November 16, 2000

NADBANK UPDATE

Bank Board still deliberating expanded mandate

By George Kourous, BIOS

The public comment session on proposed changes to the mission of the North American Development Bank (NADBank) has closed, and officials at the NAFTA-created institution say that the final decision is now in the hands of its board of directors.

No one is certain, however, when the binational board will make its ruling.

On September 28 a bank spokesperson told the financial magazine Bond Buyer that the bank expected the board to meet in late October or November to discuss the issue. However, as this article went to press, a decision had not yet been made. "They're still discussing the issues," says newly appointed NADBank Managing Director Rafael Rodriguez. "There's a lot of information, a lot of feedback, that came out from the public consultation process, and it needs to be taken into account. So they're thinking about this very carefully. They're discussing this within governments and between governments."

However, some sources in Washington involved in the board's deliberations told borderlines they predict that the earliest a decision could be made would be January 2001, explaining "there has been too much ambiguity in both countries because of the administration changes."

In July, bank managers proposed expanding both the geographic scope of NADBank operations, and the list of infrastructure projects the bank may fund, in order to address its difficulties in making loans. Currently, under the terms of the NAFTA side accord that created it, NADBank is limited to financing infrastructure projects in the water, wastewater, and solid waste sectors in a 100-kilometer-wide zone on each side of the

U.S.-Mexico border. The bank has argued that because of difficult economic and financial conditions in the sectors originally considered, the expansion is necessary in order to put NADBank loan capital to work more quickly.

Critics of the proposal say the move will dilute attention being paid to priority needs on the border, and argue that NADBank's interest rates are the primary reason border towns are discouraged from taking advantage of its loan services. The bank's lowest interest rate for loans is one percentage point above market rates.

INTERVIEW:

Rafael Rodriguez, Managing Director, North American Development Bank

[Editor's note: Recently, borderlines interviewed Rafael Rodriguez, who succeeded Victor Miramontes on October 15 as managing director of the North American Development Bank (NADBank). Many of his comments will be appearing in borderlines issue 73, which will be arriving to readers in mid-November and will later be posted to our website. Here, we reproduce at length some sections of the interview, which provide the bank's perspective on why it needs to consider expanding its mandate and how it might go about doing so. Following the text are a number of links to more information regarding the bank's proposal.]

BL ~ Why expansion?

I think it's important to see what other institutions around the world with similar mandates in terms of these sectors [water, wastewater, and solid waste] have done--or haven't been able to do. If you see what the World Bank (WB), or the InterAmerican Development Bank (IDB), the European Bank (EB), or other multilateral development banks are doing, for example, in the water and wastewater sector, or in solid waste, it's very little. For example, the WB, or the EB Bank, or the IDB--out of their total loan portfolio, less than four percent is allocated for water or wastewater projects. It's a very small percentage.

What does that tell us? That these sectors are very difficult to finance. Because the creditworthiness of the utilities is, to say the least, very limited. So what the BECC and the bank have done over the first five years of their existence is to look not only at what to finance, but also how to finance--how to make these projects financeable, creditworthy. That means a lot of technical assistance to the utilities to provide them with the tools and the standing to operate properly... In most of the utilities that you see on the border, that capacity is not there. You have to assist them with that. If you look at what the bank has been doing in terms of upgrading the efficiencies and the financial situation of the utilities, that's also very relevant.

But one thing that I would like to underline is that when you see the experience internationally, it's exactly the same thing. There's no magic solution anywhere for projects of this nature. They're the most complicated infrastructure work.

So, the bank has capital, which is not being used to its full extent. Let's assume that we are somehow able to bring down the loan conditions, even to say, no interest rate, zero interest rate. Even with no interest, [taking out a loan] is still a big challenge [for border

communities]. Even if you were to deplete part of your capital [by forgoing interest revenue], still it would be a challenge, because the ability of local utilities to repay even principle itself is not there. So what many communities are saying is: "look, we need to upgrade the water and wastewater utilities and municipal sanitation services. But that will take time. And we're working on that. We're getting technical assistance from [BECC and NADBank] to do that. But in the meantime, let's put the bank's capital to use."

