) to channel these resources into financing long-term investments in their industrial and infrastructural development. According to Hanson (2004), between 1950 and 1984, the WB provided over 350 loans to more than 140 private and public NDBs. In Latin America and the Caribbean (LAC), the most prolific region for these organizations at the time, 96 public development banks were created between 1940 and 1960. In 1970, their assets represented 64% of the total banking assets for the whole region (ALIDE, 2011; Rougier, 2011). In the aftermath of this enlargement process, many NDBs started to face financial problems, which raised concerns about their operational sustainability. Amidst the successive banking crises that affected diverse countries between the 1980s and 1990s2 , many banks failed to attest to the fulfillment of their development goals. Others did not achieve the minimum acceptable performance standards to stay afloat. This situation, in conjunction with the liberalization and deregulation impulse brought along with the Washington Consensus, led these troubled banks to either foreclose, undergo privatization, or face deep restructuration processes (Smallridge and Olloqui, 2011). According to the Interamerican Development Bank (IDB), between 1987 and 2003, more than 250 NDBs were privatized around the world. In LAC, state-owned development banks’ assets represented 40% of the total banking assets in the region by 1995, a 24% reduction in comparison to 1970 (IADB, 2005). Despite this relatively recent wave of privatizations NDBs experienced at the beginning of the 21st Century, one should not downplay the relevance of these public organizations, for they still represent a sizeable portion of the financial institutions around the world. Nowadays, development banks exist across several countries regardless of their level of development. According to information by Finance in Common, there are, in 2020, about 450 operational public development banks located in Asia-Pacific (23%), Africa (22%), Europe (31%), Latin America and the Caribbean (19%), and North America (5%). 30% of these banks were created after the 2000s (Finance in Common, 2020). These numbers reveal that, even in advanced economies, which, in general, have broader access to numerous private financial institutions and can easily access international capital markets to fulfill the financial needs of its firms, NDBs still play an essential role. Differently from first-generation development banks, which focused almost exclusively on industrial development and infrastructure provision, modern NDBs

2

According to the World Bank, between 1977 and 2000, 112 different banking crises happened in 93 countries.

1.1 Background

3

have mostly diversified their operations. They provide a whole new range of services, including advisory and technical consultancy, entrepreneurial development programs, privatization support programs, and even climate change mitigation initiatives (Smallridge et al., 2013). They ought to perform a complementary function to private banks, acting as a lender of last resort. Instead of replacing or competing with their privately-owned counterparts, NDBs ought to draw them into co-financed projects, catalyzing private investments in general. Not less important, they are now supposed to restrict their scope of operation according to a policy mandate. A more recent strand of research also points out that state-owned development banks can play an active countercyclical role during critical periods. The global financial crisis, which started in 2007, provided an excellent example of this function. While private banks were reluctant to provide credit, NDBs increased their supply, helping to minimize the credit crunch and fueling significant economic activity (De Luna-Martínez and Vicente, 2012). After a period of relative discredit and doubt about the merits of employing development banks as tools for economic development, it seems clear that these organizations still have a strong appeal for policymakers. Just recently, countries announced plans to create new banks, while they convert some older and traditional national development agencies into full-fledged NDBs. A multilateral initiative by the BRICS (Brazil, Russia, India, China, and South Africa) led to the creation of the “New Development Bank.” Around the same time, the Asia Infrastructure Investment Bank (AIIB) emerged as the result of more than fifty countries joining efforts to create an international organization to finance development projects. At the national level, development banks increasingly play new roles beyond the provision of funds. Their role in fostering investment and driving structural transformation also takes place in advanced economies such as Germany, Canada, France, and South Korea, to name a few prominent examples (Griffith-Jones et al., 2018). These combined efforts point to a revival of a development finance paradigm and consolidate a message that development banks remain to be extremely relevant vessels for development policy beyond finance. It is important to acknowledge, however, that despite enjoying renewed popularity, state-ownership of financial institutions remains highly controversial. That happens, not only due to path-dependencies related to the poor performances from many of such organizations in the past but also, as pointed out by various scholars, due to problems associated with state-ownership and the deleterious effect it may have over bank’s operations (Sapienza, 2004; Dinç, 2005). Nonetheless,

4

1

Introduction

now that state-owned development banks are, again, on the rise, merely dismissing governmental participation does not provide a practical solution to tackle the shortcomings this model may bear. Irrespective of policy preferences or theoretical orientation, if private markets fail to provide long-term finance, governments will be under pressure to address this need (Chandrasekhar, 2016). If a public development bank is likely to be used for this task, it is necessary to find alternatives to make sure these organizations succeed. Public development banks, such as any other public organization, face a diverse set of challenges that arise from state-ownership. These can affect the organization’s capacity to perform efficiently and often do, contributing to the seemingly growing perception that SOEs are, in general, inherently incapable of delivering services efficiently. Because underperforming NDBs may incur in high economic and financial costs, they are vast sources of fiscal risk and a liability to their governments. Possibly turning into sources of instability for the whole national financial system and retarding the development of financial markets in less developed countries (Scott, 2007). Therefore, identifying and mitigating the challenges facing NDBs to assure their efficient operation became an essential task for public sector researchers. There is a wide range of publications exploring causes and possible solutions for the problems related to the poor performance of state-owned organizations, including NDBs. Political intervention is one of the major culprits. It can potentially derange a public organization’s management and interfere with its capacity to make technical-based and independent decisions, leading them to select projects based on political motivations rather than according to the organization’s institutional purpose. Understanding how governments hinder development banks’ capacity to deliver results and to follow their institutional mission is an integral part of the drive behind this research agenda (Shleifer and Vishny 1997; La Porta, López-de-Silanes, and Shleifer 2002). Although a whole body of scholarly work does confirm that an excessive leeway for political interference can harm the accomplishment of NDBs’ primary objectives, that is likely, where it occurs, not the single cause for this organization’s poor performance (La Porta, Lopez-de-Silanes, and Shleifer, 2002; Sapienza, 2004). Research indicates that governance problems rather than external or context-specific issues usually drive meager SOE performance (World Bank, 2014). Development banks are also subject to other sorts of institutional and organizational problems related to the public nature of its owner: multiple and competing goals and objectives, the virtual absence of competition, insufficient transparency and accountability mechanisms, soft-budget constraints, weaknesses in the legal system, lack of proper incentives, among others (OECD, 2015).

1.1 Background

5

In the spirit of these developments, research on the governance of public development banks has been growing in recent years. Researchers in this area deal, in a more ad-hoc way, with issues connected to these banks’ governance (Scott, 2007), the importance of a clear policy mandate (Lazzarini et al. 2017), and the effects of government ownership over their operations (La Porta, Lopez-de-Silanes, and Shleifer, 2002). Ultimately, this branch of research attempts to draw and to offer solutions to improve the framework in which NDBs operate, so that principalagent issues and conflicts emerging from government acting both as the owner and controller of these organizations do not offset the gains from governmental involvement with development banking in the first place. This dissertation draws the insight from institutional theory, especially from the foundational work of Douglass North (1990) and Richard Scott (1995) in highlighting the role of rules, bureaucratic settings, and governance structures in reducing transaction costs, establishing an efficient decision-making process, and ensuring that organizations remain true to their objectives. Acknowledging the prevalence of public ownership of development banks, it aims to provide practical insights into the problem of how different NDBs govern their relationship with the state in order to avoid the pitfalls of political interference and other principalagent issues. Ensuring this way, that the organization can pursue its mission and objectives while remaining responsive to society’s inputs. There is substantial empirical evidence that state-owned banks are comparable to private banks in developed countries but not in the developing ones (Micco, Panizza, and Yañez 2007). These findings would support the claim that NDBs can indeed overcome the contradictions associated with government ownership—including political influence—and achieve satisfactory performance while fulfilling their policy objectives given that improved governance arrangements are in place. This dissertation concentrates on the role of corporate governance based on insights from more recent publications which claim that “development banks with clearly defined mandates, high corporate governance standards, strong risk management capability, proper regulation and supervision, and a strong management team have been successful” (De Luna Martinez and Vicente 2012, p. 24). However, despite this renewed interest in the topic, more systematic crosscountry evaluations of development banks’ governance systems still lack. A sizeable portion of the research on development banking focuses on large international institutions or regional development banks. These studies, in general, serve the purpose of examining specific practices towards public ownership to guide decision-making. Most current studies do not provide cross-organizational lessons, and comparative studies are not abundant. Only a few studies zoom in

6

1

Introduction

to analyze national development banks in a comparative form, even though these organizations have been historically essential for developing countries and are present in almost every country around the world. Even more importantly, there are no more than a few studies exploring the relationship between the development bank’s governance structures and their performance frameworks.

1.2

Objectives

This dissertation undertakes a comparative study with eight development banks in South America to explore this gap in the literature. It developed a multidimensional framework for benchmarking public development banks’ governance systems based on their attainment of internationally recommended practices. The National Development Bank Governance Index (NDBGI) is a tool that allows to analyze and compare different organizations, ranking them in terms of the maturity of their governance frameworks based on three fundamental dimensions of their corporate governance: Legal Framework and Ownership; Board Structures and Procedures; and Transparency, Disclosure, and Control Mechanisms. We apply this tool for three reference years after the outbreak of the financial crisis, 2008, 2013, and 2018, which allows not only to grasp the maturity of the governance systems each year but also to determine their evolution over time. This research has four main objectives: First, it aims at determining the degree of maturity of the development bank’s corporate governance frameworks in the aftermath of the North-Atlantic financial crisis in 2007 and their evolution over the following ten years. The financial crisis represented a turning point for governments around the world to engage in reformation efforts to revise and improve their corporate governance codes, including those applicable to SOEs (Florio, 2014). The application of the NDBGI and a cross-sectional examination of the results offers a unique insight into the underlying characteristics and governance provisions of the South American banks in the sample. Moreover, it allows this dissertation to provide an overview of the actual developments observed in different countries and their effect over the NDBs’ operations. Second, the research contributes to new evidence to the debate of whether improvements to corporate governance do, over time, contribute to improving NDBs’ financial performance. The positive relationship between superior governance and improved financial performance is mostly suggested by the literature on corporate governance of SOEs, especially by organizations such as the WB or the

1.3 Sample and Data

7

OECD (OECD, 2015; World Bank, 2014). Analyzing the variation of the NDBGI and commonly used financial indicators provides a unique perspective on the possible connection between governance and the economic-financial performance of national development banks. The findings help to provide some perspective on similarities and differences of NDBs and other SOEs, as well as to calibrate the expectations over possible results outcoming from governance reforms. Third, it introduces a relatively new discussion about the relationship between superior governance frameworks and banks’ capacity to measure and report on their development impact. While economic-financial performance is critical, NDBs also have an intrinsic policy mandate which needs to be measured and monitored (Rudolph, 2009). Financial sustainability is only relevant to the extent that it allows the bank to direct attention to its primary developmental objectives. A bank that displays superior financial results but which does not manage to achieve its goals nor prove its investments’ additionality faces a fundamental legitimacy problem. This dissertation analyzes each bank’s “development performance” based on the characteristics of their monitoring & reporting (M&E) systems. It also explores the question of whether better-governed banks do a better job of monitoring their development impact. Lastly, the dissertation aims to provide new insights into the possible role of governance in reconciling the inherent conflict between NDBs’ banking and development functions. There is an extensive discussion in the literature about a trade-off between a development bank’s focus on supporting development projects and its financial sustainability (De la Torre, 2002). However, not many empirical studies tackle this issue. This research introduces a method to estimate, based on their reporting, the bank’s degree of inclination to its development or banking functions. That allows a unique understanding and novel analysis of the role superior governance provisions play in smoothing this fundamental conflict so that banks can remain financially viable while playing an essential developmental role.

1.3

Sample and Data

Our sample consists of eight national development banks in South America. BICE in Argentina, BDP in Bolivia, BNDES in Brazil, FINDETER in Colombia, CFN in Ecuador, COFIDE in Peru, CND in Uruguay, and BANDES in Venezuela. To construct the NDBGI, we hand-collected data from constitutions, legal texts, other related laws, regulations, bank charters, and codes of conduct. We used them to determine 32 indicators related to each of the dimensions “Legal

8

1

Introduction

Framework and Ownership,” “Board Structures and Procedures,” and “Transparency, Disclosure, and Control.” The detailed indicators, as well as the weighting and coding, are in Annex 1. Since these variables are all textual, we utilized a questionnaire to guide the data collection, which was prepared for this purpose and is available in Annex 3. We measure the index for three equidistant reference years only, so it is not necessary to collect firm-level data for each of the eleven years but only for years of 2008, 2013, and 2018. The resulting collected data is available in Annex 2. The dissertation relies on individual bank data as well as on each country’s national financial system data to analyze possible dynamics between the NDBGI and financial-economic performance indicators. Individual bank data was retrieved from Bureau van Dijk’s Bankscope database, while the data on the national financial systems, from World Bank’s Financial Development and Structure Dataset 2019. Possible missing entries were recovered manually from the banks’ annual reports and other related documents. The detailed financial-economic indicators, as well as more detailed time-series analyses, are presented in Annex 4. This research has utilized five main guiding questions, all detailed in chapter five, to evaluate and map each bank’s monitoring and evaluation systems. This data was collected from the bank’s annual reports as well as additional documents published by each organization on measurement methodologies, impact assessment routines, among other self-reported data. Lastly, to use the analytical model proposed in chapter six, which seeks to estimate each bank’s degree of alignment with its development or banking functions and their evolution over time, we performed a content analysis on these banks’ annual reports for the years 2008, 2013, and 2018. That was done based on the coding schemes introduced and developed in chapter six and summarized on tables 26 and 27. The detailed collected data, as well as schematic analysis of each bank’s evolution, is available in Annex 5.

1.4

Organization

This dissertation is composed of seven chapters. Following this introduction, the second chapter discusses the theoretical framework behind this research project, including a detailed account of its footing in development theory, institutional approach to organizational analysis, and governance theory. The third chapter presents the methodology behind the NDBGI and discusses its potential and limitations. In that chapter, we analyze the findings related to each bank’s attainment

1.4 Organization

9

to internationally recommended governance practices and summarize the main trends observed in the sample. Chapter four discusses the literature investigating the relationship between financial performance and governance. In that chapter, we analyze detailed economic-financial performance indicators for each bank and explore their development along with the changes in NDBGI for the period from 2008 until 2018. The fifth chapter, on the other hand, presents the mapping of each bank’s M&E systems and explore the nuances of their efforts to monitor and measure their development impact and the additionality of their investments. Chapter six presents the analytical model to estimate, based on the characteristics of bank reporting, the primary logic by which a bank organizes its operations. It presents a detailed analysis of how each banks’ focus, on its development or banking functions, has shifted over time and attempts to explain these changes considering the improvement of their governance frameworks. Chapter seven concludes this dissertation, summarizing the findings and indicating paths for future research efforts.

2

Theoretical Framework

2.1

Investment, Finance, and Growth

‘(…) Investment lies at the heart of economic development.’ (Diamond, 1957, p. 7)

This statement opens the second section of William Diamond’s essay on development banks, a pioneer attempt by the International Bank for Reconstruction and Development (IBRD) to disseminate information and offer policy recommendations to policymakers about the, then, relatively new financial organizations spreading quickly across the world. Today, these organizations are far more popular, but they still carry the original mission, among others, of catalyzing investments and mobilizing capital. Not surprisingly, many of them still carry the name’ investment bank’ in some countries. Regardless of dogmatic attitudes toward these institutions, which this piece will discuss in greater detail in the upcoming sections, economic scholarship largely concurs that economic development is an impossibility in the absence of investment. Productive investments are undertaken either directly by those who save or those who borrow to invest. In the absence of financial markets, producers depend entirely on profits to make new investments. Therefore, the capacity to undertake large ones, even when they would potentially increase productivity and welfare, is severely limited. In this scenario, the level of investments will always be directly proportional to the saver’s disposable income. In the presence of financial markets, however, intermediaries and other more complex arrangements emerge, allowing savers to lend their money in return for interest to those who are willing to invest, leaving, in principle, both groups better off. Financial markets are, therefore, instrumental in fostering trade, productive specialization, and, consequently, innovation (Smith, 1776). © The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2021 R. Zimmermann Robiatti, National Development Banks in South America, Wirtschaft und Politik, https://doi.org/10.1007/978-3-658-34728-4_2

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2 Theoretical Framework

Financial markets are an essential element to economic growth, for they allow the allocation of capital, a scarce resource, to more productive use by the actors who value it the most. The link between finance and growth is well recorded in the literature and backed by a large amount of empirical work. Ross Levine provides a thorough literature review of “how financial systems influence savings and investment decisions and hence growth by focusing on its role in facilitating access to information, enforcing contractual obligations, and reducing transaction costs” (Levine, 2005: 869). It is then only a logical consequence that, in countries where financial markets are underdeveloped, capital scarcity will invariably follow. That will lead to underinvestment, which, in turn, hinders entrepreneurship, blocks economic growth, and cripples sustained development. Schumpeter, already in the early 1900s, pointed out to the importance of bank credit to investment, entrepreneurship, and innovation, emphasizing that dynamic development could only materialize where individuals have access to a functional banking sector. (Schumpeter, 1911). Of course, the existence of credit does not, by itself, ensure economic progress, but it a precondition for it. Nowadays, financial markets have, to a large extent, addressed the issue of access to short-term credit in most developed economies. Access to banking services is widespread, and private banks can generally meet the demand for loans towards productive investments in commercial activities. The focus of current discussions in development economics in these countries no longer concentrates heavily on credit shortages but other aspects such as credit quality and its impact on investments, debt, and financial stability (De La Torre and Schmukler, 2005). Access to long-term finance, on the other hand, remains a pressing issue, especially in developing countries. Once they move up towards industrialization, productive complexity increases, and new dynamics emerge. Industrialization requires bulkier long-term investments for the development of infrastructure to accommodate the new emerging patterns of production and the demands associated with it (Gerschrenkon, 1962). Investments also become riskier as entrepreneurs move away from traditional productive processes and undertake new forms of economic activity. These carry the promise of sizeable returns, but traditional private financial institutions often see them as disproportionately risky and remain unwilling to provide credit (Diamond, 1957:29). Lack of long-term finance is, therefore, an old and widely-acknowledged problem in developing countries. However, it is also, for different reasons, incredibly relevant in the context of countries in more advanced stages of industrialization. The World Bank dedicated its Global Financial Development Report in 2015 to this topic, articulating concerns about the decline in long-term funding both

2.1 Investment, Finance, and Growth

13

for infrastructure and for investment in critical sectors due to increasing shorttermism from companies and financial institutions (World Bank, 2015). In the current developed countries’ conjecture, where industrial strategies progressively embody innovation-led and sustainable growth, this type of financing is increasingly needed. “By nature, financial returns from investment in innovative activities are not always assured, and it usually takes time before they can materialize. Thus, achieving smart, innovation-led growth requires not just any type of finance, but patient, strategic finance.” (Macfarlane and Mazzucato, 2018:7). Nevertheless, why does access to finance, in general, and to long term finance, particularly, remain a challenge? What are the factors impeding financiers from providing credit where there is a demand for it? The next sub-section will discuss some of the market failures and policy distortions that lead to scarcity of long-term finance and, consequently, to financial underdevelopment.

2.1.1

Access to Finance and Financial Development

Before discussing the state’s role in broadening access to finance, one must first understand the factors hindering it. According to De La Torre, Gozzi, and Schmukler “a problem of access to finance exists when an investment project that would be internally financed by the agent (that is, the firm or individual) if she had the required resources does not get external financing (…) this occurs because there is a wedge between the expected internal rate of return of the project and the rate of return that external investors require to finance it” (2017:37). This disconnect between lenders and borrowers is caused by, among others, two elements: high transaction costs and principal-agent problems. Transaction costs are the economic burden of engaging in an actual loan transaction. These are composed of costs of monitoring payments, receiving deposits, defining and enforcing contractual obligations, and so forth. In the absence of intermediaries who have both the infrastructure and the expertise to internalize them, the costs of lending money increase considerably. Individual lenders would expect to receive much higher compensation for risks incurred in lending their capital. At the same time, borrowers would be discouraged from transacting for these costs would eventually be too high in relation to their expected returns. Principal-agent problems, on the other hand, arise from information asymmetries but also contribute to increasing the costs of transacting. Before a loan, unsurmountable conflicts of interest between the lender (principal) and the borrower (agent) may arise, blocking the transactions or making them too costly, consequently withering access to finance. These problems may happen because

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lenders can not correctly assess the creditworthiness of the borrowers, either due to insufficient knowledge about their investments or due to difficulties in assessing their willingness to repay debts. That leads to either the impossibility of transacting or to adverse selection, which essentially means that lenders will overcharge borrowers to offset the costs from bad loans, driving, in the process, “good borrowers” away (Akerlof, 1970). The second category of principal-agent problems is known as moral hazard, either “ex-ante” or “ex-post.” Ex-ante moral hazard happens when lenders assume borrowers may take actions that will reduce the likelihood of honoring their payments after granting the credit. The chance that circumstances before and after the loan will change, drive lenders to either ration credit or practice higher rates to cover for potential losses, effectively reducing the general level of investments (de La Torre, Gozzi, and Schmukler, 2017). Ex post moral hazard is the problem related to the enforcement of contracts. When lenders cannot enforce contracts to ensure payment of debts without incurring extra costs, they either refrain from lending or incorporate these costs to the loans, again, driving credit takers away and leaving “riskier” projects underfinanced (Williamson, 1987). Being able to solve these market-failures is of utmost importance to foster trade and specialization and, therefore, an essential step towards economic development. In markets where the burden of monitoring and enforcing compliance from players are relatively smaller, the costs of transacting are also less impeditive. Since complexity increases as a result of impersonality in trade relations, as more players join the market, these costs tend to rise considerably. Principal-agent problems and high transaction costs can exist in any market, but they proliferate more markedly in complex ones. Complexity provides incentives for the emergence of financial intermediaries, who, motivated by the perspective of profiting, create solutions to facilitate transactions between borrowers and lenders. Financiers specialize in the process of acquiring information about projects and judging their degree of risk, a process that allows them to price loan rates according to each client (Freixas and Rochet, 2008). They play an essential role in reducing market frictions and generate value by effectively reducing the costs of transacting, while re-coupling supply and demand for credit (Levine, 1997). Because increasing complexity tends to lead to moral hazard and other principal-agent problems, transaction costs will necessarily increase. The market failures discussed above affect long-term finance to a much greater extent than the short-term. According to Stiglitz and Weiss, longer the maturity of loans, higher is the share of risk shifting from the credit taker to the credit provider, leading to rationing (1981). That may drive banks to favor loans with shorter maturities

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15

to increase their capacity to monitor and recover their loans without incurring disproportionate risk (Diamond and Rajan 2001). The lack of long-term credit is, however, not only due to banks’ short-termism. Acknowledged their drive to reap larger rewards without being exposed to excessive risk, there is a substantial amount of evidence that a robust institutional environment plays a decisive factor in increasing the supply of long-term finance. Strong institutions help to bring cost levels down by creating an environment amenable to the operation of financial institutions, propitiating higher investment levels, and driving financial development (Beck and Levine, 2005). A robust legal system, for instance, whose laws protect creditors against default and facilitate the enforcement of contractual obligations, is instrumental in reducing risk. It propitiates better conditions for the supply of credit at lower loan rates, bringing financiers to expand their credit offer (La Porta et al., 1999; Djankov, McLiesh, and Shleifer 2007). Long-term credit is an essential ingredient to sustained economic development. It provides the underlying conditions for prolonging horizon of investments, allowing firms and investors to address issues related to the lifecycle of their businesses, consequently, stimulating investments (de la Torre, Ize, and Schmukler 2012). More recently, as a result of the international financial crisis of the late 2000s, the availability of long-term funding has consistently decreased. That caused deleterious effects over investments in critical sectors such as infrastructure, which has a positive impact on growth, but more extended maturity periods (World Bank, 2015). Lack of long-term finance can also negatively affect the welfare of households and their investments in education and homeownership, for example, contributing directly to broadening inequality levels (Case, Quigley, and Shiller 2013). Given the benefits associated with a developed financial market and the expected positive effects of access to credit on welfare and economic development, it would be reasonable to expect unrestricted support to state-led access-enhancing policies aiming to broaden access to finance. That is, however, where there is much less of a consensus among the economics scholarship (de La Torre, Gozzi and Schmukler, 2017). Although broadening access to long-term finance has become an essential topic for governments, the nature of policy interventions is still a matter of much disagreement. The next section will address the debate about state interventions, their nature, and the reasoning of opposing views on the appropriate role for the state in enhancing access to finance.

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2.1.2

2 Theoretical Framework

A Role for the State in Broadening Access to Finance

The debate on the appropriate role for the state’s intervention to broaden access to finance polarizes between two contrasting views, with, more recently, the emergence of a third alternative, and more conciliatory one. Despite the broad consensus that the state, indeed, has a vital role to play in addressing the issues affecting the proper functioning of financial markets, there is little agreement about the exact nature of these interventions, their range, and limits (de La Torre, Gozzi and Schmukler, 2017).

2.1.2.1 The Interventionist Model The interventionist model is the first and oldest of them, being prevalent during most of the 20th Century. Its proponents contend that in incomplete financial markets such as the ones to be found in most developing countries, achieving financial development depends on the active participation of the state. Gerschenkron was one of the first to claim that markets in developing countries do not allocate resources efficiently due to the prevalence of market failures, which lead to costly and asymmetric information. Under these conditions, there is a severe restriction to accessing credit, for private financiers have low incentives to provide capital beyond a small group of big businesses and wealthier individuals (Gerschenkron, 1962). Still, according to this view, markets alone cannot solve the problem of scarcity of long-term capital, and that impairs the process of economic development. Without state intervention, commercial banks will refrain from extending access to finance beyond certain groups, holding investments below the socially optimal level. Because markets “fail” to provide the necessary capital for investments in critical sectors, the state must broaden access to finance. There are different ways to do so. One of them would be setting up a public-owned bank to provide funds for large-scale investments targeting the creation of industrial capacity and the development of infrastructure, for example (Yeyati, Micco, and Panniza, 2004). There are, of course, other interventionist policy instruments for broadening access to long-term finance, which go beyond the direct provision of credit. An alternative approach is to use the state’s regulatory powers to that effect. Governments can, according to this view, impose mandatory lending quotas or other similar requirements as to force commercial financiers to attend specific “strategic” groups and sectors. Alternatively, the government can control interest rate levels to provide differential rates to attend the demand for priority areas. Lastly, refinancing schemes have been used by some countries to allow better and more

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17

attractive loan terms for targeted sectors of their economies (de la Torre, Gozzi, and Schmukler, 2017). The interventionist view served as the guiding paradigm for most developing countries until the end of the 1970s. The main hope was that state intervention would endow financial systems in these countries to mobilize savings, foster socially optimal investments, promote positive externalities, and, consequently, generate economic development. By overcoming market failures, most of the population would be able to enjoy access to capital. However, the general perception in the early 1980s was that the interventionist model had failed on its promises (World Bank, 1989). Critics endorsed this perception, arguing against each of the instruments defended by its proponents and providing evidence of failures associated with them. Direct provision of credit via public banks, they argue, has proved to be highly problematic. Critics point out that the list of organizational failures from statebanks is a long one. It involves, among other things, politically connected lending in different instances (Carvalho, 2014; Cole, 2009; Claessens, Feijen and Laeven, 2008), high administrative and operational costs in comparison with private banks, accumulation of losses, and, eventually, foreclosure at the expense of the public budget and with high fiscal costs (World Bank, 1989). “Interventionists” respond to their detractors by arguing that a comparison between public and private commercial banks is misleading. Profitability might not be a significant concern for public banks which engage in social lending, or which finance projects that may not be financially profitable in the short run but that produce positive externalities. They argue that most cross-country comparisons do not entirely take these factors into account. Producing, therefore, false positives about public banks’ poor management, lower efficiency, and political motivations (de la Torre, Gozzi and Schmukler, 2017). Another point of criticism by the detractors of the interventionist model is that the state’s indirect intervention in financial markets via law-making also proved to be mostly misguided. Excessive regulation of financial institutions and financial repression led to a reduction in productivity and efficiency levels (McKinnon 1973), reinforcing some of the pre-existing market failures such as the problem of adverse selection instead of correcting them (Goldsmith 1969). The typical interventionist response points out to success histories during the industrialization of continental Europe (Gershenkron, 1962; Cameron, 1953). More recently, they focus on the relatively successful experience of the East Asian tigers with interventionist policies (Amsden, 1989; World Bank 1993). A crucial qualifier to this debate is that, because the toolbox associated with the interventionist model involves various instruments, a direct comparison between

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cases associated with it should be made with care to avoid misleading generalizations. Grouping state-owned financial institutions under one single category “public banks” can be highly misleading due to the heterogeneity of their structures, functions, and objectives. De la Torre and co-authors argued in a similar direction: “the association between state-bank ownership and poor financial development and macroeconomic performance could stem either from the need for more state intervention in countries with lower financial and economic development or from a negative impact of public banks” (de la Torre, Gozzi and Schmukler, 2017: 81). Regardless of that, the interventionist model somewhat depleted by the end of the 1970s. The surmounting criticism of its policies opened space for a paradigmatic change at the global level.

2.1.2.2 The Laissez-Faire Model This view emerged at the beginning of the 1980s as a byproduct of the changing global economic environment towards a liberalizing, market-oriented paradigm. It offered a clear opposition to state interventionism, towards which it adopted a decidedly skeptical stance. Embodying principles derived from rational-choice theory, scholars associated with the view claim that politicians’ and bureaucrats’ intentions to tamper with the financial system are not, at least primarily, to combat market failures as a path to promote the development and social justice. Instead, their argument goes, they will use the opportunity to increase their welfare at the expense of the people they represent—a classical principal-agent problem (de la Torre, Gozzi and Schmukler, 2017). The fundamental problem is, in their view, that once the state interferes with the market’s freedom, it brings an economic expression to its political power. The interference itself creates a political market, which, in turn, will distort allocation processes (Kane, 1977). Corporations and other interest groups will seek ways to access political power to gain an edge against their competitors. Because different interest groups do not yield the same degree of influence, the process of capital allocation by the state leans in favor of the most politically connected groups (Faccio 2006; La Porta, Lopez-de-Silanes, and Shleifer, 2002; Ades and Tella, 1997). Even with the best of intentions, the use of state interference becomes a tool for the pursuit of political objectives rather than socially desirable goals, putting these interventions’ very rationale in jeopardy. Capital will, likely, not be channeled to socially optimal use, but to rent-seeking capitalists who use the subsidized funds to boost projects that they could finance elsewhere. Even worse, the government can eventually bail-out poor-performing or failing companies that are, to some degree, politically connected (Musacchio and Lazzarini, 2014; Kornai, 1980).

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The laissez-faire model opts for two main liberalizing instruments: privatization and public sector rationalization. The years following the paradigm’s emergence watched an unprecedented effort towards the reduction of the “burden” of state intervention in the economies of many developed and developing countries. As an immediate result, waves of privatizations started to dismantle public-owned banks and corporations, reducing or completely extinguishing stateownership in many sectors. Likewise, the recommendations were that the state should completely withdraw from direct lending policies (Williamson and Mahar 1998). In terms of rationalization, the laissez-faire view did not all too completely dismiss the role of the state in improving access to long-term finance. However, it defended avoiding direct interventions at all costs. The government should, instead, focus on improving the institutional environment in which financiers and other organizations operate, making sure that the costs of transacting due to information asymmetry, the enforceability of contracts, regulatory burden, are, effectively, reduced (World Bank, 2005). In that sense, other reform efforts followed, such as simplifying company legislation, revisiting securitization and bankruptcy laws, creating credit bureaus, among other measures to foster the development of financial markets (de la Torre, Gozzi and Schmukler, 2017). Although the push to promote liberalization and to reduce the burden over the financial sector was indeed strong, the results observed in most of the developing countries fell short from the initial expectations. Except for more advanced economies, the problem of access to long-term credit remained an issue where not much improvement could be observed (World Bank, 2015). The financial development gap between developing and developed countries also did not reduce considerably during the period (De la Torre, Ize, and Schmukler, 2012). Credit offer indeed expanded, but mostly due to consumer credit and not company credit (IMF 2006). Securities markets also failed to develop at the desired speed (de la Torre and Schmukler, 2004). The subsequent financial crises in the late 1980s and 1990s exposed the fragility of financial systems in many developing countries around the world. They led to a perception that liberalization generated more instability, for these countries could no longer protect themselves against external shocks (de la Torre, Gozzi, and Schmukler, 2017). That the liberalization reforms did not reach their expected potential, is not a matter of much disagreement. While detractors of the laissez-faire model criticize it for not delivering on its promises, its proponents offer different explanations for the shortcomings. They argue that, indeed, sensible changes happened in terms of reduction of state-ownership levels, expansion of financial markets, access to credit, and productivity gains (World Bank, 1997). In fact, according to some

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scholars, changes were not as profound as they should be due to political backslash and insufficient depth or incompletion of the reforms (Singh et al. 2005). Had governments deepened the reforms and had the patience to reap the benefits, they argue, results would look a lot different. Regardless of these views, the global financial crisis in 2007 ignited a movement to “bring the state back in.” The perception that the lack of regulation had created the appropriate conditions for the misuse of financial products along with the debt crisis that followed put governments increasingly under pressure to take, once again, a more prominent role in the financial sector (World Bank, 2013). The draught of credit by private financiers pushed the state to engage in the direct provision of funding to stimulate important sectors of the economy. The countercyclical role played by state-owned banks marked the transition from the laissez-faire model to a new one. One which also looks quite different from the previous interventionist design that dominated the 19th Century.

2.1.2.3 The Pro-Market Activism Model Despite its increasing deterioration, two main contributions from the laissez-faire view to the debate about the role to be played by the state in the provision of access to credit remain influential. The first one is the acknowledgment that government interventions to address market failures, even when well-intentioned, often generate principal-agent problems. These can incur high coordination costs, offsetting the gains from state intervention in the first place (De la Torre, 2005). The second is highlighting that a direct relationship exists between high levels of financial development and strong institutions. That implies that addressing the issues that hinder access to finance, such as high transaction costs due to uncertainty and risk, requires interventions focusing on underlying institutional processes and organizational structures. Since institutional change is a slow process, modifying these patterns takes time, and financial development will not happen overnight (North, 1990). The view draws from these contributions and, while acknowledging that there is room for the state to foster the development of financial markets, it contends that the government’s primary challenge ought to be different. It should concentrate on identifying areas in which it has a relative advantage over the private sector so that its interventions will be limited and sustainable in the short-run. Here, the state will only play a complementary role to markets and not a substitutive one. It is, therefore, important to carefully analyze each public intervention in terms of their cost-effectiveness. In the long run, the state must aim to draw

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in private actors, which, under efficient control and regulation, can deliver better results without resorting to public funds (De la Torre, Gozzi and Schmukler, 2017). The pro-market activism view is more practical in the sense that it recognizes the risks associated with state interventionism, but it understands that completely dismissing government involvement is unrealistic. It does, for instance, acknowledge that possible efficiency problems may arise in individual interventions due to political manipulation, such as documented in the case of public banks by several authors (Lazzarini, 2011; Cole, 2009b; Sapienza, 2004). However, when looking at the actual responses to last financial crisis, the extent to which governments have engaged in direct lending and other instruments to soften the blow on financial markets, with varying degrees of success, was extremely high even in well-developed systems. That means that state intervention must be accounted for if one wants to acquire a more realistic view of the market dynamics (De la Torre, Gozzi and Schmukler, 2017). The laissez-faire view claimed that public banks’ performance is inferior to that of their private counterparts based on observations in developing countries. However, substantial empirical evidence points out that state-owned banks’ performance in several developed countries is indeed commensurate to private banks’ (Micco, Panizza, and Yañez 2007; Altunbas, Evans, and Molyneux 2001). These countries’ different institutional capacity partially explain these findings, which are consistent with the growing empirical evidence that “good institutions” do impact economic development. Given that, the main task at hand for the state to drive the development of financial markets would be to concentrate on improving its institutional environment. Because institutions are the results of a historical process in each country, the pro-market activism view largely refrains from offering blueprints for intervention, differently from what the other two models do. This view embraces a diversity of approaches to improving access to finance because it understands that each case is unique and demands specific measures. While institutional reform is the primary goal, a state may as well play a more active, but limited and complementary role in addressing some of the market failures it can mitigate. Since interventions might trigger political motivation, the organizational structures must be able to endure and resist capture by interest groups (de la Torre, Gozzi and Schmukler, 2017). In sum, the pro-market activism view aggregates characteristics from both the interventionist and the laissez-faire model. First, according to its principles, the state can indeed play smoothing roles to mitigate market failures, but interventions must be weighed carefully against their possible downsides. Not every failure

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demands the state’s participation, and careless intervening might end up deepening the pre-existing problems instead of correcting them (Stiglitz, 2008; Rodrik, 2006). The costs of state interventions might outweigh the benefits it generates. The model admits, however, that there is scope for state to intervene as long as it deepens and develops financial markets. Second, the state can play a complementary function to markets. Instead of replacing private financiers, the government should aim to draw them in by reforming the institutional environment in which they operate. Interventions should primarily focus on addressing institutional problems underlying the market-failures that hinder access to capital instead of engaging in direct provision of credit. When the state actively participates in the allocation of resources to third-parties, the issue of political interference becomes pungent, and structures are needed to protect the organizations from the pressure coming from different interest groups (de la Torre, Gozzi and Schmukler, 2017). Finally, it is crucial to understand that the pro-market activism view is an attempt at rationalizing state intervention while preserving some of the most important theoretical contributions from the laissez-faire model. That effort represents a significant challenge since both are, to no small extent, inherently antithetical. It is, however, a more balanced and realistic view. Actual policy interventions are usually not clear-cut interventionist or laissez-faire types. They involve a chain of decision-making at the political level and negotiation to find a consensus, which is often somewhat distant from an ideal-type. In that sense, promarket activism indicates a direction for a more market-friendly role for the state to play in broadening access to finance. However, it does not, per se, proposes a bundle or model of individual interventions.

2.1.2.4 A Way in Between In the economics literature, there is an ample consensus about the direct relationship between investment levels and economic development. Since accessing finance is a necessary condition for the expansion of investments, it is problematic that, as economies move towards more complex productive activities and impersonal trade relationships, this access may remain restricted to some groups, resulting in a suboptimal investment rate. Economists, however, are far from a consensus about the ideal method to tackle the problem of lack of access to finance. One group sees it as a result of widespread failures inherent to financial markets, which, in their account, only a more interventionist approach with direct provision of credit or other tools can address. The other group sees direct state intervention as problematic for it causes distortions in the way markets do operate, leading to even more significant problems.

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This struggle of ideas was hugely influential to the outcomes of policy formulation, especially during the last 80 years. Each of these models prevailed for a given period, after which they lost their mainstream status to a new, more promising, theoretical model. Of course, aggregating these groups into different “views” is a theoretical exercise. They do not exist in isolation, but they interact and influence one another. A mix of principles, objectives, and instruments guide every policy and, although one can identify the underlying characteristics of a given model in specific policy outcomes, they are usually the result of political bargaining and some degree of consensus building. That is also the case for the national development banks, the organizations involved in the implementation of these policies. NDBs connect deeply to the debate about the state’s intervention in the financial markets. These organizations emerged as a central element of the sets of policies advocated by the interventionist model, and their structures and objectives reflected these underlying conceptual foundations. With the decay of that model and the transition towards the following period, when the laissez-faire type of policies became more influential, many of these organizations moved to private ownership or closed. Other remaining banks became tools to support the privatization of state-owned enterprises, losing, to a large extent, the prominent status they had achieved during the previous years. Now, in the aftermath of the financial crisis in 2007 and with the emergence of the pro-market interventionism view, development banks are back on the agenda, aggregating new functions and performing various new tasks. The next section will discuss, in more detail, the progression of the theoretical thinking behind the creation of NDBs in the early 1940s, their evolution, and their current status.

2.2

National Development Banks and the Contested Role of the State

‘(…) irrespective of policy orientation, the failure of private financial markets to deliver long-term finance forces governments to rely on development banking institutions’ (Chandrasekhar, 2016, p. 24)

Development Banks are not a new phenomenon. Institutions specialized in providing long-term capital for financing investments from both public and private sectors already existed in different forms since the middle of the nineteenth Century in continental Europe (Diamond, 1957). In France, for example, Crédit Mobilier was instrumental in raising and providing funds for the expansion

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of railways and other infrastructure projects all around Europe (Cameron 1953). In Latin America, however, the precursory organizations to the modern development banks were created only much later, at the beginning of the 1940s. The state-led development paradigm widely propagated by the Economic Commission for Latin America and the Caribbean (ECLAC) was immensely influential to their establishment. Consequently, many of these banks shared common characteristics such as public ownership and their use as a tool for industrial policy. In the following years, these organizations achieved increased popularity and started to spread quickly in the region and around the world. The proliferation of NDBs in the following decades was driven and strictly observed by international organizations such as the World Bank (WB) and its arm, the International Bank for Reconstruction and Development (IBRD). The latter was responsible for the first publication, in 1957, of the book “Development Banks,” the first volume to explore the role, functions, and prospects of NDBs more systematically. The book provided “practical guidance and ground rules” for the establishment of new organizations based on previous ventures, especially from developed countries (Diamond, 1957). These newly-established development banks were, later, used to manage concessionary loans from international organizations to be applied in development projects to increase welfare and generate economic growth in their respective countries. Between 1950 and mid-1980, the WB provided more than 350 loans to development banks (private and public), who functioned as intermediaries to disburse these funds to specific projects (Hanson, 2004). This practice persisted until the late 1980s when significant changes in the international development regime started to happen. The liberal, structural adjustment, era inaugurated in the 1980s, brought the state-led development paradigm into question, leading international organizations’ support towards stateownership of NDBs to shift considerably. Banks’ performance, efficiency, and capacity to attain their social objectives became the most critical considerations, whereas evidence they were able to fulfill their most basic developmental functions lacked (Francisco et al., 2008). Such a conjecture led to a broader questioning of these banks’ raison d’etrê with strong support from policymakers for extinguishing these organizations altogether. Indeed, many of them were privatized or liquidated during the 1990s, and most of the remaining organizations reduced the scope of their direct lending activities quite considerably. The liberalizing, laissez-faire model, does not seem to have affected public ownership of development banks to the same extent that it did to SOEs and other types of public banks. What are then the reasons behind the persistence of public development banking despite the relative decrease, since the 1990s, from

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state activism in the process of economic production and growth? In other words, what are the theoretical premises that help to rationalize the perpetuation of state involvement with NDBs in times when governments are increasingly expected to behave differently from what they did when the first NDBs were created? This sub-section will detail and analyze four competing views that seek to explain the prevalence of state-ownership of development banks. Although these views focus exclusively on development banks, they are, of course, directly connected to the broader debate about the state’s role in broadening access to finance from the previous section. Pubic ownership of banks was one of the many instruments of the toolkit available for states to attempt to broaden access to finance, develop financial markets, and foster development. From the four views on NDBs discussed below, the development and the social views fit in the rationale of the interventionist model. The political view is congruent with the laissez-faire model, and, finally, the agency view is consistent with the framework of the pro-market activism model.

