INTER-AMERICAN DEVELOPMENT BANK OFFICE OF THE VICE PRESIDENT FOR SECTORS AND KNOWLEDGE

INTEGRATION AND TRADE SECTOR

PROPOSAL FOR THE ESTABLISHMENT OF A MULTI-DONOR FUND TO COMPLEMENT THE FIRII:

THE REGIONAL INFRASTRUCTURE INTEGRATION FUND

This document was prepared under the supervision of Alexandre Meira Rosa (INE Manager) and Antoni Estevadeordal (INT Manager) and the coordination of Gastón Astesiano (INE) and Joaquim Tres (INT). The other members of the team are: Kea Wollrad (INT), Alonso Chaverri-Suarez (LEG), Gerhard Lair (VPC/GCM), Ginya Truitt Nakata (ORP), and Sean Bohannon (ORP).

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TABLE OF CONTENTS

PAGE I. BACKGROUND

A. The Ninth General Capital Increase and Global and Regional Integration 1 B. The Importance of Grants in Supporting Integration 2 C. The Fund for the Financing of Technical Cooperation for Initiatives

for Regional Infrastructure Integration (FIRII) 3 D. Justification for the Proposed Fund 4

II. THE REGIONAL INFRASTRUCTURE INTEGRATION FUND 5

A. Objective 5 B. Contributions 5 C. Priority Areas and Activities 5 D. Governance, Resource Mobilization and Evaluation 7 E. Eligibility Criteria 7 F. Executing Agencies 7 G. Other Provisions 8

III. RECOMMENDATIONS 8

ANNEXES ANNEX I RESULTS FRAMEWORK

ELECTRONIC LINKS LINK I INFORMATION ON FIRII PROJECTS

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ACRONYMS

FIRII Fund for the Financing of Technical Cooperation for Initiatives for Regional Infrastructure Integration - Fondo para el Financiamiento de Operaciones de Cooperación Técnica para Iniciativas para la Integración de Infraestructura Regional

GCI-9 The 9th General Capital Increase IDB Inter-American Development Bank IIRSA Iniciativa para la Integración de la Infraestructura Regional

Suramericana - Initiative for the Integration of Regional Infrastructure in South America

INT Integration and Trade Sector LAC Latin America and the Caribbean PM Proyecto Mesoamerica RES Department of Research and Chief Economist RFM Regional Finance Ministers annual meeting SIEPAC Sistema de Interconexión Eléctrica para los Países de América Central TC Technical cooperation VPC Vice Presidency for Countries

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I. Background

1.1 This document presents a proposal to establish a multi-donor trust fund, the Regional

Infrastructure Integration Fund (Fund). The Fund will be created and administered under the Bank’s Framework for Technical Cooperation (GN-2469-2). The resources of the Fund will be provided by contributions from donors. It is expected that the first contribution to this new Fund, if approved, will be formalized in the forthcoming Annual Meeting of the Inter-American Development Bank (IDB) in Calgary.

A. The Ninth General Capital Increase and Global and Regional Integration

1.2 The report of the Ninth General Capital Increase (GCI-9) that was approved by the Board

of Governors of the IDB on July 21, 2010, identified regional and global integration as one of LAC’s key development challenges, established integration as one of the Bank’s institutional priorities and set an annual lending target for integration of 15 per cent to be achieved by the end of 2015. Simultaneously, the Bank launched a dialogue with key donors in the framework of the Regional Finance Ministers annual meeting (RFM) on the topics that could help countries in Latin America and the Caribbean bridge the integration gaps. As a result of the Governors’ mandate, the IDB approved the Sector Strategy to Support Competitive Global and Regional Integration (GN-2565-4) that will provide the operational framework for the implementation of the GCI-9 mandate.1

1.3 The Bank’s Integration Strategy reflects the emerging consensus in the region that LAC may deepen its competitive integration, within the region and with the rest of the world, if it focuses on: (a) its unfinished trade agenda that sill requires expansion, perfection and convergence of existing agreements; (b) reducing logistics costs related to underinvestment in transport infrastructure, addressing the transport mode mix, improving regulatory frameworks, updating and upgrading trade facilitation at border crossings, building more competitive integration of energy markets and reducing the digital divide through investments in broadband; and (c) expanding the provision of regional public goods, harnessing the potential of South-South cooperation.

