Interview: Enrique García, Executive Director, CAF (part II)
In the previous edition of Development Finance News we brought you the first half of our interview with Enrique García, Executive President of CAF, discussing the changes he has overseen and how the institution has transformed itself into one of the biggest providers of infrastructure finance in the world. In this second part Adam Pitt explores CAF's viewpoint on green bonds, COP21 and Cuba
Green or Climate Bonds have emerged as a new asset class for investors with development bank issuers such as the World Bank and European Investment Bank leading the way. What future do you see for green bonds in terms of development finance? What other instruments will be crucial to stimulating private sector investment in infrastructure in developing markets such as Latin America, Africa and Asia? I think [the idea of Green or Climate Bonds] is a very good one. We have not had any direct experience with them yet. Nonetheless we are very pleased to see the terrific job the IDFC, KfW, Agence Française de Développement (AFD), and others have done in this field. We hope that we will be able to seize the opportunity to start issuing that type of bond in the future.
The UN summit in September 2015 and the COP21 in Paris have provided defining moments in the development agenda. How can we best measure progress on the Sustainable Development Goals and what are the biggest obstacles to financing their implementation?
I think one of the challenges is that I’m not sure countries, governments and the private sector, are aware of the risks that the world faces in the future if we do not take responsible actions now. Then there are the interest groups. Take infrastructure for example. To build up infrastructure is not merely an issue for technical engineers. Feasibility studies involved in developments should include environmental issues from the start. Unfortunately, what normally happens is that a project is studied on financial, technical, and institutional grounds, and when developers think they are ready for financing, they will usually approach an institution like the World Bank, IDB, or CAF. When they realise they cannot access finance without having considered the environmental impact of the project, they say they forgot and call in consultants to find a way to mitigate the issue and get a project pushed through. That’s not the way to do it.
The way governments operate is also an obstacle because leaders usually serve for a four or five-year term, which means presidents and authorities get very nervous if there is a delay in the process of implementing projects because they want the projects to be finished by the time their term is over. Instead of cutting corners, I think that if we are going to look at development in a serious way, we have to build an institutional setting where people see short-term impacts alongside medium and long-term ones. In the context of the Sustainable Development Goals that have been established by the UN, a consensus must be reached via agreements that involve governments, the private sector, unions, and other stakeholders.
CAF is one of the leaders of the Sustainable Urbanisation group of the IDFC but city governments have had a very limited role at COP21 and currently local governments have no formal role agreed for Habitat III in Quito. ?Given the importance of cities to sustainable development, should we be offering local governments a more formal role in the multi-stakeholder process?
Yes. I think urban issues are very crucial and especially in Latin America, which is an urban region – with all of the good and bad things that that brings. Of course, we have to deal with countries and we have to deal with regions within countries, but there is a role to be played by cities – not only large cities but small and medium ones too. This includes how you build the city, transport, mitigating damage that industries have on the environment. These are big issues, and there are a number of organisations that are trying to take the right steps.
A possible new member for CAF is Cuba. Can you shed any further light on the current status of your discussions to become the first multilateral lender to be present on Cuba since it reopened diplomatic relations with the US? We have been looking at ways to bring Cuba back into the financial system for a long time and were very happy to see the outcome of the Panama Summit, in which President Castro and President Obama had a very positive meeting. In April, we held a big conference in Havana to exchange ideas on development issues that are of relevance to Cuba.We have an important role to play in advising them on infrastructure and, in July the board of CAF unanimously approved steps to see how Cuba can become a member of CAF. For the time being we have approved some initial funds for technical cooperation and at this stage our basic relationship will be of an intellectual nature in which we will seek to provide guidance on some of the macro-economic and sectoral issues the country is facing.
To further support private sector development, CAF Asset Management Corp. (CAF-AM), an independently managed 100 percent-owned CAF subsidiary, was established in late 2014 with the objective of mobilising and managing third party funds to co-finance infrastructure projects in the region. What has been achieved so far? CAF Asset Management Corp has been created to help manage public-private sector funds generated for use in infrastructure projects. This is because infrastructure is an area where Latin America is lagging behind other regions. Investment in infrastructure represents just 3 percent of GDP. That compares with about 10 percent Asia. Now we don’t want to go that high, but we think investment should rise to 6 percent. This is impossible to do with public sector budgets alone.It is also impossible to do it with isolated funds from the private sector. To foster public-private cooperation, we’ve created special purpose groups; we’ve created one in Colombia where we’ll put in US$50 million in equity and we’re looking at the possibility of attracting investment from both insurance companies and pension funds.
The authorities will need to make some changes to regulations so that insurance companies and pension funds can be eligible to finance infrastructure but everything is in place and we’re close to an agreement. The idea is to also bring in resources from the rest of the world, from the United States, possibly from China, and Europe. This is not easy. You have to work hard to convince investors that the risks are calculated and that checks are in place to mitigate those risks, but we are confident that the fund can grow to between US$500 million and US$1 billion.
You have been elected five times as Executive President. Will you be standing again after 2016 and on what agenda? What do you hope will have been achieved by 2016? I’m very pleased with the results of the last election and in being able to continue to be a part of building up an important institution but I think it’s too early to talk about that. In terms of my hopes, I think one of the main roles of development banks in this era is not only to provide directed funding but to provide a seal of excellence to programmes and projects, so that investors can be more comfortable in financing important initiatives.
By Adam Pitt
Photo: CAF