2.2.1

Development View

The development view represents the original theoretical impulse behind the creation of national development banks in the early 1950s and their consolidation in the following decades. This view is associated with the emergence of development economics, an influential strand of economic policy thinking, which sees state intervention and participation in “commanding heights” as warranted to allocate resources efficiently across the economy and, consequently, to enable economic development (Gerschrenkon, 1962). According to this view’s tenets, public development banks are an indispensable tool to foster economic development in financial markets that are incomplete and plagued with market failures. The crucial feature of NDBs, however, is being able to coordinate and pursue the state’s strategic objectives through its involvement in financing industrial policy. NDBs are public organizations. As such, they have the advantage of mitigating risk and overcoming the costs of transacting inherent to these incomplete markets. They can directly provide capital to firms whose significant investments potentially generate positive externalities, but which would not be bankable by private financiers due to their long maturity and relatively high risk. That includes, for example, investments in infrastructure development, industrial capacity, and housing. Without NDB’s intervention, capital scarcity would hinder national economies from endowing economic development (Yeyati, Micco, and Panizza, 2004).

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The development view also argues that the state can play an essential role in the process of innovation. Due to the high costs associated with entrepreneurship, development banks can function as a coordination mechanism between different actors. They use their expertise to identify potential investment areas and provide technical support for the conception of new technologies that, otherwise, would not be pursued (Rodrik, 2006; Kane 1975). Innovative projects are usually associated with high research costs and high risks. For this reason, private financiers are usually unwilling to undertake such investments or will only do so at prohibitive interest rates. NDB’s participation and support are instrumental in reducing uncertainty, drawing-in private investments, eliminating capital constraints, and promoting entrepreneurial activity (Musacchio and Lazzarini, 2014). Either for the sake of providing long-term capital or for fostering entrepreneurship, state-ownership is fundamental in driving economic development, according to the development view. Using an NDB, governments can promote their policy objectives by providing capital to strategic sectors representing the “national interest” due to the positive externalities present in their projects or due to their strategic added value to the economy (Yeyati, Micco, and Panizza, 2004). This view was the dominant force bringing a proliferation of NDBs around the world and especially in Latin America, where these ideas found a very fertile soil within ECLAC’s ideological tenets. A global survey of DBs made by the World Bank with the members of the World Federation of Development Financial Institutions (WFDFI) in 2012 helps to elucidate the influence of the development view. Out of the 90 respondent organizations, 12% were established before 1946, and 49% between 1946 and 1989. The remaining were only created during and after the 1990s (De Luna-Martínez and Vicente, 2012).

2.2.2

Social View

The social view stresses the development bank’s function of solving market failures as opposed to active participation in the “commanding heights.” Contrary to the development view’s perspective, here, NDBs’ end-goal is not to promote industrialization or strategically coordinate economic growth per se but to do that while focusing on social justice and inclusion (Atkinson and Stiglitz, 1980). Since commercial banks and private financiers concentrate primarily on the profitability of their investments, they have reduced incentives to offer financial services to low-income communities or remote areas where it is not profitable enough to establish a branch. Also, small and medium enterprises often suffer from capital

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scarcity due to their low repayment capacity, lack of traditionally accepted collateral, and the inherent riskiness of their areas of operation. According to the social view, the state has the prerogative of looking after the most vulnerable sectors of society as well as to small and medium enterprises, and NDBs can fill in this market failure. They can provide subsidized, long-term capital to industries that can yield a positive social impact regarding employment, empowerment, and financial inclusion (Hanson, 2004). Public development banks have a clear advantage in relation to their private counterparts to finance socially profitable investments that can be considered, at first sight, financially unattractive. Their capital cost is usually far lower due to the state’s ownership, which can mitigate the risk of investing in projects with a more extended maturation period, offering them more leeway in allowing longer terms for repayment. NDBs specialize in long-term commitments and therefore develop tools to improve their capacity to estimate and evaluate the future creditworthiness of the companies applying for funding (Francisco et al., 2008). The main argument associated with the social view is that the expansion of financial services to underserved segments contributes to economic growth. Either directly, by financing projects and companies whose social contribution constitutes a significant output, or indirectly by stimulating investments in socially valuable infrastructure projects such as sewage, public transportation, housing, among others (Yeyati, Micco, and Panniza, 2004). Although each focuses on different aspects of the governmental intervention (industrial policy and social welfare, respectively), both development and social views follow the same underlying assumption. That an interventionist state—at least in the financial sector—offers the potential to generate economic growth associated with economic development and with the improvement of social welfare. Due to that commonality, both views fit the rationale of the “interventionist model,” in which state ownership is an essential condition to overcoming pressing market failures. Intervention can be instrumental in broadening access to finance, increasing investment levels, and, finally, delivering socio-economic development (de la Torre, Gozzi and Schmukler 2017; 2007). The idea of a strong and actively interventionist state was, to a certain extent, widely accepted until the beginning of the 1980s, when new ideas gained momentum. Their staunch opposition against direct state involvement with economic and productive activities influenced the emergence of a new view on development banking, now, much more critical of its shortcomings then positive about its potential.

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2 Theoretical Framework

Political View

Despite the influence yielded by the development and social views, and the considerable amount of resources channeled by development banks in the after-war period and until the early 1980s, evidence that these institutions met their goal of promoting economic progress and social development during this period was, at best, scant (Francisco et al., 2008). Some researchers emphatically claimed otherwise: “the general experience with state ownership of financial institutions in developing countries has not been successful. Cross-country evidence shows that greater state participation in bank ownership tends to be associated with lower levels of financial development, less credit for the private sector, lower banking sector outreach, wider intermediation spreads, greater credit concentration, slower economic growth, less fiscal discipline, and a higher incidence of financial crises” (de la Torre, Gozzi, and Schmukler, 2017: 80). The political view acknowledges the existence of market failures but claims that political actors often overstate them to justify the government’s involvement. For this reason, proponents of this view affirm that the state should not intervene nor allocate credit but use different tools, such as regulation, to improve the working of the markets instead. The state should concentrate on improving the economic environment to attract private financial institutions (Yeyati, Micco, and Panniza, 2004). Direct allocation of credit, even when, allegedly, “national interests” or “strategic sectors” are at stake, does more harm than good, for the government’s political goals and societal welfare often do not coincide. Governments will intervene in several aspects of the economic life at the expense of social welfare and only benefitting a selected number of individuals—frequently those with more political or economic power. (Shleifer and Vishny,1994). For these reasons, the political view adverts that politicians and bureaucrats cannot be good bankers because they operate under a different set of incentives. Political-connected lending, soft-budget constraints, lack of accountability, and, eventually, corruption, are some of the government failures that often exceed the costs of attempting to correct other possible, pre-existing, market failures (Krueger, 1974). The ideal role for the state here is to refrain from directly intervening in the process of credit allocation, abandoning the ownership of public banks for that end (Hanson, 2004). The political view adopts a skeptical view towards politicians and bureaucrats and contends that the real reason why they establish and use development banks is, as for any other SOE, to maximize their personal and political objectives, and to extract rents. Serdar Dinç, for instance, argues that these problems are even worse for public banks because “first, the asymmetric information between

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lending banks and outsiders about the quality of a specific loan makes it easy to disguise political motivation behind a loan. Second, revealing the costs of any politically motivated loan can be deferred until the loan maturity. Third, while a non-bank government-owned enterprise operates in a defined industry, which can limit the politicians’ ability to transfer resources, banks operate across the whole economy, providing politicians with more opportunity to channel funds” (Dinç, 2005:494). This understanding, associated with the change in the international regime towards liberalization, as advocated by the Washington Consensus, led to severe changes in many development banks’ operational framework. Diverse institutions liquidated or privatized, while others adapted their lending policies considerably to mimic or reflect practices used by commercial banks. According to some accounts, at least 250 financial institutions moved to private control between 1987 and 2003 (Francisco et al., 2008:4). State-ownership of financial institutions is, however, still pervasive around the world, especially in developing countries. Governments involvement with banking has, once again, increased since the beginning of the 2000s and, more rapidly, as a response to the global financial crisis in 2007, when even developed countries scaled-up their public bank’s operations to counter the effects of the crisis (de la Torre, Gozzi and Schmukler, 2017). That is not to say that state-ownership takes the same form it used to be before liberalization occurred, but it does indicate a paradigmatic shift. One change that fundamentally adjusts the manner how politicians see national development banks and, consequently, how they operate on the market.

2.2.4

Agency View

The political view’s skepticism towards public ownership of banks relies on evidence pointing out to their political manipulation and, consequently, their poor performance in comparison to private counterparts. These are some of the reasons why the proponents of this view contend that “leaving banking to bankers” is the best governments can do (La Porta, Lopez-de-Silanes, and Shleifer, 2002). This skepticism is accompanied by the political view’s unfailing trust in markets as the best actor to allocate resources. Market failures might exist but can also serve to justify some hidden political agenda that ends up distorting the allocation process even further. Markets, however, did not live up to expectations, as they happened to sorely fail several times, more notably in 2007, in a failure that led to the latest global financial crisis and the devastating consequences that followed it.

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Even before the great financial crisis, a more balanced view emerged in the early 2000s. The evidence that some developing countries became more vulnerable to instability after their liberalization efforts brought up changes. International organizations and researchers began to look at the liberalizing experiences of the 1990s to understand their limitations and failures. They concluded that, although many governments took the necessary steps in the direction of improving macroeconomic policies, reducing the sovereign deficit, and breaking government monopolies, most of them paid insufficient attention to other underlying institutional reforms in their countries (World Bank, 2005). Aligned with the concept that “institutions matter” for socio-economic development, the agency view argues that states nor markets can allocate resources efficiently in the absence of an appropriate institutional environment. This theoretical approach is consistent with the tenets of the pro-market activism model (de la Torre, Gozzi, and Schmukler, 2017). The agency view does not see NDBs or state-ownership as a problem per se. What is potentially problematic is the lack of institutional capacity to manage and control these organizations efficiently and transparently. In the presence of a conductive institutional framework, it acknowledges that selective and limited interventions can be positive if they outweigh the costs of intervening. Therefore, the agency view emphasizes that NDBs can indeed be employed to promote socio-economic development goals, such as argued by the development and social views. However, it also acknowledges that the problems laid down by the political view can hinder their capacity to do that effectively. Although market-failures exist and addressing them is necessary, governments must deal with all types of internal, structural, and administrative issues that may generate the principal-agent type of problems, offsetting the gains from state ownership in the first place (De La Torre, 2005). Because the agency view relies heavily on an institutional approach to stateownership of NDBs, it does not, contrary to the other three views, provide a “one-size-fits-all” approach. Since the institutional environment varies from country to country, pointing out what works and what does not, depends in no small degree on each country’s and organization’s institutional context. That is the reason why many experiences with NDBs have been successful—such as in continental Europe (Gershenkron, 1962; Cameron, 1953)—but many others have failed, as pointed out by the World Bank in one of its World Development Reports (World Bank, 1989). The most important aspect of the agency view is that, although being highly critical of unmerited governmental interventions, it understands that it is unrealistic to expect governments to stand aside when markets deliver suboptimal results.

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While acknowledging that a weak institutional environment can lead to harmful practices such as political interference, it too contends that the political costs of “not doing anything” are likewise too high. It makes it unlikely to imagine that governments are going to critically downscale their involvement (de la Torre, Gozzi, and Schmukler, 2017). Governments are a vital force in shaping a country’s institutional environment. In order to improve it, government involvement is necessarily part of the equation. That helps to explain why, regardless of a government’s ideological standing in the interventionist versus laissez-faire debate, state involvement with NDBs has been increasing since the beginning of the financial crisis. During that period, many development banks were used as instruments to relieve the effects of the downturn, playing a countercyclical role by expanding the credit offer when private banks retracted theirs (De Luna-Martinez and Vicente, 2012). The deficiency of private financiers in the provision of long-term credit creates political pressure and incentivizes governments to intervene. As a result, it is reasonable to expect the state to play an increased role in development banking, either by creating new or by reinvigorating pre-existing organizations in developed and emerging economies alike (Chandrasekhar, 2016). The agency view is, therefore, wary of unrestricted government intervention, but warrants that selective and well-designed policies can help to address marketfailures. They can support in overcoming coordination problems and eventually generate positive spill-over effects as long as they are subject to thorough institutional checks to avoid capture by interest groups and undue political interference. The agency view ascribes the negative experiences with state-owned DBs to governance problems, which can vary in size and degree: lack of disciplining devices, stakeholder misrepresentation, subsidies, wasteful expenditures, overstaffing, among others (World Bank, 2005). It acknowledges that even the most well-intentioned policies can have unintended allocative consequences. Therefore, specific mechanisms must be in place so to prevent NDBs from drifting away from their primary objectives. These mechanisms directly tap the institutional environment where these banks operate, providing the proper kind of incentives to ensure the fulfillment of their mandate.

2.2.5

Where Do We Stand?

This dissertation argues that one must not consider different views on development banking in isolation, but, instead, as a result of the clashing theoretical impulses pushing development theory over the last 80 years. Therefore, it is

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important to acknowledge that none of these views alone can explain the phenomenon of development banking entirely. There are many different organizations in activity around the world, and it would be unrealistic to expect either of these conceptual frameworks to grasp the reality from all these banks completely. Collectively, however, they do provide an outline that helps to trace the motivation behind the creation of NDBs and the paths that led them to where they currently stand. The current scenario indicates that state-ownership of development banks is unlikely to retreat. There are development financial institutions in almost every country around the world, and several others plan on establishing new organizations given the model’s relative success during the global financial crisis (Macfarlane and Mazzucato, 2018). It seems very clear that the objectives behind the creation and promotion of development banks today still align with those proposed by the development and social views a few decades ago. Stimulating investments in socially profitable sectors and promoting sustainable economic growth via innovation are, nominally, among top priorities for most organizations. The state has a vested interest in playing a leading role in the pursuit of these objectives. Although this helps to clarify why public control is still prevalent for development banks around the world, it does not mean that state ownership unfolds in the same manner it used to. Much due to the marked influence of the liberalization process and the critical stance taken by the political view, NDBs have increasingly been subject to pressure to “perform” and prove themselves. In Latin America, for instance, “Financial Institutions for Economic Development” membership declined from 171 to 73 in the period from 1988 to 2003, as a result of the privatization efforts NDBs have gone through (Hanson, 2004). Many of the organizations that outlived this process had their operation’s scope reduced and, to some extent, lost their policy relevance as drivers of economic development. In the wake of the financial crises that occurred in the late 1990s and early 2000s, the agency view introduced the institutional theory to the realm of development banks. The agency view acknowledges the limitations of a purely market-oriented approach, claiming that the problems commonly associated with both development and social views can also happen under the framework of the political view if the institutional environment is weak. The agency view advances that there is space for governmental interventions that improve the market’s functioning if they properly account for costs and as long as efficient institutions are in place to control for eventual failures. The NDBs that outlived the previous privatization wave became now subject to much tighter control and, often, subordinated to private regulatory standards in an attempt to reduce the prospects for

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political meddling. That brings about the expectation of state-ownership exerted in a more transparent, responsible, and accountable manner. The financial crisis that followed in 2007 opened space for NDBs to re-gain some degree of prominence. Many of these banks have proved to play critical countercyclical roles during the crisis with state ownership, once again, filling some gaps and driving these organizations to broaden their reach. The same dynamic also occurs at the international level, as new multilateral organizations appear: “the Asia Infrastructure Investment Bank (AIIB)—that 57 countries, including all major European countries and important emerging economies like Brazil, initially joined (…) and the BRICS’s New Development Bank (NDB), seem to reflect the shift in the development finance paradigm towards a more balanced public-private mix for provision of long-term funding.” (Griffith -Jones et al., 2018:3). This new momentum offers the perfect opportunity for ill-intentioned politicians to, once again, justify increasing the scope of NDBs beyond where they can de facto contribute, pushing them away from their mission and mandate. This broader trend after the latest global financial crisis compels this research to contribute to the debate on how to subject public development banks to the appropriate checks and balances. These can circumvent their capture, either by political or economic interest groups, while ensuring they perform as efficiently as possible and attain their mission. The views on NDBs discussed above provide some insights into factors one must consider when designing such control mechanisms. Drawing from these theoretical impulses, we will analyze the case studies from an institutionalist perspective on organizations, focusing primarily on the role played by rules, norms, and procedures to that effect. The next section will introduce the theoretical debate on the relationship between institutions and organizations, as well as more clearly explicit their bearing on this research.

2.3

Public Organizations, Organization Theory, and Institutions—Why do Institutions matter?

“(…) institutions are fraught with tension because they inevitably raise resource considerations and invariably have distributional consequences. Any given set of rules and expectations – formal or informal – that patterns action will have unequal implications for resource allocation and clearly many formal institutions are specifically intended to distribute resources to particular actors and not to others. This is true for precisely those institutions that mobilize significant and highly valued resources.” (Mahoney and Thelen, 2010, p. 8)

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The fact that national development banks are public organizations has many implications for the use of organization theory to investigate and compare these bank’s structures and their effect over their operations. Public organizations differ from private ones in many important aspects. Even though some of them might operate in the very same markets and have comparable features, the traditional approach to organizational theory does not capture the gist of public organizations entirely. Organization theory has traditionally focused on private organizations and their interactions with other actors and institutions. The most renowned departments to advance the theory of organizations were business schools located predominantly in American universities. Naturally, their emphasis was heavily laid on output and efficiency considerations of private organizations, leaving other important aspects, which are as important or even more crucial for public organizations, relegated to a secondary position (Christensen and Lægreid, 2007). An entire tradition of research has emerged within that context. This tradition dismisses the idea that there are fundamental differences between both types of organization and advances that a general theory of organizations must be necessarily universal, that is, applicable to any organization regardless of their public or private status. Fayol was one of the first scholars to advance the idea that “not only the public service but enterprises of every size and description, every form and purpose. All undertakings require planning, organization, command, coordination, and control, and in order to function properly, all must observe the same principles” (Fayol, 1937:101). Barnard, a year later and following this line of argumentation, criticized the excessive importance given to formal authority in organizational studies of public organizations and bureaucracy. Barnard defined organizations, in general, as “systems of coordinated activity, which needed willing participants, proper communication channels, high efficiency, effectiveness, and purpose, to work properly.” He identified the executive’s decision-making as “a key, decisive factor for an organization to achieve higher levels of efficiency and effectiveness” (Barnard, 1938:215). The ground laid by these two authors with the conceptualization of a general theory of organizations was advanced even further during the next decades, propelling a trend that would lead to, a couple of decades later, a tradition in public administration called the New Public Management (NPM). The NPM approach has been hugely influential, especially in the 1980s, in offering generally applicable solutions to known problems of public sector organizations. It proposes, in a nutshell, importing practices and methods used successfully by private organizations and transferring them to the public sector with the promise of gains. The internal logic of this approach is to submit public organizations to the same efficiency and business-orientation of the private sector,

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with pay-for-performance schemes, focus on the customer, and other conventional business practices. The NPM downplays the differences between public and private sectors, assuming they subscribe to the very same principles and rules, and, therefore, driven by the same sorts of incentives (Dunleavy and Hood, 1994). Public and private organizations increasingly intertwine their activities on many different levels. More and more, state-owned enterprises (SOEs) collaborate with private partners in diverse projects, ranging from full-fledged public-privatepartnerships (PPPs) to other sorts of different composition between them. This collaboration may hinder attempts from drawing clear boundaries between both types of organizations, for these became blurred by this growing and complex web of interactions. Nonetheless, despite the synergies between them, the challenges of governing the relationship between different organizations draw attention to an inescapable fact: even if particular objectives might, temporarily, unite the efforts of both private and public institutions, their ultimate, individual objectives are inexorably different, and so are their logics of operation (Christensen and Lægreid, 2007). NPM, however, despite quickly achieving increased popularity, is nowadays much less influential than it once was. After decades of sound failures to “rescue” public organizations through the implementation of new managerial practices, old and new voices opposing the principles of NPM pushed back, advancing an agenda for the study of public organizations as an independent branch. Graham Allison, for instance, wrote a now-famous article countering the practice of equating private and public organizations. His paper “Public and Private Management: Are They Fundamentally Alike in All Unimportant Respects?” puts forward the argument that, although similarities between both types of organizations exist, they concentrate on secondary aspects that do not outweigh the differences between them. Allison claims that three fundamental differences help to explain why one should not compare such organizations. First and foremost, public organizations have a mandate to pursue the public interest, which is broadly defined by society and therefore composed by its own set of norms and values. Private organizations, on the other hand, pursue narrower private interests that do not, in any way, compare to the complexity of the former. Second, as a direct consequence of the first aspect, public organizations must necessarily attain principles of openness, transparency, neutrality, and predictability. These are particularly salient features of this type of organization, but they are not necessarily as meaningful to their private counterparts. Lastly, the leadership of public organizations is directly or indirectly accountable to voters, citizens, and society in general, while private organizations only render accounts to a much smaller group of controllers (Allison, 1983).

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The tools provided by the traditional organization theory school of thought are assumed to take effect in any kind of organization, public or private, for they are all considered to be equal. That is the terrain where the NPM appeared and proliferated. Accepting, however, as indicated above, that the types of challenges each category of organization faces are remarkably different, alternative theories are necessary to understand and explain public organizations’ structures and operations fully.

2.3.1

Institutions and Public Organizations

The emergence of organizations bears strong linkage to the characteristics of the institutional environment of which they are part. Institutions are determinant to the development of organizations and to the shaping of their structures, which, by their turn, interact and contribute to change institutions incrementally (Scott, 1995; Meyer and Rowan, 1977). In order to understand how organizations emerge and change over time, it is imperative to study their embeddedness in the institutional framework. For that purpose, it is necessary to review the central tenants of institutional theory and employ its explanatory power to substantiate the analysis of the development bank’s organizational structures in light of their environment. The concept of institutions is widely used throughout different areas of knowledge and continues to take on new meanings. Because of the frequent use, the term often assumes different and, sometimes, even conflicting significance. This research relies on the definition of institutions by Douglass North, who defined them as “the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction” (North, 1990:3). North proposed that institutions play a regulatory and controlling role for human interactions (political, social, economic), and therefore reduce the costs for structuring such interactions. By having institutions in place, humans save time and effort when facing situations that are repetitive and regulated by the institutional framework. Although different theorists tend to emphasize one aspect over another, such as the role individuals play in the building up of institutions or the function of cognitive behavior in shaping interaction, there is an underlying idea behind the institutionalist perspective that cuts across different areas of knowledge. Be in political science, economics, or sociology, the primary tenant of the institutionalist approach departs from the underlying assumption that every human activity and interaction embeds in a broader institutional scheme, which offers them stability and predictability. In the center of the institutionalist project is the search for an understanding of how human action is constrained and structured by institutions

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and how they constrain and limit the range of opportunities and choices (Djelic, 2010:16). This view on institutions is a more modern construct that owns its existence to many earlier institutional theorists who developed their formulations until the middle of the twentieth century. These theorists, due to, perhaps, the novelty of the framework they sought to advance, focused on large social-institutional structures such as religious beliefs, government systems, legal traditions, and trade systems, to construct their institutional explanations to observed phenomena (Scott, 1995). Most of them did not contemplate the effect of institutional setting over smaller units of analysis, such as organizations, and, therefore, are not of much use to advance the core objective of this research. This literature review departed from the 1940s when other theorists started to use an institutional approach distinguishing between smaller units of analysis, such as organizations, and broader social institutions.

2.3.1.1 Early Institutional Approaches to Organizations As mentioned above, organization theory emerged and first consolidated itself as a field of study in business schools of American universities. It was not until the translation into English of Weber’s seminal work on bureaucracy in the late 1940s, that interest in the process of bureaucratization increased, and that the observation of public bureaucracies as distinctive organizational units became popular among academics (Scott, 1995). Merton is one of these early scholars. He discussed, based on the work of Weber, the tendency of bureaucrats to overorient their actions around written rules and regulations, completely relieving their self-awareness in the process. The organization of bureaucracies around normative directives, where hierarchy and discipline are extremely valued, produces a tight system where formalism and conformity become a goal in themselves, often overshadowing the organizations’ original objectives (Merton, 1940). Although Merton has not named that process of ordering and normalizing as “institutionalization,” this conceptual construction would later be hugely influential as a point of departure for other scholars studying organizations. Selznick, for instance, drew heavily on Merton’s previous works to formulate a differentiation between stages in organizations. According to him, organizations, in their most basic form, are purposefully created as mechanisms to achieve some goal—or “the structural expression of rational action” (Selznick, 1948:24). However, since organizations are organic systems, they change over time. They are affected by interactions with its members, with the environment and with other organizations, adopting, through this process, new characteristics that become embedded in their structure. Persisting characteristics transform, at a

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later stage, into values, which end up serving as a compass that guides the actions of the organization and becoming institutionalized. Essentially, what Selznick did was formalizing the idea that organizations become “infused with values” and that these may influence their actions, going well beyond their initial purpose. Organizations have foundational and specific objectives, but their interaction with different systems provides them with new values, expectations, and goals (Selznick, 1957:17). The process of institutionalization is part of both Merton’s and Selznick’s concepts. While the first observe how bureaucracies tend to institutionalize rules and regulations to the point of making conformity and formalism compete with their primary objectives, the latter expands this view, adding that value infusion can re-signify the very objectives and commitments of an organization. Arthur Stinchcombe, a few years later, pushed this institutionalization argument even further, claiming that it is not a process in which the organizations are mere bystanders. According to him, the institutionalization process is not natural. It is a result of explicit attempts, by powerholders, to tilt a given organization in a particular form. Differently from previous authors, who see institutionalization as a, more or less, natural occurrence, Stinchcombe claims that this so-called “infusion of value” is a deliberate attempt of preserving individual interests, and bolstering influence and power. Institutionalization is, above all, an expression of political power (Stinchcombe, 1968). Examining the influential work of Selznick, Talcott Parsons directed his attention to the issue of value infusion during the process of institutionalization. Parsons sought to understand why some organizations incorporate values and others did not, or, in other words, why similar organizations “institutionalized” in different ways. He advanced a “cultural” perspective, which focused its locus of analysis on the interactions between the organization and its surroundings. According to him, organizations assume value systems that are compatible with the environment they exist. Different social sectors legitimize different values and functions. Policing and schooling, for instance, are areas governed by different codes and norms. Therefore, the organizations within these realms will reflect the input of these broader social systems and will also look different from each other (Parsons, 1960). Since public organizations compete for limited resources, the ones which reflect values treasured by society will end up being the ones to receive a more significant share. For organizations, reflecting societal norms becomes a matter of survival. All theories discussed above focus on institutionalization as an exogenous process that generates consequences to the settings of organizations. Bureaucrats’

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ritualism may drive the institutionalization process, per Merton’s accounts. Alternatively, the increasing complexity accruing from interactions within and outside the organization may do it, per Selznick’s. It may be a result of purposeful direction given by power groups, as advanced by Stinchcombe, or a reflection of specific societal values, per Parson’s cultural view. These different descriptions of how values infuse organizations all assume that actors purposefully choose their paths of action based on a rational process. It was Heber Simon who developed an alternative explanation to the process of institutionalization using endogenous factors as the explanatory variable. Simon acknowledged the fact that values and culture do influence organizations. What he sought to challenge was the notion that actors within the organizations always, knowingly, took such factors into account in a rational process. Simon crafted the theory of “bounded rationality”: actors have limited cognitive capacity to make informed decisions in most situations confronting them. Due to that limitation, humans design organizations to, as much as possible, remove this prerogative from individuals, creating routines and programs that automatize decision-making to avoid or minimize mistakes (Simon, 1997). For Simon and March, institutionalization is the process in which organizational rules, norms, and procedures emerge to shape individual behavior. Organizations become institutionalized by standardizing processes and reducing, to a large extent, opportunity for individual discretion (March and Simon, 1958). Although the instrumental and cultural arguments presented earlier remain relevant aspects of institutional approaches to organization studies, the idea of bounded-rationality has redefined how organizations are understood and organized. The underlying assumption that the organization’s members act with limited knowledge and cognitive biases has, single-handedly, pushed a whole tradition of studies of formal institutions in both public and private organizations across disciplines. In the next section, we discuss its influence on neo-institutional theory, which is where this dissertation draws its main theoretical assumptions.

2.3.1.2 Neo-Institutional Theory and Organizations There are many different traditions associated with the new institutionalism in sociology, political science, and economics. Regarding the latter, from where we draw our main theoretical assumptions, Scott cites the work of Richard Langlois. He, according to Scott, “incorporated within neoinstitutional economics, the contributions of Simon, a focus on transaction costs and property rights inspired by Coase, the modern Austrian School as influenced by Hayek, the work of Schumpeter on innovation, and evolutionary theory as developed by Nelson and Winter” (Scott, 1995:26).

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Even if different in form, there are three common characteristics in these schools’ approaches. The first one is the concept of bounded-rationality and the dismissal of the assumption that agents will always choose the welfaremaximizing option when confronted with a set of options. The second is a focus on the study of the economic process and its evolution, considering institutions an endogenous variable in this process. The third is the idea that economic activity is not just an outcome of market-level transactions but also of internal, institutionalized structures within organizations and firms (Scott, 1995). The following lines discuss these critical characteristics in more detail. Neo-institutional theory’s drive to understand the mechanisms ruling trade, be in its purest form or as they grow more complex, provided one of the arguably most important contributions for the study of organizations. The insight famously brought forward by Ronald Coase in his book “The Nature of the Firm” is that neoclassical economic models can not wholly explain economic (but also political and social) transactions because they assume that the costs of transacting are null (Coase, 1937). According to these models, there is no friction in the process of trading. They assume property rights are perfectly specified and do not account for the costs of acquiring information about products, substitutes, and competitors. That is, however, an oversimplification. Acquiring and processing information about the products and suppliers, measuring quality, communicating specifications, and enforcing contracts are costly processes to be added to the equation. Understanding transaction costs is of utmost importance to understanding the economic process (North, 1990). This insight was further elaborated by Williamson, who specified costs of transacting and developed conditions under which they increase or decrease. Since human-beings’ rationality is limited (bounded) and influenced by a series of socially-related factors, the costs of transacting increase as trade relations become more impersonal. Under these conditions, there is no background information about buyers and sellers. Therefore no guarantee that the other party is not going to act deceitfully and transactions might not occur. If organizations do not emerge to provide some degree of structuration and institute control mechanisms, reducing the risk and the very costs of transacting, exchange processes might not take place (Williamson, 1981). The very existence of transaction costs is what pushes organizations to emerge and create governance systems (Scott, 1995). These theoretical impulses led to further attempts to comprehending the role of rules, structures, and frameworks incorporated in institutions to drive organizations to manage exchange processes. A common approach was to compare different governance forms and modes to contrast their efficiency levels in reducing transaction costs and allowing for more complex exchange patterns, ergo

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development. Douglass North was probably one of the first economists to compare countries’ institutions, using them as an explanatory variable to account for differences in levels of development. North formulates his theory of institutional change and development, accounting for all the insights and contributions discussed so far. He questions the assumptions of the rational-choice models by recalling the phenomenon of bounded-rationality. Given individuals’ limitations and framing issues, their decisions are frequently sub-optimal and, as a result, institutions— which are created by human beings—are also not necessarily efficient (North, 1990:3). He also takes into consideration the argument advanced by the cultural view, which he repurposes as “informal constraints.” Informal constraints do affect human behavior. Culture, beliefs, and customs frequently drive individuals’ choices against the maximizing-welfare principle in favor of other, less objective, principles that one cannot always explain or identify (North, 1990:40). Although North was mostly interested in high-level institutions such as legal traditions or government systems, he did not downplay the role of organizations and individuals in mutually influencing these institutions. North defines organizations as “(…) groups of individuals bound by some common purpose to achieve objectives. Modeling organizations is analyzing governance structures, skills, and how learning by doing will determine the organization’s success over time” (North 1990:5). To him, understanding institutional change depends a great deal on understanding individual behavior. A theory of the institutions cannot exist and have explanatory power without accounting for the individual’s actions (North, 1990). Here, three distinct but interconnected levels of analysis become apparent in this arm of the neoinstitutional theory. One focuses on individual behavior and its interaction with other individuals; the second looks at the organization’s settings and structures; the last concentrates on broader institutions. This research opts for a meso-level analysis, not directly focusing on individuals, nor at the broad institutional level but on organizations, organizational settings, and their governance structures instead. North’s definition of organization brings two underlying assumptions along with it. Organizations are human-made and, therefore, not necessarily efficient (due to bounded-rationality), and they are subject to informal constraints (culture, beliefs, customs) that limit and shape their action. Accounting for these factors, it becomes evident that an organization’s governance structure is vital for ensuring it remains true to its mandate and objectives. It does so by putting an efficient decision-making process is in place to avoid the traps that make it, willingly or not, deviate from its original purpose. The next section will discuss the role of corporate governance in this

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process, looking, especially, into its specific controlling functions on state-owned organizations (SOEs).

2.4

A Theory of Governance

As put by Mark Bovir, governance is “one of the most fashionable and frequently used social science terms in the world,” being, therefore, a “notoriously slippery term” (Bevir, 2011:563). The word governance is usually followed by a prefix that gives it significance in a specific context, which is one of the reasons why it can be easily misused and misinterpreted. “Multi-level governance,” “good governance,” “global governance,” and “new governance,” for example, have different meanings despite having the word governance as a common element. This bewildering variety emerged during the mid-1980s, when academic research started to employ the term governance, which overflown above all, to the political discourse. Despite possible similarities, the concept of governance traces back to three different but interrelated approaches: governance as a value, governance as a strategy, or governance as a structure. To avoid the pitfalls of misuse in the remainder of this dissertation, it is useful to discuss each of them in turn briefly. The use of governance as value goes back to the World Bank’s World Development Report in 1989. The document attributed the difficulties of Sub-Saharan African countries to achieve economic and social development to “governance problems,” specifically pointing out a few of them: corruption, lack of accountability, and deficient attainment to human rights (World Bank, 1989). This valuebased approach to governance highlights democratic ideals as pre-conditions to the active pursuit of economic development. This approach is of utmost importance to the debate of “good” versus “bad” governments, which, to date, strongly resonates with development agencies, NGOs, and various western governments. That is, therefore, a politically non-neutral definition of governance, and its relationship with aid-development practically dominated the political discourse over the following decades (Ahrens, 2002). Seeing governance as a value is intrinsically analogous to the concept of “good governance,” promoted by international organizations such as the UN and the World Bank. They benchmark and measure “governance” in terms of countries’ attainment to certain qualities such as openness, transparency, accountability, responsiveness, among others. Intuitively, good governance quickly became a mantra, an inescapable concept in any analysis of a country’s prospect of achieving political, social, and economic development. Like many other good ideas, its promise outpaced its capacity to deliver. Its “silver bullet” quality, as it became

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clear in retrospect, was inflated and not empirically well supported (Grindle, 2010) In any case, this remains to be one of the primary uses for the concept of governance to date. A more technocratic and self-proclaimed politically-neutral approach to governance sees it as a strategy. Here, the concept focuses, primarily, on state capacity and encompasses reformation of public sector targeting, for instance, budgeting processes, financial stability measures, and fiscal soundness. Improving governance is about boosting the state’s capacity to successfully “define and implement policies” (Kjaer, 1996:6). This approach to governance is typically related to the liberalizing reforms of the 1990s, by which international financial organizations such as the IMF, strategically inserted clauses conditioning their loans to state reforms, ergo governance reforms. It is a view that, although claiming political neutrality, is strongly identified with the emergence of the liberalization paradigm in the same period. It sees the state as a burden to the pursuit of economic development and free markets as the solution. Governance reforms, here, aim not necessarily at strengthening state-capacity but at redirecting the state’s attention to specific areas such as rule enforcement, fostering markets, and protecting property rights. (Ahrens, 2002). Such a strategy includes the idea of “hollowing out the state,” that means, opening the black box of government in favor of more multicentric networks: market solutions to break public monopolies, insertion of competition elements to the logic of public organizations, and others. Based on elements of the new public management playbook, these attempts aim at reducing the role of the state and its interference in the economic and social organizations via privatization, public-private partnerships, and deregulation as essential components of this broader strategy. Government and governance become markedly antithetical terms (Bevir, 2010). The latter approach looks at governance as a structure provider, moving away from the strong politico-normative assumptions attached to the other two, while concerting some of their characteristics. This approach to governance focuses on norms, rules, and enforcement mechanisms as its main characteristic, under the assumption that different patterns of rules, hierarchical chains, and the relationship between actors will produce different results in terms of efficiency. Governance here sees rules as abstract and functional, in the sense that it does not matter whether one is analyzing democratic or undemocratic regimes, for the rules and their enforcement are the most important factors to understanding the governance environment (Ahrens, 2002). Since the state is the ultimate law-maker, it becomes one of the central elements of the analysis. However, this approach also emphasizes that informal rules, customs, and culture exist and that these reflect a more complex pattern of social coordination.

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To understand patterns of governance, one must look at the “the comparatively stable institutional, socio-economic and ideational parameters as well as the historically entrenched actor constellations” (Zürn et al. 2010:3). The structural perspective represents an important step to move away from the strict state- versus market-centered approaches to governance by embedding the dynamic interaction with and between non-state actors as a fundamental part of the rule-making process. It also incorporates a theory of change to its central tenets, with questions such as “how does governance change?” or “what are the driving forces behind governance changes?”. The work of Williamson, who incorporated the notion of transaction costs to the analysis of governance systems, profoundly influenced this dynamic view. An efficient governance environment identifies potential hazards (immediate or future) that increase the costs of transacting and factor them into its mechanisms to allow transactions to happen. It contributes to reducing transaction costs to protect the involved parties, allowing the undertaking of increasingly complex transactions (Williamson, 1981). This approach to governance acknowledges the importance of formal and informal rules to the configuration of the environment and to foster transactions, therefore focusing on the process by which the interaction of different actors— the state, society, markets—generate these rules and norms. Since a governance system can only be useful to the extent that it manages to overcome conflict and reach collective negotiated outcomes, governance is, here, an instrument for decision-making (Ansell, Levi-Faur, and Trondal, 2017). Because it is impossible to look at public organizations and disregard the underlying political component to decisions, political considerations are also incorporated into this view, making it a useful tool to analyze policy and public organizations (Bevir, 2010). A public organization should operate to reduce uncertainty and foster transactions—be them of economic, social, or political nature. Given the expectation that different governance mechanisms lead to different results, designing governance becomes a purposive process in which actors engage, hoping to achieve specific outcomes (Ahrens, 2002). The influence of the new institutionalist theories on this latter approach to governance should be self-evident at this point. Framing differences in governance in terms of the incentives provided by transaction costs follow the same logic of institutional creation and change. It can even be argued, following NIE’s tenets, that a country’s governance framework is an actual institution. After all, a series of formal and informal constraints constitute it. Moreover, it develops as a result of interactions between different actors to attempt to reduce the costs of transacting. Being an

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institution created by humans, it can range from being wildly inefficient to extremely effective. It may promote specific objectives while hindering others, even if unintendedly. This attempt to classify approaches to governance is, admittedly, subjective, and non-exhaustive. As hinted at the beginning of this section, the term governance is, indeed, an umbrella for many other uses, and its nuances can serve vastly different purposes. This section focused on three of the most relevant to the objectives of this study since they are often part of the scholarly work on public development banks. Looking at governance as a structure provider is helpful towards our research goals, for we focus, primarily, on how rules and decision-making mechanisms affect the operation of NDBs and, consequently, their financial-economic performance. One form of grasping these rules and mechanisms is to observe each bank’s corporate governance framework. Therefore the next sub-section will introduce the concept and deepen the discussion on corporate governance of state-owned enterprises.