How can you do that? Well, you have two options. Either you deplete it, and the two institutions fade out with a limited short-term impact. Or, you try to improve your instruments and terms and conditions as much as you can and in parallel choose a few other sectors to cater to; sectors that are a bit better in terms of their capacity to take out loans, and are still very relevant for the communities in terms of their environmental impact and their overall impact on their development. That's the fundamental issue here. And it can be a virtuous circle: by not depleting capital and by financing projects that present better conditions, down the line you would be able to funnel more resources into the poorer sectors.

Now, easier said than done. It's not like you have fifty projects out there of other kinds that are ready to be financed. The point is, on a gradual basis, why don't we allow the bank to start considering other things, even on a pilot basis, as mentioned in the mandate expansion document? Why not start working on those? It doesn't take away from the focus. It doesn't take away from the fact that we will continue to be accountable, before anything else, on water, wastewater, and solid waste. But again, it will help us to be more effective and move the institutions forward.

BL ~ Many observers agree that, generally, looking at additional sorts of environmental infrastructure projects for BECC-NADBank support is not a bad idea. But the suggestion to expand the bank's geographic area of operations seems to have sparked a lot of concern. Comments?

If you ask on the Mexican side, that is very much a request that [communities there] came up with. If you talk for example with state government officials on the Mexican side, they'll tell you "look, we have very substantial problems in terms of the border state capitals, Hermosillo, Chihuahua, Saltillo, Cd. Victoria, which is: if we continue to develop... we'll be able to retain a lot more of the population that is flowing toward the border, we'll be able to attract a lot of the industrial growth that the border is attracting so far."

And that is true. Unfortunately, you can't solve the border's problems by concentrating on the border alone. You have to start containing the flow further south. These are cities that have a common denominator--you might exclude Monterrey, which gets a lot more attention--but the rest of the state capitals are in dire straits in terms of resources for infrastructure. So, it is not fortuitous that we put the 300-kilometer line there; that's precisely the line that covers those cities.

Now, there is an argument on the side of the U.S. which says, "yeah but this would include LA, San Antonio, and would include other cities that don't need it;"4 and I agree. The point is, how can you cover more cities that are critical, that are not getting resources, and that are fundamental for the border in a concept that is covered by the charter today--which does cover other opportunities in terms of transboundary impacts that are further south or north of the 100 km line--but in a concept that was brought up by the president of El Colegio de la Frontera Norte, which is the "economic basins" approach. Which makes a lot of sense. Wherever you see an impact that is directly affecting the border but is further south, not only from a water basin or a river basin perspective, why not cater to that, down the line. So again, that was part of the concept, why we put the 300-kilometer idea there... We didn't suggest it only from the bank's perspective, but also from the perspective of other constituents, like the border state governments in Mexico; they strongly supported that.

BL ~ So how do you make sure, in an expanded area of operations, that big cities in the U.S. don't outcompete other communities?

Why don't you put affordability considerations in place, such as the ones that are already there for the BEIF and for SWEP? We do filter available resources for rich communities through affordability constraints. Well, you might be able to do the same thing when you expand from a geographic perspective. Again, it's something that will continue to be discussed. It's not an easy thing.

BL ~ What is the feedback you are getting from border communities regarding the bank's proposal?

Some of the reports on this process have mainly accounted for comments coming from the U.S. I think it's important to take into account the Mexican perspective too. How can you put the bank's capital to better use? It's there. It's not an endowment. I mean, Mexico can't afford as a country to place endowments anywhere with money that will be used five years from now, ten years from now, with so many needs in Chiapas, in Oaxaca, and other places. And we have that money there; we better put it to good use, and as quickly as possible. Again, the thing is--how do we do that without losing focus on the fundamental things?

If you read, for example, the input that we got from the Mexican side, it's a bit of a different perspective. What they're saying is "yes,  the priority is water, wastewater, solid waste. No doubt. But we have other urgencies that are relevant from an environmental perspective, and we don't have anyone helping us. We, the communities on the Mexico side, mainly, think that you could do more. And yes, don't lose focus and don't lose priority in terms of water, wastewater, and solid waste. But by the same token, help us develop solutions for these other things."