1.4 The Integration Strategy establishes that the Bank needs to promote simultaneously

investments on the software (policy and regulatory frameworks) and the hardware (physical integration) of integration, ensuring coherence between national and regional interventions. Although software investments require fewer resources, they can make integration infrastructure more efficient and unlock investments in hardware. Hence, focusing on the software-hardware continuum and strengthening the production of regional public goods will be key for LAC’s integration prospects in the next decade as it will support strategic innovations in integration processes and projects. However, such a

1 The document was considered by the Programming Committee of the IDB’s Board of Executive Directors on March 11, 2011 and approved by the Board on March 22, 2011. Throughout this document, the Strategy will be referred to as “Integration Strategy”.

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strategic shift in the support of integration can only be implemented with incentives that are commensurate to the challenges ahead.

B. The Importance of Grants in Supporting Integration

1.5 The Integration Strategy puts forward a new instrument compact (Figure 1) based on the functional combination of Bank financial and non-financial instruments, most of which already exist but require a more efficient deployment or a different scale. Grants play a central role in the operational implementation of the integration compact. The Bank’s experience and research show that regional projects (involving more than one country) generate higher costs than national ones, because they face intertwined institutional and operational challenges: Specifically, (i) they have a more complex execution structure because consensus on a shared vision and close coordination among countries need to be assured along the project cycle; (ii) the benefits of collective action have to become evident during the design and execution of a regional project to make multi-country cooperation sustainable; and (iii) they compete with other national investments that often generate shorter-term benefits and do not present cross-border externalities. These institutional and operational challenges constitute a “cost bias” faced by integration interventions.2

Figure 1

A Strategic Compact to Support Integration

1.6 Figure 1 illustrates that grant resources not only lay at the core of the instrument compact, providing support for the rest of the instruments; but they need to be sufficiently large to remove the “cost bias” against regional and integration projects, so that both Bank

2 Some studies carried out by comparator institutions estimate the cost of regional project preparation is 100 per cent higher and the cost of supervision is at least 35 percent higher.

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specialists and their clients can originate, design, execute and evaluate integration interventions on a leveled playing field. Therefore, regional projects need to incorporate incentives to compensate for these “cost bias” and coordination failures.

1.7 With the implementation of the Integration Strategy, the Bank expects to increase the

effectiveness of incentives by: (i) enhancing coordination among relevant Bank units to increase the efficiency in the use of grants funded by the net income of the Bank’s ordinary capital; and (ii) offering an attractive, seamless platform for donors to make a strategic contribution to LAC’s integration.

C. The Fund for the Financing of Technical Cooperation for Initiatives for

Regional Infrastructure Integration (FIRII) 1.8 The proposed Regional Infrastructure Integration Fund will add a donor window to the

already existing Fund for the Financing of Technical Cooperation for Initiatives for Regional Infrastructure Integration (FIRII). The FIRII was created in 2005 to support the Initiative for the Integration of South American Regional Infrastructure (IIRSA) and its objective of promoting the integration of physical infrastructure across national borders, increasing production and trade, and fostering sustainable growth in South American countries. Subsequently, the Fund started to support regional infrastructure projects of the Proyecto Mesoamerica (PM) initiative (previously Plan-Puebla-Panama)3.

1.9 The FIRII provides non-reimbursable national and regional technical assistance to help countries in the preparation of strategic infrastructure integration projects, including pre-feasibility and feasibility studies, project viability assessments, and social and environmental impact evaluations.

1.10 Whereas the initial emphasis was on supporting the creation and development of specific

integration infrastructure projects in the area of transportation, energy and communication (as the three pillars of infrastructure), the FIRII later branched out to finance trade facilitation (e.g. in the area of customs) and the software of infrastructure interventions. An interesting example for the latter has been FIRII financing to solve legal, regulatory and tariff issues that were key in the creation of an integrated electricity market in Central America (Sistema de Interconexión Eléctrica para los Países de América Central - SIEPAC).