2.4.1

The Emergence of Corporate Governance

Whereas two decades ago, corporate governance (CG) was little more than an obscure management-related academic subject, it became a topical subject in recent years. Claessens and Yurtoglu, in their classic publication exploring the relationship between corporate governance and development, retrace the emergence of this concept to reoccurring corporate scandals in the late 1990s—among which the energy mammoth Enron stands out. These scandals exposed deficiencies in many corporations’ control mechanisms, which triggered graver financial crises, affecting other companies, and exposing entire countries’ finances. Nowadays, it becomes even more of a necessity that enhanced corporate governance is in place to govern the relationships within companies and with its stakeholders. As put forward by the same authors, “(the) private, market-based investment process is now much more important for most economies than it used to be (…) with the size of firms increasing and the role of financial intermediaries and institutional investors growing (…) with the opening up and liberalization of financial and real markets (…) monitoring the uses of capital is more complex in many ways” (Claessens and Yurtoglu, 2012:1). Shleifer and Vishny offer one of the earliest and, therefore, narrower definitions for corporate governance, indicating it “(…) deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment” (Shleifer and Vishny, 1997:737). CG functions, in their accounts as

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economists, as a mechanism to prevent management from expropriating investors. That is, it provides a framework for solving possible collective action problems, reducing friction, asymmetries, and enabling investments. Cadbury provides a broader definition, one which introduces other properties of CG, which go beyond the mere (financial) relationship between investors and investments. He holds that CG is “(…) concerned with holding the balance between economic and social goals and between individual and communal goals (…) aligning as nearly as possible the interests of individuals, corporations, and society” (Cadbury, 1999:vi). The novelty of this definition is that it incorporates social responsibility to the realm of companies, moving beyond the idea that corporations only own justification about their choices and actions to their immediate shareholders and investors. This research lends the definition by the OECD for corporate governance, which was, of course, highly influenced, among others, by the two discussed above. Here, CG is understood as an instrument to define authority, responsibility, and hierarchies between owners, boards, and managers. It establishes the rules by which decision-making takes place as well as the mechanisms for reporting and resolving conflicts. Corporate governance sets the ‘rules of the game.’ It provides a structure “through which the objectives are set, and the means of attaining those objectives and monitoring performance are determined” (OECD, 2004b:11). This structure provides guidance and facilitates monitoring by owners, boards, managers, and stakeholders. Good corporate governance is, therefore, expected to play a critical role in increasing the quality of investment decisions, improving managerial performance, and enhancing the operational efficiency of corporations. Departing from this assumption, international organizations such as the OECD and the World Bank, via its arm, the International Finance Corporation, have been major forces in developing frameworks and other tools against which companies benchmark their practices. This phenomenon resulted in a soaring number of new corporate governance codes around the world, as well as in the increased output of research on the topic (OECD, 2005). Although this phenomenon has started in the realm of private corporations, it did not take long for the agenda towards improving corporate governance to spill-over from private corporations and reach public enterprises as well. With mounting evidence from the 1980s and 1990s that SOEs were incurring in financial losses, retarding the development of the private sector by crowding out investments and failing to deliver quality services, a reformation agenda emerged (; World Bank, 1995; Boardmand and Vining, 1989). These reforms sought to incorporate elements and principles of performance management, typically

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connected to private sector enterprises, to the public sector organizations with the promise of increasing their efficiency, effectiveness, and transforming them in performance-oriented organizations (Curristine and Flynn, 2013). Despite SOEs’ increased exposition to competition and new incentive systems, their performance remained, to a large extent, meager. Achieving fiscal discipline remained a problematic issue, hampering the reform efforts and leading many companies to relapse (Kikeri, Nellis, and Shirley, 1992) The poor performance of SOEs is worrying for many reasons. First, direct public ownership or indirect participation in a broad range of enterprises is still ubiquitous in many low and middle-income countries, despite large-scale privatization efforts. This trend has been accentuated more recently, even reaching some advanced countries (Robinett, 2006). Second, many of these SOEs are often essential instruments for the provision of basic services and utilities such as water, energy, transportation, and financial services (Florio, 2014). SOEs are responsible, by some conservative accounts, for more than ten percent of the total global gross domestic product and are, in turn, critical to supporting other private sector undertakings (Bruton et al., 2015). Lastly, because some SOEs are now critical global players in important industries such as finance, energy, and infrastructure, they can potentially contribute directly to the achievement of some of the development goals such as sustainable development and poverty reduction, for example. Using OECD’s broader concept of corporate governance is helpful for it considers as an objective of CG to improve an organization’s contribution to the economy, directly and indirectly. Because it incorporates social goals and highlights the firm’s social responsibility, it suits the logic of public corporations more accurately than other narrower definitions. It embraces the role of systems of rules and of institutions to the company’s decision-making and operations (Claessens and Yurtoglu, 2012), which conveniently fits the approach of this research. Although these ideas became reasonably popular, it is not possible to say that the undertakings related to the improvement of governance in state-owned enterprises moved at the same pace in the public as they did in the private sector. One can partially attribute that to the fact that public companies face a different set of challenges in comparison to their private counterparts, calling for more complex institutional solutions to be put in place (OECD, 2004b). The most common governance problems associated with the state-ownership of enterprises are summarized below: a. Multiple Principals Principals are the owners of a company. Important roles are associated with ownership, going beyond the provision of capital: choosing managers and

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monitoring their performance, designating the company’s objectives, offering strategic direction, among others. In SOEs, diffuse ownership exists among ministers, governmental agencies, and the legislative power, increasing the potential for conflict. Different actors may want to use the company to achieve political goals—which may be legitimate—in detriment of the company’s mission. That may create difficulties for the state to perform these ownership related functions straightforwardly, reducing efficiency, and affecting the organization’s capacity to reach its goals (Estrin, 1998). Because a government corporation has multiple principals, it is a challenge to align the interest of its managers with those of the ultimate owners (the citizens). It is a challenge to precisely define what the public interest stands for. The public holds a dual relationship with every SOE, for they are both shareholders and customers of the same organization. As a customer, one wants to have access to the best services for the smallest possible costs. As a shareholder, one wants the company to be profitable. Both scenarios are unlikely to co-exist. Whincop calls this phenomenon as “agency costs of management” (Whincop, 2005) b. Common Agency The complexity of the chain of command in SOEs may lead to a so-called common agency problem. That means that different agendas, competing objectives, and competition for influence by the multiple principals may affect the relationship between owners and the board (Jensen, 2002). SOEs are set-up to achieve particular policy objectives, but the rationales for state-intervention can be manifold. That makes the identification of individual public policy goals not always a very straightforward task. A public electric company, for instance, has an unequivocal mission of delivering a product (electricity) to its customers (the population). Leaving aside the possible complications for a moment—such as attending specific disadvantaged groups, keeping certain price levels, among others—identification of this company’s mission is a simple exercise. The same cannot be said from other activities that involve a higher degree of complexity, such as banking (Andrés, Guasch, and Azumendi, 2011). A public bank performs several activities that can have an impact across the economy, affecting more than only one target group. Its capacity to interact and affect multiple sectors at the same time, create difficulties for a casual observer to pinpoint—thus monitor—the objectives of that bank. SOEs often embrace a broad mandate that allows the pursuit of several goals concomitantly. This

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“flexibilization,” however, may weaken the owner’s ability to monitor performance in every front. At the same time, it reduces board incentives to manage all of them equally (Dixit, 1997). c. Soft-budget Constraints Most SOEs are not subject to bankruptcy or insolvency laws, for they have the government as their ultimate guarantor. They often operate in a monopolistic or quasi-monopolistic position, not being subject to competition or take-over. That situation protects the board and management from two of the most critical market-disciplining mechanisms to keep their performance in check. In the absence of instruments to correct that, the board may not have the proper incentives to control costs and increase the profitability of the company (Baygan-Robinett, 2004). This set of (or lack thereof) incentives, makes it of limited interest for management to protect and maximize the value and profitability of the company. Since many of these SOEs offer public service-type of benefits to its employees, allying stability and good salaries, margin to reduce costs is also reduced (Robinnet, 2006). Another important yet often undebated characteristic of some SOE that can lead to the soft-budget type of problems is the prerogative that some of them have to secrecy in their contracts. Because some SOEs operate with sensitive technology or information—military-grade, for instance—their operations and contracts might be protected by confidentiality clauses and rules, which make them less transparent and, therefore, less accountable to the public (OECD, 2015). That is the case for many contracts of public banks with other private corporations. It is often the case that such contracts are, to no small extent, protected by confidentiality clauses and essential information that would allow the public to judge management’s and the board’s competency are not fully disclosed for long periods. Lastly, SOEs’ fiscal and financial discipline can be impaired as they have preferential access to subsidized and cheap credit. Such a prerogative makes the playing field uneven between SOEs and private companies, favoring the first ones to the detriment of the second group. Direct and indirect access to finance in the form of subsidies creates problems for the society to compute the real costs of certain public services, hiding, at times, operational and managerial inefficiencies. These inefficiencies may, moreover, generate liabilities and fiscal risks, which will affect the position of the company and the government (World Bank, 2015).

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d. Accountability Issues Accountability is a broad concept, used to indicate a relational situation, in which one party is answerable or liable for actions or lack of them. In the case of companies and organizations, an accountable individual is one that is responsible for the outcomes and consequences of his or her actions, framed in terms of legal obligations or legal requirements (Mashaw, 2006). For accountability mechanisms to exist, monitoring and scrutinization of an individual’s actions must be possible, as to allow for objective judgment. These control mechanisms in an organization operate at two different levels. Internal ones are hierarchical arrangements, reporting, and auditing. External control is usually undertaken by supervisory bodies, who, independently, judge the organizational and individual performance of each member of the corporation (World Bank, 2014). Because of the shortcomings discussed above, such as the common-agency problem, or multiple-principals problem, reporting may be deficient, making it hard to identify wrongdoing. That is particularly the case for difficulties in determining the origin of responsibility for poor performance or illegal behavior. External control mechanisms can also be problematic in SOEs since the state acts both as the controller and the ultimate owner of the company. In case these relationships cannot be unbundled, independence is impaired, opening space for malpractice and corruption (Scott, 2007). Transparency is a fundamental step to the implementation of control mechanisms and, therefore, to the establishment of an accountability regime. Deficient control in the internal and external levels impairs the organization’s capacity to be accountable. e. Multiple Objectives The very justification for the creation of a public organization presupposes that state intervention is the best possible approach to tackle particular problems: supplying public goods, addressing market failures, minimizing negative externalities, or ensuring public safety via regulations, for example. That affects the way these organizations are structured, for they must introduce mechanisms to assimilate and process collective interests (OECD, 2015). In a cyclical process, society delivers inputs to political representatives, who, in their turn, use the institutional mechanisms to set objectives and goals and translate them to management. Managers lead daily operations and publicize results and operational indicators, which are, once again, evaluated by society. That means that

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organizational objectives can change and even drift away from the original goals of an individual institution. Having public policy goals besides the regular commercial activities means that SOEs have significant trade-offs to manage. As mentioned above, public companies often do not take financial profit as their primary concern. Sustaining negative financial results can even be acceptable given that the organization manages to fulfill its objectives, and, of course, that society accepts to bear that burden in return for possible benefits that are not, necessarily or strictly, financial (Bruck, 2005). That is not to say that for public organizations’ efficiency considerations are not necessary. They are. However, the principle that collective interests should have primacy over special interests defines a unique characteristic of these institutions that is unmatched by their private counterparts (Scott, 2007:3). Managing these trade-offs is, of course, an immense challenge. f. Politicization This problem is fundamental to public companies, but the extent of it depends on a combination of the other issues mentioned above. Since the state is the ultimate owner of SOEs, it reserves the rights that come associated with this position. It appoints directors and managers, it defines the general objectives of the company, and it audits the organization’s performance. It has been often pointed out in the literature that politicians tend to select and nominate board members, for instance, based on political rather than technical grounds (World Bank, 2015; OECD, 2015). When there are no mechanisms in place to avoid this from being done, highly technical functions might be occupied by professionals who do not have the experience, capacity, or conditions to undertake their job competently, and the company will suffer the consequences. In some countries, it is also the case that politicians themselves can be part of a public company’s boards. That leads to the incorporation of the dynamics of the political game to the very heart of the organization’s high-level decision-making. As it should be obvious, the higher the degree of the problems described in the items above, the higher will be the likelihood of misuse of the company for the fulfillment of objectives alien to the public company. Excessive autonomy and lack of controls lead to actions that are contrary to the company’s best interest, even when they do not configure as corruption (Scott, 2007).

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Superior Corporate Governance Practices

Because SOEs are still very relevant for the delivery of essential services in most countries, poor performance has repercussions in terms of productivity, competitiveness, and growth. Inefficient SOEs crowd out private sector investments, either by stifling their expansion or by hindering entry, which consequently diminishes the access to quality services (Scott, 2007). Besides that, underperforming public companies quickly become sources of fiscal and budgetary risk with the potential to destabilize the financial system (World Bank, 2015). Notwithstanding, the governance problems discussed above still constitute significant challenges for SOEs to run efficiently and sustainably while delivering quality goods and services (Schwarting, 2013). Financial crises sharpen criticism against underperforming SOEs. In a recession scenario, political forces often drive more active participation of these companies, especially the ones operating in the financial sector. However, being constrained by governance problems, they incur in adversities to intensify their efforts and to broaden the scope of their operations, often leading to bad investment decisions. This vicious cycle intensifies public pressure over SOEs in general. The civil society rightfully accuses many of being opaque to public scrutiny, undemocratic in their dealings, or of not being sufficiently public-service oriented (Grossi and Thomasson, 2011). The World Bank, in its publication Corporate Governance of State-Owned Enterprises: A Toolkit claims that “past efforts at reform have made clear that poor SOE performance, where, it occurs, is caused less by exogenous or sectorspecific problems than by fundamental problems in their governance — that is, in the underlying rules, processes, and institutions that govern the relationship between SOE managers and their government owners” (World Bank, 2014: xxii). Many public companies still perform, on average, much worse than their private counterparts, and many of them remain a disproportionate source of fiscal risk to governments. That became more evident with the crash in 2007. Due to its severity and adverse effect on the global economy, it brought corporate governance issues, once again, to the center of the debate (Claessens and Yurtoglu, 2012). The International Corporate Governance Network (ICGN) released a statement in 2008 in which it claimed that “corporate governance failings were not the only cause (of the financial crisis), but they were significant.” Also, that “enhanced governance structures should be integral to an overall solution aimed at restoring confidence to markets and protecting us from future crises” (ICGN, 2008:1). The OECD released, in that same year, a report called Corporate Governance Lessons from the Financial Crisis. The authors highlighted the necessity of

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comprehensively reviewing CG arrangements and principles as to prevent excessive risk-taking, irresponsible behavior by board members and executives, and to protect the system against new shocks (Kirkpatrick, 2009). In light of this historical conjecture, governments and international organizations engaged in the revision and creation of new corporate governance codes and tools targeting, especially, state-owned companies and the issues affecting their capacity to perform, set, and pursue their primary objectives (Florio, 2014; Davies, 2000). These new governance codes are bold about the prospects of CG in improving SOE performance. The World Bank, for instance, points to the association between a sound corporate governance system and several benefits for public and private companies. “Better access to external finance (…) higher growth, and greater employment creation; lower costs of capital and higher firm valuation (…) improved operational performance through better allocation of resources, and more efficient management (…) reduced risk of corporate crises and scandals (…) and better relationships with stakeholders, which help improve social and labor relationships, help address such issues as environmental protection, and can help further reduce poverty and income inequality” (World Bank, 2014:xxiii). Such arguments rely on studies showing that there is indeed a relationship between superior governance practices and better performance indicators in SOEs. Andrés, Guasch, and Azumendi, for instance, looked at over 40 public companies across Latin America and identified and analyzed six dimensions of their CG system—legal aspects and ownership arrangements, performance monitoring apparatus, transparency, and disclosure mechanisms, board composition, and staff’s qualifications. They found out that companies that scored high on their composite index were more likely to display superior indicators for productivity and service coverage, for example (Andrés, Guasch and Lopez-Azumendi, 2011). Others have focused on single-country studies analyzing CG reforms related to laws and regulations in, for example, Korea (Black and Kim, 2012), India (Black and Kanna, 2007), and China (Beltratti and Bortolotti, 2007). Other studies concentrate on the relationship between CG and firm performance, including, among other variables, “ownership structure, CEO duality, board independence, the board size, board committee, remuneration, performance monitoring, and transparency and disclosure” (Heo, 2018:3).1 The OECD emphasizes CG’s role in controlling political interference over public corporations and its additional feature of providing “standard(s) for how governments should exercise the state ownership function to avoid the pitfalls 1

See Claessens and Yurtoglu (2012) for a detailed summary of key studies on corporate governance structures and performance.

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of both passive ownership and excessive state intervention” (OECD, 2015:3). A robust corporate governance system is expected to play an essential role in minimizing political meddling in SOEs’ operations by strengthening their transparency and accountability mechanisms, consequently reducing the prospects of mismanagement and corruption, preventing mission creep. Improving SOEs’ efficiency and effectiveness is expected to benefit the national economy in general, boosting public and private investments, leveraging competitiveness and supporting the development of the financial sector (Claessens and Yurtoglu, 2012). Reducing the issue of SOEs’ politicization is a vital function of the corporate governance framework. Democratic control of public organizations can only transpire via the implementation of control mechanisms, and these, in turn, only function where accountability relationships are well-established, and where transparency and disclosure systems can inform the decision-making process (World Bank, 2014). Of course, minimizing political interference is expected to have an impact on firm performance, but there are other essential gains related to it. Because SOEs use public funds to finance their operations, they must remain financially sustainable and balance the needs of their stakeholders while meeting their public policy objectives (Smallridge and Olloqui, 2011). A company can be highly profitable and still suffer from mission creep. Being efficient does not automatically guarantee an SOE is fulfilling its policy mandate. Corporate governance instruments can ensure companies remain mission-oriented while providing long-term financial sustainability by specifying responsibilities and accountability relationships between the state as an owner, board members, managers, employees, and stakeholders (OECD, 2015).

2.4.3

The Road Ahead

During the last decades, many countries engaged in different levels of corporate governance reforms to help public companies address the issues described above. However, clear evidence that this instrument has indeed contributed to improving these companies’ financial performance and reducing government’s exposure to budgetary and fiscal risks are often disputed, claimed either anecdotal, limited, or inconsistently observable across countries (World Bank, 2015). Despite the increasing interest in corporate governance of SOEs, few comparative empirical studies do observe the relationship between CG and public companies’ performance, especially among developing countries, which is where SOEs tend to, more often, underperform (Heo, 2018). Whether this is a result of incomplete

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reformation efforts or other institutional-related problems, is still not entirely clear in the current literature. Comparing the effects of corporate governance in companies situated in different institutional environments represents a significant challenge. It is, however, imperative to incorporate these dynamics into a cross-country analysis if one ought to determine the importance of CG to SOEs (Roe and Siegel, 2009). Because CG combines a bundle of legal and economic institutions bearing linkage to the characteristics of each organization, it is also affected by the outcomes of the political process, which is highly dynamic and varies across countries and organizations (Licht, 2011). In a nutshell: two organizations with similar objectives operating in different institutional environments will invariably develop different structural characteristics. Institutions are determinant to the development of organizations and to shaping their structures. In turn, organizations interact and contribute to change institutions incrementally (Scott, 1995; Meyer and Rowan, 1977). A successful SOE will be an organization with a high degree of adaptability, which copes with the challenges brought upon it by its institutional environment to accomplish its objectives (Scott, 2007). Since institutions change, organizations must also be flexible to adapt to these changes if they are to survive and succeed in the long-term. Governance structures determine the success of an organization, and so do the skills it mobilizes, and the capacity to learn by doing over time (North, 1990). Therefore, to harmonize with the characteristics of a changing institutional environment, SOEs’ structure must be configured in a manner to allow them to pursue their mission efficiently, despite the challenges the environment may impose. The Northian assumption that governance structures—alongside skills and learning capacity—affect the success prospects of an organization implies that those play an essential role in keeping an organization true to its objectives. Since the latest financial crisis, many developing countries have invested time and effort to reform or create improved corporate governance systems. These investments, however, occurred either as a response to the crisis or as part of the changing international regime, which generated an increased output of codes and guidelines towards the improvement of corporate governance standards (Black et al. 2017). They all depart from the assumption that corporate governance indeed plays a critical role in increasing the quality of investment decisions, improving managerial performance, and, consequently, raising firm value, even though solid pieces of evidence seem to be lacking. In World Bank’s own words, “while few empirical studies specifically analyze the direct impacts of corporate governance

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on SOE performance, anecdotal evidence shows that better governance benefits both individual companies and the economy as a whole” (World Bank, 2015). Given the magnitude of the efforts involved in improving the governance of SOEs, it is crucial to go beyond its normative condition of a desirable characteristic of public organizations. It becomes necessary to understand whether it does meaningfully impact their operations and outcomes. Drawing back to the discussion at the beginning of this section, it is essential to move beyond the use of governance as “value,” towards verifying its function as a “structure.” This dissertation contributes to these efforts by comparatively analyzing the evolution of corporate governance practices in the context of National Development Banks in South America in the aftermath of the financial crisis. It seeks to understand the impact of changes in governance on the economic-financial performance of these NDBs and their repercussion on these banks’ development impact. This research piece contributes to the debate on if and how CG systems contribute to mitigating the governance problems associated with the state-ownership of enterprises, offering the opportunity to advance the current understanding of the relationship between corporate governance practices and their effect over the performance of public bureaucracies.

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3.1

Understanding Corporate Governance in National Development Banks

Improving governance has become a task of utmost importance for governments in the aftermath of the financial crisis in 2007. However, despite this being a shared concern, there is only very little expectation of convergence of corporate governance systems around the world. Although some authors have written about the possibility of international convergence towards a unique model of CG as a byproduct of globalization, most scholars seem to agree that corporate governance structures are and will remain bound to each country’s specific features (Malin, 2010). Roe most notoriously claims that CG, consisting of legal and economic institutions, is highly susceptible to the outcomes of political processes and, therefore, unlike to be regularly reproduced in different countries and contexts. That is one of the reasons why governance systems vary so widely across countries and regions (Roe, 2003). Other scholars also link CG variation across countries to informal institutions such as a country’s cultural characteristics (Branson, 2004). The prevalence of family-firms, the historical origins of the legal system, or the fact that governmentownership is historically more pervasive in certain countries than others, these features make governance arrangements unique to the characteristics of each country. Specific firm structures are more likely to be found accompanying certain cultural features, which consequently affect the manner CG arrangements ought Electronic supplementary material The online version of this chapter (https://doi.org/10.1007/978-3-658-34728-4_3) contains supplementary material, which is available to authorized users. © The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2021 R. Zimmermann Robiatti, National Development Banks in South America, Wirtschaft und Politik, https://doi.org/10.1007/978-3-658-34728-4_3

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to be organized (Guillén, 2004). From the impossibility of a global governance convergence results the fact that “one-size-fits-all” models can only sub-optimally fit different organizations and will, consequently, fail to produce consistent results across them (Malin, 2010). That is one of the reasons why there are not plenty of studies comparing different corporate governance systems in a cross-country perspective. Given institutional differences, there is a fundamental attribution problem in comparing the role of different CG systems over company performance. Nonetheless, if not in the level of specific provisions, there is indeed a broader consensus about the fundamental objectives of corporate governance, which can be shared by organizations and, especially, public corporations regardless of the broader institutional characteristics of the environments of which they are part of. The very principles of transparency, accountability, control, and independence are objectives that, as explained by the agency theory, help to reduce transaction costs, mitigating some of the governance problems discussed in the previous chapter (Malin, 2010). These objectives are considered essential to good corporate governance and, somehow, reflect in most governance codes. Both the World Bank’s Toolkit for the Corporate Governance of SOEs and OECD’s Guidelines for State-Owned Enterprises, for instance, are non-binding codes that notoriously acknowledge the impossibility of a “one-size-fits-all” approach to corporate governance across contexts. They do, nonetheless, provide sets of best-case practices to address common weaknesses in SOE’s CG. The OECD publication defines itself as “(…) recommendations to governments on how to ensure that SOEs operate efficiently, transparently, and in an accountable manner. They are the internationally agreed standard for how governments should exercise the state ownership function to avoid the pitfalls of both passive ownership and excessive state intervention” (OECD, 2015:3). Meanwhile, the WB’s claims to be an “overarching framework for the corporate governance of state-owned enterprises (SOEs), along with the tools and information for making practical improvements” (World Bank, 2014:xv). A logical consequence would be to expect that public companies that attain to all or most of the best practices contained in these codes would provide its owners with the necessary conditions for exerting proper monitoring, control, and oversight. That would improve the relationship between management and government, contributing to addressing the risks and issues associated with public ownership, such as, for instance, political interference (Robinett, 2006). Both publications overwhelmingly refer to a body of anecdotal evidence of the benefits of these CG provisions in various countries and institutional contexts around the world, only marginally referring to cross-country evaluations.

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This research developed a methodology that takes these gaps and concerns into account. It seeks to benchmark NDBs situated in different countries to compare their degrees of attainment to OECD’ and World Bank’s best-practices. In also aims to provide initial inputs on the association between CG practice’s standards and these development bank’s performance—in both economic and developmental terms. Since the organizations evaluated operate in the financial sector, it introduces another important sector-specific guideline to the evaluation: the Basel Committee’s “Corporate Governance Principle for Banks” (BIS, 2015). However, before moving forward, the next section will discuss some of the most common governance issues affecting NDBs.

3.1.1

Governance Issues

National development banks are, in most developing countries, the main or even the only provider of long-term capital to their national economies. These organizations also target ventures which are considered risky by private banks, but which have the potential to generate gains in welfare and spillovers. They are often set-up with specific policy objectives, such as financing projects in more impoverished and secluded regions, or supporting small and medium enterprises which typically lack traditional collateral. They ought to perform an economic, social, and environmental appraisal of the projects for areas they have the prerogative to target. Their end-goal is to support projects from which sustainable socioeconomic development may accrue (Bruck, 1998:64). Mobilizing and efficiently allocating funds to these projects can stimulate productivity gains by reducing the cost of access to capital and boosting the process of capital formation. Failing in properly allocating these resources can cause negative consequences for economic activity and disproportionate risks to public finances (Levine, 2004). Although each NDB embodies a unique mix of policy objectives and goals, they are all public organizations, generally financed by earmarked public funds. As such, they are at a crossroads between political control and organizational autonomy. It is a situation that requires an equilibrium that is challenging to achieve. To be able to concentrate on their institutional mission, a protection layer from undue political interference over the public organizations’ bureaucracy must exist. At the same time, they must remain responsive and accountable to society, which can only be accomplished if they do not remain completely insulated from the political authority’s steering. The only manner to effectively provide this separation between state ownership and control is through the establishment of a functioning governance system (Hodges, Wright and Keasey, 1996).

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NDBs are susceptible to diverse types of governance problems related to the public nature of its owner. Multiple and competing goals and objectives, absence of competition, insufficient transparency and accountability mechanisms, softbudget constraints, among others (OECD 2015). In line with the claims set forth by the agency view, research indicates that problems in SOE’s governance, rather than external or context-specific causes, is what drives poor performance of these organizations (World Bank 2014). Micco, Panniza, and Yañez (2007) present empirical evidence showing that state-owned banks’ performance is comparable to that of private banks in developed countries but quite inferior in the developing ones. Efficiency issues also seem to be primarily ascribed to inconsistencies with governance arrangements, which ultimately influence the organization’s performance as well as its capacity to set and pursue its primary objectives (De la Torre, Gozzi, and Schmukler 2017). Nowadays, the debates concentrate on scoping NDBs’ activities and making sure they operate as efficiently and transparently as possible. As suggested by the agency view, it is necessary to reduce the agency costs within government bureaucracies so that they do not offset the social gains of state participation in the allocative process (Yeyati, Micco and Panizza, 2004). There is extensive literature discussing the governance-related problems from the vantage point of public banks. These contributions point out that without a sound governance framework, these organizations will likely suffer from principal-agent issues arising from the interactions between management, ownership (the state), and stakeholders (society at large). These problems can influence the organization’s performance and the pursuit of its policy objectives (Davies, 2000). One of the most prominent issues on that account is the phenomenon of political intervention. According to Rudolph, “political intervention is one of the major threats for successfully functioning State-Owned Financial Institutions (SFIs). It is typically a consequence of the lack of independence of the board of directors and senior management and nontransparent communication between the SFI and its shareholders. While governments might want to use the SFI to fulfill their short-term political needs at the cost of affecting the financial sustainability of the SFI, they do not want to take responsibility for their involvement.” (Rudolph, 2009:21) Being owned and primarily financed by a central government, these banks are usually very influential players and typically have access to a sizeable amount of resources. Their operations have a very technical character, quickly drifting public attention away from their undertakings. These factors create the perfect conditions for attempts to politically meddle with the bank’s autonomous decision-making process in favor of goals which usually do not coincide with the organization’s

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institutional mission (Yaron, 2004). The political struggle generated by attempts to influence decisions such as whom to lend, what terms to offer, or whose indebtedness to forgive, can have a detrimental effect over the bank’s operations, hurting its efficiency and often preventing it from achieving its institutional objectives (Robinett, 2006). That is not a problem unique to public banks, but it tends to be graver in this type of organization. As explained by Dinç, “the problem of political influence will be greater at banks than at other government-owned enterprises for several reasons. First, the asymmetric information between lending banks and outsiders about the quality of a specific loan makes it easy to disguise political motivation behind a loan. Second, revealing the costs of any politically motivated loan can be deferred until the loan maturity. Third, while a non-bank government-owned enterprise operates in a defined industry, which can limit the politicians’ ability to transfer resources, banks operate across the whole economy, providing politicians with more opportunity to channel funds” (Dinç, 2005:454). To minimize the agency costs associated with the political targeting of the institution, the interaction between politicians and management must be somehow limited. The board of directors is an essential tool to provide a clearer separation between state ownership of the public institution and political control over its operations by performing an intermediary function between ownership and management (Frederick, 2011). Since the board also performs controlling functions, its status before the government is vital to determine the extent of political influence over management. A well-insulated board of directors filters the interactions between politicians and managers and plays an essential role in keeping the public organization accountable and authentic to its policy mandate. On the other hand, a board of undermined by political interference cannot control nor protect management, which might push the bank to drift away from its principles and objectives (Friedriksson, 2011). Another governance problem that is particularly salient in public banks such as NDBs is related to ownership oversight: lax control, lack of transparency, and insufficient reporting. Jacob Yaron argues that, because development banks are in place to achieve specific, often elusive, socio-economic objectives, they have historically tolerated a lack of transparency in terms of their costs, cross-subsidies, and impact evaluation. Interest groups benefiting from this “blurry picture” had no interest either in promoting transparency to assess the “social desirability of using scarce public resources.” That makes “data related to their performance only seldom adequate to shed light on the cost-effectiveness of its operations” (Yaron, 2004:16). Without access to reliable and current information, how can

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government set-up incentive schemes to achieve NDB’s development objectives? How can management be held accountable for achieving them or not? This lack of transparency associated with the fact that these organizations, as most SOEs, lack market-disciplining forces (such as competition or risk of takeover), are also not favorable to ensure appropriate control. NDBs tend to suffer from soft budget constraints, meaning that losses can often be compensated and covered by the government via budgetary relocation. That generates weak incentives to control costs and administer resources efficiently, distorting management’s sense of the real costs of capital. Such a conjecture can lead to wasteful investments, overstaffing, high costs, and failure to reach organizational goals (de la Torre, Gozzi and Schmukler, 2017). Because NDBs aim to maximize their socio-development function, it is not unusual that management uses this as a justification for poor performance. The financial unattractiveness of sectors with positive externalities is often the one to blame for the bank’s negative financial results. The problems above have direct consequences to the operation of the NDBs, contributing to mining the soundness of the financial system and to exposing government to disproportionally large sources of fiscal risks. As discussed in the previous chapters, the evidence overwhelmingly indicates that poor governance of SOEs is strongly correlated with lower levels of financial development and contributes to reducing the welfare of the population by shrinking their access to financial services and making them more costly (La Porta, Lopez-de-Silanes, and Shleifer, 2002). In different words, the costs of an inefficient governance system tend to outweigh the benefits of government intervention in the financial system. The current trend indicates that state-ownership of banks is unlikely to recede, making a case for improving governance of these public organizations, even more pressing (Robinett, 2006).

3.2

Key Improvements to Corporate Governance Arrangements

Governance arrangements are built upon legal and organizational foundations. The legal foundations are the constitutional rules, legislation, and other regulations defining the legal framework and boundaries for the lawful operation of an NDB (Scott, 2007). They establish which mechanisms are to be used for the bank’s auditing and accounting, for example, defining limits for the bank’s undertakings. The organizational foundations, on the other hand, derive from formal and informal practices limiting and regulating the exercise of state ownership. They include

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policies and practices applicable to the board of directors and management, which influence the decision-making processes and the bank’s organizational characteristics. Internal codes such as the incorporation charter, bylaws, codes of conduct formalize them and reflect in the organizational arrangements used to carry on daily operations (Scott, 2007). The governance problems discussed in the previous section can, ultimately, refer to weaknesses in three different key-elements of the NDB’s governance system: the legal framework and exercise of state-ownership; the role, structure, and functioning of the board of directors; and the regime of control, disclosure, and reporting. We will briefly discuss each of them in turn.

3.2.1

Legal Framework and Organization of the Ownership Function

The legal framework is composed of a set of written rules, laws, and codes which apply to the organization. Since it is composed of provisions coming from different sources, the applicable ground rules for the operation of the corporation is often dispersed across several documents. A clearly defined legal framework is of utmost importance for disseminating and publicizing governments’ expectations and policy directions to all the stakeholders involved with the corporation: management, employees, the board, and the public. The framework conveys the government’s objectives and goals, providing input for management and settingout the ground rules for the organization’s operation. Because the goals of an NDB are less straightforward than those of private banks, these goals and objectives must be set by the owner and communicated to management. The rationale for state-ownership must be clear and incorporated in the organizational strategy (World Bank, 2015). An NDB’s legal form can vary greatly depending on the country, company’s objectives, and other factors. Legislation or the bank charter usually specifies the legal form assumed by the bank. They determine whether the enterprise adopts the form of a statutory corporation, an autonomous body, or a government department, for instance, consequently, determining, to a large extent, the relative position of the corporation within government administration. Each of these legal forms implies different degrees of separation between management and government, playing, therefore, an essential role in the prospects of the NDB’s administrative and operational independence (Bruck, 1998). That is extremely important, for each legal form sets different boundaries for government action as

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legitimate owners, affecting the degree of autonomy management enjoys in its decision-making. An NDB’s status before the government is also intrinsically related to its degree of financial dependence. Because a development bank is usually an instrument of specific national policies towards development or used in specific economic programs, it is quite naturally under the direct influence of government (Robinett, 2006). That intensifies in case the organization relies mostly on government funds to finance its operations, which will directly reflect on the expected degree of political pressure. How can autonomy, independence, and flexibility be achieved when public funds represent the most significant share of the bank’s financing means? (Diamond, 1957) If an NDB would want to maintain relative independence from the government, it must start from a strong financial position and pursue sustainability in its operational results. Although losses might be tolerable in the operations of public organizations in specific circumstances, they are politically costly and may result in increased political pressure (Mathew, 1968). Financing terms, conditions, and alternatives are also, to a large extent, determined by the settings specified in the legal framework. The legal framework also determines the degree to which the NDB is subject to market-disciplining forces such as bankruptcy laws, competition, budget constraints. Removing NDBs far-off the reach of these forces might as well reduce incentives for controlling costs and improving operational efficiency. That is also an issue target by attempts at CG reforms for these organizations (World Bank, 2014). The state, being the only or major owner of an NDB, has the prerogative to influence the methods of managing the company to ensure its operations achieve desired outcomes and fulfill its mission. For that effect, the state representative must perform a series of tasks, participating in meetings to vote upon strategic matters, choosing and appointing management, monitoring and evaluating the company’s performance, among others. A framework must exist to determine hierarchical structures, accountability relationships, and individual responsibility, as well as clear procedures to guide decision-making and ensure consistency in the execution of these tasks. These are determined, to no small extent, by the organization’s legal framework (Scott, 2007). Governance reforms focusing on the legal framework also targeted the deconcentration of NDB’s ownership by allowing shareholding by other non-state actors such as international organizations and other corporations. Dispersed shareholding ought to drive improvements at the bank’s CG arrangements, raising, consequently, the quality and reliability of reported data. Moreover, the presence of

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non-state shareholders aims at reducing the prospects for political interference by “depoliticizing” the boardroom (Levine, 2004). The examples above should make clear that the legal framework is extremely important for the operations of an NDB, for it, directly and indirectly, influences the organizational structure, objectives, goals, funding, and supervision. The problem is that, often, these legal provisions are unclear, opaque, and even contradicting. The rationale for state-ownership remains dubious or too broad. The company’s objectives are not clearly defined; accountability relationships are incomplete, and ownership rights are not well-established. Consequently, NDB’s operations brim with governance issues that can affect their capacity to fulfill their mandates (Rudolph, 2009). To tackle these issues, governance reforms in SOEs have been focusing on the necessity for states to streamline and homogenize the legal forms used in different state-owned corporations, including, of course, NDBs. The OECD’ and the World Bank’s guidelines suggest governments harmonizing, as much as possible, SOEs legislation with company law, which usually establishes higher standards of disclosure, accounting, and auditing, for example. That action would bring about expectations of increased transparency and higher standards of governance practices (World Bank, 2014; OECD, 2015). Another significant reform broadly defended in the literature refers to the improvement of the state’s ownership arrangements for NDBs via the institution of ownership policy. An ownership policy is a document which states in detail the rationale and purpose for the state ownership, aligning it to the broader objectives of the organization. That includes clearly defining ex-ante what ought to be the role of government in the governance of the NDB, guiding the process by which the state exercises its rights and duties as an owner: setting objectives, monitoring operations, and evaluating performance, for example. That is expected to provide a clear separation between state’s ownership and policy-making functions, offering management and boards more autonomy in their decision-making, as well as reducing the prospects for conflict of interests (Robinett, 2006). The ownership policy should, of course, subscribe to the principles of accountability and transparency. It ought to be disclosed to the public and reviewed regularly. This policy should deeply connect to a broader, more concise corporate governance code applicable to the organization. As mentioned at the beginning of this subsection, the legal framework is often dispersed across documents and sources. A written corporate governance code serves to condense all the provisions in one single place, easing, that way, the dissemination of the best practices and facilitating control by each of the responsible parties (BIS, 2015).

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Boards: Structure, Powers and Procedures

The board of directors (or supervisory board in two-tier systems) plays an essential role in the operations of a corporation. Its constitution is, therefore, a matter of extreme importance. The board is the central actor in the organization’s governance, performing an intermediary function between ownership and management (Frederick, 2011). It is responsible for providing stewardship and overseeing management. As such, its members must possess relevant qualification and sectorspecific technical knowledge, which will aid them to deliberate on the issues concerning the operations they ought to control. The board must exercise “independent and objective judgment” so that it can fulfill these responsibilities accordingly (OECD 2013). In its capacity as the intermediary between owners and management, the board of directors has a critical function that goes beyond mere oversight. Boards are directly responsible for designing strategies and driving managerial performance, and, to that effect, they must entrust adequate powers. According to the OECD’s Guidelines on Corporate Governance of State-Owned Enterprises, “the boards of SOEs should have the necessary authority, competencies, and objectivity to carry out their functions of strategic guidance and monitoring of management. They should act with integrity and be held accountable for their actions” (OECD, 2015:26). Board structures vary among different countries and companies. Unitary boards, also called the board of directors, are those where non-executive board members may or may not share the table in a single decision-making body with executive members. Some countries, however, favor two-tier board systems, which essentially means a clear separation between supervisory and managerial functions into different bodies. In such cases, the supervisory board is exclusively formed by non-executive members, whereas the management board is composed entirely of executives (OECD 2015). Boards in SOEs, although structured in the same way, are fundamentally different from those of private companies. Since they represent the government’s interests, which are not as straightforward as “generating value,” as is the case for most shareholders from private enterprises, these boards represent a multiplicity of actors (Menozzi, Urtiaga, and Vannoni, 2012). Employees, ministries, and other stakeholders can usually be part of the board, which increases the potential for conflict. One objective of CG reforms in SOEs has been to reduce direct government representation at the boards, for they lack the objectivity necessary to represent the company’s best interests. To that effect, it is possible to observe more and more often the introduction of “independent directors” to the board or of

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other stakeholder representatives such as employees or members of civil society (World Bank, 2014). When a government sets out to create an NDB, it must define, from the very beginning, which role it will play in the direction of the new organization. The government could define broad policy objectives and investment priorities, offering leeway for management to meet these goals. Alternatively, it could appoint every member of the board of directors, exerting more direct political control over management and, inevitably, in interfering with the bank’s allocation process (Diamond 1957). Other board prerogatives such as the recruiting and replacing the CEO, evaluation, removal, or replacement of management teams, among others, also display the prospects for political interference as these functions are removed from boards and concentrated in the shareholder representatives (World Bank, 2014). Since the board performs controlling functions, its status before the government is critical to determine the extent of political influence over management. A well-insulated board of directors filters the interactions between politicians and managers and plays an essential role in keeping the public organization accountable and true to its policy mandate. On the other hand, a board of undermined by political interference cannot control nor protect management, which might push the bank to drift away from its principles and objectives (Friedriksson, 2011). Capable boards have an appropriate size to allow them to perform their main activities accordingly. They also meet enough times and combine the necessary skillsets to fulfill their functions. They are elected for fixed terms and evaluated based on procedures set in a written set of board-related policies (World Bank, 2014). Since boards are usually very closed and hard to access, directly monitoring their activities is quite a difficult task (Leblanc and Schwartz, 2007). That is especially true in weaker institutional environments such as those typical in developing countries, where transparency and accountability are historically quite low, creating perfect conditions for political interference. The mere existence of a board, however, does not guarantee freedom from undue intervention. The primary characteristics of effective boards mentioned above divide into three different categories. First, boards must have an appropriate structure to allow them to undertake their tasks and fulfill their responsibilities. Second, boards must be composed of members who have the necessary skillset and experience to perform their functions adequately. Third and last, boards must be empowered as to be able to influence the operations of the organizations they ought to control.

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Transparency, Disclosure and Control Mechanisms

It is important to communicate information accurately and timely within the organization to ensure boards, management, and owners can make informed decisions. Stakeholders must be in a position to evaluate the organization’s attainment to its objectives and its operational costs to exert democratic control over the public institution and its managers. These tasks can only happen in the presence of a certain degree of transparency (OECD, 2004a). The third and last key-aspect of NDB’s governance provisions is related to the issues above. It focuses on instruments to ensure transparency, enforce an effective disclosure regime, and propitiate the conditions for an appropriate control environment. Even when an NDB operates under an organized legal framework, where the objectives and limits of state-ownership are well-defined, and where boards are appropriately structured and empowered, the absence of appropriate transparency and disclosure mechanisms endanger the organization’s whole governance system. As put by Scott, “effective corporate governance depends on the flow of accurate, timely and relevant information internally within the organization, and externally to the government, legislature, and public. That includes internal reporting to management, management reporting to the board, board reporting to the shareholder representative, shareholder representative reporting to the government and legislature, as well as public reporting via the published accounts” (2007:16). Without transparency, an organization can hardly establish accountability relationships, affecting, therefore, the base of its governance system. That is even more important in NDBs, due to their public nature. Reported information is divided, generally, in two different groups: financial and non-financial. Financial reporting consists of more quantitative information such as operating results, financial performance, accounting statements, funding arrangements, remuneration policies, among others. Non-financial reporting focuses on qualitative information such as the qualification of board members and employees, foreseeable material risks, ownership structure and voting, relevant issues regarding stakeholders (World Bank, 2008). Governance reforms aim to stimulate NDBs to attain to internationally accepted standards of reporting, accounting, and disclosure. CG codes focusing on SOEs defend that they should comply with, at least, standards used for listed companies, possibly even surpassing these. Of course, reported information can widely vary across organizations concerning their completeness, timeliness, relevance, and accuracy. While some NDBs might not publish certain information and others do, it does not tell much whether reporting is accurate or that data is complete. Indeed, the WB affirms that “many

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SOEs produce reports that are incomplete (lacking key statements or notes that would normally be produced by listed companies) and inaccurate (especially in the treatment of more technical or sensitive areas) or that are so delayed that they lose their practical relevance. (…) Even when SOEs produce financial statements, they may not publicly disclose other critical information. Often they do not report their objectives or mandate, their social or policy commitments, any special power or rights the government enjoys as the owner, who their board members are, their relationships with other SOEs, the risks they face, or how they are managed” (World Bank, 2014:221). NDBs often attempt to follow international standards for reporting similar to those primarily used in the private sector. However, these are, of course, not entirely suitable to some of the unique characteristics related to state-ownership. The OECD works, since 2005, on guidelines for SOEs’ disclosure mechanisms, including those related to their policy and socio-economic objectives. From these efforts, integrated reports emerged, aiming to connect financial and non-financial information with the broader social, environmental, and political context of which these organizations are part. They consolidated themselves as good practices for public organizations and have been broadly used around the world. They generally include, besides the well-known “corporate social responsibility” from private corporations, clear-cut policy objectives, and the organizations’ attainment to them, as well as SDGs and other measures of societal impact (World Bank, 2014). Lastly, to ensure that the reported financial and non-financial information are accurate, specific control mechanisms must be in place. They are necessary to make sure that actions are taken timely in response to instructions of ownership and the board, as well as to prove that such decisions align with specific legal and organizational requirements. Control systems ought to ensure that the other elements of the corporate governance system remain functioning appropriately and to prevent fraud. Absence or inadequate controlling mechanisms can lead to diverse sets of costs to the organization (Ashbaugh-Skaife et al., 2009). The entire corporate governance framework of an organization depends on controlling mechanisms that regulate different actors’ behavior, minimizing deviation, and ensuring compliance. That is done at various levels and by different units such as the board or even the general assembly. Internal controls are, however, intraorganizational cells dedicated to analyzing and monitoring the daily organizational work to identify and mitigate possible sources of risk. The typical organizational unit carrying out internal monitoring functions and verifying compliance in a corporation is the internal audit unit. It is not uncommon, however, that SOEs “lack internal audit functions or have internal auditors who report to and are tightly

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controlled by management and thus cannot be expected to act as an independent source of information or vigilance for the board” (World Bank, 2014:229). Besides the audit committee, another increasingly common reference for internal control is a document that determines ground rules for expected and acceptable conduct by members of the corporation, boards, management, and employees. The code of ethics or code of conduct serves as an instrument to reinforce and uphold ethical standards to protect the company, its owners’ and stakeholders’ interests from fraudulent behavior as well as corruption. (OECD, 2015). That is linked and complemented by another source of internal control, namely a “whistleblower channel.” It is an independent unit that pursues complaints and conducts internal investigations on possible illegal or unethical behavior by members of the organization. That is an enforcement mechanism that plays an important role in fostering responsible behavior, not by employees, but also by the board and ownership (BIS, 2015).