BL ~ Some have said that NADBank didn't involve BECC in early discussions regarding mandate expansion to the extent it should have. Do you think that's accurate?

No, I differ. Number one, our two public sessions within the board meeting in July were entirely devoted to [mandate expansion], and there were BECC board members there. Number two, there was public consultation, not only in terms of posting all relevant information to the website, but in terms of meetings. And number three, we've been meeting with BECC management... we just met with Fernando [Macias, BECC

Managing Director] and Javier [Cabrera, BECC Deputy General Manager] two weeks ago for a full day of discussions. I'm sure we could do even more to communicate it, but there's a lot being done that's perhaps not perceived. We have been discussing this issue for quite some time within our board, and with the BECC there's a common link between our boards, which is the EPA. EPA participates within our board and with the BECC board, so there are more links between the two institutions than are apparent. There was also a management change at the BECC, and that might have produced a bit of a communication lag. But it did not affect the process.

The document is, as clearly indicated, a proposal for discussion--it's not a foregone conclusion or anything that suggests that the bank has reached a conclusion on its own. And I think it was an exercise that was worthwhile in terms of us coming out with our perspective. And there's no indication anywhere in our document that we'll be shying away from BECC involvement.

Part of the perception is due to the fact that, early on in the life of the two institutions, the link between the BECC and the NADBank wasn't up to par. Everybody knows that, and we acknowledge it internally. But I think there's a lot of improvement. And the kind of link that we established under Javier and Pete was good and I'm sure it will continue under Fernando. We have to continue to work better as time goes by, recognizing there are improvements to achieve throughout the process by both institutions.

As we move ahead in terms of two new administrations at the BECC and the NADBank, I think it's extremely relevant for us to dissipate some ideas that have been lingering for a long time, which are that we don't talk to each another, that there's no communication, that there's animosity. Might have been true in the past, but I think there's a lot of improvement. We need to build on that, and we need more communication.

BL ~ In your comments at the recent Border XXI National Coordinator's Conference in El Paso, you mentioned Vicente Fox and the NADBank, saying:

"We started working very closely with the key folks working with the main candidates in the Mexican presidential election... What we provided was a briefing of how we saw the NADBank then, and the link between the BECC and the NADBank, and the relevance of what we're supposed to be... And I have been, since July, working in different areas with the transition team. And in this capacity, I had a meeting with Mr. Fox yesterday, and the NADBank did come up. It frequently does, because it's on his mind. It's a relevant issue to him."

BL ~ Can you talk more about your discussions with the candidates and now with Mr. Fox?

As a non-partisan institution, we were clearly unbiased. It was important for all the key candidates in the race to be aware as to what the BECC and the NADBank were doing. And it happened to be that some of the folks that were working with each of the three main candidates on the international scene... were good friends of mine from years back.

They were aware vaguely of what we were doing from an institutional perspective, and I just took the occasion throughout the campaign to brief them more fully.

As a governor of Guanajuato, I believe Mr. Fox had been aware more or less of the Mexican domestic window's potential and so he was interested. And when he started discussing the idea of fostering a great flow of development funds from the U.S. and Canada to Mexico, particularly for infrastructure development, and then as president-elect, presenting that concept in his trip to the States and Canada, it struck him that the NADBANK could be, number one, an interesting precedent in terms of the BEIF, which is a unique program in that sense, and then, number two, in terms of the bank being a channel to foster that and then to manage it. The bank's potential role with an expanded mandate was highlighted within his long-term vision of how the North American region should evolve and "deepen"4 NAFTA. He refers to this quite frequently, and his op-ed in the New York Times on August 25th pointed that out.

I think the impact for the short run is that the NADBank is very much on the radar screen of the incoming Mexican president. And I think that's very positive.

Rafael Rodriguez was appointed Managing Director of the NADBank on October 15, 2000. He has been Executive Director of the Mexican Foreign Trade Bank; Mexico's Trade Commissioner in Canada; Secretary of Economic Development for the border State of Tamaulipas; and Professor and Research Fellow at ITESM.

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