1.11 The FIRII is funded by the Bank’s net income of the Ordinary Capital (OC) and has so

far been endowed with US$ 40 million (US$ 20 million at its establishment in 2005 with a replenishment of an additional US$20 million in 2008).4 As of December 2010, the fund had financed thirty (30) technical cooperation operations for a total of US$29.6 million. Fourteen (14) projects (representing 54% of approved resources) have benefitted the countries of the PM and sixteen (16) projects (representing 46% of approved resources) have supported IIRSA initiatives. Two (2) additional projects for 1.7 million

3 Document GN-2344-8. 4 Resolution DE-10/05.

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are under preparation. The FIRII currently has a balance of approximately US$ 7 million.5

1.12 The FIRII has proven to be an effective and successful instrument for four main reasons:

a) It is flexible and compatible with the needs and complexity of multi-country infrastructure projects, which face greater preparation and execution challenges, as described in Section B above.

b) It provides clients with timely, nimble project preparation financing in accordance with transparent and standardized eligibility rules and procedures.

c) It has generated projects for the IDB’s lending pipeline. Since 2005, FIRII resources have contributed to the preparation of eleven (11) loan proposals for a total amount of US$1.7 billion.

d) FIRII support for both the IIRSA and PM is coordinated very closely with their designated liaison institutions in the region. The inter-institutional coordination has strengthened the Bank´s ties with these integration initiatives and has positioned the IDB as a key partner in the IIRSA and PM cooperation and integration processes.

1.13 OVE’s 2007 evaluation of the Bank’s involvement in IIRSA (RE-338) confirms that the

FIRII appears to be an excellent vehicle for supporting IIRSA. The aforementioned document as well as OVE’s 2009 evaluation of the Bank’s support for the Plan Puebla Panama Initiative6 (RE350) mention the Bank’s general lack of financial products tailored to regional integration projects, with the limited FIRII resources not being enough to give the IDB a more prominent role in supporting regional infrastructure initiatives.

D. Justification for the Proposed Fund

1.14 As the Bank’s Integration Strategy points out, the progressive integration of goods,

services and factor markets generates growing interdependence and creates externalities that lead to an increasing demand for regional public goods and functional cooperation. The Bank’s experience with IIRSA and the PM, and other sub regional integration schemes, confirms this. In addition to the preparation of regional infrastructure projects, borrowing countries increasingly approach the Bank for support in new integration areas such as the harmonization of regulations, customs rules and technical standards, associated with - among others - increasing competitiveness, fomenting rural development, and controlling the cross-border transmission of infectious diseases.

1.15 In response to such requests, the new Fund will strengthen the existing FIRII by

complementing its emphasis on the preparation of hardware projects (investment in

5 A report on the results of the FIRII to date has been prepared and is currently under review by Management. Link I provides information on the projects financed by the FIRII. 6 Later renamed Proyecto Mesoamerica.

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infrastructure) with software interventions to improve regional trade logistics and supply chains. Specifically, the new Fund will expand the FIRII’s thematic focus to areas that a) increase connectivity and infrastructure investments that facilitate an efficient and secure movement of goods and services; and b) foster productive integration, regional value chains, reduce cross-border logistics costs and promote sustainable local economic development in border areas.

1.16 The creation of the Regional Infrastructure Integration Fund is expected to meet the

region’s demand in the aforementioned areas in the short term. In the medium term, the Bank will consider the establishment of a platform to channel donor resources aimed at reducing the relative effective costs of integration projects and unlocking their profitability, for both public and private Bank clients.

II. The Regional Infrastructure Integration Fund

A. Objective

2.1 The objective of this multi-donor fund is to support the preparation of strategic

infrastructure integration projects in Latin America and the Caribbean by providing financial incentives in the form of technical assistance. These strategic infrastructure projects will contribute to increasing production and trade, fostering sustainable growth, and promoting the countries’ competitive integration at the regional and global levels. B. Contributions

2.2 This proposed fund will be established as a multi-donor fund. Several sources of funding

may be contemplated: (i) contributions from both borrowing and non-borrowing member countries of the Bank; and (ii) contributions received from non-member countries and from private sector entities (corporations, foundations, philanthropic organizations and individuals) as contemplated in the New Framework for Technical Cooperation (GN-2470-2). The Bank’s guidelines for donations from the private sector will be applicable.7

2.3 Pursuant to section 4.12 of the Bank’s Framework for Technical Cooperation (GN-2469-

2) contributions to the Fund will be subject to a five percent administrative fee.