3.2.4

An Overview

During the last two decades, international organizations such as the IMF, the World Bank, and the OECD have spearheaded reformation efforts to drive governments towards improving their SOEs’ governance systems. These attempts, however, picked up a much slower pace and narrower scope in public companies than they did in the private sector. That is particularly problematic since governance mechanisms are, as previously discussed, paramount to keeping those organizations accountable and responsive (Menozzi, Urtiaga, and Vannoni, 2012). Because underperforming NDBs incur in high economic and financial costs, they are vast sources of fiscal risk and a liability to their governments. Moreover, they might turn into sources of instability for the whole national financial system, retarding the development of financial markets in less developed countries (Scott, 2007). Therefore, identifying and mitigating the challenges facing NDBs to assure their efficient operation became an essential task for public sector researchers. Despite the existence of research evidence pointing out to some ills associated with public ownership of financial institutions, the state-owned model remains prevalent for development banking (UN, 2006). The support for these institutions even increased in the aftermath of the global financial crisis in 2007, when the perception that “financial markets failed” contributed to bringing government back in (Chandrasekhar 2016). This development banking model, given its limitations and shortcomings, is relatively widespread. Recently, countries such as France and Ireland have created new institutions. Multilateral organizations such as the Asia

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Infrastructure Investment Bank, and the BRICS’s New Development Bank also emerged, reflecting the increased support for the idea that the state can contribute to development efforts via NDBs (Griffith-Jones et al. 2018). The latest findings indicate that NDBs can indeed overcome the contradictions associated with government ownership and achieve satisfactory performance given that efficient governance arrangements are in place. In that sense, strengthening governance provisions is an essential step in keeping organizations accountable and responsive, while ensuring they fulfill their duties as public institutions (De Luna-Martinez et al., 2018). The literature on corporate governance indicates that the outbreak of the North-Atlantic financial crisis put these issues, once again, under the spotlight. The governance failures observed in the cases of Lehman Brothers and other scandals have raised the pressure for governments to act more incisively as to ensure that such crises would not repeat (Malin, 2010). That included, by and large, revamping SOE’s governance, especially of the ones operating on the financial sector, such as NDBs. In the previous pages, the research introduced three key-aspects of NDB corporate governance arrangements and discussed their main associated challenges. These aspects are all, to different extents, covered in guidebooks and toolkits published by the OECD and the World Bank. They provide instructions for the reformation of SOEs’ corporate governance arrangements, including several best practices and evidence from various countries. Following the claims that the financial crisis was a turning point in terms of bringing governance back to the table, the next section presents the methodology used to observe whether this is indeed true for the banks in the sample. We introduce an aggregate index based on the provisions discussed and reflected in the best practices proposed by those international organizations in their corporate governance guides. This index is a proxy for benchmarking the governance of eight NDBs in the sample. It, too, allows us to observe the maturity of their governance systems and their evolution over ten years, from 2008 to 2018.

3.3

Benchmarking Governance: National Development Bank Governance Index

Analyzing and comparing governance across organizations is not a straightforward task. There are no universally accepted standards or instruments in the CG literature to evaluate governance arrangements. Therefore it is common that scholars and different organizations use alternative methods on different studies, which often end up not being entirely comparable across the board (IFC, 2019). The

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most common method is to construct aggregate indices focusing on specific governance elements based on each study’s objectives. Despite the limitations of this kind of approach, CG indices function as reasonable proxies for assessing governance quality (Black et al., 2017). This research follows that same path and uses one aggregate index as the primary resource to measure the NDB’s governance maturity levels. The National Development Bank Governance Index (NDBGI) is constructed based on three different dimensions, each of them referring to one of the critical aspects of governance systems discussed above. They are “Legal Framework and Ownership,” “Board Structures, Powers and Procedures,” and “Transparency, Disclosure, and Control.” These aspects and their associated provisions ought to contribute to addressing the risks and problems associated with public ownership, reducing agency costs, and the prospects of political interference. The NDBGI focuses on each bank’s application of the recommended practices drew from the World Bank’s Toolkit for the Corporate Governance of SOEs (World Bank, 2014), OECD’s Guidelines for SOEs (OECD, 2015), and the Basel Committee’s “Corporate Governance Principle for Banks” (BIS, 2015) (Table 3.1).

National Development Bank Governnance Index

Table 3.1 The National Development Bank Governance Index Legal Framework and Ownership

Board Structure, Powers and Procedures

Transparency, Disclosure and Control Environment

To determine each bank’s NDBGI score, we created a standard checklist containing 32 items focusing on their attainment to the recommended practices—the observable variables. The answers are coded as “0”, “0,5” or “1”, depending on their degree of fulfillment for each question. Each item represents a different indicator of the aggregate index. Since the number of variables in each dimension is

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different, the scores are standardized across dimensions to ensure they have the same weight in the aggregate index. That reflects the fact that there is currently only very little evidence about which provisions are comparatively more important. According to Black and co-authors, this procedure is a common practice to build indices for it limits the subjectivity and eventual bias. It, too, reduces the opportunity to engage in data mining when assigning weights to different elements (Black et al., 2017). The answers to the checklist’s questions are all based on hand-collected textual data retrieved from constitutions, legal texts, regulations, bank charters, codes of conduct, and annual reports applicable to each bank. For the construction of the NDBGI, it would be redundant to collect firm-level data for each of the ten years in the sample, based on the fact that CG provisions tend to, only marginally, vary over time (IFC, 2019). Therefore, we calculate NDBGI scores of each bank for three reference years, 2008, 2013, and 2018, allowing the research to move beyond comparative statics towards observing the evolution of the organizations’ governance systems in the immediate aftermath of the financial crisis until ten years later. Annex 1 displays detailed information on the checklist, including the standard questions and possible answers, as well as the weighting and coding strategies to each of them. Annex 3 dives deeper into each of the dimensions and includes an individual discussion of each index item. It serves to clarify the rationale and provide references in the literature.

3.3.1

National Development Bank Governance Index: General Findings

With the NDBGI, the banks compare against recommendations set by international organizations. Even if the decision of embodying or not these governance provisions might not entirely lay with the board or management, not attaining to specific international standards of corporate governance is a good indicator for the degree of sophistication of the organization and its level of protection against political meddling. Observing, first, the attainment of these NDBs to best practices and, second, the evolution of their governance system over time helps us to determine their CG maturity levels. The analysis of the NDBGI scores of development banks included in this study provides some interesting insights into the maturity of their governance systems. First, in general terms, it is possible to observe that, in 2008, adherence to the recommended practices was at its lowest point, with an average score of only

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Table 3.2 NDBGI Scores: 2008, 2013, and 2018 1.00 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00 BANDES (VEN) BDP (BOL) BICE (ARG) BNDES (BRA) CFN (ECU) CND (URU) COFIDE (PER) FINDETER (COL)

2008 0.23 0.45 0.43 0.47 0.26 0.31 0.64 0.48

2013 0.27 0.50 0.62 0.52 0.34 0.31 0.71 0.65

2018 0.12 0.58 0.69 0.80 0.38 0.38 0.73 0.72

Source: Prepared by the author

0,41 for the whole sample. That means that, on average, an NDBs would only comply with about 13 out of 32 recommended governance practices. The situation is particularly dramatic for the banks in Venezuela, Ecuador, and Uruguay, which scored between 0,23 and 0,31. In that year, they only complied with a maximum of nine practices. The best performance was that of the Peruvian COFIDE. With a 0,64 score, it complied with around 20 out of 32 recommended practices. The situation in 2008 makes it clear that all the banks were extremely vulnerable to being affected by possible governance issues associated with stateownership. In the aftermath of the global financial crisis, these banks started to play a countercyclical role in a moment of instability while inserted in fragile institutional environments, without, first, having established a sound governance framework. That made them potential diffusers of instability to their country’s entire financial system and, therefore, a relevant source of fiscal and budgetary risks to their national governments.

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In 2013, the second year of the analysis, despite considerable improvements observed in the Argentinian BICE and the Colombian FINDETER, which increased their score by 19 and 17 percentual points respectively, the general picture remained much bleaker. The average score for the entire sample lingered around 0,49, which meant that the average organization would only comply with about 15 out of 32 recommended practices. Although a marginal improvement existed, only three out of eight NDBs surpassed the 0,60 range. The three underperforming organizations remained the same concerning 2008. BANDES improved in four and a half points and CFN in less than seven and a half, while CND did not experience any improvement. Their scores for 2013 are 0,27, 0,34, and 0,31, respectively, and they occupy the bottom of the list. The year of 2013 is particularly meaningful. Five years after the outbreak of the financial crisis, the debates about governance weaknesses and problems that led to the financial crisis were already well-diffused in the literature. Since 2008, new efforts had emerged to reform governance systems in the private and public sectors. Since public banks, were, at that point, very engaged in the provision of countercyclical finance (Além and Madeira, 2015), the drive to engage in reformation efforts was already a real concern with enough traction to consolidate. The improvements observed in the NDBs and their attainment to recommended practices show a trend in that direction, however slow they may have happened. The improvement of NDBs’ governance continued at a slow pace for most of the banks in the sample. The year of 2018 consolidated a great divide between these organizations. While the average NDBGI for the whole sample score improved only very marginally—in less than five percentual points—a clear distinction between two groups can be perceived. Whereas half of the banks scored reasonably well, achieving NDBGI levels between 0,69 and 0,80, the other half remained at a considerably lower level with scores ranging between 0,12 and 0,53. The average NDBGI score for the top four organizations is more than two times higher than that of the bottom four in the final year of the analysis. The performance of BANDES can partially explain such a wide gap. It saw its NDBGI shrink in more than 15 percentual points, reaching 0,12, the lowest absolute score for the whole sample over the entire period. However, it is important to notice that CFN and CND, too, scored very poorly, both remaining below the 0,40 mark. BDP did considerably better, but still only barely managed to stay above 0,50. On the other end of the spectrum, BNDES, the strongest performer in the sample, hit the mark of 0,80. That represented an improvement of over 30 percentual points for the entire ten-year period. COFIDE, the second-best performer, reached 0,73, followed by FINDETER with 0,72. BICE keeps up with them with 0,69 in the fourth place.

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Although we observe some improvements over the entire period, it is interesting to contemplate their slow pace. Except for COFIDE, all the other banks displayed quite poor scores in 2008, all of them ranging below the 50% range. In 2018, despite some progress, three of them were still well below this range, and one barely reached above it. The remainder experienced above-average improvements in their NDBGI scores for the same period. BNDES attainment to recommended practices improved in more than 32 percentual points, BICE in 26, and FINDER in 24. COFIDE, although improving only eight points, started from a relatively higher position in comparison with the others. Table 3.2 consolidates the NDBGI variation for each bank and the whole cluster from 2008 to 2018 (Table 3.3). Table 3.3 NDBGI Scores and Variation Bank

2008

Δ (p.p)

2013

Δ (p.p)

2018

Total Variation

BANDES (VEN)

0,23

4,5

0,27

−15,2

0,12

−10,6

BDP (BOL)

0,45

5,7

0,50

3,0

0,58

8,8

BICE (ARG)

0,43

19,5

0,62

6,9

0,69

26,4

BNDES (BRA)

0,47

4,8

0,52

27,8

0,80

32,6

CFN (ECU)

0,26

7,3

0,34

4,8

0,38

12,0

CND (URU)

0,31

0,0

0,31

7,3

0,38

7,3

COFIDE (PER)

0,64

7,3

0,71

1,2

0,73

8,4

FINDETER (COL)

0,48

17,6

0,65

6,9

0,72

24,6

Average

0,41

8,7

0,49

4,5

0,54

13,7

The following points summarize these initial findings: i. The assumption that the financial crisis has submitted public banks to higher scrutiny and more strict regulation, consequently improving their governance systems might be accurate for governance aspects such as risk management. It does not, however, seem to hold for governance provisions in general. ii. Improvements in governance provisions are largely considered by the literature as slow and incremental (IFC, 2019). The analysis of the entire sample for an extended period seems to corroborate with that interpretation. Besides some exceptions, the improvements happened at a quite slow pace. Even after ten years, governance improvements were mostly marginal.

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iii. It is not possible to refer to a regime when referring to improvements in corporate governance provisions for NDB. The literature claims that these organizations are usually very connected due to the synergies of their activities and that they tend to imitate each others’ forms of governance. That, however, could not be precisely observed here. Instead, a clustering effect took place in which some organizations indeed improved their compliance with international recommended practices, while others drifted away from them and mostly remained in non-conformity. Now we move forward to understand, in more detail, what were the underlying mechanisms to the aggregate NDBGI scores. The following sections will discuss in depth each of the dimensions composing the index to look for patterns and highlight the practices from each NDBs’ governance system.

3.3.2

Unpacking the NDBGI: Legal Framework and Ownership (D1)

Analyzing the legal framework applicable to NDBs is helpful to determine the degrees of separation between management and government. It is, therefore, essential to indicate the organization’s real prospects for administrative and operational independence. The legal framework communicates the state’s expectations to its stakeholders, it provides general guidance for management, defines the underlying rules for the organization’s operation, and sets the goals and objectives for deliverables that directly or indirectly impact the public. Beyond that, it also defines accountability relationships within and outside the organization (World Bank, 2015). The legal framework is the set of written rules, regulations, codes, and laws applicable to the organization. The state can either impose them, they can be the result of voluntary market interactions, or they can emerge from within the organization itself. Although these rules have various sources, different scopes, and mixed practical effects, they all affect how the organization operates, determining, to a large extent, the incentives and constraints that management considers for their decision making. Because legal systems vary across countries, it is fundamentally challenging to compare the nuances of legal frameworks across NDBs. These organizations are subject to different sets of fundamental laws and rules, so we should not frontally compare their legal content. There are, however, some underlying characteristics

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that can help us to compare, not the legal framework per se, but some of its expected effects on the organization, on its degree of autonomy, and the implementation of an underlying rationale for state ownership. The first sub-index constituting the aggregate NDBGI is composed of seven indicators representing these underlying characteristics. They serve as a proxy to measure the maturity of the governance provisions related to the NDB’s legal framework and ownership. They are 1) NDB’s exposure to market discipline mechanisms; 2) the existence or not of a written ownership policy; 3) the degree of separation between the state’s ownership and regulatory functions; 4) the setting of the actual ownership arrangements; 5) the presence of minority shareholders; 6) the applicability of insolvency and/or bankruptcy laws; 7) the existence of a corporate governance code for the organization. Annex 1 introduces the checklist for the indicators, their respective questions, coding, as well as the point system used to build the aggregate index and each of the sub-indices. Annex 2 presents the NDBGI results detailed at the variable and dimension level across banks for the three reference years. Lastly, Annex 3 details the questionnaire referring to the guiding documents with the recommended practices by the OECD, World Bank, and the Basel Committee. Table 3.4 depicts and summarizes the sub-indexes scores for each bank in 2008, 2013, and 2018. As shown above, governance provisions related to legal framework and ownership tend to remain very stable, with marginal changes taking place only very slowly. One can argue that the provisions under this dimension are more closely intertwined with country-related institutional factors than it is the case for the others. Because institutional change is, by definition, an incremental process, provisions that are a byproduct of this process also change slowly. As a result, almost half of the banks did not experience any improvements in their provisions related to the first dimension over the ten years, while the others experienced only very marginal improvements. Leaving aside the slow pace of perceived change for a moment, the scores also generally indicate a shallow level of attainment of the NDBs to the internationally recommended practices related to that specific dimension of the NDBGI. In 2008, for instance, only the Peruvian COFIDE, with 0,71, managed to score above the 50% range. Two organizations, the Uruguayan CND and the Ecuadorian CFN did not follow any of the recommended practices, scoring zero, while the rest of the group scored between 0,14 and 0,50. In 2008, no bank in the sample established an ownership policy to precisely define the limits and responsibilities associated with the state’s ownership rights (Q2). Also, none of them were subject to insolvency or bankruptcy laws (Q6), which, as discussed in the previous sections,

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Table 3.4 NDBGI: Legal Framework and Ownership (2008, 2013, and 2018) 1 0.9

0.8

D1 Score

0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 BANDES (VEN) BDP (BOL) BICE (ARG) BNDES (BRA) CFN (ECU) CND (URU) COFIDE (PER) FINDETER (COL)

2008 0.14 0.5 0.36 0.36 0 0 0.71 0.43

2013 0.14 0.5 0.5 0.36 0 0 0.71 0.57

2018 0.14 0.64 0.5 0.5 0.14 0 0.71 0.57

Source: Prepared by the author

often misaligns incentives to control costs, incurring on “soft-budget constraints.” COFIDE was the only organization to, already at that point, have a written and publicly available corporate governance code (Q7), while all the others failed to fulfill that recommendation. In 2013, as already hinted earlier, the situation did not improve much. The Colombian FINDETER and the Argentinian BICE were the only organizations to increase their scores. By then, both banks had already established and published a corporate governance code to establish and disseminate more precise provisions and procedures within the organization and towards its stakeholders. FINDETER surpassed the 50% level, while BICE joined BDP with that exact score. Besides this development, every other provision or lack thereof remained the same across banks. In 2018, only three banks improved this dimension’s scores. This time, it was BDP, BNDES, and CFN, which, yet again, created and published their corporate governance codes. The Bolivian bank raised to a 0,64 score, the Brazilian

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reached 0,5, while the Ecuadorian organization scored meager 0,14 in that same year. Considering the numbers above, it should be more evident now that improving governance provisions related to the legal framework and ownership of NDBs remains a challenging task. In over ten years, the only meaningful change observed within the sample was that some banks created and publicized their corporate governance codes (Q7). Although this is, arguably, some improvement, even that was not uniformly observed. BANDES and CND, for instance, did not publish their internal corporate governance codes at all. Other than that, we could not observe further improvements related to other specific CG features across banks. An interesting yet positive finding is that three banks in the sample follow an unconventional and quite unusual path by allowing minority shareholders to own part of the company (Q5). That, according to the literature, is less prevalent, especially in public corporations in developing countries which, directly or indirectly, participate in key government policies (Rudolph, 2009). That seems to, indeed, be the case, for, among all banks, only BDP, COFIDE, and FINDETER follow that practice. Both the Bolivian and Peruvian organizations have an international development bank (CAF) as their shareholder. In contrast, the one in Colombia has distributed shares to the governments of territories across the country. The remaining banks in the sample still refrain from that practice. The organization of ownership arrangements (Q4) is one point in which there is a wide variation between the organizations. Although the recommended practice indicates the desirability of the centralized model (de Acevedo Sanchez, 2016), the Peruvian bank is the only one to centralize ownership arrangements in an administrative body, which coordinates ownership-related activities (FONAFE). The other three banks rely on an intermediate solution and a less commendable approach to organizing the ownership functions—the dual model. BDP, BICE, and BNDES delegate tasks and ownership functions between two ministries according to their specialization. The remaining half of the banks, however, still rely on the least desirable option; the decentralized model. BANDES, CFN, CND, and FINDETER still spread ownership responsibilities among different levels of the executive, bringing political actors and their considerations to the core of critical decision-making processes. Looking specifically at the first dimension’s total scores, it is possible to conclude that attainment to best practices is generally low, with some “extreme” cases. The Uruguayan CND, for instance, has not scored in any of the three reference years, meaning it does not follow any of the seven proposed recommended practices. Others like BANDES and CFN only scored 0,14, meaning they only

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follow, each, one recommendation. These three banks share one important characteristic, which might explain, at least in part, why they drift that much away from internationally recommended practices: all of them organize as statutory corporations under public law (Q1). Because their governments see them as public organizations with an especial mandate, they have fewer incentives to comply with practices that are far more common under company law and are, consequently, “left behind” in terms of modernization of their corporate governance structures. There are, however, two non-conformities to recommended practices that are common to all organizations in the sample regardless of their legal status. None of the banks publish or follow a written ownership policy (Q2), nor is any subject to bankruptcy and insolvency laws (Q6). The first provision touches at a core issue to address the so-called problem of “common agency,” while the second talks about the issue of “soft-budget constraints.” These two, combined, contribute to reducing incentives to control costs and improve monitoring. Without these provisions, the risk of political capture of these organizations rises considerably, and so does the prospect of mismanagement and wasteful expenditures. The table below summarizes the main positive and poor practices found under Legal Framework and Ownership (D1) (Table 3.5):

3.3.3

Unpacking the NDBGI: Board Structures, Powers and Procedures (D2)

The board of directors (or supervisory board in two-tier systems) plays an essential role in the operations of a corporation. Its constitution is, therefore, a matter of extreme importance. The board is the central actor in the organization’s governance, performing an intermediary function between ownership and management (Frederick, 2011). It is responsible for providing stewardship and overseeing management. As such, its members must possess relevant qualifications as well as sector-specific technical knowledge. That will allow them to deliberate about the issues that concern and affect the operations they control. The board must have the opportunity to exercise “independent and objective judgment” so that it can fulfill these responsibilities accordingly (OECD, 2013). Since the board performs controlling functions, its status before the government is significant to determine the extent of political influence over management. A well-insulated board of directors filters the interactions between politicians and managers and plays an essential role in keeping the public organization accountable and dependable on its policy mandate. On the other hand, a board of directors

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Table 3.5 Legal Framework & Ownership Good Practices • Peru is the forerunner in terms of establishing centralized ownership arrangements. It is the only country to have established an independent agency responsible for performing ownership-related functions (FONAFE). • Both BDP and COFIDE have an international development bank as a minority shareholder, which is expected to raise transparency and standardize operational procedures. BDP’s charter entitles the shareholder to appoint one member of the board of directors, while on COFIDE, the shares do not include voting rights. • FINDETER is the only organization to have regional governments (31) as shareholders. Since the bank focuses on territorial development, this was one solution to making these stakeholder’s voices heard and their interests represented. Poor Practices • No bank in the sample publishes an ownership policy, meaning, in practice, that they offer an opportunity for a political power to steer its operations, possibly incurring in politically-connected lending. • No bank in the sample is subject to insolvency or bankruptcy laws. Because they mostly operate using earmarked tax contributions, this is an expected outcome. However, the reliance on such funding sources comes along with a risk to the independent operation of the bank. That might lead to soft-budget constraint types of issues. • BANDES, CFN, and CND are, until 2018, organized under statutory law. That places them in a very privileged position to access funds and to participate in policies. However, they are also under an increased risk of political interference.

undermined by political interference cannot protect management and might push the bank to drift away from its principles and objectives (Friedriksson, 2010). The second sub-index of the NDBGI is composed of 14 indicators, which divide into three underlying sub-dimensions: “board structure and composition,” “board’s powers,” and “board-related procedures.” These combine some key variables that, as discussed in previous sections, are essential aspects to determine the effectiveness of the governance framework in protecting the board from undue political interference. They focus on: 1) written board policies; 2) board’s size; 3) meeting periodicity; 4) nomination and appointment policies; 5) presence and proportion of independent directors; 6) board-level employee representation; 7) restrictions to politicians in the board; 8) CEO duality criteria; 9) CEO selection process; 10) board terms; 11) removal and replacement policies; 12) board’s periodic evaluation; 13) audit committee; and 14) risk committee. Annex 1 introduces the checklist for the indicators, their respective questions, coding, as well as the point system used to build the aggregate index and each of the sub-indices. Annex 2 presents the NDBGI results detailed at the variable

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and dimension level across banks for the three reference years. Lastly, Annex 3 details the questionnaire referring to the guiding documents with the recommended practices by the OECD, World Bank, and the Basel Committee. The table below summarizes the sub-indexes scores for each bank in 2008, 2013, and 2018 (Table 3.6). Table 3.6 NDBGI: Board Structures, Powers and Procedures (2008, 2013, and 2018) 1 0.9 0.8

D2 Score

0.7

0.6 0.5 0.4 0.3 0.2 0.1 0 BANDES (VEN) BDP (BOL) BICE (ARG) BNDES (BRA) CFN (ECU) CND (URU) COFIDE (PER) FINDETER (COL)

2008 0.18 0.43 0.46 0.29 0.11 0.29 0.39 0.32

2013 0.18 0.46 0.64 0.43 0.14 0.29 0.43 0.57

2018 0.18 0.46 0.71 0.89 0.14 0.32 0.46 0.64

Source: Prepared by the author

As indicated in the table, the scores for the second dimension in the year of 2008 are generally quite low, with none of the banks scoring above 0,43. BICE and BDP are the only two to reach that range. It is remarkable that, in that year, none of the organizations allowed employee participation in the board (Q13) nor set procedures whatsoever to evaluate board members’ performance periodically (Q19). In all banks, directors were dismissable at any point without the need for justification (Q18). Not less interesting is the fact that that FINDETER was the only bank in the sample to determine and publicly disclose written policies to guide board activities (Q8), another point indicating the weakness of the boards. Generally, the scores for the year 2008 indicate that the boards’ constitutions were

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weak, that their structures were far from ideal, and that they effectively had no power to guarantee the guidance and oversight needed by the organizations they controlled. In 2013, the overall situation improved only very marginally. BANDES and CND did not show any sign of evolution, maintaining the same overall score. BDP, CFN, and COFIDE did improve their scores, but in less than 5 points each. In BNDES, BICE, and FINDETER, however, sensible improvements could be observed with an increase of 14, 21, and 25 percentual points, respectively. Another positive aspect is that, by 2013, all the banks had introduced, to some degree, nomination and appointment policies for the recruitment of new board members (Q11). The problem with the dismissal and replacement of board members, however, remained an issue in 2013, as no bank in the sample had defined specific, more restrictive policies targeting the practice of replacing board members without justification. Although the improvements to the BGI scores were, in general, modest, they indicated some changes in a positive direction. The gap between banks started to increase. The year of 2018, however, frustrated any expectation of more general improvement. Three NDBs’ scores (BANDES, BDP, and CFN) remained stagnant, while COFIDE’s and CND’s only marginally improved in three percentual points. BICE’s and FINDETER’s s scores, which had experienced a significant improvement in the previous period, increased more modestly in about seven percentual points. The Brazilian BNDES was the outlier in 2018. It improved its score during the period in impressive 46 points, as a result of extensive organizational reforms in 2016. As a group, however, NDBs in the sample still perform, in general, quite poorly in terms of their scores for board governance. Only three out of eight banks scored above 0,60. All the others remain well below the 0,50 mark, with the Ecuadorian bank scoring meager 0,14 points, even less than the 0,18 that of the bank in Venezuela, a country where institutions have been facing challenges to work properly due to a prolonged political crisis. At the end of the period, some indicators provide a good measure of these NDBs’ fragile situations concerning their attainment to recommended practices. In 2018, only four banks published their board-related policies (Q8), while only two precisely defined nomination and appointment procedures based on experience and qualification criteria (Q11). Most banks had at least one independent director on the board (Q12), but only three of them had two or more. When it comes to stakeholder representation of the board (Q13), BNDES is the only bank to guarantee one spot on the board for an employee representative. Five banks do not restrict politicians or members of the executive of being part of the board (Q14). For obvious reasons, mixing politics and technical decisions is, by itself,

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extremely problematic due to the number of conflicts of interest that may arise from it. Moreover, CEO duality and full separation between the top executive position and the head of the board (Q15) is only a reality in two banks. The lack of separation may undermine the board’s ability to remain independent from management, disempowering the board, and affecting oversight and control. Lastly, one of the most problematic indicators, which affects all the banks in the sample is the lack of clearly defined policies to avoid the removal of board members before the end of their terms (Q18). That is an extremely problematic situation, for it puts board members in a delicate situation, where their work might be judged based on political considerations rather than technical competence. Therefore, it does not come as a surprise that only three banks submit the board to periodic board evaluations (Q19). Some generally positive aspects observed in the sample are the overall commitment to reasonably sized boards (Q9) and, connected to that, an overall satisfying periodicity of meetings (Q10). For both cases, only one bank does not comply, at least partially, with the recommended practices. In six banks, quite surprisingly, for public organizations’ standards, the board participates in the CEO’s selection process (Q16). Audit committees (Q20) are present, in some form, in seven banks while a risk committee (Q21) is present in six of them—both indicators were likely driven by the Basel Agreements after the global financial crisis. It becomes quite clear, when observing the development of D2 scores across the entire period, that the gap between the top and worse performing organizations has only increased, showing that some banks were “left behind” in the process. Over ten years, the Brazilian BNDES has improved ten out of 14 of its indicators, FINDETER in Colombia enhanced six and the Argentinian BICE, the best performer in 2008, bettered four. On the other end of the scale, the banks which already departed from a primitive situation did not follow the same path. The Uruguayan CND has improved only one of its indicators, the Ecuadorian CFN improved two but worsened one, while BANDES, for instance, remained utterly stagnant (Table 3.7).

3.3.4

Unpacking the NDBGI: Transparency, Disclosure, and Control (D3)

The last but not less critical dimension of governance aggregated to the index consolidates the provisions towards transparency, disclosure mechanisms, and control. This dimension is exceptionally relevant in state-owned enterprises for it speaks

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Table 3.7 Board Structures, Powers, and Procedures Good Practices • BNDES provides a place on the board for one elected employee representative. Although limited, this signals a commitment to, in fact, considering the opinions and expertise of actors who have high stakes in the operations of the organization, besides conferring a higher degree of transparency. • Choosing the president of public organizations has, historically, been the prerogative of the executive or the legislative powers. Under more modern governance arrangements, SOEs are moving away from that practice towards “de-politicization.” Six banks in the sample include the board in the selection of a new CEO. • All the banks operating under company law include, to some extent, independent directors on their boards. Creating instances that provide stability and insulation for board members from the political arena is a fundamental step to improving the governance of these NDBs. • Every bank in the sample does, to some extent, establish experience and qualification requirements that must be fulfilled by candidates to be nominated and appointed as board members. Poor Practices • None of the banks explicitly imposes barriers to the removal and replacement of board members by the stakeholders, nor conditions them to performance evaluations. • Only three banks have managed to introduce mechanisms to prohibit or limit the participation of politicians on the board of directors. Understandably, public organizations are more politicized than regular companies, but this sort of pervasive influence must be limited in SOEs as well. • Stakeholder participation in the board remains almost non-existent. In these NDBs, it is also common that no external, non-state stakeholders participate in the board of directors, even if without a right to vote. That is an often overlooked aspect of board governance, but there is a consensus that relevant stakeholders should have a place on the board of public organizations.

directly to the democratic control of public organizations—reporting of financial and non-financial information, sources of funding, channels to receive and treat complaints. A successful organization must keep its shareholders informed about its performance and operations. However, it is fundamental that NDBs, due to their public nature, maintain information available to all its stakeholders, preferably in a simplified language that allows the public to understand its functions, monitor its real costs, and follow its achievements. Disclosing information timely and adequately is, however, not a simple task. The intertwine between business, and public aspects are not always evident, and often important information is not adequately publicized. Also, being part of the state administration, careless (non-)reporting might be deliberately used to achieve

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political objectives or to hide inefficiencies. It is, therefore, important that particular guidelines and standards are in place and followed, so that the organization can be controlled, not only by its supervisory bodies but also by society in general. This dimension consists of eleven variables, which together provide a proxy for measuring the levels of transparency, disclosure, and control of the NDBs. They are 1) publicizing its legal framework; 2) publishing financial and operating results; 3) external auditing of financial statements; 4) remuneration policies and levels from employees; 5) qualification and experience of board members; 6) publishing a risk management report; 7) reporting on sources of financial assistance; 8) preparing an annual aggregated report; 9) having an internal audit function; 10) preparing a code of conduct/ethics; 11) setting up a whistleblower channel to treat complaints. Annex 1 introduces the checklist for the indicators, their respective questions, coding, as well as the point system used to build the aggregate index and each of the sub-indices. Annex 2 presents the NDBGI results detailed at the variable and dimension level across banks for the three reference years. Lastly, Annex 3 details the questionnaire referring to the guiding documents with the recommended practices by the OECD, World Bank, and the Basel Committee. The table below summarizes the sub-indexes scores for each bank in 2008, 2013, and 2018 (Table 3.8). As the table above makes clear, the third dimension of the NDBGI differs quite starkly from the other two. Here, except for one quite resounding outlier, all the organizations reached, to a certain degree, very high levels of attainment to the internationally recommended corporate governance practices. Across time, one can observe a clear positive trend in the third dimension that has impacted almost all banks, boosting these organizations’ scores by the end of the period. We now discuss them in more detail. Although D3 scores are, in 2008, generally higher than for the other two dimensions, there was still plenty of space for improvement. Three banks, BANDES, BDP, and BICE, scored below the 50% range, and only other two banks scored above 0,70. Six banks, at that point, did not have or published a code of ethics (Q31) applicable to its employees and board members. Likewise, six banks also did not publicize their risk management reports (Q27), which might come as a shock, given the outburst of the financial crisis one year earlier. Other indicators that show some mixed results for that year are the non-disclosure, by half of the banks, of their remuneration policies for board and employees (Q25), the lack of information on board member’s qualifications (Q26), and the absence of a whistleblower channel (Q32).

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Table 3.8 NDBGI: Transparency, Disclosure, and Control (2008, 2013, and 2018) 1 0.9 0.8 D3 Score

0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 BANDES (VEN) BDP (BOL) BICE (ARG) BNDES (BRA) CFN (ECU) CND (URU) COFIDE (PER) FINDETER (COL)

2008 0.36 0.41 0.5 0.77 0.68 0.64 0.82 0.62

2013 0.5 0.55 0.73 0.77 0.86 0.64 1 0.88

2018 0.05 0.64 0.86 1 0.86 0.82 1 0.85

Source: Prepared by the author

In 2013, all the banks, except BNDES, which already scored 0,77 by then, improved their scores quite sensibly. Most of the banks scored above 70%, with COFIDE attaining to all the recommended practices and being the first to reach the perfect score of 1. In 2013, the only practices which were still not wholly diffused among most banks were, still, a code of conduct information about board member’s qualification, and remuneration policies. On the other hand, in that year, all banks publicized financial statements by independent audit firms (Q24), all of them had established an internal audit function (Q30), and most had already implemented a channel to treat complaints and fraud accusations. In 2018 most of the banks reached a peak in terms of their attainment to the internationally recommended practices. BNDES joined COFIDE with a perfect score of 1, a bit ahead of FINDETER with impressive 0,95, and of other three banks (BICE, CFN, and CND), all of which scored relatively high—above the mark of 0,8. BDP, despite some improvement, remained slightly below 70%. These high scores on dimension number three contrast quite markedly with the poor performance of one of the banks. On the very bottom of the list is BANDES,

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which, unsurprisingly, given Venezuela’s delicate institutional situation, receded from 0,50, in 2013, to a meager 0,05. It is important to notice that the Venezuelan bank did not do much better in the other dimensions, but, at least in terms of provisions toward transparency, disclosure, and control, it had been following an ascending trajectory until the complete failure observed in 2018. Given its impact on the average score and the fact that, in 2018, it did not completely fulfill any of the recommended practices, we will leave it aside for a moment. Looking at the specific provisions, the situation with the other banks is as follows. Almost all the banks fully publish their charters, statures, and relevant laws on their websites (Q22). The only ones to do it only partially are the BICE and the BDP, both only publish their charter, but not other applicable legislation. Although that is better than not publishing anything, leaving pieces of information scattered around different sources and documents, may lead to uncertainty and lack of clarity for stakeholders and employees. Likewise, both banks do not inform the public about the board member’s remuneration schemes (Q25), while the Uruguayan CND does it only partially. That may lead to negative perceptions by the public about salary levels in SOEs and reduce monitorability. Also negative is the fact that CFN does not disclose detailed board member’s qualifications (Q26), which hinders the public from uncovering the added-value of board member’s contributions and, more importantly, their affiliation. After ten years, all the banks except the Bolivian BDP publish a code of conduct/ethics (Q31) applicable to their employees and board members. The banks generally do a better job in terms of publicizing information related to their operations, supported projects, and costs. Over time, all of them started to publish their financial and operating results (Q23), audited financial statements (Q24), sources of financial assistance received from the state (Q28), and their integrated annual reports (Q29). Also, all banks have implemented a whistleblower mechanism (Q32) by the end of the period. Such a mechanism plays an essential role in fostering responsible behavior and opening space for societal control of its activities. The fact that D3 scores are generally better than the other two shows that the NDBs in the sample are more aligned to the internationally recommended practices focusing on transparency, disclosure, and control mechanisms than they are to the other CG practices under other dimensions. That may have happened because the push towards transparency and accountability are, in the context of public organizations, anterior to most of the other CG provisions. An international effort towards making SOEs more transparent exists since the beginning of the good governance movement in the early 2000s. In contrast, a more integrated concept

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of corporate governance for public companies is considerably more recent, only being more systematically articulated since the beginning of the current decade. Another important conclusion that supporting the results of this analysis is that governance improvements are not necessarily permanent. As observed in the Venezuelan case, although governance provisions improved from 2008 until 2013, the intensity of their deterioration after that year was considerably higher, making them reach a rock bottom in 2018. That indicates that improving corporate governance requires a continuous effort and that any advances must be nurtured and protected. Governance change has both a rate and a direction, and any improvements can, if not adequately embedded within the company’s very structures, be squandered and lost (Table 3.9).

Table 3.9 Transparency, Disclosure and Control Good Practices • Publishing integrated annual reports have become prevalent among the NDBs. All of them do it regularly since 2008. The quality of the reporting, however, still considerably varies. • Because they are banks, the organizations are affected and, even if indirectly, participate in international financial markets. That has pushed them to publicize their financial information such as operating results, audited financial statements, and also the sources of financial assistance received from the state. • By the end of the period, all banks had established a channel to receive and treat complaints from internal and external stakeholders. Poor Practices • Some banks still fail to publicize complete information about remuneration policies (BDP and BICE), or just do it partially (CND). • One of the outcomes of the financial crisis was a concerted effort for banks to manage their risk appetite accordingly. Most banks started to publish risk management report to signal their commitment to that cause. BDP, although having a risk management committee, and CND still fail to do so. • BANDES had been improving its corporate governance provisions in line with the rest of the sample, but it receded strongly after 2013. That downward trajectory indicates the intrinsic relationship between a country’s institutional environment and its organization’s governance provisions.

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A Global View

This chapter has focused on grasping and measuring the attainment of NDBs to internationally recommended governance provisions, an underexplored area of current research on development banks’ governance. It has also looked upon a highly underrepresented sample—organizations in developing countries—which can provide new insights on the state of corporate governance of SOEs in less stable institutional environments. Focusing on a small number of cases has offered the possibility of digging deeper into these organizations’ governance arrangements and systematically analyzing the systems used in different banks across countries. Likewise, observing the sample for ten years has provided the opportunity to determine how their governance framework evolved in a period in which public banks suffered increasing pressured to provide countercyclical capital but also to take efficiency considerations into account. The observation of the index and its development over the last ten years allows the identification of some important patterns that might be helpful to uncover other general trends for NDBs in the region. First, such as it would be expected based on claims of the literature on SOE governance, the banks organized under public law are, indeed, more poorly governed in comparison with their peers following national company law. In our sample, three NDBs are subject to public law: CND, BANDES, and CFN. All of them consistently underperform in comparison to the others for every single year. In terms of NDBGI scores, the Venezuelan bank ranks 8th in 2008, 2013, and 2018. The Uruguayan and Ecuatorian organizations alternate between 7th and 6th for the same period. At the dimension-level, this trend is similar for both the first and second dimensions, in which the same banks also monopolize the bottom three positions with deficient scores. In dimension two, which strikes as the most dynamic for all banks in the entire sample, BANDES’, CFN’ and CND’s best scores in 2018 are still well-below the worse scores of the other banks in 2008. The third dimension is the single one where, except for BANDES, there is less of a difference between banks, and almost all of them achieved relatively higher scores. A second valuable observation refers to two claims from a portion of the literature discussed in previous chapters, which indicate that the presence of non-state minority shareholders owning stakes at SOEs exerts a positive effect on bank governance1 . According to these claims, the very presence of minority owners increases transparency and improves control mechanisms and accountability relationships. In our sample, the Regional Development Bank Corporación Andina de 1

See Frischtak, Pazarbasioglu-Dutz, and Byskov, 2017.

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Fomento (CAF) owns minority shares in two banks, the BDP with 20% and the COFIDE with 8%. The findings of this research, however, dot not entirely support the same conclusions. Regarding transparency, results are somewhat mixed. COFIDE is, along with BNDES, the best-performer, scoring perfectly in the third dimension by the end of the period. BDP, however, is the worse performer (excluding BANDES in Venezuela), scoring under 70%. Regarding accountability relationships, we can take board-related governance provisions as a proxy. By 2018, both organizations achieved a score of 0,46, which indicates there is much room for improvement in both NDBs. That is not to say that organizations in which the state is the only shareholder necessarily perform better. However, opening participation for nonstate minority shareholders does not seem to have such a decisive effect on the improvement of governance provisions, at least for the two NDBs in this sample. A third quite striking pattern is that the banks operating under public law, even though starting from a much lower position in the NDBGI, also seem to have remained relatively more stable over the entire period, with fewer changes in their corporate governance provisions. That indicates that the lack of market disciplining mechanisms tends to put these public organizations on a less dynamic track, in which improvements, in general, seem to be less frequent than in other similar organizations. The two banks with shared ownership, the BDP, and COFIDE, too, have only experienced marginal improvements in the period, although starting from much higher scores in comparison to the triad above. The banks in which the most extensive improvements happened—BICE, BNDES, and FINDETER—are fully corporatized, 100% owned by their national governments, and operate under company law. One last finding worth mentioning draws back to the very theory on development banks and attempts at explaining the reasons why the state would pursue ownership of this type of organization. In theory, the political view sees politicization of an NDB as, primarily, a negative affair for political interests would be misaligned to the organizational mission and, therefore, that conflict would render suboptimal results. In our sample, BNDES’ NDBGI score started in 2008 considerably below the 50% range, and it reached 2018 with the best one, with an impressive increase of more than 32 percentual points between the first and the last year of the analysis. Ironically, this impressive improvement impetus was driven by a political crisis in Brazil, which led to a parliamentary committee (CPI) to investigate the bank under accusations of politically-connected lending. Although no signs of wrongdoing were uncovered, the committee suggested the implementation of improvements on many different levels. These led, in 2016, to an overhaul of

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BNDES’ statute and governance system. Contrary to expected in theory, the Brazilian case shows that a movement initiated as a political crisis is, to a large extent, responsible for extensive reforms that, paradoxically, are meant to reduce political interference over the institution’s governance system. After observing the evolution of the NDBGI for the banks in the sample, one can conclude that the idea that the financial crisis submitted banks to higher scrutiny and more strict regulation, pushing owners to improve governance, is not entirely accurate. It might be the case for some governance aspects such as risk management and transparency; however, it does not seem to hold for across the board for other types of corporate governance provisions. The analysis of the banks in the sample showed that, even though most of them started from deficient scores, only marginal improvements happened in the period. Significant changes only developed in BICE, BNDES, and FINDETER, the only banks to improve their scores in over twenty percentual points. Besides the general lack of enhancement, the low average NDBGI score indicates that most banks are still far from adhering to the best international practices in terms of corporate governance for state-owned organizations. This problem seems to be more pervasive among NDBs organized as statutory corporations, which have, by far, the worse NDBGI in the sample. That also shows that there is some merit in subjecting NDBs to company law and fully corporatizing them. That drives the modification of some basic structures towards harmonizing NDB’s organizational practices with the ones used in the private sector, eventually leading to more advanced governance arrangements, while allowing for the democratic control of these organizations. Now that we traced the evolution and state of the NDBs corporate governance systems, we move forward towards exploring the impact of these arrangements on important aspects of these bank’s operations. The next chapter will shed some light on the relationship between corporate governance and these organization’s measures of financial performance as measured by economic-financial indicators.

4

Economic-Financial Performance

4.1

Measuring the Performance of National Development Banks

National Development Banks are subject to a conflict that is inherent to their historical formation and, therefore, extremely hard to overcome. NDBs were created as government’s vessels of development policies, functioning as proxies to mobilize expertise and financial resources to invest in specific projects with the expectation of gains in welfare—employment generation, infrastructure creation, industrial development, among others. As discussed in more detail in chapter two, such investments generally involve a significant degree of uncertainty and are extremely risky, which makes them highly unattractive for private financiers. Without government intervention—at least according to the theory—banks and other financial organizations leave these projects’ financial demands unmet. Therefore, in their very origin, NDBs have an intrinsic socio-economic mandate, which is arguably the most critical measure of their performance (Francisco et al., 2008). Over time, these organizations suffered increasing pressure for achieving superior financial-economic performance, what has driven them to incorporate policies and structures analogous to those of private financial institutions. That was initially pushed by the liberalization movement that gained traction during the 1980s when widespread failures of many state-owned development banks and companies started to emerge. Once this process began, the whole model based on which Electronic supplementary material The online version of this chapter (https://doi.org/10.1007/978-3-658-34728-4_4) contains supplementary material, which is available to authorized users. © The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2021 R. Zimmermann Robiatti, National Development Banks in South America, Wirtschaft und Politik, https://doi.org/10.1007/978-3-658-34728-4_4

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NDBs were built in the late 1950s started to be challenged (World Bank, 1989). The prioritization of financial performance over their social mandate often drives NDBs to pursue conservative lending practices to reduce their exposure to risk, making loan repayment a central consideration when choosing which projects to finance. Prudential regulation has also proved to be a vital force pushing development banks in this direction (Sobreira and Zendron, 2011). Of course, it is important to acknowledge that the recurring fiscal crises in many developing countries exposed their lack of adequate financial controls and politically related (mis)spending, for which many NDBs were also answerable. On top of that, substantial evidence lacked that banks were delivering on their missions (Thorne and du Toit, 2009; Nellis, 1986). From that point on, NDBs that outlived privatization and liquidation started to be increasingly benchmarked against their private counterparts, leading to a partial Integration of their modes of governance. That aimed to ensure that they would operate more sustainably and responsibly given their potential of generating fiscal imbalances in their national budgets. However, when NDBs adapt to governance and regulatory standards applicable to private banks, those may push these organizations away from their social mandate. That diverts them from their mission for the sake of “financial considerations” in a dynamic known as “Sisyphus syndrome” (De la Torre, 2002). The Sisyphus syndrome is part of the very core of development banking activities. Purely relying on a policy mandate may drive these organizations to concentrate on activities with high-risks and low expected financial returns. Over time, this may incur in systematic losses, which lead to the necessity that the state rescues these underperforming organizations via recapitalization. This situation will eventually lead to political pressure to make these organizations more efficient, reduce their losses, and scale down their activities. That, in turn, will induce attempts by the government to improve bank governance and supervision, explicitly seeking to mimic private sector practices. Once this happens, NDBs will reorient their operations towards more profitable sectors, often competing with private banks. That drives them away from their original policy mandate, which, once again, will generate pressure over the banks in the opposite direction (De la Torre, 2002). Achieving the balance between sustainability, efficiency, and the pursuit of their mandate is a challenging task (Figure 4.1). This difficulty in balancing different aspects of their operations is not unique to NDBs. It is reflected, more broadly, on an ongoing debate in public administration about how public organizations’ performance is to be measured and how it ought to be understood. Dubnick (2005) advances a model in which it opposes four different “types of performance” as to explain the most important factors accounted for under each of them. These ideal-types are a combination of two

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Policy Mandate + Focus on high-risk/low-return activities; + Low success rate and eventual losses; + Need for recapitalization; bail-out; = Political pressure towards efficiency

Efficiency + Focus on low-risk and high-returns activities; + Competition with private banks, drawing-out; + Failure to fulfill its basic objectives and mission; = Political pressure towards achieving the policy mandate

Figure 4.1 The Sisyphus Syndrome in NDBs. (Source: Prepared by the author)

different foci (“focus on the quality of performance actions” and “focus on the quality of performance achievements”) and the degree to which they are relevant under each performance regime (high or low). The following table illustrates these relationships (Table 4.1).

Table 4.1 Dubnick’s Four Perspectives on Performance Focus on quality of achievements Focus on quality of actions

Low

High

Low

Production (P1)

Results (P3)

High

Competence (P2)

Productivity (P4)

Source: Adapted from Dubnick, 2005:392

The first perspective (P1) sees performance in its most basic form. To perform means to offer a specific service or to complete tasks at hand. Here, there is no concern about how these services are undertaken nor on their final quality. Performance as production mechanistically concentrates on the activity itself, with no concern on how well done or how successful it is. This perspective is of limited practical interest to the objectives of this research, for it lacks the nuanced view need to explain the intrinsic conflict to measuring performance in NDBs. The following two perspectives on performance are, by definition, less neutral as they

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focus on opposing characteristics. Being so, they can be helpful to reflect on some critical aspects this research must contemplate. Performance as a competence (P2) goes beyond the mindless execution of an activity, concentrating, instead, on the manner it is undertaken. To perform means to complete specific tasks competently and without losing sight of the attainment of specific agreed-upon procedures and processes. Here, in a certain way, the form often becomes more important than the outcome itself: “Performance is not merely related to outputs and outcomes but to competence as well.” (Dubnick, 2005: 393). Performance as results (P3), on the other hand, focuses on the outcomes and achievements of certain activities, not particularly regarding the manner they are completed. Efficiency becomes a mantra and a guiding principle of performance monitoring, which usually embraces quantitative methods of measuring the performance of a particular activity. This perspective “focuses attention on the products as opposed to the process of production itself” (Dubnick, 2005:393). Lastly, performance as productivity (P4) can be understood, in a way, as a mix of P2 and P3. It stresses both the quality of action and the quality of the achievements as determinants to relative performance. Performance is only superior if it accounts for both aspects simultaneously. Results are important if the competence is there to ensure the proper process and form. Equally, the quality of the actions does matter, but only if it is embedded in a framework delivering superior results. When both qualities—actions and achievements—are accounted for, an organization’s performance is sustainable (Van Doreen, Bouckaert, and Halligan, 2015). Dubnick’s framework can be useful to weigh in on the occurrence of the Sisyphus syndrome in NDBs and to reflect on different and concrete methods to measure their performance. Consequently, it can help to understand their roles better and to frame their operations based on these different conceptualizations of performance. Each of the theoretical views on development banking presented in chapter two—development, social, political, and agency views—concentrate on specific factors to justify government ownership of development banks. Consequently, each of them uses different units of analysis to evaluate what they understand as “performance.” The development view concentrates on the added value of public intervention prioritizing the bank’s role in industrial and development policies. Under this view, the evaluation of an organization’s performance is its capacity to mobilize investments in infrastructure, for example, without an excessive focus on its associated costs. The social view, on the other hand, sees development banks as instruments to subsidize and attend underserved sectors or social groups. Here banks are primarily evaluated according to their social impact—job generation, assistance to rural populations, among others.

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The political view is less enthusiastic about the official objectives of the NDBs, arguing that politicians and bureaucrats will use the banks to advance their agendas, regardless of how competent or knowledgeable they may be. Under this view, performance evaluation links strictly to the results the organization achieves. Moreover, given its potential to be captured by self-interested actors, the ideal scenario would be to ensure that NDBs concentrate on a small and limited scope of activities with highly measurable outputs. Lastly, the agency view is somewhat more concerting. It acknowledges the risk of capture, as put forth by the political view, but it also recognizes the potential for delivering results in a balanced and sustainable way. Performance, under the agency view, is related to the quality of the output and the achieved outcomes. Unbundling NDBs performance in function of their production (P1) would imply that the mere existence of these organizations, if they, somehow, manage and allocate development funds would be enough to consider them as “performing.” A non-performing bank would be the one that does not or cannot carry out its basic activities (e.g., providing loans, assessing investment plans). Seeing performance in function of the carried-out actions—regardless of their quality or their achievements—limits the extent of the scrutiny that a public manager, a politician, or society more broadly can pass on development banks. NDBs are, like most organizations, more complex than that. Other methods are, therefore, more fitting and must be called upon to assess their “performance.” When NDB’s performance is assed primarily based on its adherence to a policy mandate, and the extent of its organizational capacity, the underlying perspective on performance falls closer to P2. As the precursory organizations to modern NDBs were created in the early 1950s, having such a bank in place was deemed as an indispensable ingredient towards industrial development. There was then an essential focus on “creating capacity” and “mobilizing skills,” especially in developing countries, as advanced by Diamond in one of the first publications to focus on this type of organization. “Such institutions were designed to be means of mobilizing resources and skills, and of channeling them into approved fields under private auspices rather than into the public sector(…), they are intended to be pump primers rather than simply conduits for the factors of production, and they usually have to perform a greater variety of functions” (Diamond, 1957:4). Under this perspective, NDB performance ought to be primarily measured by its capacity to catalyze investments and to foster entrepreneurship. That is not to say that the costs of undertaking these activities were not relevant. However, it is the case that financial costs were not the primary concern for public officials. “Development banks are financial instruments of national development policy whose performance is measured more in terms of social benefits generated (as

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measured by indicators of social accounting), then in terms of social (economic) and private (financial) returns” (Bruck, 2005:2). That then predominant understanding of how performance ought to be appreciated, however, has not prevailed long. Two decades later, once fiscal stress and budgetary crises emerged on the horizon, the generally accepted perspective on the performance of NDBs and of other public organizations alike quickly started to shift. They moved from a focus on competence and capacity towards an indissociable connection with costs and results, which approximated them to Dubnick’s P3. A critical take on public development financial institutions by Yaron states that they “were often established and used to achieve political objectives (…) that promoted and tolerated obscurity instead of transparency related to the costs, subsidies, and benefits related to their performance” (Yaron, 2004:15). In that sense, the performance was no longer to be primarily determined based on the grounds of competence, methods, or organizational capacity, but on their interplay with the actual results delivered. It is on these grounds that an important part of the critics argues so strongly against state-ownership of (development) financial institutions. Understanding and measuring performance only in terms of deliverables and results with no regard to other objectives that, at least in theory, matter to the public but not necessarily to private organizations (such as transparency, equity, and democratic controls), calls the existence of public development banks into question. NDBs could, goes the argument, be entirely privatized or even liquidated. That drives the existing public banks towards the other extreme depicted by the Sisyphus syndrome, in which they are pushed away from fulfilling policy mandates in favor of financial considerations. That understanding of performance associated with P3 can be as problematic, at least in terms of the NDB’s fundamental goals and objectives, as focusing exclusively on the organization’s competence and capacity, as in P2. To fully grasp the complexity of evaluating the operation of a public organization such as NDBs, a mix of units of analysis seems more appropriate to measure and determine each bank’s ability and competence to achieve its objectives. Dubnick’s productivity perspective (P4) provides a multifaceted concept that seems to fit that purpose better. Thinking performance in terms of productivity represents an attempt to balance aspects connected to the quality of actions with the ones regarding the quality of achievements. In a nutshell, it signifies a convergence between two historically different units of analysis that, only more recently, were brought together under one agenda: outputs and outcomes. Harmonizing them, however, brings the issue back to the very core of the Sisyphus syndrome: ensuring a balance between outputs and outcomes is extremely hard for NDBs. On the one hand, because NDBs should “maximize broader social

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objectives, credit losses can always be blamed on the need to finance financially unprofitable projects with positive externalities, rather than on bad loan origination” (De La Torre, Gozzi, and Schmukler, 2017:82). That exemplifies how a disproportionate focus on outcomes tends obscure and frequently trumps the pursuit of balanced outputs. On the other hand, the same authors admit that “it seems rather naive to expect governments to remain completely disengaged from any direct intervention (…) governments are likely to face increasing political pressures to do something (…) reform fatigue is in any case likely to boost pressures for state intervention” (2017:92). Here, focusing on the outputs without paying attention to the outcomes is understood as an unsustainable mistake in the long run. Balancing both outputs and outcomes demands a careful evaluation of development bank interventions as to understand whether the benefits they generate exceed the costs of intervening. From an efficiency perspective, these two factors must be considered concomitantly, with no space for the ascendancy of one over the other. That, however, generates dazzling measurement issues. In which terms are outputs to be measured? What are the agreed-upon standards to evaluate outcomes? Are costs the most crucial factor, or one must consider other important, intangible aspects too when debating performance? These issues and conflicts lay in the very heart of the discussion about NDBs activities, and they are of utmost importance to engage in any debate about measuring or evaluating these organizations’ track and performance. It should be clear at this point why development banks are not equivalent and should not be treated on the very same footing as commercial banks. The projects served by NDBs—or at least those they ought to serve—have underlying socio-economic objectives, such as financing specific demographic groups or even fostering economic linkages in “strategic” sectors. As such, they are instruments of public policy, and their operations follow a logic different from those of private banks. Besides that, there are usually elements of subsidy involved in their operations (Francisco et al., 2008). Their legal requirements and cost structures are also widely different from private financiers, which exposes them to a whole different set of challenges. Measuring their performance, therefore, cannot be done in the same form it is done for other commercial banks (Bruck, 2005). Ignoring the element of social objectives in favor of traditional accounting and profitability assessments does not do justice to the NDBs’ raison d’être. However, at the same time, in order to be able to invest in projects with high social returns and generate net positive welfare impact, these banks must operate sustainably. One should not expect them to be as profitable as private banks. However, they should keep track and controlling overhead costs, credit quality,

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and efficiency is essential to avoid losses and, consequently, reduce the space for political manipulation and mission drift (De La Torre, Gozzi, and Schmukler, 2017). As discussed in the previous chapters, the literature on corporate governance indicates that efficient governance arrangements can contribute to keeping NDBs accountable and responsive. Once they can overcome the contradictions associated with government ownership, they can achieve sustainable performance (De Luna-Martinez et al., 2018). Nevertheless, as made evident in this brief introduction, “performance” can be measured in a variety of ways with widely different assessment criteria. In the following chapters, this research will look at the sample of banks in South-America to observe the dynamics and interaction between changes in their governance systems and two distinct groups of performance indicators: economic-financial outputs and measures of development impact. After that, we will propose a new framework to evaluate the relationship between changes in governance and measurement of NDB performance from a standpoint based on Dubnick’s P4, combining both output and outcome elements when tracing the impact of transformation in the public banks’ governance.

4.2

Economic-Financial Performance

Even though public banks might differ in objectives, targeted sectors, and organizational structure, the introduction of standards to measure their economicfinancial performance is a valuable step to put goals into perspective and to evaluate a bank’s attainment to these goals. As advanced by Francisco and coauthors, “measurement forces DFIs and their sponsors to discuss their goals. Foggy goals wither under attempts at measurement. Buzzwords lose punch unless grounded in the nuts-and-bolts problems of measurement” (Francisco et al., 2008:3). When clear financial performance objectives are not defined, measured, and evaluated, problems associated with state-ownership emerge. Political intervention, soft-budget constraints, overstaffing, and unchecked autonomy will likely affect the organization’s capacity to pursue its goals, leading to mission creep (Scott, 2007). One of the main challenges is to build economic-financial performance frameworks that contemplate NDB’s commercial and non-commercial objectives so that one does not overshadow or conceal problems with another. Besides the competing character of these emphases, good performance in one might mask poor performance or mission drifting in the other, buying public managers and owners time (World Bank, 2014). Intending to provide information to policymakers and

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society about the cost and associated benefits of government ownership of public development banks, research targeting these organizations’ economic-financial performance is plenty in recent literature. These studies aim, among other things, at assessing bank’s financial sustainability (ALIDE, 2011), subsidy levels (Schreiner and Yaron, 2001), to evaluate the relationship between NDBs and financial system development (De la Torre, 2005), as well as their actual role in addressing market-failures (Eslava and Freixas, 2016). The focus on non-commercial objectives, however, has mainly been relegated to a secondary position. The liberalization movement that started in the 1980s has been mostly responsible for this one-sided focus. Its impetus has helped to redefine the understanding of the ideal role the state is supposed to play in the economy, and, as a consequence, public development banks also had to move from an interventionist towards a more market-friendly role. Through this process, NDBs became primarily submitted to the same type of prudential regulation, such as those of private banking institutions. The objective of this harmonization was minimizing the prospects of mismanagement of public resources and reducing the risk of capture of these banks by organized interest groups. However, it ended up affecting many other aspects of banking operations (Bruck, 1998). Even though state-owned development banks are, in many ways, different from their private peers, the conditions made it almost inevitable that their economic-financial performance would come to be measured and benchmarked against the standards of commercial banks. Since there is no significant difference in the reporting requirements between them, the economic-financial performance of NDBs has been, for an extended period, solely evaluated in the same terms of those from private commercial banks. The focus of the first generation of governance reforms for SOEs was, in their very words, pushing towards bolstering up financial performance in the first place, transforming it the primary focus for top state-owned enterprises (Mako and Zhang 2004). According to this view, it was essential to, first, focus on these organizations’ financial capacity and on the sustainability of their operations to, only then, evaluate their objectives in light of their mandates. More recently, this emphasis tilted towards a broader evaluation, counting with more holistic performance indicators. Financial considerations, however, remain a vital pointer to diagnosing an NDB’s health (Smallridge and de Olloqui, 2011).

4.2.1

Governance and Financial Indicators

As discussed in more detail in the previous chapter, several studies indicate that a positive relationship exists between superior governance practices and various

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financial performance indicators of profitability, efficiency, and solvency (IFC, 2019). Claims of this kind are also present in the World Bank’s Toolkit for the Corporate Governance of SOEs (World Bank, 2014) and the OECD’s Guidelines for State-Owned Enterprises (OECD, 2015), the most recent and influential publications focusing on reform efforts for the corporate governance of public companies. Since we drew a clear picture of the changes in governance for the NDBs from 2008 until 2018, it is possible to observe whether the variation in their attainment to recommended governance practices has seemingly had any effect—either positive or negative—over firm-level financial performance indicators. There is no intention to determine causality between superior governance levels and positive financial performance. Even if these indicators are correlated, they do not necessarily indicate that higher performance indicators are caused by improvements governance. If a correlation between both exists, this can also be due to other factors such as the size of the firm, the competitive pressures it faces, or even other reasons not related to firm-level characteristics. Other than that, better governance might also be an upshot of better performance and not the other way around (IFC, 2019). Since our sample is quite small and constituted by public organizations that steeply differ in some of their primary characteristics, these operational indicators do not allow for statistical analyses. Also, the literature largely concurs that differences in bank profitability depend on several bank-specific and country-specific determinants (Demirguç-Kunt and Huizinga, 1999). Since the banks in our sample operate in different countries, with different structures and endowments, comparing indicators against each other to rank the organizations would not be very helpful to determine their relative efficiency levels. For this reason, we plot each bank’s indicators against the average of each national banking system. With that, this research will be able to contextualize these banks’ performance and more accurately depict their position relative to their private peers. The objective is not to compare the bank’s performance indicators but to understand the interplay between governance changes and the variation in these indicators for each bank. This chapter will present diagrams for each organization, accounting for the variation of financial performance indicators commonly used in the banking industry. For the period from 2008 to 2018, we analyze the following Key Performance Indicators (KPIs): cost to income ratio (C/I), overhead costs to total assets (OCTA), return on equity (RoE), return on assets (RoA), and nonperforming loans ratio (NPL). The graphs will cross-reference these indicators with the observed variation in the NDBGI for each organization during the same period as to

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observe weather patterns between changes in attainment to superior board-related governance practices and economic-financial indicators can be uncovered. We analyze each NDB individually and then undertake a broader comparison across banks, highlighting common points, and situating significant differences between them. Individual bank data was retrieved from Bureau van Dijk’s Bankscope database and data referring to the national financial systems, from World Bank’s Financial Development and Structure Dataset 20191 . Possible missing entries were recovered manually from the banks’ annual reports. Before moving forward, it is essential to note that two out of eight organizations (BANDES and CND) do not publish their economic-performance indicators and, therefore, observing their variation will not be possible. The fact that these two organizations do not publicize these important KPIs indicates weaknesses in their governance system that reflect on their transparency. Without transparency, it is difficult to establish control mechanisms, to determine accountability relationships clearly, and to ensure independent decision-making. Both banks also score poorly in the NDBGI, which indicates that the index might be a good proxy for governance more generally. Table 4.2 summarizes the economic-financial indicators that will be used in this section, briefly defining each of them and indicating the formula used for their calculation.

4.2.1.1 Return on Equity (RoE) RoE is one of the most used measures of performance, for it is easily calculable using public information about the company. It is an indicator that varies a lot across sectors; therefore, a bank’s relative level can only be put into context if compared to a group of organizations operating in the same industry. The latest survey on development banks commissioned by the WB in 2018 indicates that, among the respondents, more than 90% of the DBs reported positive RoE ratios but that only around one-third of them outperformed their national averages in the period (De Luna-Martinez et al., 2018). These figures seem to, at least partially, reflect the same observations in our sample. In the period from 2008 to 2018, all the six banks also reported a positive RoE; however, only the Brazilian BNDES managed to outperform the national average for most of the period. All the other banks remained well-below the national average. This difference becomes even more apparent when we compare the average RoE for the entire period for both groups. BNDES’ average RoE 1

Version from September 2019 available at https://www.worldbank.org/en/publication/gfdr/ data/financial-structure-database.

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Table 4.2 Economic-Financial Performance Indicators Indicator

Definition

Formula

Return on Equity (RoE)

RoE measures how efficiently a company utilizes its assets to create profit. It can be understood as to how much return net assets generate. RoE is highly variable across industries.

RoE =

N et I ncome Avg. Shar eholder  s Equit y

Return on Assets (RoA)

RoA is an indicator of profitability relative to the company’s assets. It indicates how well a company uses its assets to generate profit. Higher the RoA, the higher the asset efficiency.

Ro A =

N et I ncome T otal Assets

Nonperforming Loans Ratio (NPL)

NPL is the proportion of N PL = loans that are in default or close to default divided by the total loans. For a loan to be considered nonperforming, it must usually be 90+ days past due. NPL functions as a measure of a bank’s health.

Cost/Income Ratio (C/I)

C/I ratio shows a company’s C/I = total costs in relation to its operating income. Lower the C/I, more profitable the NDB will be. Rising ratios indicate that costs are increasing more than income.

Overhead costs to total assets (OCTA)

OHCDTA indicates the OC T A = operating costs of doing business compared to the company’s assets. Higher the value of the OHCDTA indicates low efficiency.

N onper f or ming Loans T otal Loans

O perating Costs O perating I ncome

Over head Costs T otal Assets

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ranged 20%, while the Brazilian average was about 5,5% lower. For all other banks, the national average was much higher than the bank average reaching a difference, except for the CFN, of over ten percentual points. Table 4.3 displays the RoE average figures for the NDB’s, each country’s national average, and the difference between them. Table 4.3 Average Return on Equity (%)2 BNDES (BRA)

Average NDB RoE%

BANKS Average RoE%

Difference

19,9%

14,5%

5,5

BDP (BOL)

5,5%

16,7%

−11,2

BICE (ARG)

10,6%

25,7%

−15,1

COFIDE (PER)

2,8%

21,3%

−18,5

CFN (ECU)

7,4%

11,3%

−3,9

FINDETER (COL)

3,7%

16,6%

−12,9

Annex 4 contains the diagrams plotting the yearly evolution of each bank’s RoE compared to the national average. It also plots the changes in the bank’s NDBGI scores to inform the analysis. Even though the Brazilian BNDES shows a very high average, the trend after 2010 displayed a downward trajectory. It scored, in 2016, below the national average for the first time in the period. The trend seems to go in the opposite direction of the bank’s evolution in terms of the NDBGI. While BNDES’ attainment to recommended governance practices has starkly increased, the indicators for return on equity have deteriorated. This same trend takes place in FINDETER, BDP, and COFIDE. Their RoE ratios have decreased while NDBGI scores increased, although not as dramatically as in the Brazilian case. The dynamics look a little different for BICE and the CFN. They were the only banks to sensibly improve both their RoE and their NDBGI over the period. Regardless of that, their performance over the period remains well-below the national average.

2 In order to ensure comparability, averages were calculated for the period between 2009 and 2017 due to incomplete data.

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The analysis of the diagrams points out that gains in the NDBGI are not necessarily connected to improvements in RoE in this sample for the observed period. In fact, the bank to most tangibly improve its return on equity was the CFN, which, coincidentally, also displays the worse governance index score among the six banks in 2018. BICE also experienced a marginal improvement in both its RoE and NDBGI. In that case, the explanation likely resides in countryspecific factors. The Argentinian national average RoE too increased and at a much faster pace. The other two banks to experience high growth in their attainment of the recommended governance practices are FINDETER and BNDES. Despite NDBGI increase, the Colombian bank saw its RoE slightly decrease over time, remaining well below the national average. The Brazilian bank, on the other hand, despite the severe diminution of its return on equity, remains more or less in line with the national average. BDP and COFIDE marginally improved their governance indicator, but both saw their return on equity experience some reduction. One could expect to observe falling RoE indicators in the aftermath of the financial crisis. The national average indicators indeed show that losses in RoE are prevalent. The surprising finding is that even banks that managed to improve their governance indicators quite considerably also experienced a reduction in their return on equity. Meanwhile, CFN, a bank that scores quite poorly in the NDBGI, improved its RoE over time. Besides that, except for BNDES, banks that have worse governance scores are the ones for which a smaller difference between their RoE and the national average exists. In other words, the higher the NDBGI score, the more significant is the gap between the banks’ and the national average performance in this small sample.

4.2.1.2 Return on Assets (RoA) Despite its extensive use in the evaluation of commercial companies, RoA is only the second most used measure for profitability in the banking sector. It is simpler than RoE for it does not take leverage or debt into account, and it aims to reflect management’s capacity of using company assets to generate profits. (Claessens and Laeven, 2004). Such as in RoE’s case, the latest World Bank’s survey of development banks indicates that over 90% of the surveyed organizations have reported positive RoA figures, but also that most of them underperform in comparison to the average bank in their countries (De Luna-Martinez et al., 2018). Data from our sample corroborates with the first claim but does not entirely support the second one. Consistently with WB’s findings, all the banks in the sample have reported positive RoA ratios during the entire period of the analysis. In 2009, the RoA

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range for all banks remained somewhere between 0,6% and 4%. By the end of the period, in 2018, the gap increased even further, between 0,15% and 3,9%. However, contrary to the WB survey’s findings, most banks performed better or, at least, as well as their national averages. Two banks managed to outperform the national average for the entire period, while two performed as well as the average, and only two of them underperformed in comparison to their national average. Table 4.4 displays the RoA average figures for the NDB’s, each country’s national average, and the difference between them. Annex 4 contains the diagrams plotting the yearly evolution of each bank’s RoA compared to the national average. It also plots the changes in the bank’s NDBGI scores to inform the analysis. Table 4.4 Average Return on Assets (%)3

Average NDB RoA%

Avg. BANK RoA%

Difference

BNDES (BRA)

1,2%

1,2%

0

BDP (BOL)

1,3%

1,3%

0

BICE (ARG) 5,6%

2,9%

2,7

COFIDE (PER)

0,9%

2,2%

−1,3

CFN (ECU)

2,5%

1,2%

1,3

FINDETER (COL)

0,5%

1,9%

−1,7

Although profit is not necessarily a primary goal to NDBs, the analysis of the RoA indicators for the period in question indicates that these organizations can indeed be competitive, at least in terms of profitability. Nonetheless, it is important to point out that RoA ratios do not differentiate between subsidy-dependent and subsidy-independent profits. It means that highly subsidized organizations might have their results affected or even masked by the existence of non-accounted subventions. The cost of these subsidies and the level of subsidization must also be precise in order to determine whether the RoA ratios are misleading or represent the actual profitability ratio of the bank (Yaron, 1992). In the cases of the NDBs in this sample, they all report the sources of financial assistance received from the state. 3 In order to ensure comparability, averages were calculated for the period between 2009 and 2017 because that is when data is available across banks.

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Generally, all the banks except for CFN have experienced a sharp contraction of their RoA ratios in the period, despite the expansion in lending activities when compared to private sector banks. Since credit growth seems to be an essential factor behind increases in profitability, the downturn, in the case of the NDBs in the sample, might be attributed to increases is sovereign premia or as a reflection of greater risk-taking in the period (Kohlscheen, Murcia, and Contreras, 2018). CFN was the only organization to consistently increase its returns on assets, even though the national average in Ecuador moved in the opposite direction. BICE experienced a spike in RoA rates, followed by a steep downturn in 2016. All the other NDBs, as well as their national peers, experienced declining indicators. Such as was the case for RoE, the analysis of the diagrams dos not seem to indicate a positive relationship between improvements in the NDBGI and increasing RoA ratios for these banks. CFN, with the worst governance scores, experienced an almost fourfold boost on its return on assets, while BNDES, with the best NDBGI at the end of the period, saw its RoA fall in more than 50%. COFIDE reported virtually zero returns on equity in the last two years of the analysis. FINDETER and BICE, with the same scores and similar governance improvement stories, also experienced a substantial downturn in their returns. Lastly comes BDP, a bank that did not experience much of an NDBGI improvement. It saw its RoA retrocede to a third of its initial value by the end of the period. From these observations, it seems to be clear that the determinants of profitability for NDBs go way beyond their governance characteristics. The fact that most banks experienced declining profitability indicators regardless of their NDBGI scores indicates that, at best, a very weak link may exist between good governance and returns on assets in public development banks. Since a negative relationship exists between profitability and risk-taking, it might be the case that, as banks improve their governance, they maintain their operations more closely connected to their socio-economic objectives, which are, by definition, riskier and less profitable. That can, at least partially, contribute to explain why even wellgoverned organizations have experienced declining profitability indicators. If a bank deviates from its mandate and finances more prominent companies and less risky projects, the prospects for profitability are higher, but the risk of mission drift increases. The relationship between good governance and profitability might as well be a negative one, and that is not necessarily a problem as long as the bank achieves financial sustainability.

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4.2.1.3 Nonperforming Loans (NPL) One of the biggest criticisms against public ownership of financial institutions is that they are prone to asset quality issues. That means that their difficulty in assessing the creditworthiness of the borrower may lead to the execution of riskier loans and, consequently, a higher incidence of default. Also, being owned by the government, these banks have even more troubles when operating in countries that have a culture of non-payment with soft laws for abiding debt collection. These may lead to financial losses, the need for recovery programs by the government, among other problems. The NPL indicator measures the extent to which NDB loans are behind the payment schedule, functioning as a good proxy for measuring and identifying these banks’ asset quality. Recent research presents evidence pointing out that state-owned banks in developing countries have, compared to private banks, “a higher fraction of nonperforming loans” (De La Torre, Gozzi, and Schmukler, 2017:80). The World Bank survey of development banks goes in the same direction, showing that more than half of the responding banks reported a higher average NPL than the national average of the banking sector (De Luna-Martinez et al., 2018). This number might be even higher, considering that participation in the survey is voluntary, and comparatively well-managed banks can be overrepresented. Our sample deviates from the WB’s findings and some of the claims in the literature. Only one bank displays higher NPL ratios than the national average, while part of the others is well-bellow that threshold. Table 4.5 displays the average NPL figures for the NDB’s, each country’s national average, and the difference between them4 .

Table 4.5 Average Nonperforming Loans (%)

Period

NDB NPL%

Avg. Bank NPL%

2008–2018

0,75

3,35

BDP (BOL)

2016–2018

0,94

1,70

BICE (ARG)

2009–2018

1,17

1,85

COFIDE (PER)

2010–2017

2,85

3,69

CFN (ECU)

2010–2018

7,07

2,88

FINDETER (COL)

2008–2017

0,11

3,31

BNDES (BRA)

4

Due to the lack of comprehensive data, the period for which the average is calculated varies for each case.

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Annex 4 contains the diagrams that project the yearly evolution of each bank’s NPL compared to the national average and plotted against their NDBGI scores. The diagrams show that FINDETER recorded the lowest NPL rates among the entire sample. It remained below the 0,2% margin during the entire period, while the national average never reached below 2,8%. Even more impressive is the fact that, in 2010, the bank recorded a 0% NPL, with virtually all payments being received or recovered on time. BNDES is the second most successful NDB in terms of NPL indicators. Its rates have remained below 0,15% for most of the period, reaching virtually zero between 2013 and 2015. The NPL rates peaked to over 2% during the last three years of the analysis, as a consequence of the political turmoil in Brazil that led to investigations (Operacao Lava-Jato), whose repercussions affected major recipients of BNDES’ funds—civil construction companies and other industries. Even so, the bank’s NPL still remained below the national average. BDP’s NPL is also lower than the Bolivian average, but the bank only started to lend directly to customers in 2016 (first-tier lending). In previous years, the development bank would offer bank guarantees, and other commercial banks would lend resources to the borrowers (second-tier lending). Since the bank did not lend money to borrowers, calculating the NPL was technically not possible. From 2016 to 2018, the ratio has been increasing, but still ranges below the national average. BICE, too, managed to keep its non-performing loans below the average in Argentina across the period, except for two years (2014 and 2015) when these numbers peaked before returning to normal levels. Contrary to what happened with RoE and RoA indicators, CFN performed well below the national average for NPL. An immense disparity reflects in the appalling average difference between CFN’s and the Ecuatorian average: 7,07% against 2,88%. Looking at the possible association between the NDBGI and the NPL indicator, it seems evident that, at least in this small sample, the banks which attain to higher levels of governance standards seem to have an edge in terms of picking and managing their assets. CFN, with the lowest scores in the NDBGI, seems to be indeed prone to asset quality problems. The other banks with better governance scores appear less vulnerable to problems with nonpayment of their loans. That does not mean that well-governed banks are not susceptible to asset quality problems or to spiking NPLs. As the diagrams indicate, peaks of NPL ratios have affected all the banks at some point during the analyzed period, since multiple factors influence it. It seems, however, that superior governance standards can play a smoothing role to keep NPL, to some extent, under control. Lastly, another critical remark is that NPL ratios, by themselves, only indicate whether the bank has been receiving the scheduled payments against its loans

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and not whether the loans are meritorious of NDB funding. Since the customers targeted by development banks could typically be involved in riskier and less profitable projects, a low NPL may indicate two different and opposed paths. First, it may be that a low NPL is due to a high-quality process of pricing and securitizing loans: management might be hugely successful in identifying the best projects and in making sure that they are viable and relevant to the mission of the bank. Alternatively, a low NPL might also indicate that the bank is targeting less risky projects or more prominent clients for which the risk of nonpayment is low. If that is the case, it might be that the NDB is targeting groups that would be able to finance their projects elsewhere, which could be configured as a “mission drift.”

4.2.1.4 Cost to Income Ratio (C/I) Cost to income ratio is a valuable tool to indicate management efficiency, as it measures how total costs evolve in relation to the company’s income (Hess and Francis, 2004). Focusing on income alone might be misleading if one does not keep an eye on the associated costs. Raising income levels is an important task for banks, but there are many ways of doing that. Expanding the credit by lending more money can lead to a higher income, but there are associated costs that come along managing a larger portfolio. Raising interest can lead to more income without, necessarily, much additional cost, but that might affect the demand for loans and, therefore, the potential gains in income associated with them. Since different banking activities are associated with different costs, one must calculate them in order to determine how much of it is de facto as profit. Table 4.6 displays the average C/I figures for the NDB’s, each country’s national average, and the difference between them5 . Annex 4 contains the diagrams that project the yearly evolution of each bank’s C/I ratio benchmarked against the national average and plotted against their NDBGI scores. BNDES is the only bank to keep its yearly C/I ratio below the national average for the entire period, and that seemingly happens regardless of governance changes. Even in 2008, when the bank’s NDBGI was around the 47% range, C/I was extremely low compared to the national average. The stable ratio reflected the increasing levels of income the bank experienced until 2015, when an abrupt drop leveraged the ratio by almost 50%, remaining, nonetheless, well below the national average.

5

Due to the lack of comprehensive data, the period for which the average is calculated varies for each case.

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Table 4.6 Average C/I

Economic-Financial Performance

Period

NDB C/I

Avg. Bank C/I

BNDES (BRA)

2008–2017

19,62

58,68

BDP (BOL)

2008–2017

50,35

65,67

BICE (ARG)

2009–2017

48,28

56,34

COFIDE (PER)

2009–2017

51,84

46,43

CFN (ECU)

2008–2017

55,45

69,21

FINDETER (COL)

2011–2017

59,91

58,66

The Bolivian BDP also started 2008 with an impressive C/I ratio representing around 20% of that of the national average. Nevertheless, the ratio has progressively increased throughout the years at a much faster average rate than the standard Bolivian bank, which also experienced expanding rates. The BDP caught up with the national average in mid-2015, overcoming it in 2016 and with a 20% growth in the following years. BICE also started the series from a relatively superior position concerning the Argentinian average but moving in an ascending trend followed by a slump from 2011 until 2014. Its C/I ratio skyrocketed between 2015 and 2018 when it surpassed the national average, reaching worrying 79% at the end of the period. Despite improvements in governance observed at BICE, it is clear that the overwhelming lending enlargement from 2016 to 2018, when loan amounts expanded in almost seven times, has unbalanced the cost to income ratio in the short run. Peru’s national C/I ratio remained relatively stable, varying between 43% and 49% and settling on 46% by the end of 2018. COFIDE, on the other hand, displayed less stability. It varied between 32% and 64%, remaining, on average, above to the national banks. The Peruvian NDB’s loan rate varied considerably, from moments of expansion to almost total contraction, and that led to an impact on profits and, consequently, the variation in the C/I ratio. C/I ratio data for FINDETER starts only in 2011, but then, it was already around 15% lower than that of the national average. The years to follow evidenced a steep growth that peaked in 2014 when the bank’s C/I was around 85%, 30% higher than the average Colombian financial organization. Even though FINDETER reduced that average for two consecutive years, it would, once again, overtake the average, ending 2018 with a rate higher in 15 percentual points to that of the beginning of the sampling period.

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CFN, however, tells a different history. The national average in Ecuador was generally very high and has remained so throughout the entire period, varying between 73% and 63%. CFN, in 2008, started within this range and remained around it until 2013. Then, contrary to what happened to all banks in the sample, its C/I started to fall consistently, reaching 17% at the end of the period—a mere one-fourth of the average for Ecuadorian banks. That downward movement happened at the same time when the CFN almost doubled its net profits without a proportionally relevant increase in its loans. As indicated in the diagrams, the variation in C/I ratio does not seem to be closely associated with a variation in our governance index. While BNDES, the best performing bank in terms of the NDBGI, has maintained a stable ratio in a scenario of loan expansion, CFN, the worse scorer in terms of governance, has been reducing its C/I ratio to levels well-below the national average. All the other banks, regardless of their NDBGI score, also experienced growing cost-to-income indicators, most of them remaining, at the end of the period, above the national average. It is crucial to notice that C/I ratios can be affected by changes in the bank’s business models or significant changes in the lending strategy. The aftermath of the financial crisis deteriorated the economic conditions for these NDBs to do business, and, therefore, an increase in C/I indicators were to be expected for most banks. Since the C/I ratio does not capture non-recurring effects such as the selling of shares or the recapitalization by the shareholder, declining cost to income ratios might be due to one of these phenomena which do not ensure any sustainability in the long run (Welch, 2006). It might as well be that poorly governed banks indeed experience a steep fall in C/I ratio, not due to positive and efficient management, but due to an intervention by the government to rescue the bank from a delicate situation. That might be the case for CFN, for instance. That is why the relationship between this indicator and the NDBGI may not fit all that well.

4.2.1.5 Overhead Costs to Total Assets Overhead costs indicate the fixed costs related to the administration of a business, also referred to as operating expenses. Those are costs related not directly to the services and products provided by the company, but to those, the enterprise incurs for remaining minimally operational—rent, utilities, insurance, among others. When these costs are high for an NDB operation, they will induce the bank to charge higher underlying fees for providing its services in order to cover for operational costs. When divided by the total assets, the resulting ratio indicates the

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bank’s intermediation efficiency. Higher the ratio of overhead costs to total assets, less efficiently a bank is being run (Beck, Demirgüç-Kunt, and Levine, 2010). The ratio is highly variable across countries—even those in similar development levels. Characteristics of the regulatory framework (taxes, compliance) or industry-specific characteristics (bank concentration, availability of technology) usually explain the differences between them. Therefore, looking at the national average is even more essential to benchmark each NDB. Table 4.7 shows the average OCTA ratios for the NDB’s, each country’s national average, and the difference between them6 . Table 4.7 Average OCTA Ratios

Period

NDB OCTA

Avg. Bank OCTA

2008–2018

0,39

3,91

BDP (BOL)

2008–2017

1,69

4,91

BICE (ARG)

2009–2018

2,90

6,30

COFIDE (PER)

2011–2017

1,33

3,67

CFN (ECU)

2010–2018

1,95

5,46

FINDETER (COL)

2008–2017

1,59

6,28

BNDES (BRA)

The NDBs in the sample, in general, display much lower OCTA ratios than their national averages. There is no point in time when OCTA and Bank OCTA have crossed trajectories within the same countries, and this indicates that, on average, NDBs display a higher efficiency when it comes to controlling non-income generating operational costs. BNDES has kept its OCTA ratios stable throughout the entire period, with no significant variation up- or downwards, while the Brazilian average has sensibly increased over time. This stability measure denotes that BNDES’ non-operational expenses also increased. Since the bank’s assets have increased fourfold in the same period, it is possible to interpret that expenses expanded more or less at the same pace in order to keep the OCTA ratio stable. The situation is somewhat different for the Colombian COFIDE. The bank experienced a reduction in OCTA ratios despite the almost threefold increase in the value of its total assets. That indicates that the NDB managed to keep its 6

Due to the lack of comprehensive data, the period for which the average is calculated varies for each case.

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non-income-generating expenses to the same level throughout the entire period. The Colombian average OCTA also declined but at a much slower pace. Similar dynamics are observable in Ecuador. There CFN also reduced its overhead costs to total assets ratio while substantially increasing its assets. Such as in the previous case, the proportion of that reduction was higher than that of the national average. BICE’s OCTA indicators have increased marginally in the period, following a similar dynamic as the average bank in Argentina. Because this indicates that non-income-generating costs have increased at a faster pace than the total assets, it must be a primary point of attention for management, since BICE’s assets have been increasing year after year and very quickly. If costs raised to the point of affecting OCTA, this might indicate they also have been exponentially increasing. Since the Argentinian economy is heavily dollarized, this might be a side effect of galloping exchange rates. BDP has also seen its OCTA ratio increase disproportionally to the size of its assets. Although the indicator remains well-below the national average, differently from it, the indicator has followed an ascending trajectory. Bolivian banks have, on average, consistently reduced their OCTA ratio. A similar observation in the case of FINDETER. The Colombian bank has seen its overhead costs to total assets ratio peak by 2014 and then decline until 2018, remaining, nonetheless, well-above the initial level. That indicates that costs are increasing faster than income-generating assets. The average ratio in Colombia has also been declining. Here it is also hard to make a clear cut argument relating improvements in governance and attainment to the NDBGI to gains in OCTA ratio indicators for the observations are also very mixed: BNDES, the best-governed bank in the sample, has maintained a stable OCTA, meaning that overhead costs have been increasing together with the total bank assets. That can not be interpreted as a positive outcome. Increasing overhead costs become a problem in the long-run once assets stop expanding. One may argue that BNDES’ NDBGI indicators just improved very late in the analysis and that, therefore, a reduction in the OCTA could not yet be captured by the analysis until 2018. COFIDE, the second-best bank, in terms of attainment to the internationally recommended governance practices, has consistently reduced its OCTA. Since the NDB, already in 2008, displays a high score in terms of its governance practices, that could indicate that well-governed banks do a better job in controlling overhead costs. Here, however, CFN functions once again as a counterfactual. The Ecuadorian bank, which is the worst governed bank in the sample with a mere 0,38 NDBGI score, has also managed to reduce its overhead costs to a proportion much higher than that of the national average. How could a poorly governed bank achieve

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such a positive indicator? BDP and, to a more considerable extent, FINDETER performs much better than the CFN in terms of their attainment to recommended governance practices. Nonetheless, they have seen their OCTA indicators worsen during the analyzed period. Lastly, BICE, whose NDBGI scores were already relatively high in 2013, also did not manage to reduce its OCTA ratio. The indicator marginally deteriorated for the Argentinian bank, following, more or less, the same trajectory of the national average. That, in conjunction with the other cases, may indicate that external factors might be more determinant to the changes in OCTA indicators than attainment to governance practices per se. As it is the case for some of the other economic-performance indicators discussed in this chapter, this analysis can not find a plausible association between governance and overhead costs to total assets.

4.3

Reframing the Debate

Over the last two decades, international organizations such as the World Bank, the OECD, and the IFC have invested resources in producing recommendations aiming to improve the governance framework of state-owned organizations. Their guidelines base on a body of academic research pointing out to the relationship between governance and performance, under the assumption that organizations with a sound governance system operate more efficiently and deliver superior results—as understood by Dubnick’s P3 logic (IFC, 2019; OECD, 2015; World Bank, 2014). The last section has concentrated on evaluating if and how the attainment by NDBs in South America to these organizations’ recommendations had seemingly any impact over some of these banks’ economic-financial performance indicators. We have generally found no evidence of a discernible dynamic between the bank’s respective NDBGI scores and their profitability and efficiency indicators. A more reliable link appears to exist between asset-quality indicators and bank governance. With profitability indicators as a starting point, the analysis has shown that all the banks in the sample report positive return on equity numbers and that almost all of them display indicators inferior to their respective national average. The only exception has been the BNDES, which managed to sustain superior performance in comparison to the Brazilian average for most of the period. Although BNDES also happens to be the bank with the steepest improvements in the NDBGI score, this seems unlikely to be a determinant factor affecting its

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119

level of RoE ratios. Before 2016, the inflection point for the substantial improvement of that bank’s governance, BNDES attainment to governance practices was subpar. Its RoE remained, nonetheless, well-above the national average. All the other banks, including the ones which displayed much better governance indicators by the same year, performed substantially worse to their national averages. CFN functions as a counterfactual: even though it is the worse performer in terms of NDBGI, it was also the only bank to improve its RoE during the period. In terms of their return on assets, despite all banks displaying positive indicators throughout the period, variation across organizations is even more mixed. While two of them performed as well as the national average, two underperformed it, and the last two outperformed. Here too, all banks except one experienced a contraction in their RoA rates over the period. CFN, the worse governed bank by the measure of its NDBGI, was again the only bank to see its RoA increase over time. All the other banks, regardless of their NDBGI scores, saw their RoA indicator end the period in a lower position to 2008. Here, such as for the RoE, no clear relationship between higher attainment to the recommended governance practices and the actual performance indicator could be uncovered. From these different scenarios, we can observe that the attainment of superior governance practices does not necessarily seem to play a significant role in affecting NDB’s profitability ratios, as measured by RoE and RoA. These indicators are likely more strongly associated to other institutional-, bank, or country-specific factors, such as the general level of interest rates, the maturity of its loan operations, the size and assets of the bank, and the national guidelines regulating the authorized level of these bank’s risk appetite, among others. It is also important to, once again, underline that traditional profitability indicators such as RoE and RoA do not take NDB’s policy mandates into account. Therefore, high profitability indicators can not be used as a proxy for attainment to socio-economic goals. Moving away from profitability and towards asset-quality indicators, we found that, contrary claims in the literature about public banks, NPL ratios are, for most of the NDBs in the sample, considerably lower than their national averages. Here some anecdotal evidence was uncovered that indicates that well-governed banks might do a better job in managing their assets and assessing the creditworthiness of the projects they support. CFN, for instance, displays both a meager NDBGI score and a much above-average NPL in comparison to the banks in Ecuador. The highest scorers in the governance index, on the other hand, have mostly managed to keep its NPL ratios under control and generally below their country’s average. Here, it is essential to highlight that attainment to recommended governance practices is not claimed as the primary factor driving improved asset-quality in

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these NDBs. Other factors, such as the specific groups, sectors, and industries targeted by the bank, can also play an important role over the expected NPL rates. Therefore, it is also worth noting is that a low NPL ratio, usually seen as a positive indicator, may also uncover problems with the loan portfolio of a development bank. It may as well be that some banks target projects that would be bankable by the private sector or clients that would be able to finance their projects elsewhere. Since these organizations are expected to target riskier sectors and underfinanced projects, above-average NPL ratios would not be, necessarily, uncommon. Concerning efficiency indicators, we could not observe a discernible relationship between improvements in governance and changes in the cost to income ratio. The Brazilian bank—with the highest NBDGI score—managed to keep a stable ratio, which means that running costs increased alongside with income but maintaining a similar proportion. BNDES remained more efficient than the average bank in the country over the entire period. The Ecuadorian bank—with the lowest NDBGI score—reduced the proportion of its running costs to its income, meaning CFN has grown more efficient over time regardless of its low attainment to recommended governance practices. By doing so, it managed to bring its C/I ratio to levels well below those of the national average. All the other banks, although scoring higher than CFN in the governance index, saw their running costs grow more rapidly than their income. That led them to experience a soaring C/I ratio and placing each of their ratios marginally above their national average. It is important to stress that the cost to income ratio does not encompass non-recurring effects, so it may be that these indicators are artificially inflated by governmental intervention or even accounting maneuvers instead of by legitimate management efficiency. Nonetheless, it does not seem to be possible to identify a visible relationship between the variation in C/I ratios and changes in governance, as proxied by the NDBGI. Similar circumstances happen when observing the last efficiency indicator, overhead costs to the total asset. Here too, a mixed bag of observations makes it difficult to advance arguments associating improvements OCTA ratios and the variation in the NDBGI. Here, again, BNDES has maintained a stable ratio throughout the entire period, including before most improvements in its governance were implemented. COFIDE has seen its OCTA ratio improve over time along with improvements in the NDBGI, but this dynamic is not consistent for other relatively well-governed banks. BICE and FINDETER, for instance, experienced increasing OCTA ratios despite governance improvements. BDP occupies only an intermediate position in the NDBGI, but its overhead costs, too, increased. The outlier here is, once again, the CFN. Despite its subpar attainment to

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governance recommendations, it was one of two banks to reduce the OCTA ratio over the entire period effectively. That indicates that external and bank-specific factors other than governance have more weight on affecting the development of the OCTA ratio. In short, contrary to the claims of guidelines towards the improvement of corporate governance in state-owned enterprises by the OECD and the World Bank, the analysis does not corroborate with the thesis that organizations implementing more governance reforms in line with internationally recommended practices will also display notable improvements in their economic-financial indicators. As discussed above, in four out of five indicators (RoE, RoA, C/I, and OCTA), no evident sign could be found that points to a relationship between superior governance practices and improved economic-financial results. For one of the asset-quality indicators, better-governed organizations do display a seemingly higher level of asset quality as measured by the NPL. However, it is necessary to highlight that either positive, negative, or the lack of a relationship between specific indicators and the attainment to recommended governance practice does not unequivocally prove that the one causes or not the other. There are many country-specific or bank-specific factors in play that can likely be alternative explanations for the changes in the financial indicators. This analysis attempted to provide some elements to evaluate a possible degree of association between the financial indicators and the NDBGI as a proxy for corporate governance practices. It is also important to acknowledge that the analysis carried out to observe a possible interaction between governance and financial performance is only meant to provide initial insights and an avenue of investigation to guide future research. To unequivocally determine whether a definite relationship exists between the indicators used here and the governance index, an empirical estimation would be necessary, which would demand a larger number of observations. The main contribution of this research is creating an index that serves to compare development banks across the world based on the same set of criteria. The application of this index to a more significant number of organizations would allow a larger sample with more observations and controls. That would ensure a more robust and statistically significant ground for analysis, allowing future research to determine whether a correlation or even a causal link between governance, as measured by the NDBGI, and any of the financial indicators exist. Also, besides the fact that this study used a small number of cases, there are at least another two reasons why one should interpret the findings of this research with care, before completely dismissing a possible association between governance and financial indicators for national development banks as well: First, it is

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possible that the timeframe used in this research did not allow the newly implemented governance practices to bear fruit to the point of actually influencing the outcomes of these banks’ operations. Because governance changes happen only very incrementally, changes can take time to institutionalize. Therefore, a more prolonged timeframe might prove to be more appropriate and useful to capture the integrity of the potential effects of changes that happened in the past. Second, the NDBGI is an indicator that serves as a proxy for the existence of governance provisions. That means that, for some indicators, it mostly measures the de jure existence of given rules, clauses, and instruments, and not whether they implemented de facto nor if they are fully functional. It may admittedly happen that some banks do publish a series of regulations that are not entirely followed or that function only as proforma provisions. The indicator has the limitation of not capturing if, under closed doors, the management does indeed abide and follow the publicly disclosed rules. In any case, despite possible limitations, these findings do allow to affirm that, contrary to much of what has been published and the apparent common sense that dominated the discussion about NDBs in the 1990s and early 2000s, public development banks can remain financially viable while financing projects with low financial rates of return. The organizations in this sample have consistently outperformed some of the national average indicators, and, when they did not, they at least maintained positive numbers as not to incur in systematic losses. Investing in the internationally-recommended governance practices, however, seems not to be, at least in the short-run, the first- or best-response to improving these financial performance indicators.

5

Development Impact

5.1

Beyond the Economic-Financial Nexus: Assessing Development Impact

The last section has focused primarily on identifying and interpreting the nexus between improvements in bank governance and selected economic-financial indicators. Although this is a critical discussion underlying the literature on development banks since the beginning of the 2000s, concentrating on financial performance indicators only provides a partial evaluation of NDBs’ operations. Of course, long-term financial soundness is essential to allow the banks to finance the risk-intensive projects they ought to embrace. Equally important, however, is to understand whether development banks are delivering on the objectives entrusted to them. To do that, we must move beyond the economic-financial nexus of NDB’s operations towards uncovering and unbundling their existing frameworks and strategies for evaluating their development impact. After the wave of privatizations and liquidations that took place in the 1990s and early 2000s, the efforts to improve the governance of banks that outlived this process have not been short from remarkable. Much progress has been accomplished over the last twenty years, mainly helping to move the debate away from “which banks can be closed?” to “how can their roles be repurposed?” (UN, 2006). NDBs’ roles had already been changing, and the countercyclical function played by many of them during the global financial crisis served as a proof of their multifaceted value. Now, as new challenges such as climate change and sustainable development goals emerge, many governments look to NDBs seeking for solutions. That led some countries to include development banks in their sustainable development strategies mix (Griffifth-Jones et al., 2018).

© The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2021 R. Zimmermann Robiatti, National Development Banks in South America, Wirtschaft und Politik, https://doi.org/10.1007/978-3-658-34728-4_5

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According to World Bank’s definition used in this study, development banks have “an explicit legal mandate to reach socioeconomic goals in a region, sector, or market segment” (De Luna-Martinez et al., 2018:12). These goals are usually reflected in the bank’s mission statement and differ from organization to organization according to the markets, clients, and sectors they target. While different banks focus on different activities, ranging from poverty reduction to infrastructure and industrial development, they all face similar kinds of problems when it comes down to measuring their actual impact, proving their effectiveness, and justifying their existence. Differently from financial indicators, measuring a bank’s “development impact” is a more nuanced and less straightforward task. Although it became more increasingly present with the writings of scholars identified with the agency view in the early 2000s, additionality is one of the oldest concepts driving the debate on development banks’ impact. The idea of measuring the additionality of NDB’s investments consists of answering one counterfactual question: “what would happen in the absence of bank/government intervention?”. If the organization’s intervention was a determinant factor for the execution of a project, if it generated income, created jobs, and led to other positive externalities that would not exist otherwise, the investment had some degree of additionality (Frischtak et al., 2017). Additionality can be measured in many forms, and there is not necessarily much agreement across organizations on the best or even “proper” manner of measuring it. Financial additionality is the most common measure to feature in the literature and to be embraced by NDBs. Because financial investments are at the very core of banking operations, development banks’ ability to catalyze additional investments by the private sector across different industries is one of the standard measures of financial additionality. One can measure these additional investments in terms of the size of new investments (money invested), their fiscal impact (taxes collected), contribution to the GDP, among others. NDBs being able to leverage these additional financial investments can be understood as a positive development, as long as the generated outcomes exceed the associated costs of investing in them (Spratt and Ryan-Collins, 2012). Non-financial additionality is a less straightforward and much broader concept. Because of that, the methods and standards for measuring it are hardly agreed upon across organizations. Spratt and Ryan-Collins suggest a subdivision of nonfinancial additionality in two different groups: design additionality and policy additionality. Since these can be more convenient to refine and aid the conceptual debate about development impact, we will discuss each of them in turn.

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Design additionality is a measure of non-financial additionality. It concerns all NDBs, for it refers to their immediate socio-development goals. This additionality measure focuses on the non-financial outputs from bank’s activities such as employment generation (number of jobs created), regional and local development (utilization of local companies/suppliers), human resources development (number of people provided with technical training), additional services provided to parts of the population (water and sewage provision), technical transfer (number of patents), improvements in socio-environment governance (clauses of social and environmental responsibility), mobilization of investments towards sustainable development goals (renewable energy, climate change), among others (Spratt and Ryan-Collins, 2012). Policy additionality is also a measure of non-financial additionality. It is often considered as a byproduct of the bank’s activities and not, necessarily, a direct objective of NDB’s operations. Being so, these measures of additionality are usually not adequately tracked nor measured. From an institutional perspective, public policy is the driving force behind a public development bank operation. At the same time, however, NDBs interact and affect the policy process, mutually influencing each other. Policy additionality is, therefore, the bank’s effect on legal and regulatory framework as well as its influence on building and developing capacity within the public sector. Measures for policy additionality are partnerships with other public sector organizations, embeddedness in broader sector-specific development policies, consultation with affected stakeholders, or input to the fruition of nation-wide policies (Spratt and Ryan-Collins, 2012).

5.1.1

Nuts and Bolts: Measuring Development Impact in Practice

Although there is a burgeoning literature on the importance of measuring and understanding the development impact—in any and every form—of development banks and other public financial institutions, there is still a noticeable lack of comprehensive data for this purpose. That happens for two main reasons. First, due to an insufficient consensus by different organizations on how to appropriately track and measure their development impact; and second, due to inherent methodological difficulties that come with any attempt at measuring, not only what happened after an intervention, but what would have happened in its absence (Heider, 2017). Some organizations have been working on and providing solutions to the second problem. The World Bank’s IFC launched in 2018 a system known as Anticipated Impact Measurement and Monitoring (AIMM), which they use to

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inform their project selection with estimates and rates for the expected development impact of specific investments. These integrate into performance monitoring mechanisms after making an investment, allowing for an integral project evaluation concerning predetermined benchmarks. In a nutshell, it represents an end-to-end system that integrates ex-ante and ex-post evaluations under one tool. Although this represents a new and exciting avenue, most banks, especially the smaller ones operating in developing countries, still carry out ex-ante evaluations only, just a few of them manage to do both (Kingombe, Massa, and te Velde, 2011). Because there are different systems in place for such analyses, it can be complicated to compare different bank’s development impact based on reporting only. Also, even if banks do use the same indicators—such as the number of jobs created or their fiscal contributions to tax revenue—to measure their impacts, these may not be good proxies for good or bad development performance. These indicators are highly contingent on country-specific counterfactuals that, often, cannot be precisely determined. Transformative investments made by a development bank, for instance, can entail the creation of direct and indirect jobs. At the same time, it can also destruct jobs elsewhere due to increases in firm productivity, for example. Thinking of job creation in terms of a static input-output relationship is likely a bad proxy for actual development impact (Carter, 2019). Other more innovative attempts to measure development impact have been emerging in the last few years. USAID and the Amazon Fund, for instance, have been using geospatial data and satellite images to estimate the impact of individual projects in specific fields such as infrastructure provision, deforestation, and agricultural production (BenYishai et al., 2018; Forstater, Nakhooda, and Watson, 2013). Although certainly innovative, this is still far away from the actual capacity of most organizations that invest and support development projects. The latest World Bank survey of NDBs has found that only about half of the responding banks have dedicated monitoring and evaluation units. Most of them still “(…) rely exclusively on financial indicators to measure their performance and results (…) they use essentially the same framework and tools that private financial institutions use to monitor their business activities, financial soundness, and profitability.” (De Luna-Martinez et al., 2018:40). The same survey still indicates that besides only half of the banks conducting economic effect evaluations, the non-financial indicators they use is quite limited. The figure below displays some of them (Figure 5.1): The lack of adequate and comprehensive monitoring and evaluation frameworks is an extremely pressing issue since it affects NDBs’ legitimacy in being

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Figure 5.1 Nonfinancial Indicators Used by DBs to Monitor Economic Effect of Operations. (Source: Survey of National Development Banks—De Luna-Martinez et al., 2018:40)

considered as relevant players embedded in broader national development policies. Because most of them are funded with public resources, they must be accountable to a diverse group of stakeholders in terms of their finances and mandates. Because of past experiences during the liberalization regime, most banks have concentrated on making sure their financial performance was in order. Now that they started fulfilling new roles, assessing their development impact has become increasingly important. To do that, however, monitoring and evaluation systems must be put into place. Without such mechanisms, NDBs will not be able to evaluate their programs, operations, and instruments. Nor will they understand what works and what does not, incurring in the possibility of wasting resources only to find later that better strategies to approach their goals existed (Heider, 2017). Since there are not yet, broadly accepted and adaptable international standards, most banks must develop their own methodology according to the specific features and objectives of their operations. Therefore, the current tools used by different NDBs to evaluate the impact of their operations (when they do) vary across organizations. Because measuring impact becomes more difficult and therefore costlier further away from the intervention point, banks tend to concentrate on variables that are more readily observable and closely connected with the projects they are financing: employment, productivity, sales, among others. One can hardly consider these as evidence of transformational impacts, but they are considerably less

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expensive to undertake. Only a few organizations go beyond as far as implementing more complex randomized control trials (RCTs) to evaluate the difference between similar projects with different funding outcomes (Carter, 2015). Since the costs of measurement are an important barrier to improving the standards and robustness of monitoring activities, there is an inevitable heterogeneity to the evidence presented by different organizations regarding their development impact, based on the type of evaluation they afford to undertake. Ex-ante and ex-post evaluations are helpful for NDBs to build a comprehensive system to judge projects before, during, and after they have been funded. These indicators ought to feed the learning process, honing the bank’s capacity to increasingly select better projects, those displaying a higher development impact potential. This practice also increases the bank’s accountability before its stakeholders—the public, institutional donors, government, and others—be by reporting the detailed impact of projects supported by the NDB or by highlighting non-fulfilled expected objectives from funded projects (De Luna-Martinez et al., 2018). It seems clear that the movement towards improving NDBs’ capacity to assess their impact is unlikely to go away. In times when governments are increasingly under pressure to pursue a “value for money” agenda, development banks’ investments are also affected. Moreover, in a context in which they are more and more framed under sustainable development goals (SDGs), demonstrating their environmental and social outcomes becomes even more relevant. Indeed, some organizations are already using quite advanced mechanisms to measure their development track record. They go beyond the traditionally used indicators such as jobs created after an intervention towards more complex ones such as job quality, for example. For most of the NDBs around the world, however, the starting point is to build capacity to, first, implement a reliable measurement and assessment framework for the evaluation of their development impact (te Velde, 2015).

5.1.2

Defining, Measuring and Reporting on Development Impact

This section concentrates on mapping and evaluating the South American banks in the sample to understand if and how their development impact assessment strategies have changed in the aftermath of the financial crisis. The objective is to test the hypothesis that NDBs, which experienced most improvements in their attainment to the internationally recommended governance practices, are also expected to be more transparent and accountable in terms of measuring and reporting their development impact. Since each bank has a different system for assessing their

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development impact and track record, comparing these systems’ outcomes is very complicated. Comparatively measuring their success can be, therefore, a very subjective exercise in the absence of comprehensive, aggregated data on development impact (Grettve, 2007). To avoid these pitfalls, we move away from attempts to measure or compare these banks’ development outcomes directly and, instead, we seek to understand how each of them frames and pursues their development strategies more generally. In other words, the idea here is to uncover how, if at all, each bank devises their strategies to define, assess, incorporate, measure, and report on their development impact as opposed to comparing their development outcomes. To do that, we use banks’ annual reports from 2008 to 2018 in order to map the evolution of their initiatives on assessing, learning from, and reporting their development impact. This effort does not mean to evaluate the effectiveness of the NDBs’ impact measurement frameworks, but to describe and compare how each of them attempts to do so. The analysis bases on each bank’s annual reports and other supporting documents, so it has the disadvantage of utilizing self-reported data, which can, due to the owner’s pressure, be selective and attempt to overrepresent some positive aspects of the operation (Lynch, 2011). At the same time, self-reported data is ideal for grasping the values on which the bank bases its evaluation framework. Assuming a bank wishes to show its best version in these reports, it makes possible shortcomings even more relevant to the analysis. Admittedly, however, reported procedures are not, necessarily, equal to the de facto procedures. Appreciating the limits of self-reported data, the mapping we undertake is based on five main guiding questions related to each bank’s development impact framework. The next few pages state the questions and explain the logic behind each of them, followed, in the next section, by the application of the questionnaire for each development bank: Q1) How does the bank’s mission statement reflect specific development objectives? An NDB’s mission statement represents its ultimate objective, institutionalizing the organization’s duties before the public and government. This statement might be narrow—defining precise targets the bank ought to pursue and areas within it can operate—or it might be broad—offering more freedom and flexibility for the use of the bank as a tool to target various sectors. There are possible up- and downsides for each of them. Research on development banks indicates that a clear mandate is an essential characteristic of successful organizations because it precisely defines the boundaries within which the bank ought to operate. The mandate serves, above all, as an accountability tool. A broader mandate, however, offers

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the bank the chance to cover more ground, cross-subsidizing weak performing sectors with the income from better-performing ones (Schapiro, 2014; Rudolph, 2009). However, in terms of the analysis undertaken here, we do not consider having narrow or broad objectives intrinsically good or bad. With this question, we aim to evaluate whether each bank’s mission statement clearly defines what its specific development objectives are, be them narrow or broad. A bank can have narrow objectives and be unaccountable for them, while another bank with a broader mission can report and track them all in much detail. Since the mission statement provides a starting point to understanding the bank’s very core objectives, it feeds the organization’s monitoring and evaluation system. This first and essential question helps to shed some light on what kind of performance indicators and reporting areas one would expect to find in the bank’s annual reports. Q2) What type of evaluation framework is in place? In order to assess and prove their capacity to impact development and fulfill their mandates, different banks may use different tools depending on their organizational capacity, objectives, and means. There is a whole range of instruments available to evaluate and monitor impact. Some of them are well-known instruments developed by international organizations such as IFC’s Development Outcome Tracking System (DOTS) or EBRD’s Transition Impact Monitoring System (TIMS). Others are specific solutions developed by each organization using concepts or variations of other evaluation frameworks (Kingombe, Massa, and te Velde, 2011). These instruments usually attempt to estimate the bank’s operations direct impact—employment generated, taxes paid, additional services provided, people trained, regions reached, among others. They also seek to grasp less straightforward, indirect impact—contribution to the GDP, indirect employment, peer effects, among others. These evaluations can be done in two different points in time, prior to the commitment to invest in a project and through its lifecycle (ex-ante evaluation) or after the project is implemented (ex-post evaluation). While many banks focus on the first type of evaluation, and only some pursue the second type, few banks engage in both. There are also differences in the level of evaluation each bank undertakes. While some banks evaluate development impacts on a project-level, others do so on a program level. As discussed earlier, evaluating development impact is not an easy task for it requires trained staff, information systems, and sizable investments. Therefore, there are also NDBs that do not directly evaluate the

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development impact of their operations. That is more common in the case of organizations that embed in governmental programs. For those cases, an evaluation is usually done externally to the organization on a ministerial level. Q3) Which development impact dimensions are addressed and reported? Although different evaluation strategies exist, there is one crucial similarity that cuts across different development financial institutions. Regardless of how they pursue measuring and reporting on their impact, most of them reverberate their influence on four related but separate dimensions: financial impact, economic impact, social impact, and environmental impact. Of course, the extent to which the evaluation strategy addresses and reports on these dimensions depend, to a large extent, on the bank’s main objectives and mandate. In one way or another, development banks have increasingly claimed to pursue objectives related to these dimensions and, to different extents, aggregated them to their evaluation systems and their reporting (Kingombe, Massa, and te Velde, 2011). The financial dimension is the most commonly favored in the evaluation and reporting by NDBs. That is, of course, expected given the banking nature of the organization. This dimension covers the financial contribution of NDBs as measured by the size of the contribution it carried into different projects. The economic dimension is also often present in the development bank’s reporting. They cover their contribution to specific sectors and industries, breaking them down in more detail as to point out to the influence it has over specific sectors it targets. The social dimension has become increasingly important, but not all banks cover it. Here, the organizations report on the impact they have over socially vulnerable groups such as the poor, women, or other context-specific populations. Lastly, but not less important, the environmental dimension covers initiatives that target specifically sustainability, climate change mitigation, among others. Q4) What type of indicators are reported? Beyond the dimensions evaluated and reported by the NDBs, there is the matter of the type of indicators used to track and monitor the bank’s attainment to its mission and objectives, more broadly speaking. The capacity to set and monitor operation-specific indicators critically depends on the maturity degree of the organization’s monitoring and evaluation systems. Monitoring fundamental indicators such as the volume of transactions, breaking them down into sectors, industries, and other groups is a relatively straightforward task for a bank because these are KPIs embedded in their daily operations. Other less straightforward indicators demand different types of analyses that only a more advanced system can deliver. Quantitative indicators, regardless of the dimension they refer to, are easier to track and monitor. When the bank undertakes ex-ante or ex-post studies, these

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are the primary indicators used in the evaluations because they measure output. They refer to the volume of financial resources, number of customers, size of emissions, or other specific items and services. Qualitative indicators are, on the other hand, more nuanced and usually connected to more detailed and long evaluations conducted ex-post. The qualitative indicators usually evaluate outcomes such as technological transfer, effects of investments on aggregated demand, corporate governance, or gender-related issues (Dalberg Global Development Advisors, 2010). These are harder to measure and demand more detailed and advanced methods and mechanisms. Therefore most of the smaller organizations concentrate only on quantitative indicators, while the bigger ones also aggregate qualitative aspects to their analyses. Q5) How is development impact on strategic areas reported? Different banks pursue distinctive strategies to report on their development impact. While some of them do a better job aligning its reporting to the organization’s general goals, others concentrate on publicizing only necessary information about the bank’s operations. It is, however, increasingly expected from NDBs to go beyond transparency about their financial performance indicators towards being more accountable about their impact on the economy and its repercussions for society and the environment. Even development banks that already strive to report development outcomes of the projects they support are now increasingly pressured to do so in the context of sustainable development goals. These banks must go beyond empty claims of having an impact and toward providing evidence of that impact. That can only happen through monitoring and evaluation systems allied to an excellent communication and reporting strategy (ODI, 2016). Be due to their reduced capacity or due to unwillingness to track their development impact, many banks still only provide very limited reporting of their activities. Limited reporting is, very likely, a good proxy for a weak evaluation capacity. A bank that monitors its development impact would most likely be very interested in publicizing its accomplishments as opposed to being silent about them. Still, many banks do not go beyond claiming to impact people’s lives and the economy, without providing much evidence for it. They describe programs and give detailed accounts of what the plans behind each investment are what is, however, distinct from providing evidence. Other banks attempt to provide more extensive reports about their impact and their logics of action. These usually go beyond the financials towards using proxies for development impact, be it internally, through a dedicated unit, or externally, partnering with specialized evaluation companies.

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5.1.2.1 BNDES The Brazilian National Development Bank has historically played a significant role in the provision of long-term credit to the Brazilian economy and, especially, to the infrastructure and heavy industry sectors, which remain very relevant in the bank’s portfolio to date. During the last ten years, the bank has slowly been changing its investment profile, aligning its strategic objectives with broader developmental goals. It has more actively engaged in fostering innovation, promoting sustainable growth, stimulating the green economy, and dynamizing the national economy with a particular focus on small and medium enterprises. During the North-Atlantic financial crisis, the BNDES has strongly expanded the credit offer for the Brazilian market, playing a smoothing role in opposition to the pro-cyclicality of private financiers. From 2008 until 2016, BNDES’ mission statement was “to promote the sustainable and competitive development of the Brazilian economy, generating employment e reducing social and regional inequalities.” This statement changed in the following year to “making financial solutions that add investments to the sustainable development of Brazil viable.” This seemingly small change gains a new connotation in the context of the impeachment process that removed a center-left government from power after thirteen years to give place to a more liberalizing, center-right alliance. The substitution of the words “social and regional inequalities” by “adding investments” denotes that change in the political mindset quite clearly. BNDES’ development objectives remain, nonetheless, quite broad. A similar situation reflects on the revision of the bank’s vision statement. Until 2016 it read “to be Brazil’s national development bank, an excellence institution, innovative and proactive front our societal challenges”1 changing to “to be acknowledged as Brazil’s development bank due to its relevance and effectiveness”2 in 2017. The removal of “societal challenges” and replacement by “effectiveness” also shows a specific realignment in terms of the bank’s general inclination: prioritizing efficiency. In any case, although different in nature, the bank’s mission statement preserved clearly stated development objectives for the institution. While “tackling inequalities” disappeared from the mission, the idea of sustainability and innovation was preserved and even readdressed to frame the SDGs. 1

Original in Portuguese “Ser o Banco do desenvolvimento do Brasil, instituição de excelência, inovadora e proativa ante os desafios de nossa sociedade.” 2 “Ser reconhecido como o banco de desenvolvimento do Brasil pela sua relevância e efetividade.”

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Although development objectives are present in the bank’s mission, they remain only partially quantifiable. These development objectives are further specified in the bank’s corporate strategic plans. From 2008 until 2018, BNDES launched three different corporate plans and, although there are quite concrete objectives established in each of them, KPIs to monitor the bank’s attainment to them are still not equally well-developed. Most of these objectives serve to guide decision-making by the board and management, but they are not entirely nor individually monitored against more detailed development impact indicators. In line with its mission of promoting regional development, the bank monitors, since 2008, the percentage of total loans destined to different regions of the country. It also specifies the percentage of loans dedicated to export promotion and internationalization of companies, for instance. These are, however, not explored beyond the total amount of funds or the number of loans provided. Investments break down according to the destined sectors, such as infrastructure, agriculture, industry, and others. Here, again, these do not go beyond quantities and values. Since 2011, the bank started to individually report on its investments’ contribution to the “green economy” and to “social development.” A few years later, “innovation” and “small and medium enterprises” were also added as separate categories to the standing monitoring efforts. BNDES attempts to provide specific examples of investments it provided, which follow the logic of its mandate. Although observing improvements in that direction, it still seems far from ideal. Regarding the incorporation of the development objectives to the lending policies, BNDES started, in 2008, to implement a system called MAE (Evaluation Methodology of Enterprises, in Portuguese) to monitor and evaluate the intangible assets of the companies it supported. Still, in 2008, the bank created the environment and the internationalization departments, indicating management’s commitment to work towards these goals in alignment with the bank’s global objectives. However, it was only in 2011 that the bank claims to have started to monitor the socio-environmental impact of all its investments more systematically. The monitoring bases on “internationally accepted methodologies” and uses indicators “which allow the bank to evaluate its efforts in comparison to other development financial institutions in Brazil and abroad,” so to that the bank can engage in strategic partnerships towards the attainment of sustainable development objectives (BNDES, 2011). These led, in 2015, to an initial impetus towards the creation and systematization of a monitoring and evaluation system (M&E). It primarily consists of a bundle of monitoring and evaluation tools to support the global evaluation of the bank’s operations as well as to foster accountability. The system consists of three

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different pillars: a logical framework method, a planning division, and building external partnerships. We discuss each of them in turn: The logical framework method (logframe) is the first instrument part of the M&E tools. It consists of a systematic evaluation of the expected effects of a specific program, indirect or direct, quantitative, or qualitative. This ex-ante analysis is revisited with the conclusion of the project and used in the evaluation of the program’s results, allowing for a contextual revision of the expected objectives and aiding the learning process. The second M&E instrument is the planning division. It undertakes quantitative studies to estimate deliverables for each project—employment generation, econometric analyses, and physical deliverables, such as products and services. These studies are done before the actual disbursement and used, later on, to inform the evaluation of the program. The third and last pillar of the M&E is partnerships. BNDES partners with other organizations and external consultants, which prepare viability studies and ensure independent evaluation of specific programs. These serve as a form of accountability mechanism, fostering a learning process for internal departments as well (BNDES, 2015). In 2017, the BNDES developed a new system for the promotion of effectiveness (SPE) to be introduced in the following year. It is a new multicriteria methodology called TIIP used to qualitatively evaluate the expected impact of projects supported by the bank. This tool contemplates the potential impact of the projects in five different, critical impact dimensions for the BNDES: social, economic, client, regional, and environmental. During this evaluation, the bank constructs a “results board” (quadro de resultados) containing specific indicators that need to be followed-up during and post-implementation of the projects. Such as the M&E, the TIIP consists primarily of ex-ante evaluation tools. They are, in addition to the often-used indicators to illustrate the bank’s impact on the economy—number of loans, financial amounts disbursed, number of projects supported, important but not sufficient to understand the development impact of the bank across different sector and industries. Therefore, the bank has started, although slowly, to move in a direction towards expanding ex-post evaluations as well. In 2015 the bank released a first effectiveness report, which evaluates investments it undertook from 2007 until 2014. In the document, the Brazilian development bank attempts to provide a range of indicators that go beyond the regular financial KPIs of its operations or breakdowns of disbursements across industries, regions, and sectors. That represented a first systematic attempt to tackle the issue of fine-tuning its programs and of increasing its levels of transparency and accountability. Some indicators used by the BNDES in that specific report are employment indicators, changes in salaries, employee education, impact

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on turnover. It also addresses more specific ones, such as impacts on additional units of electric energy generation, support to generic medical drugs, increases in conservation units, IPO participation, and others (BNDES, 2015b). In 2017, the bank released its second effectiveness report, consolidating the activities and evaluation from 2016 to 2017. It also presented further details about the SPE to be implemented in the following year. The report follows, to some extent, the first one published a few years earlier and presents the perceived impact of BNDES’ investments across a whole range of products. It also describes in much more detail its monitoring and evaluation system. It goes as far as summarizing the impact evaluation studies made within the bank and externally, including academic papers whose authors have no relationship with the organization. Interestingly enough, even papers that found adverse effects on BNDES’ interventions were summarized there. This report reaffirms the bank’s commitment to undertaking and improving its evaluation methods, including expanding ex-post evaluations. Nonetheless, it acknowledges how difficult and costly it is to perform ex-post evaluations for all its investments. It pledges, therefore, to concentrate specifically on programs that represent the most important objectives of the bank (BNDES, 2018b). As evidenced by the table below, it seems quite clear that BNDES’ efforts in measuring, monitoring, and evaluating its development impact have consistently increased during the last ten years. The bank has developed new tools to expand its monitoring and evaluation capacity, and their methodologies have increasingly been available to the public. The organization has incorporated critical dimensions to its evaluations, going well beyond the mere evaluation of the financial and economic impact of its supported projects. Environmental and social aspects have increasingly been contemplated and highlighted following society’s and the bank’s interests and agenda. Besides that, there has been an evident improvement in the content and quality of the bank’s reporting efforts. It goes beyond the publication of its evaluation methods and impacts studies, publishing bi-annual effectiveness reports in an apparent attempt to increase its transparency and remain accountable to the public (Table 5.1).

5.1.2.2 COFIDE The Corporación Financiera de Desarrollo was established in 1971 with the primary goal of financing public investment projects as an arm of the Peruvian government while also performing some commercial functions. It was initially created as a first-tier bank, meaning it concentrated on lending directly to companies and projects without resorting to banking intermediaries. It was not only

Broad

Broad

2013

2018

✖ ✖ ✔

✔

✔

✔

Source: Prepared by the author

Broad

2008 ✔

✔

✔ ✔

✔

✔ ✔

✔

✖ ✔

✖

✖

✔

✔

✔

✔

✖

✖

Extensive

Extensive

Limited

Bank Dev. Eval. Framework Reported Dimensions Indicators Reporting Objectives Ex-Ante Ex-Post Financial Economic Environmental Social Quantitative Qualitative

Table 5.1 BNDES’ Monitoring and Evaluation Framework: 2008, 2013, and 2018

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until 1992 that it became a second-tier bank, allocating resources via other financial institutions to foster their participation in the financing of long-term capital. In the same year, COFIDE completely removed commercial bank activities from its portfolio, concentrating entirely on development banking functions. It currently seeks to go beyond the provision of financial services by providing technical assistance to projects from Peruvian companies (Quispe et al., 2017). In the analyzed period, COFIDE’s mission statement changed four times. In 2008, it read “to contribute with Peru’s sustainable and decentralized development, participating actively in financing investments and developing financial and capital markets through high-value innovative products and services in benefit of the diverse economic agents in the country.”3 In the period from 2009–12, the statement changed very marginally. The main difference, besides the order of the sentences, was the incorporation of the word “inclusive,” referring to the services provided by the bank.4 From 2013–17, the changes were more evident: “to participate actively in the inclusive and sustainable development of the country through financing investments and the financial system, as well as supporting enterprises with innovative products and services, while being socially responsible.”5 Finally, in 2018, the statement was shortened to read: “to be the motor of inclusive and sustainable development in the country, boosting its productivity and competitiveness, granting funding and other financial services.”6 COFIDE’s mission statement quite clearly reflects its broad development objectives. Differently from all the other banks in the sample, it already discussed “sustainable development” as early as in 2008 with “inclusiveness” becoming a guiding principle in the statement in the following year. Social responsibility only became a topic in 2013, whereas in 2018, the shortened mission statement condensed all these goals. The objectives stated in the bank’s strategic plans, however, seem much narrower than those of the mission statements. In the strategic plan 3

Original in Spanish: “Contribuir con el desarrollo sostenible y descentralizado del Perú, participando activamente en el financiamiento de la inversión, el desarrollo del mercado financiero y de capitales, a través de productos y servicios innovadores de alto valor agregado, en beneficio de los diversos agentes económicos del país.” 4 “Fomentar el desarrollo sostenible y descentralizado en beneficio de los diversos agentes económicos del país, participando activamente en el financiamiento de la inversión y en el desarrollo del mercado financiero y de capitales, a través de productos y servicios innovadores, inclusivos, y de alto valor agregado.” 5 “Participar activamente en el desarrollo sostenible e inclusivo del país, a través del financiamiento de la inversión y del sistema financiero, así como apoyando al emprendimiento, con productos y servicios innovadores, y siendo socialmente responsables” 6 “Ser motor del desarrollo sostenible e inclusivo del país, impulsando su productividad y competitividad, otorgando financiamiento y otros servicios financieros.”

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2007–11, for example, the bank’s main strategic themes are stated as follows. One, supporting investments; two, SME development; three, financial and capital markets development; and four, decentralized presence in Peru (COFIDE, 2008). Besides, to some extent, the support to SMEs, all the goals are clearly stated in financial or economic terms. The situation changed slightly in the following plan, 2013–17, in which COFIDE added environmental investments as one of its strategic axes (COFIDE, 2013). After 2017, the bank has not published new strategic plans. In line with these thematic areas, the bank has consistently reported on its activities related to the strategic pillars, explicitly referring to them in one section of the annual report. The performance indicators go beyond COFIDE’s financial contributions to specific projects or the traditional breakdown in different industries or sectors. Already in 2008, the bank reported on the social-related dimension of its investments: the number of people trained in specific programs, number of SMEs which regularized their tax situation, number of scholarships financed via bank-funded programs, number of volunteers for the implementation of training programs for small companies, among other services and programs (COFIDE, 2008). The number of indicators is higher than that of most banks in the early years, and it includes an ample range of non-financial indicators, as well as anecdotal evidence of the bank’s impact on its strategic objectives. Over the years, COFIDE has mainly focused on reporting quantitative indicators without making the transition to a more qualitative approach to describe the development impact of its operations. In 2009, some qualitative indicators specific to a program the bank was part (COFIGAS), which focused on financing the conversion or acquisition of vehicles moved by natural gas as well as the installation of generators moved by the same source, were indeed reported. For this program, COFIDE used a comparison of pollution data in specific cities before and after implementing the program. It claimed that the increase in the number of these gas-moved vehicles led to an improvement in air quality (COFIDE, 2009:43). Besides that, the bank did not systematically use qualitative data to the effects of illustrating its development impact. Regarding its M&E framework, the evidence presented in the reports indicates that the bank undertakes, to some extent, ex-ante evaluations of its programs to understand how, if and how much impact they have in the bank’s strategic objectives. However, in the early years of the analysis, the bank’s annual reports do not mention nor specify the framework for evaluation of programs and interventions. In fact, until 2012, the word evaluation was strictly used in the context of credit risk management and human resources. It was not until 2014 that COFIDE expressly referred to an evaluation methodology concerning one of its projects

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called PRIDER. That project aimed at the creation and empowerment of credit cooperatives for rural, impoverished families, and had reached, until then, more than 58 thousand people (COFIDE, 2014). CAF supported the evaluation of that project, which entailed designing randomized control trials (RCT) for two specific regions in the country. The one that received the program’s support would function as the treatment group, while other would be the control group. That evaluation project expanded to other regions in order to verify the degree to which it could also hold in different contexts. The experiment ran from 2014 until 2016 and included constant in-loco visits from the evaluators to verify and monitor the conditions of the targeted groups. From 2016 to 2018, these groups would be visited once again so that the impact of the intervention could be estimated. For this specific program, detailed qualitative indicators were reported, such as self-esteem levels of the participants, degree of commitment to social and ethical standards, confidence bond among the partners, among others (COFIDE, 2018). Besides this particular reference to a monitoring and evaluation system, which includes an ex-post evaluation of a project, COFIDE does not provide further details about its M&E framework. Despite that gap, the word “impact” has appeared more and more often in the bank’s annual reports, in contexts further away from credit risk and personal management. Since 2015, the bank has committed to framing its projects and funds in the context of the triple bottom line model. That consists, primarily, in an attempt to highlight, not only the economic impact of its activities but also its social and environmental impact. Without details about the bank’s M&E system, it is particularly hard to frame the reported impacts COFIDE claims to deliver. Also, reporting using a triple bottom line approach does not necessarily mean that the indicators used by the bank are, necessarily, direct causes from its interventions. Regardless of that, it is evident that the dimensions reported by COFIDE have followed those established in its strategic directions. Over time, the bank has engaged in clear attempts to account for its impact beyond financial and economic terms. The social aspect of the bank’s operation was already very latent in early reports, and it has only broadened since then. Although the word “sustainable” is part of COFIDE’s mission statement since even before the frame of the analyzed period, more detailed reporting on its claimed impact on concrete actions related to climate change and mitigation were only systematically integrated much later. Although reporting quality has indeed improved over time, the attempt to document the bank’s development impact on strategic areas remained, such as from the beginning of this evaluation, quite extensive. Table 5.2 summarizes that development.

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Although the bank checked al the boxes in 2018, it does not mean that its M&E system is necessarily better than that of other banks. COFIDE has failed to provide details on how it measures and understands its development impact beyond the provision of some indicators that may or may not be due to its interventions. Reporting on jobs created, people trained, the number of companies financed, and the amount of funds destined to specific sectors does not necessarily mean that the bank can adequately evaluate its impact. More importantly, without this data, it is not clear how the bank can improve its programs to increase its impact on Peru’s development. In order to do that, it would be necessary for the bank to be more transparent about the methods it uses, the indicators it monitors, and the results it has had in the past. The reporting on the use of the RCT to evaluate the PRIDER program is an excellent example to show that the bank has the knowhow to do it. It only needs to start to, more systematically, apply similar strategies to other programs.

5.1.2.3 BICE Since its creation in 1992, BICE works towards mobilizing resources and driving medium and long-term investments in the Argentinian economy. It targets primarily small and medium enterprises, with a minor share of larger ones, mostly financing productive investments of export-driven companies. The bank operates as an arm of the national government to channel and structure investments in infrastructure, energy, and industrial capacity as a path towards improving the competitiveness of productive sectors. According to the bank’s reports, BICE only started its consolidation as Argentina’s development bank between 2003 and 2010, when it became the main source of long-term credit to the private sector in the country. After that first cycle, the bank created, among other things, lines of credit in strategic areas such as technological innovation, renewable energies, and environmental improvement (BICE, 2010:117). These development objectives, however, were not summarized in its mission statement from the beginning of this period. BICE’s mission statement only appeared in its annual reports quite late, in 2016. It read: “to be the Argentinian development bank, complementing markets through the extension of loan terms, the inclusion of new credit subjects, and the financial structuration of real investments.”7 In 2017’s annual report, the bank’s mission read slightly differently: “to grant medium- and long-term financing for productive investments 7

Original in Spanish: ser el Banco de Desarrollo Argentino, complementando mercados mediante el alargamiento de plazos, la inclusión de nuevos sujetos de crédito y la estructuración de financiamiento de la inversión real.

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Bank Dev. Eval. Framework Reported Dimensions Indicators Reporting Objectives Ex-Ante Ex-Post Financial Economic Environmental Social Quantitative Qualitative

Table 5.2 COFIDE’s Monitoring and Evaluation Framework: 2008, 2013, and 2018

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and foreign trade, focusing on small- and medium-sized enterprises and regional development.”8 Until 2016, the bank’s objectives articulated in its mission statement concentrated primarily on financial and economic outcomes without necessarily covering socio-economic aspects. All four goals included in the bank’s strategic plan for the period 2011–2015 can be strictly understood as financial-economic only. One, to sustain the privileged position of BICE as a source of long-term resources assuring that 50% of its direct transactions are for more than five years. Two, to continue expanding the indirect transactions channeled through financial institutions, reaching a minimum of 20% of total disbursements. Three, to keep a Financial Efficiency Ratio lower than 46%. Four, to reach a profitability ratio higher than 7% in 2013 (BICE, 2011:27). Since then, some socio-economic goals were added to the core of the bank’s mission—focus on SMEs and regional development; however, BICE’s development objectives remain relatively narrow in comparison to the other NDBs. Given these narrow development objectives, the KPIs used to monitor the bank’s attainment to the mandate are also quite straightforward. Since 2008, the bank consistently reports on very few indicators related to the core of its mission, such as loan distribution by economic activity and loan distribution by region. All the other indicators only reflect the bank’s economic-financial performance and do not touch upon the issue of development impact. In 2011, BICE claimed to have aggregated impact indicators to its process of project feasibility analysis. According to that year’s report, the bank started to use ex-ante indicators on the potential for job creation, impact on less developed regions, and contribution to local technological content, in order to evaluate and prioritize which projects had the potential to generate higher impact (BICE, 2011). Further reports claim, quite generally, that BICE’s support to particular projects is due to their potential “to generate employment” or “reduce negative environmental impacts,” however, no evidence nor details about expected development impacts have been further reported. Until 2017, the bank’s annual reports continue to focus on financial metrics to evaluate its economic impact. Simple claims stating “it dedicates over 85% of its loans to SMEs”, or “the average loan maturity is of 55 months, while the financial system’s average is of only five months” are the most common type of evidence reported by BICE to prove its role as

8

“el financiamiento a mediano y largo plazo destinado a la inversión productiva y al comercio exterior, con foco en las pequeñas y medianas empresas y en el desarrollo regional.”

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a development bank (BICE, 2017:6). No other evidence besides anecdotal “success stories” presented in the bank’s website is available or detailed in the annual reports. Finally, in 2018, other socio-economic objectives became more salient in BICE’s primary objectives with the release of the first lot of green bonds by the bank, which were followed by increasing demand for more extensive reporting on the environmental and social impacts of the bank’s operations. Besides the publication of, in comparison to previous years, a longer and more detailed annual report, the bank has also published its first-ever sustainability report in which it details some of the programs and actions related to environmental and social development projects. Since the report follows the standards of the Global Reporting Initiative (GRI), it attempts to connect BICE’s operations to specific SDG and to illustrate how the bank contributes to supporting each of them. According to the report’s text, BICE direct- or indirectly impacts seven different sustainable development goals: no poverty (goal 1), gender equality (5), affordable and clean energy (7), decent work and economic growth (8), industry innovation and infrastructure, (10), reduced inequalities (11), and climate action (13). It does so by investing in companies lead by women, companies operating in less developed areas of the country, in SMEs with employment generation potential. Also, it allocates funds to projects focusing on renewable energy sources (solar, wind, biogas) and energy efficiency (BICE, 2018b:38). The bank claims that its innovative and visionary movement towards green bonds is to have a demonstrational effect on the national financial system. In 2018’s sustainability report, the bank indeed reports in much more detail about the reach and coverage of many of its specific programs in comparison to what it does in its regular annual reports. Although it indeed accounts for the bank’s contribution to the goals it claims to achieve, the indicators used here are also primarily economic-financial. When focusing on companies run by women, BICE reports on the size of loans, number of companies, and their geographical distribution, for example. When describing its impact on environmental projects, it also details the number of projects it finances, the amount of resources destined to them, among other indicators. BICE does not provide additional pieces of evidence that link to its contribution to national development apart from the financial sums involved. Throughout the years, BICE claims in its annual reports to undertake ex-ante evaluations of projects so to develop and improve its financial products as well as the process of project selection itself. In 2018’s report, it became even more evident that the ex-ante evaluations of products and lines of credit happen with the support of international organizations such as the CAF, the IFC, and the World

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Bank. (BICE, 2018). However, apart from the nominal mention to a so-called “project feasibility analysis” in 2011’s annual report, no further clarification of which and how indicators apply for ex-ante evaluations. The information is not presented in any other annual report nor in additional publications by the bank in the period. Methodological notes or similar documents remain lacking in the body of the bank’s publications. Likewise, there is no evidence or accounts of ex-post evaluations. Although it is implausible that the bank would not conduct any sort of evaluations of its programs after the disbursement, the reported indicators show that BICE focuses primarily on their economic-financial aspects. Not even more traditional, more straightforward indicators of development impact such as the number of jobs created, additional capacity, among others, have been reported by the Argentinian bank. That would be understandable given that the bank’s development objectives have always had a strong relationship with economic-financial aspects—as made clear by the guidelines of its previous strategic plans. However, as BICE aggregates less narrow and self-evident development objectives related to social and environmental dimensions, developing its monitoring and evaluating capacity becomes of utmost importance. In order to prove its value as a development bank for Argentina, BICE will have to do a better job in terms of incorporating more qualitative indicators to measure and validate its development footprint. Simarily if it aims to, as indicated in the last sustainability report, increasingly support projects that contribute to fulfilling the SDGs, evidence of that role must exist to make sure that society, as the bank’s ultimate stakeholder, can extract value from its operations. The path to it that passes by setting the bases and developing measurement & evaluation methods to capture proxies of its contribution to the national development. Table 5.3 shows that BICE’s framework for measuring and reporting on development impact has not improved much over the years. In the last year of the analysis, an important step has been taken in a positive direction with the publication of the sustainability report and the partnership with the IDB group to issue green, social, and sustainable bonds.9 Now BICE must work on being more transparent about its evaluation framework, clearly establishing improved quantitative and qualitative KPIs that contemplate all the essential development dimensions encapsulated in its mandate. The bank’s reporting capabilities also must be improved to make sure it remains transparent and accountable to the public, its most important stakeholder. 9

https://www.idbinvest.org/en/news-media/idb-group-supports-bice-issue-first-sustainablebond-argentina

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Bank Dev. Eval. Framework Reported Dimensions Indicators Reporting Objectives Ex-Ante Ex-Post Financial Economic Environmental Social Quantitative Qualitative

Table 5.3 BICE’s Monitoring and Evaluation Framework: 2008, 2013, and 2018

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5.1.2.4 FINDETER FINDETER was created in 1989 to finance the development of infrastructure in different Colombian regions and, especially, less-developed ones. It aimed to ensure their economic and social integration with the rest of the country. To do that, the Colombian government provided long-term capital funds to finance both private- and public-led development projects. These funds were commissioned via local banks in order to make sure that the financial system is included in the process, developing alongside the region and increasingly being able to finance their future needs. FINDETER general objectives have changed only very marginally in the last 30 years. The focus on regional development remains, while in the last five years, it incorporated an increasing preoccupation with the quality and sustainability of development to the bank’s operations. The incorporation of this new agenda can be confirmed, looking at the changes to the bank’s official mission statement over the analyzed period. From 2008 to 2011, the mission statement read: “to promote national development, to increment regional competitivity and the quality of life through the provision of financial and technical services, to public and private sectors, within the framework of public policies”10 (FINDETER, 2011:1). The statement changed in 2012: “We support the sustainable development of the country, generating well-being in the different regions”11 (FINDETER, 2012:3), and again in 2015: “We are the strategic partner that generates well-being in the regions”12 (FINDETER, 2015:5). This movement from being strictly connected to infrastructure development in line with public policies towards a more global involvement with sustainable development and well-being also reflected on the bank’s vision. It started, in 2008, from “to be acknowledged (…) as the best development bank in Colombia, with products and services that attend the needs of the market”13 (FINDETER:2008:1). Passing by, in 2012, “to be the development bank for sustainable infrastructure in the country”14 (FINDETER, 2012:3) and reaching, in 2015, “to be the development bank that transforms the regions in sustainable territories”15 (FINDETER:2015:5). 10

Original in Spanish: “Promover el desarrollo del país, incrementar la competitividad territorial y la calidad de vida, através de la prestación de servicios financieros y técnicos a los sectores público y privado, dentro del marco de las políticas del Estado.” 11 “Apoyamos el desarrollo sostenible del País, generando bienestar en las regiones.” 12 “Somos el socio estratégico en las regiones, que genera bienestar para la gente.” 13 “Ser reconocidos en el año 2012 como el mejor Banco de Desarrollo de Colombia, con productos y servicios que respondan a las necesidades del mercado.” 14 “Ser la banca del desarrollo para la infraestructura sostenible del país.” 15 “Ser la banca de desarrollo líder que transforma las regiones en territórios sustenibles.”

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This movement away from more narrow objectives such as the strict concern about regional competitivity in terms of their economic capacity, to more broad objectives such as regional well-being allied to sustainable development, has been well captured in the bank’s mission statements and vision. Looking at the three strategic plans released in the period from 2008 until 2018 helps to understand how the bank incorporated these objectives into their strategy. In the 2008–12 plan, FINDETER established its goals in the form of a target percentage of total disbursements to specific regions, projects, and segments. The bank also defined targets related to the national government’s national development plan. These foresee a certain number of investments in specific areas with high expected social impact, such as education, social housing, health, and transportation, for instance. Later, in the 2012–14 plan, the primary goals were defined based on seven strategic objectives. The plan comprises a mix of financial—maintaining the asset values and the financial competitivity of the bank –, and non-financial elements—increase efficiency and effectiveness of socio-economic development in the regions. It defined related KPIs according to these global objectives. It started to track other non-financial elements as well—employment generation, number of people attended by the programs, number of schools, among other intersectoral project-level indicators. FINDETER kept building-up on that base when it released the plan 2015–25. The new plan bases on six strategic objectives, each of them with specific weights in the final strategic outlook: financial and profit, clients and market, efficiency, innovation, strategic capital, and sustainability. These subdivide in another 16 sub-objectives and at least 50 concrete initiatives. Here too, KPIs had to be more refined, as to encompass non-financial goals as well. FINDETER’s efforts to provide evidence of its development impact have evolved at the same pace. It aggregated less clear-cut development objectives such as fostering sustainable development or contributing to the population’s wellbeing. Until 2011, annual reports concentrate on indicating the percentage of the bank’s contribution to specific sectors against the goals established by the Colombian Government. It mostly reports breaking down its contribution to different industries, regions, and departments without necessarily providing evidence of any impact outcoming from these investments beyond their financial aspects and doing the same to clarify the bank’s participation in public policies and specific governmental programs (FINDETER, 2008: 34). Starting in 2012, in line with the new strategic objectives and mission, the bank has incorporated social and environmental sustainability policies into its operations. Following up with the efforts to increase its efficiency and effectiveness, it implemented a measurement and evaluation system (Seguimento y

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Evaluacion—S&E) to measure and understand the impact and results of the projects it finances. The evaluation framework constitutes of three pillars: strategic planning, result-oriented monitoring, and evaluation. It combines both an ex-ante evaluation—to ensure that the financed projects are in line with the organization’s objectives—and as an ex-post evaluation—to feed the learning process and to increase transparency and accountability (FINDETER, 2012:39). The system was developed in 2012, implemented in 2013, and reported on its impact KPIs for the first time in 2014. Since 2014, the indicators reported by FINDETER go well-beyond its quantitative contribution to the economy. Macro indicators focus on both qualitative and quantitative outcomes of the bank’s operations, such as employment, populationrelated indicators, and other intersectoral indicators such as additional kilometers of roads, expansion of the public transportation, additional school places. FINDETER also started to report on some individual projects to attempt to provide the public with more palpable information about the extent of its impact on their lives. Differently from the early years, the bank does not limit its reporting to the participation as a secondary or support actor to government. It has started to provide more details about its role in the structuration of PPPs and the support to local governments too. In 2016 the bank reworked its reporting mechanisms to more comprehensively embed the sustainability aspect as a central element in its reports. It renamed its annual document to deliberately include the word sustainability (Informe de gestión y sostenibilidad) and adapted the reporting content to the guidelines of the GRI. It started to report separately on three dimensions of sustainability—financial, regional, and environmental—including its specific contribution and impact on climate change, use of water, contribution to the peace process in Colombia, and others. In comparison to early reports by the bank, the quantity and quality of the indicators used to measure and provide evidence of development impact have improved considerably. The inclusion of the environmental aspect already in 2015 represents a significant change in relation to the previous reports. Table 5.4 indicates the evolution of FINDETER’s framework for measuring and reporting on its development impact. Although it is evident that FINDETER’s reporting has improved in virtually every aspect evaluated here, this is not to say that the bank does not have further dimensions from its reporting and evaluation of development impact to improve. One of these aspects mentioned earlier and which deserves further analysis is the bank’s S&E system. This system, presented in 2012’s report, claims to have substantially improved the evaluation and monitoring capacity of the bank. The result is that, two years later, the organization

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started to provide more detailed reporting of its expected development impact beyond financial and economic aspects, including social and environmental ones. Since then, no further details about the S&E system have been published, nor any methodological notes were made available for the public. It remains unclear how it conducts ex-post evaluations if they are at all. That is a concern, mainly because the bank mostly reports on “expected impacts” of its projects and not on, de facto, “observed impact.” It is also unclear how it uses these KPIs as an input to the learning process and to adjust the bank’s lending policies. That is not to say that the bank does not conduct ex-post evaluations nor tracks its related indicator. However, the lack of information about it does not allow us to evaluate and learn from the lessons provided by FINDETER in that respect.

5.1.2.5 BDP BDP was created as such in 2007 as part of a new economic policy adopted by Bolivia after Evo Morales’ election in 2006. The organization, however, already existed under the name NAFIBO SAM since 1996 and operated under a somewhat different structure. Since its creation, BDP has functioned as a second-tier bank, distributing its funds via intermediaries in the financial system and without direct lending. It was conceived to function as an arm of the national government for the execution of its newly created national development plan (PND, in Spanish). The plan aimed at developing Bolivia’s productive system by offering favorable conditions to sectors and regions historically excluded from access to the traditional financial sector (BDP, 2008). The bank would concentrate, especially in providing financial and non-financial services to the development of sectors such as agriculture, livestock, fishing, forestry, and logging. After 2015, it received authorization from financial authorities to operate as a first-tier bank as well. Although BDP has not published a “mission statement” as such in its annual reports until 2011, since 2008, the bank’s mission was referenced to multiple times, adapted in small variations, from its official mandate. In 2011 the bank’s mission read: “to guide and support the transformation, diversification, and growth of the productive matrix through the provision of financial and nonfinancial services that attend the needs and characteristics of the micro-, small-, and medium-sized producers”16 (BDP, 2011:10). In 2015, the bank’s mission explicitly aggregated some key issues. “To support the productive development of the country, generating income, employment, and reduction of inequalities 16

Original in Spanish: “orientar y apoyar la transformación, diversificación y crecimiento de la matriz productiva a partir de la otorgación de financiamiento y servicios no financieros, que respondan a las necesidades y características de los micro, pequeños y medianos produtores”

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Broad

2013

2018

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Source: Prepared by the author

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2008 ✔

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Extensive

Extensive

Limited

Bank Dev. Eval. Framework Reported Dimensions Indicators Reporting Objectives Ex-Ante Ex-Post Financial Economic Environmental Social Quantitative Qualitative

Table 5.4 FINDETER’s Monitoring and Evaluation Framework: 2008, 2013, and 2018

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among the different actors of the plural economy, seeking the creation of value, productive transformation and diversification, food security sovereignty, and the preservation of the environment”17 (NOVA Monitor Social, 2016:11). In 2017, the mission statement, which was relatively broad until then, became quite narrow to the point of being condensed in one single, short sentence: “to finance the development and the productive innovation of the country.”18 The bank’s quinquennial strategic plans detail its specific strategic objectives. The first one comprises the period of 2009–13 and establishes, among other more corporate-related plans, the objectives of financing the transformation of the productive matrix in the country, as well as to finance micro, small and medium producers. It also covers some social objectives, such as financing the educational system, among other priorities (BDP, 2008). In the following plan for 2014–18, BDP established three main lines of action for its operations. One, to reach traditionally excluded producers and also those who have high productive potential but remain underserved. Two, to align its financing mechanisms to the priorities established by public policies focused on the agricultural sector, manufacturing industries, and processes of technological change and innovation. Three, to be responsive to the demands of and commitments made with producers’ associations (BDP, 2015:18). The reporting on these objectives remained relatively limited. Starting as early as 2008, the KPIs reported by the bank consist of the classic breakdown of its loans according to economic sectors, geographic areas, and according to the financial intermediaries used to deliver the resources. For one of the bank’s main programs destined to supporting micro and small producers, the reported indicators are even more detailed. BDP reports on, besides the traditional breakdown, the number of recipients, the type of producers financed, a break down according to gender, and, finally, the number of jobs created. In the following years, the bank also provided quantitative reporting for other programs with social goals (number of kids and schools targeted; the number of pregnant women subsidized; among others. From 2012 on, the bank started to provide indicators about its non-financial services as well, such as the number of people trained in seminars or specific events, even breaking these numbers down according to regions, gender, training program topics, among others. Since 2015, with the beginning of the first-tier operations, BDP also reports details about its direct loans in a greater level of detail than it did with the 17

“Apoyar el desarrollo productivo del País a través de la otorgación de servicios financieros y no financieros, para incrementar y mejorar la producción, ingresos y empleo de los actores productivos, buscando la diversificación productiva, seguridad alimentaria con soberanía y agregación de valor” 18 “Financiar el desarollo y la innovación productiva del país.”

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programs the bank only acted as an intermediary, the KPIs reported, however, remain overwhelmingly quantitative. One year earlier, in 2014, the bank engaged in efforts to improve its communication with its main stakeholders by publishing social responsibility audits made by external, independent companies. These reports evaluated BDP’s operations per their corporate, social, economic, and environmental impact. It was not until 2017 with the publication of the bank’s first sustainability report, which includes, in much detail, the strategic indicators to be followed by the bank in terms of its social and environmental role. These reports include the actual annual targets and BDP’s attainment rate at the end of the year, representing the broadest attempt to increase transparency and accountability to the public about the bank’s operations and goals. Moreover, the annual reports in 2017 and 2018 already include a small range of qualitative indicators of its operations in addition to the predominantly quantitative approach present in earlier years. That denotes a clear attempt to provide evidence of the effects of its operations on real-life projects. The bank reports, for instance, on “success cases” in which it evaluates the situation prior and after the intervention, attempting to construct a logic chain through which it establishes its influence on improved results. Moreover, it also made available results from technical training and opinion surveys on some of its non-financial services (BDP, 2018b). The improvement of reported indicators has, evidently, connection to advances in monitoring and evaluation of projects. Already in 2008’s report, there is mention of the objective, per the strategic plan 2009–13, of establishing a department called Monitoring and Impact evaluation in the following year. The existence of a systematic M&E methodology, however, has only been occasionally mentioned. In 2014, for instance, the bank reports undertaking specific studies to improve its understanding of the areas and sectors it ought to attend. In addition to that, the bank has developed a study to build on its capacity to estimate the impact and reach of specific public policies to establish linkages with them more effectively and to increase BDP’s interventions’ impact (BDP, 2014:65). That indicates that the bank does undertake some ex-ante evaluations of its programs to tailor them according to their public policy content and the government’s objectives. The fact that BDP, since 2015, has started to operate as a first-tier bank, increases the degree of responsibility it has over the selection of projects it finances. Now, ex-ante evaluations ought to be done, to some extent, on a project level as opposed to a program level in the early years. Nonetheless, there is no mention in the reports on if and how it undertakes these evaluations. Similarly, in opposition to the beginning of the sampled period, when the bank did not lend directly to projects or customers, the type of indicators used in the late annual reports indicate the existence of some degree of ex-post project evaluations. Such as for

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ex-ante evaluations, the methodology for such studies remains largely undisclosed and unaddressed. Table 5.5 demonstrates the evolution of BDP’s framework for measuring and reporting on its development impact. Although the bank already covered the social dimension of its investments in addition to economic and financial ones since 2008, reporting efforts improved in scope and breadth. Besides the effort in detailing the programs it finances, BDP has consistently followed up the results from its interventions in public policies so to provide a sample of its developmental role. It has also aggregated the environmental dimension to its reporting to keep accountable and in line with its triple-bottom strategy. The bank’s mission has been narrowed down by the end of the analyzed period, and the strategic plans are not always evident regarding the bank’s main objectives. Therefore the publication on the bank’s leading indicators and targets in its sustainability report represents an important step in terms of keeping transparent and accountable to the bank’s main stakeholders. It is clear, however, that the BDP did not evolve as much in terms of its M&E system. Alternatively, if it did, the lack of transparency about the bank’s framework to assess, report, and learn from the results of its interventions makes it very difficult to have an overview of the weaknesses and strengths of its M&E system. The analysis of some of the bank’s published indicators demonstrates some advances in the quality of program evaluation more generally. Nevertheless, it remains unclear what the main criteria for project selection and evaluation are. The bank must be more transparent about its methodology to evaluate its projects before and post-implementation.

5.1.2.6 CFN CFN is, alongside BNDES, one of the oldest organizations in the sample. Created in 1964, during the military dictatorship that ruled the country, the bank stood in alignment with the interventionist paradigm that dominated Latin America during those years. The bank’s objective was a developmentalist and straightforward one: fostering and accelerating the industrialization of the country via the provision of credit and non-financial services to the productive sectors. Differently from other banks in the sample, this close connection and almost natural alignment with government policies have not reduced over time, not even with the re-democratization process in Ecuador. CFN is still primarily seen as an integral part of the state’s toolbox for the implementation of public policies aiming at development.

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2013

2018

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Source: Prepared by the author

Broad

2008 ✔

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Broad

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Bank Dev. Eval. Framework Reported Dimensions Indicators Reporting Objectives Ex-Ante Ex-Post Financial Economic Environmental Social Quantitative Qualitative

Table 5.5 BDP’s Monitoring and Evaluation Framework: 2008, 2013, and 2018

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This natural inclination can be confirmed when one looks at the different mission statements published by the bank during the analyzed period. In eleven years, the bank has changed its mission statement six times. During nine of those years, alignment with one specific development plan or public policies more broadly was part of the bank’s official mission statement. In 2008, the mission statement read “to serve the productive and service sectors in Ecuador with financial and non-financial products aligned with the National Development Plan.”19 From 2009–11 the statement changed only very slightly to “through the provision of financial and non-financial products aligned with the National Plan for the Good Living, to serve the productive sectors in the country.”20 Between 2012–13, the phrase “(..) to serve the productive sectors in the country” was replaced by “(…) to boost the development of the country’s priority and strategic sectors.”21 In the following period, from 2015–16, the mission changed to cover a broader horizon than those given by specific national development plans. It became connected to public policies in more general terms: “to boost the development of the country’s priority and strategic sectors, through the provision of multiple financial and non-financial services in alignment with public policies.”22 In 2017 and 2018, the statement changed yet another two times, first to “to be a reference for development banks in Latin America, efficient and proactive, which promotes the transformation of the productive sectors in Ecuador”23 and finally to “we promote the development of the country financing the dreams of the Ecuadorians.”24 The changes in CFN’s mission statements show the bank departed from a relatively narrow set of objectives and a great alignment with specific governmental programs towards a broader mission, which is less palpable (financing dreams) and also less automatically aligned with specific state policies. The translation of the bank’s strategic objectives into specific operational KPIs also reflects that change. In its early years, the bank’s strategic objectives did 19

Original in Spanish: “Servir a los sectores productivos y de servicios del Ecuador como Banca de Desarrollo, con productos financieros y no financieros alineados con el Plan de Desarrollo Nacional.” 20 “A través de la provisión de productos financieros y no financieros alineados al Plan Nacional para el Buen Vivir, servir a los sectores productivos del País.” 21 “(…)impulsar el desarrollo de los sectores prioritarios y estratégicos del país.” 22 “Impulsar el desarrollo de los sectores productivos y estratégicos del Ecuador, a través de múltiples servicios financieros y no financieros alineados a las políticas públicas.” 23 “Ser el banco de desarrollo referente de Latinoamérica, eficiente y proactivo, con talento humano comprometido, que promueva la transformación de los sectores productivos del Ecuador.” 24 “Impulsamos el desarrollo del país financiando los sueños de los ecuatorianos.”

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not cover any socio-economic aspects whatsoever, concentrating, instead, on a financial-economic rationale. In terms of its reporting, in 2008, CFN focuses on the more traditional economic-financial indicators related to its loans and performance. In that year, the bank reported on the origin and destination of its loans, breaking down investments according to sectors, industries, and regions. It also provided data related to the type of financial institution incorporated into its lending, among others. In terms of its operations socio-economic impact, the bank reported with some references to jobs created in the framework of specific programs. Even for the programs that have distinct social objectives and for its non-financial services, the bank has restricted itself to enumerate them, briefly mentioning specific targets and coverage. In 2010, the bank’s objectives still only covered economic-financial dimensions. CFN’s three principal strategic axes were: supporting the country’s productive development; managing its financial resources and credit portfolio; strengthening the business’ supporting processes. However, the coverage of its reporting efforts showed some signs of improvement. The bank, although shyly, started to report on the “socio-economic impacts” of its different lines of business. What the CFN calls socio-economic impacts are mostly numbers on (expected) employment generation, or power generation, incrementation to the automotive fleet, and so on. Also, the bank started to provide some more details about its nonfinancial programs, such as the hours and number of people trained, topics covered during training programs, among others. Although limited in scope, the bank demonstrated some willingness to address these critical aspects of its investments. It was only in 2012 that, for the first time, CFN acknowledged the environmental dimension as a concern to its operations. It responded to that by creating a department of environmental management and, in the following year, the annual report already mentioned, quite explicitly, objectives related to environmental and sustainability issues. Although it reported specifically on two programs related to the environmental dimension—forestry management (Forestal) and fleet modernization (Renova)—the KPIs used did not change much concerning those reported in previous years. In 2016, CFN announced the intention of publishing an environmental and social strategic plan the following year, in which it would more clearly identify the bank’s contribution to the environment and improvements in quality of life. At the same time, the idea was to track and minimize possible environmental, social, and reputational risks in its investments. What it delivered, however, looked a little different. Although mention to social and environmental concerns often appear throughout the report, no new specific indicators appeared covering the impact of specific operations on any of these dimensions. The bank continued to concentrate on economic and financial ones,

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relying on traditional measures of its impact such as job creation, new machinery, cars, among others. Besides some breakdowns between business sizes, the geographical distribution of the loans, and sectors, the extent to which CFN reports on impact is relatively limited, not systematically covering environmental and social dimensions. It is essential to mention, however, that the embeddedness of the bank in specific public policy objectives remain very clear. In that aspect, clear indicators and deliverables are disclosed and monitored. Unfortunately, the same does not happen for other objectives, which the bank claimed to be equally important. The limited width and depth of the indicators used by the bank help to shed some light on the status of its evaluation and monitoring system towards development impact. No mention can be found, in reports since 2008, to the existence of an M&E system or of initiatives to evaluate the bank’s impact on the Ecuadorian development. This impact seems to be understood or at least proxied by the number of investments mobilized or directed by the bank to different regions, sectors, and industries. Although employment indicators are well-present in the bank’s annual reports, CFN does not make a clear distinction whether direct and indirect jobs are calculated ex-ante (expected jobs) or ex-post (actual jobs). In 2012, the bank presented a concept for the creation of a department for environmental management. It also claimed to have developed a methodology to analyze the social and environmental risks of its projects. However, later reports would no further make any mention to that method. CFN claims to have an impact on the national economy and measures that impact based on the amount of capital it manages to allocate across industries and regions. The bank does not demonstrate a willingness to explore the outcomes of these investments in more detail and not in dimensions other than the financial and economic ones. It does, indeed, refer to non-financial products, investments in SMEs, training, and workshops. Bank reporting, however, does not cover the outcomes of these actions. CFN claims, nonetheless, that society, in general, receives the most significant share of indirect gains from its investments. Which benefits, more specifically, is a question that remains in need of an appropriate answer. As indicated in table 5.6, CFN’s framework for measuring and reporting on its development impact has not substantially improved over the period. The weaknesses present in 2008 remained, to a certain extent, unaddressed by the end of the period. Although there is some evidence of ex-ante evaluations for some programs, no indicators reflected ex-post evaluations. That might be the case because CFN still acts primarily as an arm and executor of government-mandated programs, which effectively means that the evaluation is undertaken at a different level and externally to the bank. In any case, it is not entirely clear how and if the

5.1 Beyond the Economic-Financial …

159

bank incorporates lessons from successful or unsuccessful programs to its lending policies. It is also not entirely clear whether there is any space for independence concerning government. Another problem that remained unaddressed over the years was the lack of qualitative indicators of the CFN’s investments. Besides that, the concentration on financial and economic dimensions of the bank’s investments left other critical dimensions—according to the bank’s very objectives—underserved. Focusing primarily on the economic and financial arguments for the operation of a development bank is something done early in the history of NDBs. Differently from other banks in the sample, the environment and socially demanded investments did not become major topics nor became systematically incorporated into the organization’s reporting. That makes CFN’s reporting, in general, much more limited than that of its peers. Although it does individually report on the attainment of each of the bank’s strategic objectives, the KPIs used are relatively narrow. They do not provide insights beyond those commercial banks would. For a development bank, this is a noteworthy shortcoming.

5.1.2.7 CND The Uruguayan development bank was created in 1985 as a response to the financial crisis that hit Uruguay years earlier. A financial system plagued with over-indebtedness and the incapacity of firms to repay their debts led the Uruguayan State to create a financial institution that would attempt to refinance debt while keeping the national economy operational. CND initially played a role by buying 50% of the private debt and offering better terms for repayment, while driving the restructuration of many of these companies. The bank’s mandate was to function as a tool to create new companies, reorganize, and strengthen existing ones in order to keep productive systems fully functional (Creimer and Algorta, 1986). Being kick-started as an instrument to reorganize private debt, CND aggregated new functions common to other development banks over time, such as structuring state investments in infrastructure, industrialization, and participation in strategic sectors. A second guiding principle since the mid-1990s was the provision of financing mechanisms to small and medium enterprises, as well as traditionally excluded groups such as young entrepreneurs and women (CND, 2010). The bank has faced difficulties with keeping itself financially healthy over the years, which called for governmental recapitalization efforts repeated times, even before the financial crisis in 2007. Because of that close reliance on government, the bank never really followed the path of an independent public organization, remaining, consequently, very much connected to a broader set of governmental policies.

Narrow

Broad

2013

2018

✖ ✖ ✖

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✔

✔

Source: Prepared by the author

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2008 ✔

✔

✔ ✔

✔

✔ ✖

✖

✖ ✖

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✖

✔

✔

✔

✖

✖

✖

Limited

Limited

Limited

Bank Dev. Eval. Framework Reported Dimensions Indicators Reporting Objectives Ex-Ante Ex-Post Financial Economic Environmental Social Quantitative Qualitative

Table 5.6 CFN’s Monitoring and Evaluation Framework: 2008, 2013, and 2018

160 5 Development Impact

5.1 Beyond the Economic-Financial …

161

Until 2010, the bank had never published an independent mission statement. For the early years of the analysis, CND objectives and missions aligned with a strategic plan for the period 2006 to 2010. CND’s objectives reflected its policy mandate, which was present in the legal documents which established the organization. “To foster business development with the participation of the private sector; to create, strengthen, and participate in enterprises; to collaborate in the execution of sectoral public policies; to foster research, exchange, and incorporation of technology; to contribute with the development of stock markets; to nominate advisory council members for free trade zones; to create industrial parks; to grant concessions of national highways; to grant concessions for the economic exploration of highways”25 (CND, 2006). The aftermath of the financial crisis deteriorated the economic environment in the country. It contributed to the worsening of CND’s capacity to perform its main activities without resorting to the governmental rescue. In 2010, Uruguay constituted a new directorate with the mission of restructuring the bank’s operations and professionalizing CND’s management. The government hoped that it would build up the capacity to deliver better results and outcomes while balancing financial sustainability. This new directorate published the strategic plan 2010–2014, which contained an inaugural mission statement. It reads: “to offer services to ministries, municipalities, public entities and state-owned enterprises to the achievement of the development objectives of the country through managerial excellence with a focus on the citizens and social responsibility.”26 This relatively narrow mission statement remained the same until the end of the analyzed period. Although the existence of a mission statement is a relatively new development, CND’s main objectives remained unchanged, and the bank’s main axes of operation are still the same. The development of infrastructure via concessionary initiatives and supporting PPPs. Productive development via the offer of financial and non-financial services to micro, small, and medium enterprises. And its work as a fiduciary agent for public and private large-scale investments. This last objective would later receive a new wording: “to drive increased efficiency for 25

Original in Spanish: “1) Incentivar el desarrollo empresarial, con participación del sector Privado; 2) Crear, fortalecer y participar en empresas; 3) Colaborar en ejecución de políticas económicas sectoriales; 4) Fomentar la investigación, intercambio o incorporación de tecnología; 5) Contribuir al desarrollo del mercado de valores; 6) Nombrar Consejo Asesor en Zonas Francas; 7) Crear Parques Industriales nacionales; 8) Concesión de rutas nacionales; 9) Concesión para la explotación de vías férreas.” 26 “Brindar servicios a Ministerios, Intendencias, Entes y Empresas Públicas para la consecución de los objetivos de desarrollo del país mediante la excelencia de gestión con enfoque al ciudadano y responsabilidad social.”

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public sector projects.” Naturally, the bank’s reporting, by and large, addressed indicators referring to these activities, but only to the extent of their financial dimension. CND is the bank with the most limited depth and breadth of reporting in terms of either the expected or actual development impact of the projects it supports. From 2008 until 2018, the organization’s annual reports concentrate on enumerating all the projects it finances or on providing some fundamental financial indicators about the main sectors and regions where the projects are. These short reports concentrate primarily on detailing how much of a financial contribution the bank was able to redirect to these projects without any type of reporting on the economic repercussions of the investments such as jobs created, for example, nor on social and environmental aspects of these investments. Of course, CND’s mission does not necessarily bring social and environmental aspects as the main objectives of its operations. However, they are, nonetheless, a byproduct of the interventions and could be, to some extent, addressed. There are some mentions to projects related to the environment, but only very unsystematically and not covering any indicators related to them. The first time any type of reference to the environmental dimension of investments appeared on a report was in 2017, the year when the CND reported kickstarting the process for accreditation to the Green Climate Fund (GCF). Through this accreditation, the organization would gain access to additional financing sources for investments related to the objectives of that fund. For this purpose, the bank announced in 2018, the creation of its first Environmental and Social Safeguards (ESS) and its Gender Manual. These steps indicate some willingness towards monitoring and reporting on the environmental and social impact of at least some of CND projects. That, however, has not happened until the end of 2018. In line with the very limited KPIs reported by the Uruguayan development bank, references to a monitoring and evaluation framework for the projects it supports are also very scant. In early reports, there was no mention at all to the world evaluation. Annual reports briefly mention the objectives of each project but nothing beyond that. In later reports, there is a reference to the creation of a planning department, which would be responsible for evaluating specific programs and designing indicators to control the attainment of their objectives. Since them, CND reports on some pre-investment studies it either undertook or commissioned on behalf of other public organizations. That means an ex-ante evaluation of projects does exist, but it is not possible to uncover the extent to which it is a systematic procedure. Still, regarding the bank’s M&E system (or the lack thereof), there are no references to the expected impacts of specific funds managed by the bank nor to

5.1 Beyond the Economic-Financial …

163

the results of specific lines of credit. Similarly to what happens with the CFN in Ecuador, the fact that CND is very much connected to public policies, working, de facto, as an arm of government for the implementation of programs, might mean that project evaluation happens in a level different from that in which the bank operates. The bank may function only as the carrier of orders that come from the political level and, maybe, tracking and reporting on the outcomes of programs the bank does not design would go beyond its intended mandate. Because of that conjecture combining a limited M&E framework, relatively narrow objectives, the reliance on strictly quantitative indicators that do not cover more than the financial dimension of CND’s investments, the bank’s reporting can be considered extremely limited. As shown in Table 5.7, the situation has also not improved over the years and, although the organization shows some signs of positive steps in the direction of broadening the report on social and environmental dimensions, this would only be a small step in relation to what most of the other NDBs already do since long ago. Given the critical role played by CND for Uruguay and its aspiration of promoting efficiency of public sector investments, it must align its M&E system and dimensions covered by it accordingly.

5.1.2.8 BANDES BANDES was created in 2001 when the then President Hugo Chavéz converted the Venezuelan National Investment Funds into an organization to operate as a development bank. Following the example of other regional NDBs, the newly created organization aimed at providing stimuli for private sector investments and activities, especially in regions across the countries that were characterized by low levels of economic development and low income. With BANDES’ investments, the national government expected to modernize infrastructure and drive technological innovation across the country to foster private sector activity. The bank also aimed to foster international cooperation efforts with its Latin American neighbors. The bank’s mission is quite broad and remains practically unchanged since its creation. In 2008, the mission statement read, “we are the bank governed to boost the integral, sustained, and sustainable development of Venezuela in the framework of the Bolivarian Socialist Model, through the support, technical and financial, of productive and social investments in the country and abroad.”27 In 2018 it dropped references to the Bolivarian model, reading: “We are the bank 27

Original in Spanish: “Somos el banco dirigido a impulsar el desarrollo integral, sostenido y sustentable de Venezuela en el marco del Modelo Socialista Bolivariano, a través del apoyo técnico y financiero a la inversión social y productiva en el ámbito nacional e internacional.”

Narrow

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2018

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Source: Prepared by the author

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✔

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Limited

Limited

Limited

Bank Dev. Eval. Framework Reported Dimensions Indicators Reporting Objectives Ex-Ante Ex-Post Financial Economic Environmental Social Quantitative Qualitative

Table 5.7 CND’s Monitoring and Evaluation Framework: 2008, 2013, and 2018

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165

governed to boost Venezuela’s social and economic development through the support, technical and financial, of the productive and social investments nationally and internationally, under the principles of justice, equality, and solidarity.”28 As discussed in previous sections, the bank suffers from severe problems in terms of transparency of its operations. The bank has not published annual reports nor additional documents to provide details about its affairs. Therefore, it is not possible to analyze its monitoring and evaluation framework, nor the dimensions tracked and reported by the bank. Besides some notes on the bank’s website with numbers and some information about projects it finances, there is nothing else. No indicators, no annual reports, not even audited financial statements. It has reached the point of being imposed sanctions by the U.S. treasury for attempting to move money out of Venezuela on behalf of its current President, Nicolas Maduro.29 That, amidst the political, economic, and social turmoil that has been afflicting the country in the last decade, does not point to a positive direction about the bank’s operations and prospects (Table 5.8).

5.2

Governance and Development Impact

There is no denying that, in the course of the last ten years, more than ever before, NDBs have gradually incorporated new activities to its core functions. First, they assumed an important countercyclical function in the aftermath of the global financial crisis. Now they are increasingly reckoned as suppliers of public goods, as they embody new agendas, especially SDG-related ones, such as climate change, poverty alleviation, and sustainable development more broadly (Griffith-Jones et al., 2018). Although, indeed, financing infrastructure and productive investments are still a big part of these banks’ operational mix, these “traditional” objects of NDB intervention are now expected to be approached under a different paradigm. These investments ought to follow improved standards, to be undertaken with alternative means, and to consider new factors. Measuring NDB’s development impact became progressively, as paramount as the number of projects they support or the size of the funds they manage. Possibly even more important.

28

“Somos el Banco dirigido a promover el desarrollo económico y social de Venezuela a través del apoyo técnico y financiero a la inversión social y productiva en el ámbito nacional e internacional, bajo los principios de justicia, equidad y solidaridad.” 29 https://home.treasury.gov/news/press-releases/sm636

Broad

Broad

2013

2018

?

?

?

Source: Prepared by the author

Broad

2008 ?

?

? N/A

N/A

N/A N/A

N/A

N/A N/A

N/A

N/A N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

None

None

None

Bank Dev. Eval. Framework Reported Dimensions Indicators Reporting Objectives Ex-Ante Ex-Post Financial Economic Environmental Social Quantitative Qualitative

Table 5.8 BANDES’ Monitoring and Evaluation Framework: 2008, 2013, and 2018

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167

New approaches to measuring impact flourished while existing ones matured. Efforts in that direction respond to the increasing importance for governments, as NDBs major owners, to be able to determine an approximate value for their outcomes-to-dollars or a similar proxy to measure how much investment is needed to achieve particular development objectives. Of course, as discussed above, measuring development impact is not an easy task, and it is also not uncomplicated to put a financial value on impact. Since methodologies to approach development impact vary, and not all of them are scalable to every type of project, it is tricky to convince the public about the value of these banks to society. Some authors go as far as claiming that, since an NDB project scope goes beyond the apparent objectivity of financial and economic dimensions, pricing other less-straightforward factors is almost an impossible task. How can a bank objectively measure other byproducts to development such as happiness, liberty, and life? Therefore, these banks are fated not to be able to directly measure their investments’ transformative impact (Carter, 2019). Regardless of these more pessimistic views, the problem of measurement remains, and so does the demand for answers. As demonstrated so far, different banks continue to stride, with varying degrees of success, towards providing some proxy to their development impact. In the last few pages, we have attempted to uncover the evolution, as well as the similarities and differences between monitoring and evaluation systems used by the banks in our sample to measure their development impact. Table 5.9 shows the overview of each bank’s M&E system and reporting for the year of 2018 and, additionally, the NDBGI score for the organization at the end of the sampled period. Beyond systematically uncovering different approaches and methods used by each bank to maintain a framework for measuring development impact, the analysis seems to corroborate with the hypothesis that well-governed banks are more likely to develop a sound system for monitoring, evaluating, and reporting on their development outcomes in comparison to less well-governed peers. BNDES, the bank with the highest NDBGI score in the sample (0,80), is also the bank with the most well-developed M&E system. In contrast, BANDES, the lowest-scoring bank with 0,12, does not even report on its basic activities and much less on its development impact. Taking CND, the second-lowest performer in terms of the NDBGI, there is a clear difference between its measuring and reporting capabilities in relation to the other, better-governed banks. We briefly recapitulate these findings below. In terms of their mission statements containing broad or specific development objectives, governance does not necessarily seem to play a role. Since NDBs mandates are usually defined on a political level, their content is either non-related or

✖

✔

Narrow

Broad

CND

BANDES

?

✖

✔

Broad

CFN

?

✔ ✔

✔

✖

✔

✔

✔

✔

Narrow

Narrow

BICE

✔

✔

BDP

Broad

FINDETER Broad

Broad

COFIDE

N/A

✔

✔

✔

✔

✔

✔

✔

N/A

✖

✔

✔

✔

✔

✔

✔

N/A

✖

✖

✔

✔

✔

✔

✔

N/A

✖

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✔

✔

✔

✔

✔

N/A

✔

✔

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✔

✔

✔

✔

N/A

✖

✖

✖

✔

✖

✔

✔

None

Limited

Limited

Extensive

Extensive

Limited

Extensive

Extensive

0,12

0,38

0,38

0,56

0,69

0,69

0,72

0,80

Dev. Eval. Framework Dimensions Indicators Reporting NDBGI Objectives Ex-Ante Ex-Post Financial Economic Environmental Social Quantitative Qualitative

BNDES

Bank

Table 5.9 NDB’s Monitoring and Evaluation Framework: 2018

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only very marginally related to the degree of bank governance. What seems to be a significant difference, however, is how each bank publishes and defines its global objectives based on this mandate. BNDES has a broad mission statement, but it does publish multiannual corporate plans, which define and track specific objectives for a given period. That document provides some sort of narrowing down from a broad mission into concrete lines of action and operational targets. That is also the case for other banks with broad missions such as COFIDE and FINDETER. BICE, although pursuing more narrow objectives in comparison to the other three, is also quite transparent about its development objectives, monitoring, and reporting on them in each of its annual reports. That is not the case for the other, less well-governed banks in the sample. BDP has narrowed down its mission statement over time, but its strategic plans remain broad in terms of the declared objectives. CFN moved in the opposite direction, broadening development objectives over time to the extent of reaching a very intangible objective by the end of the period: “financing the dreams of the Ecuadorian people.” Monitoring these bank’s mandate-related objectives remains a challenge, considering the small extent of their reporting. CND only published the organization’s mission statement in 2010, but it remains operating as an arm of the Uruguayan government. As such, its development objectives, although narrow, change according to political conjecture, and its monitoring suffers from the difficulty of measuring moving targets. BANDES does not even publish reports, so monitoring its development objectives based on the mission statement is not possible. A similar but even more clear pattern presents itself when uncovering each bank’s evaluation framework. Although the table indicates that all banks but BANDES indicated the presence of, at least, ex-ante evaluation tools, the extent to which each bank details and report on them is extremely diverse. BNDES is, here too, the avant-garde example of transparency concerning its M&E system. Already in 2008 reports the bank referred to its evaluation methodology, but it was in 2015 that the bank advanced to a whole new level. Not only it implemented and systematized an approach to evaluate the ex-ante effects of specific programs, but it also introduced partnerships with external consultants to evaluate programs expost. Later in 2017, another tool was implemented, which focused on other scopes of evaluations, aggregating qualitative aspects as well. These methods are not only shortly referred to, but also published on the bank’s website. That represents a yet unseen, transparency, and accountability effort by the bank. Data on COFIDE’s M&E system is not as abundantly available as for the Brazilian case, but the bank also refers to some of its characteristics in its annual

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reports. Besides ex-ante evaluations for which there are no methodological references, the organization has partnered with the CAF to evaluate one specific program based on RCT and has reported on the results and methods over the years. FINDETER, too, refers to the existence of an M&E system that includes ex-ante and ex-post evaluations since 2012, reporting on results for the first time in 2014. BICE is the outlier in the group of banks with above-average NDBGI scores, for it does not elaborate on its M&E system despite claims of conducting ex-ante evaluations. The bank’s reports also do not mention ex-post evaluations. That is also the rule of thumb for the banks at the medium and lower NDBGI tiers. BDP also mentions the existence of an M&E system and claims to conduct ex-ante evaluations. Although the bank has established an evaluation department, details on these studies are not plenty. Also, albeit data on what seem to be expost evaluations are published, no reference to the methodology behind either of the frameworks exists. CFN’s and CND’s evaluation frameworks seem only to contemplate ex-ante evaluations at an even lower stage. None of them published more than empty references to an evaluation system. Since both organizations operate under public law and, therefore, closer to the government than it is the case for the others, it is also possible to imagine that evaluations are conducted externally to the organization on the line ministry level. Since BANDES does not even publish reports, we could not ascertain the existence of an M&E system. Regarding the type and quality of indicators reported by each bank, there is a strong relationship between these banks’ mandates, missions, and reporting. Since these NDBs operate in different sectors of the economy, it is only natural that their KPIs differ to some extent. Comparing the banks’ reporting across the board may not necessarily be helpful to shed light on their differences. However, since investments by NDBs necessarily have, at least, four dimensions in common (economic, financial, environmental, and social dimensions), evaluating the extent to which their reporting efforts cover each of them may be helpful to determine the maturity of the bank’s evaluation framework. The financial impact of the NDBs is, as expected, covered in all bank’s annual reports. Given the financial nature of these organizations, broadly report of this dimension is not a surprising finding. Also, almost all the banks, except the CND, report on the economic impact of investments in terms of jobs created, sectors supported, industry distribution, and others. Since that is one of the main justifications for governments to set up a development bank, it comes as a surprise that the Uruguayan NDB does not, at all, address that specific dimension of its operations. The situation is a little bit different when it comes down to reporting on the environmental and social dimensions of development banks’ investments. Here it quickly becomes evident that well-governed banks tend to consistently report

5.2 Governance and Development Impact

171

in all four dimensions, while the ones who fall behind in terms of attainment to recommended international practices do not. All banks in the sample scoring above 0,50 NDBGI also report on the environmental and social dimensions of their investments. That, of course, does not mean that reporting comes in the same depth or breadth. As referred to earlier, there seems to be a relationship between the M&E’s system quality and the reporting level. Banks such as BNDES or COFIDE, for instance, not only report on all the four dimensions, but they do that in very much detail for multiple programs, while other banks, such as BICE and the BDP, only do that for some of their investments or projects. The mixed-use of qualitative and quantitative indicators is a good proxy for the specificity of the reporting, as qualitative indicators are outcomes from an in-depth evaluation process, which can only happen in advanced M&E frameworks. No other banks which score below 0,60 report with qualitative indicators. The last aspect analyzed in this chapter was the extent of each bank’s reporting on development impact more generally, which also serves as a proxy for the quality of their M&E system in general. Here too, banks that display better NDBGI scores tend to produce more extensive reporting of their activities, both at a program level and at a project level. Often, some NDBs even publish additional documents. BNDES, for instance, publishes since 2015, a so-called “effectiveness report” in which it attempts to provide proof of its development impact by detailing methodologies, programs, and outcomes. BICE published, in 2018, its first sustainability report, which incorporates information about some actions and their associated impacts according to the alignment to the SDGs. FINDETER changed the name of its annual report to include the word “sustainability” to it and to introduce reporting on areas related to the sustainable development goals too. The other banks ranking below-average on the NDBGI scale tend to produce limited reports. These usually concentrate on describing the programs they finance as opposed to using the act of reporting as means of reflecting on the activities financed by the bank and highlighting their added value in terms of contribution and development impact. That indicates their unwillingness or incapacity to engage in a process that is essential to increase the transparency about their operations and which provides an important accountability mechanism before society and other relevant stakeholders. The very act of reporting is not only an effort to publicize its operations, but an exercise of democratic control, and an essential step to enhance the bank’s capacity to reflect on its weaknesses and strengths. Unfortunately, poorly governed banks do not seem to be interested in monitoring, tracking, nor reporting on their development impact.

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In conclusion, it seems quite clear that a positive relationship exists between the high attainment of internationally recommended governance practices and the national development bank’s capacity and willingness to monitor and evaluate their development impact. The trend in the South American sample indicates that the banks which score high in the NDBGI index also seem to have a more developed M&E framework and to report their results more consistently. Not only that, but improvements in attainment to governance practices over time also seem to drive improvements in the quality, depth, and breadth of these bank’s reporting efforts, as indicated in the tables for each organization. The international organizations that stood behind the reformation efforts for corporate governance of state-owned enterprises over the last two decades have mostly concentrated on the potential of superior governance arrangements to drive improvement and gains in terms of these banks’ economic-financial performance. Another central claim to the reformation efforts is that corporate governance would promote transparency and accountability mechanisms that would make the banks more responsive to its stakeholders while subjecting them to a higher degree of democratic control of public organizations by society. This research already indicated that improvements of economic-financial performance have not necessarily been the case for the NDBs evaluated in the period from 2008 until 2018. Even banks that scored high in the NDBGI index, which we introduced in with this study, have suffered the consequences of the financial crisis over their operations. That indicates that more robust governance arrangements are not necessarily a sine qua non condition to achieving superior economic-financial indicators. Regarding governance’s potential to increase accountability for these banks, using the degree of development of their M&E systems as a proxy for transparency and responsiveness, investing in improving NDBs’ governance arrangements seems to work in favor of improving their capacity to effectively tracking, monitoring and reporting on their development impact. That might be an interesting, yet underexplored, development outcoming of the corporate governance reformation efforts of the last 15 years.

6

Consequences vs. Appropriateness

6.1

An Analytical Model for National Development Banks

The history of national development banks is directly connected to the evolution of the debate on the appropriate role for the state in broadening access to finance and, more generally, on its part in designing and implementing development policies. In the aftermath of the Second World War, development banks started to proliferate in Eastern Europe and around the world, driven by an interventionist model that prevailed then. These organizations started to be systematically employed by governments as policy tools to advance industrialization and to drive investments in infrastructure, which are some of the essential ingredients to achieving sustained economic development (de la Torre, Gozzi, and Schmukler, 2017). In a first phase, development banks acted as policy tools to advance economic and social development. The depletion of this interventionist model in the late 1970s opened space for another approach to the role of the state in facilitating the access to longterm finance, inaugurating a second phase for NDBs. The laissez-faire model countered the interventionist methods in favor of a more liberalizing program. It saw the state as a facilitator instead of a driver in the development process. Privatization and state-reform processes drove many public banks out of business and rescoped the operations of several remaining organizations. Under pressure to achieve superior performance, NDBs started to be increasingly subject to the same regulations as private banks (Francisco et al., 2008). The pursuit of efficiency Electronic supplementary material The online version of this chapter (https://doi.org/10.1007/978-3-658-34728-4_6) contains supplementary material, which is available to authorized users. © The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2021 R. Zimmermann Robiatti, National Development Banks in South America, Wirtschaft und Politik, https://doi.org/10.1007/978-3-658-34728-4_6

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gains has relegated these banks’ development functions to a secondary position, and NDBs were expected to operate primarily as financial institutions as opposed to development-driven organizations. The subsequent financial crises in the early 2000s and the global shock in 2007, contributed to, once again, change the paradigm guiding NDBs’ operations. When private banks were not able or unwilling to provide finance due to the recession that impacted the whole world, development banks were primarily used by governments to mitigate the damage caused by the crisis, expanding the offer of countercyclical finance (De Luna-Martinez and Vicente, 2012). The success achieved in many cases drove governments elsewhere to recreate or reactivate their NDBs, using them more aggressively as part of a broader development strategy. Since then, these organizations have increasingly assumed new roles, such as stimulating investments that focus on social and environmental agendas without necessarily, losing touch with their original banking inclination (Macfarlane and Mazzucato, 2018). Development banks suffer from this inherent conflict between their banking and development functions, as reflected in their first and second phases. As development-oriented organizations, they act on government’s behalf to pursue a set of objectives configured in a policy mandate. They may be required to target individual segments of the economy that are deemed consequential, but that due to high risk and financial unattractiveness are under- or not at all served by the private sector. At the same time, their banking function drives them toward mimicking structures used by private banks, both for organizational matters and for decision making. When they make financial considerations as profitability and efficiency a priority over their development impact, these banks may drift apart from their social mandate and divert from their mission—what De la Torre has called “Sisyphus syndrome” (De la Torre, 2002:2). As should be clear by now, balancing these two functions is not a trivial task. The new scenario faced by NDBs in the aftermath of the financial crisis challenges them to, more than ever before, keep this delicate balance between their conflicting development- and banking-related functions in check. One of the most disseminated theories in publications by international organizations also resonates in the literature, which was, at length, explored by this research. It states that efficient governance arrangements hold the key to balancing these organizations’ focus on outputs and outcomes, contributing to addressing the conflict posed by the Sisyphus syndrome. Well-governed banks should display superior performance indicators as they become more transparent, accountable, and responsive (De Luna-Martinez et al., 2018). Our findings, however, point out in a somewhat different direction.

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National development banks in our sample that improved their attainment to governance practices, as recommended by the World Bank and the OECD, did not necessarily improve their financial performance measured in terms of changes in their economic-financial indicators over time. Except for asset-quality indicators such as non-performing loans, high profitability and efficiency indicators did not seem to vary following superior attainment to recommended governance practices. In fact, some banks, which scored somewhat poorly in terms of the NDBGI, seem to have outperformed their national private peers and even consistently improved some economic-financial indicators over time. Regarding the nexus between the banks’ attainment of internationally recommended governance practices and their degree of efforts to measure, track, and report on their development impact, the research has found that NDBs scoring better on the NDBGI also tend to have a more developed M&E system in place. They also seem to report results more extensively and systematically. Worsegoverned banks, which are also those in higher risk of political interference and other issues related to their public-ownership, demonstrated several limitations in their capacity to measure and track their development impact. They are much less accountable, less responsive, and less transparent than their peers in this sample. Reflecting on the concept of a Sisyphus syndrome and the reforms these banks have been through to during the last two decades, this chapter will introduce a theoretical model that helps to organize the findings of this research. With this analytical model’s support, it is possible to determine the primary logic by which a bank organizes its operations as well as to observe if and how this logic shifts over time, based on features of its reporting. The model assists in interpreting NDB’s inclination towards its role as development agencies, as financial institutions, or to a balance between both. It captures the effects of governance changes across time using these banks’ reporting frameworks as the departing point. The model draws from March and Olson’s rationale of the logic of consequences and logic of appropriateness (March and Olsen, 2009; Brenton and Bouckaert, 2020) developed and adapted to the context of NDBs. The logic of consequences is compatible with the banking function of a development bank, for it concentrates on performance reporting elements. The logic of “input-processoutput-outcome” sees all investments as primarily neutral. All investments are equal in accounting terms, for they are submitted to the same criteria and expect the same results—the repayment of a debt. The logic of appropriateness, on the other hand, ranks and organizes investments, in a sense that is compatible with the development function of an NDB. It attaches ethics, values, and “preferred

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objectives” to each investment in the sense that they are no longer seen as neutral. Rather than repayment considerations, fostering development is the ultimate objective of each investment. Each logic represents one side of the seesaw that is the Sisyphus syndrome. The logic of consequences stands for the drive towards efficiency, the focus on returns, and lowering risks. The logic of appropriateness is more closely related to the pursuit of a policy mandate, higher risks, and focus on development objectives. There is usually a trade-off between them both; however, in an ideal scenario, a national development bank would be able to balance both considerations—financial criteria and development objectives. High-performing organizations manage to be financially sustainable while achieving their policy mandates, and that means concatenating both logics. Likewise, some organizations advanced on none of the logics; they are those that do not manage to be financially sustainable nor achieve development goals. The next sections expand on each of these concepts and introduce the model.

6.1.1

Logic of Consequences: Development Banks as Financial Institutions

National development banks are financial institutions in nature. In fact, many authors prefer to call them by their official name “development financial institutions” in order to avoid any possible connection with the term “bank,” which is usually employed referring to private commercial organizations. As financial organizations, NDBs are often managed under the auspices of management practices that emulate the private sector adapted to the reality of a public sector organization with the objective of aggregating value to the public. With the triumph of NPM-type of reforms, a logic of performance-oriented organizations emerged, offsetting, to some extent, the concept of public service delivery as value (Hood, 2003). This dynamic was, as discussed before, particularly prominent during the 1990s and early 2000s. If the value of an NDB contribution is based on the demonstration of its economic impact in comparison to private alternatives, the organization’s value ought to be measured using a performance framework. Because such a framework for private companies is based in function of the production process, we shall use this it as the starting point to build-up our analytical model. The basic production model derives from private sector activities, and it looks at inputs (resources added), process (the transformation of these inputs), outputs (the final product), and outcomes (effects on customers and market) (Brown, 1996). The model has

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been adapted and expanded to better represent the increased complexity of public administration activities by several authors, replacing products by services or adding other layers such as policy objectives to the flow. For the sake of simplicity, we rely on an adapted version that represents the core of the production process for public sector organizations as introduced by Van Doreen, Bouckaert, and Halligan (2015) (Figure 6.1):

Inputs

•

Resources

Process

• Productive and managerial practices

Outputs

• Products and results

Outcomes

• Effects

Figure 6.1 Simplified Production Model of Performance. (Source: Adapted from Van Doreen, Bouckaert, and Halligan, 2015, pp 21)

Since this research looks at NDBs reporting activities, the attempt is to connect each element of the basic production model to variables representing them in each bank’s annual reports. The objective is not to compare the depth or the quality of the indicators across banks, but simply to verify whether the organizations report them or not. Of course, some banks will indeed address multiple indicators for a given step of the model, while others will only report on some of them. The underlying idea, however, is that the presence of indicators that reflect a given step of the production process model, regardless of how many or how detailed they might be, conveys the banks’ commitment to, first, monitoring and, second, being transparent about them. As it should be clear, these indicators privilege a strong financial-economic language, which is quite typical for NPM type of performance frameworks (Van Doreen, Bouckaert, and Halligan, 2015; O’Brien, 2013; Bouckaert and Halligan, 2008). Plenty indicators can establish a bank’s position in terms of its alignment to a logic of consequences. This research has selected eleven representative examples, which are often referred to in the literature on development banks, as discussed in previous chapters. Each of these indicators is also used by private banking institutions, which only reinforces their solid relationship with an underlying rationale of a performance framework. They divide into four groups: inputs (3), process (3), outputs (2), and outcomes (2).

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Inputs refer to the usual triad, capital, human, and physical resources. Under capital resources, management reports on the bank’s sources of funding and describes the state and evolution of equity, liabilities, and debt over a given period. Human resources are reported with a focus on the employees, breaking down their training, educational background, gender, among others. Physical resources, on the other hand, refer to the actual infrastructure of the bank. The number of branches, details on their location, references to IT structures, or other systems used in the bank’s daily operations. Each of these three broader terms comprises several sub-indicators, which vary in detail or degree of monitoring. All of them are, however, inputs that management uses to feed the operation of the bank and which are to be essential to producing its outputs. Process-type indicators are those concerned with the transformation of these resources. Here, the model draws from three different concepts that are closely related to the process stage of the production function. Management practices are the selected strategies used by the bank’s direction to use resources and control their transformation. Here, indicators and reports on specific managerial policies towards rationalization are particularly representative. Another essential process type of variable is benchmarking. Banks compare their operations and results with that from other organizations or even whole productive sectors to provide a baseline or reference about their efficiency and competence in processing resources. The last process-type of variable used in this model is investments. In it, NDBs typically provide breakdowns of their investments in terms of geographical distribution, sizes, target sectors, among others. Output-type indicators are those focused on the products outcoming from the bank’s operation, the direct result from interventions ventured by the NDB. Here, the reporting on two main variables has been tracked and used to construct the model: strategic objectives and economic-financial KPIs. The first one refers to the constant monitoring and reporting by the organization on the degree of attainment to the bank’s strategic objectives. Since they help to guide the decision-making process, it is of utmost importance that it reports on the achievement (or not) of strategic objectives that reporting efforts cover. Likewise, economic-financial KPIs are the bottom line of a bank’s operation. A private bank’s ultimate goal is to ensure it keeps in line with the owner’s expectations. Outcomes point out to less immediate effects of a bank’s operations, but which indirectly influence the environment in which the bank operates. These are measured by the reporting of financial added-value, participation in networks, and the bank’s relationship with its customers and stakeholders. Added value includes reporting on the additionality of banking investments such as rates of capital

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formation, contribution to GDP, the share of NDB investment over the total. Networking covers the participation, by the development bank, in international events, especially those aiming to homogenize and multiply best practices. Relationships, lastly, covers all reporting of indicators monitored by the bank of its interactions with customers, complaints, events, seminars. Table 6.1 summarizes the operationalization of the variables used under each type of indicator, describing, and providing examples. Table 6.1 Operationalization: Logic of Consequences Logic of Consequences Type

Variable

Description and Example

Inputs (3)

Capital resources

Sources of funding, size of the assets, equity, liabilities, and its evolution over time, etc.

Human resources

The number of employees, hours of training, skills development, etc.

Physical resources

IT systems, offices, branches, infrastructure improvements, etc.

Managerial practices

Reference to operational improvements, policies aiming to improve efficiency, rationalization, etc.

Benchmarking

Comparing operational indicators/KPIs against peers or national/international standards.

Investment decisions

Detailed reporting on the volume of investments, their sectorial distribution, number of loans, evolution, etc.

Strategic objectives

Following-up the accomplishment/attainment of strategic objectives set-up by management/the owner.

Economic-financial KPIs

Summarizing operational KPIs (efficiency, liquidity, profitability, etc.) and comparing to previous years/baseline.

Financial Added-value

Rates of capital formation, percentage of total investments, additionality, etc.

Processes (3)

Outputs (2)

Outcomes (3)

(continued)

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Table 6.1 (continued) Logic of Consequences Type

6.1.2

Variable

Description and Example

Networks

Participation in national and international events and efforts towards the incorporation of internationally accepted best-practices.

Relationships with customers and stakeholders

Information on inquiries received, other contacts, complaints, etc.

Logic of Appropriateness: Development Banks as Development Organizations

At this stage, it should be evident that national development banks have inherent embeddedness in development policy with goals and functions that are encapsulated in their mandate. They were created as institutions to support state policies towards industrialization, infrastructure expansion, and productive capacity. More recently, after a brief hiatus during the liberalization period, they have been increasingly deployed to perform new functions and fulfill new objectives, such as those related to the SDGs (Griffith-Jones et al., 2018). NDBs differ from private financial institutions in many respects, especially in their goal-setting structure. While commercial banks have the main objective of generating profit for their owners, NDB has a broader set of socio-economic goals. Therefore, the logic of consequences is not the only manner of depicting the added value of their contribution to the economy or society more broadly. As public organizations, NDBs have the responsibility of carrying out a policy mandate, which establishes concrete goals and delimits a scope of functions for the bank. Due to problems these banks faced, in the recent past, related to mission creep, over politicization, and low levels of transparency and accountability, they have been imposed the additional challenge of proving their development impact beyond the size of their direct investments (ODI, 2016). They have also been increasingly submitted to intense pressure, besides performing their essential functions and fulfilling their roles efficiently, being more transparent, accountable, and ethical. Not only regarding their operations, but also to the role they play in public policies and to the enterprises and projects they finance. Their policy embeddedness allied to the expectation of the pursuit of a sustainability and transparency ethos is consistent with a logic of appropriateness.

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Appropriateness is deeply connected to the values and principles of the modern democratic government under which a myriad of institutions provides order. The logic of appropriateness embeds the idea that behavior according to established rules provides legitimacy to the result of any given process and that, although outcomes matter, they highly “depend on how things are done, not solely on (their) substantive performance” (March and Olsen, 2009:6). That means that reaching predetermined goals is only considered legitimate to the extent that these goals happen under the auspices of democratic norms and rules. Integrity, ethics, transparency, among others, are as important as the outcomes from any given intervention. In the case of NDBs, applying the logic of consequences implies in evaluating their reporting efforts from at least four different perspectives, all of them deeply connected to the developments observed in the field of development banking over the last two decades. These four criteria provide a framework with eleven indicators to map these organizations’ relative position and their attainment to general democratic norms and their expected behavior (Bouckaert, 2019). All of these, in light of the international regime for development financial institutions. The appropriateness of their mission statement and vision (2), the appropriateness of the individuals which are part of the banks’ teams (2), the appropriateness of their organizational structures (3), and, finally, the appropriateness of the policies applied to each NDB (4). We propose two variables as proxies for determining NDBs’ mission and vision appropriateness. The first one is the degree to which each bank is missionoriented. Although the banks still are embedded in other broader state policies, development banks ought to have bold missions that aim to address local, national, or even global challenges, as opposed to small interventions. A mission-oriented organization sees the bank as one instrument and an integral part of the solution to tackle concrete problems; it refers to concrete challenges the bank faces and uses them to define its strategic approach to them. The second variable is the degree to which banks refer to socio-development goals as part of their main objectives. As discussed before, NDBs have an intrinsic social function, which connects to their strategic plan. These goals ought to be clearly articulated and publicized. Individual appropriateness refers to the initiatives targeting the organization’s internal units, such as employees and departments (Bouckaert, 2019). Here, we suggest two attributes as proxies for the construction of the mapping tool. Reference in reporting to Integral Integrity Standards is the first one. The objective of this variable is to verify the existence or not of internal programs and actions aiming to ensure that all employees act under a framework that privileges ethical behavior as a cornerstone for the bank’s operations. The second proxy

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observes the reporting of practices that cover the appropriateness of contracts in terms of their ethical standards. Here, banks ought to report on specific provisions targeting the monitoring of the projects they finance regarding their respect to human rights, prevention of money laundering, corruption, among others. Not only should the banks uphold high standards of ethical behavior, but so do their employees, partners, and customers. Organization appropriateness, on the other hand, looks at the properties of NDB reporting that are more immediate to the bank and its “direct” impact. The first variable encompasses the bank’s reporting on its social function. Here, some complementarity exists between this one and mission/vision appropriateness. In this case, however, we seek evidence of bank reporting on the monitoring of the social aspects of these goals and mission: loans to socially vulnerable groups, underrepresented populations, among others. The second variable looks at the incorporation of ex-ante evaluation of development impact. Under this point, the tool concentrates on explicit evidence that NDBs conduct some evaluation of their development impact before disbursement to projects. The last variable refers to the existence of corporate social responsibility (CSR) strategy for the organization, which reflects the impact of the bank’s operation on the environment, society, and other stakeholders. Policy appropriateness revolves around reporting by NDBs on their closer involvement in public policies. That includes reporting on their social impact, and engagement in efforts towards financing green growth and innovation, which are two of the key-investment sectors for development financial institutions. Reporting on embeddedness in public policies refers to any connection NDBs might have with broader policies at the national, state, or local levels, especially those in which they play a crucial role. Socio-development impact reporting focuses on systematic publication of the social impact of the investments beyond their financial-added value. The two last variables considered under policy appropriateness are the bank’s consistently reporting on their efforts to finance and foster innovation and green (sustainable) growth, which are currently two of the most important foci of international development banks such as the World Bank. Table 6.2 summarizes the operationalization of the variables used under each type of indicator, describing them, and providing examples.

6.1.3

Conciliating the Logics

As discussed in the second chapter, organizations bear strong linkages to the features of the institutional environment of which they are part. The institutional

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Table 6.2 Operationalization: Logic of Appropriateness Logic of Appropriateness Type

Variable

Description and Example

Mission/Vision (2)

Mission-Orientation

References to a concrete mission involving national/global development challenges, beyond small-scale interventions.

Socio-development Goals

Explicit reference to formulated socio-economic goals aligned with the organization’s strategic plan.

Internal Integrity Standards

Direct reference to internal programs and initiatives to uphold personnel’s ethical behavior.

Ethics in Contracting

Direct reference to provisions to ensure monitoring of investments in respect to human rights, control of corruption, etc.

Social Function

Reporting on the attendance of specific social groups (minorities, women, the poor, etc.).

Incorporation of ex-ante Evaluation

Development aspects are evaluated prior to the investments and explicitly incorporated into lending policies.

Corporate Social Responsibility

Reporting on the organization’s impact on the environment, society and other stakeholders

Individual Appropriateness (2)

Organizational Appropriateness (3)

Policy Appropriateness (4)

Embeddedness in Public Policy Reporting on the organizations’ broader connection to given public policies. Socio-development Impact Reporting

Systematic reporting and monitoring of social impacts of investments beyond financial aspects. (continued)

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Table 6.2 (continued) Logic of Appropriateness Type

Variable

Description and Example

Fostering Innovation

Reporting on investments related to innovation/innovative interventions, evolution over time.

Fostering Green Growth

Reporting on investments related to green growth/sustainability and climate change mitigation.

characteristics of a country affect the paths through which organizations develop and contribute to shaping their structures (Scott, 1995; Meyer and Rowan, 1977). That is not different for development banks, which, such as any other organization, are very diverse both in their institutional background and in their end goals. Although adopting similar structures and belonging to the same broader category, these organizations can differ a lot from each other. Different NDBs have different guiding principles and policy mandates. Their institutional settings directly influence the instruments they use. Even though one can argue that it is possible to group these organizations under one single denomination, as development financial institutions, the manner each of them conceptualizes and interpret development can also vary. As much as they affect national development policies, development banks are tremendously affected by their historical paths and the political struggles in each of their contexts. Because of that, to ascribe each bank to either the logic of consequences or appropriateness would be particularly tricky. These logics, as do the mix of principles and objectives guiding these banks, do not exist in isolation but interact and change each other at the same time. In different historical periods, the tension between the logics of action has favored one or the other side. Focus on the bank’s development functions has dominated the scene during the golden days of the interventionist view and until the late 1970s. During the laissez-faire reforms of the 1980s and 1990s, the banking functions have dominated these organizations’ operations, with an increased focus on efficiency and financial results. The struggle between the logics continues, and the competition between them has become more intense since the early days of the financial crisis in 2007. This chapter seeks to map the evolution of the interaction between them for the eight national development banks in South America in the period from 2008 to 2018.

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We performed a content analysis on these banks’ annual reports for the years 2008, 2013, and 2018, to estimate the bank’s degree of alignment with each of the logics—appropriateness and consequences—and their evolution over time. That was done based on the coding schemes introduced and developed in the previous subsections and summarized in tables 6.1 and 6.2. Any mention to one of the examples and descriptions associated with a specific variable, regardless of frequency or level of detail, means that the bank reports per one of the attributes composing the logic. If reported, the variable receives a score of 1 point. In case it does not feature in the reports, no points are attributed. All variables have the same weight to limit subjectivity and the opportunity for data mining when assigning different weights to elements. Each logic is composed of eleven indicators weighting one point each. Therefore, it is possible to draw two scales ranging from 1 to 11 in order to capture the position of each bank in relation to their peers and represent them on the scatterplot. Since features of both logics can coexist, it is possible to truncate these scales on number six and compose a cartesian plane in order to represent the interaction between the two logics graphically. This plane will be constituted by four quadrants, each of them representing different degrees of interaction between the logics and possible expected outcomes for each of these banks. Figure 6.2 depicts the plane and the quadrants: Figure 6.2 Logic of Consequences vs. Logic of Appropriateness. (Source: Bouckaert, 2019 p. 232)

The third quadrant would be occupied by banks which display low levels of attainment for both the logic of consequences and the logic of appropriateness.

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Such an organization should report as poorly as a bank as they do as a development organization. In the fourth quadrant, the logic of consequences progressively overpowers that of appropriateness. In this area, banks report more in line with the guidelines and standards of financial institutions but fail to report on topics dear to development organizations. Well managed private banks would fit that quadrant quite well. The second quadrant encompasses organizations that are well-aligned with the logic of appropriateness, but which do not perform as well on the logic of consequences. That ought to be a rarer position in the sample. Since the organizations existed before the 2000s or were founded around that time, they have been influenced by the laissez-faire view. Therefore, they all should have adapted well to the logic of consequences. Quadrant one, on the other hand, would be the one where the highly effective organizations, in terms of their attainment to both the logic of appropriateness and consequences, are located. We expect that to be the position where organizations that improved their governance ought to be at the end of the period. Because all banks have been through the liberalizing period or were created amidst it, most organizations ought to perform, in 2008, higher up in scale in terms of the logic of consequences than appropriateness. Based in our research’s findings indicating that improvements in governance have not necessarily lead to improvements in economic-financial indicators but that they did seem to improve the organizations’ capacity to monitor and report on their development impact, we would expect well-governed organizations to perform better in terms of the logics of appropriateness than their less well-governed peers. In other words, we expect to find that higher attainment of internationally recommended governance practices benefits the logic of appropriateness more than it does the logic of consequences. Because we measure the relative position of each bank in three distinct points, 2008, 2013, and 2018, we are also able to visualize the development of these NDBs’ coupling with both logics across time. Connecting these points unveils the path followed by each of the organizations in the sampled period, allowing the analysis to determine which of the logics dominated their reporting and, consequently, infer what paradigm informed these bank’s actions. The figure below illustrates this point with the example of a hypothetical organization whose reporting starting point (1) is of relatively low attainment for both logics. It evolves into a situation of apparent domination by a logic of consequences in point (2), following a more balanced position between the two logics on the other end of the scale in point (3) (Figure 6.3).

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Figure 6.3 Application on a Hypothetical Organization (2008, 2013, and 2018). (Source: Bouckaert, 2019 p. 232)

This form of visualization will support the interpretation of the relationship between improvements in governance, these banks’ economic-financial performance, and their capacity to track their development impact. We will also be able to estimate the impact of banks increasing their attainment to internationally recommended governance practices and its possible consequences to the logic by which banks report and operate. Because the standards used in this research are applicable cross-country and cross-organizations, if the model proves successful, we will have contributed by providing a useful analytical tool that can be used across development banks in different contexts. Of course, there are some limitations to the use of this exploratory model for this study. We will discuss each of the most relevant ones in turn. The first claim is that the use of data from corporate reports often hides some self-reporting biases. Management produces an annual report to display the achievements of their administration for a given year, so they might cherry-pick only the best examples to showcase their competence, as opposed to possible failures and problems. Moreover, reported information does not necessarily indicate that the banks are de facto pursuing the reported actions. It may as well be that banks claim to be “incorporating ex-ante evaluations,” for example, without necessarily conducting them. Lack of reporting also does not indicate unequivocally that these actions are not being pursued. Because these are valid concerns, the indicators representing each variable were deliberately chosen in a manner to minimize the chances of using empty claims for “reported but non-existing” practices. As tables 6.1 and 6.2 indicate,

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examples for each of the variables are backed, almost entirely, by factual and systematically reported evidence. If the bank claims to pursue “advanced human resources practices” without providing hard evidence such as, for example, data on their employees’ backgrounds, no point is computed to the variable “Human Resources” in the logic of consequences. The same applies to other variables for either of the logics. Regarding “Fostering Innovation,” for instance, if a claim that the bank does “support innovative projects” is not backed by hard data on how the bank pursues these investments in innovation, no points are distributed. The “cherry-picking problem,” on the other hand, is deemed as less problematic for the purposes of this analysis. If a bank can provide evidence of attainment to a specific variable for either of the logics with examples, that should be enough to affirm that its reporting efforts contemplate that element of the logic. That is also the case, even when the example might not apply as smoothly to other aspects of its operations. Since the logics are frequently competing for influence, it is to expect that one or the other does not necessarily guide 100% of the bank’s reports. The willingness to report on specific dimensions of the logic is more important than the extent to which it does. Because banks tend to choose their best light for public reports, observing the variables which are not at all reported becomes even more telling than the details about it does report. Another critical point of concern about possible limitations of this methodology to map the organizations’ relative position refers to the fact that each variable has the same weight. That might distort the interpretation of the effect each of them has over the bank’s alignment to one or the other logic. Since this study is exploratory and the first of its kind, the variables selected to compose each logic’s framework mostly derive from the literature on bank and SOE governance, which considers corporate governance as a system rather than several individual provisions. The specific indicators selected to compose the tool were picked based on their presence in the publications focusing on NDB governance. However, they do not intend to be exhaustive nor exclusive. In order to avoid aggravating possible selection biases and gaming, the weights for each of them are considered equal (Black et al. 2017). Given all these measurement challenges, it is important to make clear that the scales constructed here are a theoretical attempt to represent the degree of compatibility between each bank’s reporting efforts with the logic of appropriateness and consequences, as well as the interaction between them both. The scales are not to be understood as an indicator to analyzes the effectiveness, depth, or breadth of the aggregate but only as a tool to depict their relative positions and allow comparisons between the NDBs. This analytical model represents an effort to provide a reference point of view as opposed to, necessarily, a factual one. It

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does serve, however, the purpose of identifying trends for the whole sample and of supporting the assumptions from which we will draw conclusions about the dominating logic guiding the reporting efforts for each of the banks.

6.1.4

Mapping National Development Banks

The application of the analytical tool to the banks in the sample revealed interesting dynamics during the period in question. Table 1 in annex 5 displays the overview of all NDBs and their detailed scores distributed across variables composing each logic for the years 2008, 2013, and 2018. Figures 1 to 7 in the same annex plot each bank’s individual trajectory for the entire period. One will notice that the Venezuelan BANDES is not, yet again, analyzed, nor presented in the tables. That is because it has not produced any annual reports or other documents that we could use for this study. BICE’s annual reports for the years of 2008 and 2009 could not be retrieved online, so the analysis for the Argentinian bank starts in the year of 2010 instead. In 2008, the logic of consequences (LC) prevailed over that of appropriateness (LA) for all the banks in the sample. FINDETER was the only exception where both logics scored the same (6;6). In four out of six of the remaining banks, the difference between the scores for both logics is of at least three points in favor of consequences, reaching, in two cases, five points. The logic of consequences proves very dominant, as five out of seven banks scored between six and eight points on an eleven-point scale (>50%). For the logic of appropriateness, only one bank scored above 50%, with most scoring three points or less (