C. Priority Areas and Activities 2.4 The proposed multi-donor fund will finance non-reimbursable national and regional

technical cooperation operations, in the following priority areas:

Strengthening and adopting best practices to implement regional regulatory frameworks as key incentives for regional connectivity and infrastructure investments

7 Guidelines for strategic partnerships with the Private sector and IDB operational procedures (CC-6007-1).

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(public and private) and to facilitate timely, efficient and secure movement of goods and services throughout the LAC region by:

o Promoting transparent and coherent regulatory requirements and standards to enhance regional supply-chains,

o Removing bottlenecks at border crossings and other customs and logistic related inefficiencies to facilitate cross-border transactions and promote sustainable local economic development in border areas.

Identifying and promoting priority investments to increase connectivity and reduce

the countries’ high logistics costs that erode the region’s competitiveness and thus employment generation by:

o Directing investments in sustainable integration corridors consisting in physical connectivity through roads, energy, telecommunications on the hardware end and trade facilitation on the software end,

o Reducing inefficiencies in the multi-modal transport mix,

o Increasing the capacity and quality of land transportation regional networks,

o Investing and adequately regulating ports and maritime services,

o Improving market structures in air cargo services,

o Providing support to established regional infrastructure platforms such as IIRSA and PM.

Expanding the FIRII´s geographical focus to the Caribbean.

Addressing transnational regulatory issues for key regional markets, such as energy

and telecommunications and leveraging the corresponding infrastructure investments. 2.5 The following activities would qualify for financing under the proposed Fund: pre-

feasibility and feasibility studies, project design, document preparation and revision to carry out financing requests and/or for bidding purposes, and studies related to project viability (technical, economic, financial, environmental, social, institutional and legal). Within the scope of these activities, this multi-donor fund could also finance social and environmental studies, public-private collaboration for specific projects, strategic environmental and gender8 assessments, as well as institutional strengthening activities with an emphasis on sustainable project execution capacity among local or regional organizations.

8 The Integration Strategy emphasizes the significance of donor support for trade-related issues in LAC, not only in terms of financial contributions but to spur the discussion and analysis of new issues such as trade and gender and trade and climate change (see document GN-2565-4, paragraph 5.7)

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2.6 The proposed Fund can finance activities related to the development of Non-Financial Products (NFPs) in accordance with the Bank’s Policy on Technical Cooperation (GN-2470-2, paragraph 2.11).

D. Governance, Resource Mobilization and Evaluation

2.7 Governance and TC processing: Technical assistance financed with resources of this

fund shall be selected, approved and carried out as contemplated in the Proposal for a New Framework for Technical Cooperation (GN-2469-2), the Proposal for a New Bank Policy on Technical Cooperation (GN-2470-2) and any applicable operational guidelines. The governance structure of the Fund will be modeled on IDB best practices. The decision on the projects to be financed will be taken by a technical eligibility committee that will include as core members the Infrastructure and Environment Sector (INE), the Integration and Trade Sector (INT) and Country Managers (VPC/MGR). The Grant and Co-Financing Division (GCM) will act as secretary of the committee. The operation of the committee will at all times ensure that projects from all areas of the Bank are given equal consideration and that departments and divisions of the various vice presidencies can participate, within the aims of the Fund.

2.8 Resource Mobilization: ORP, in collaboration with INE and INT, will design an

appropriate outreach strategy and lead resource mobilization efforts with IDB´s public sector donors as well as with the private sector.

2.9 Evaluation: The results of the Fund will be assessed by means of an evaluation of the group of projects that have been financed. The evaluation will be carried out between year three (3) and five (5) of the Fund’s operation and will be financed with its resources. E. Eligibility Criteria

2.10 Projects to be financed need to:

be part of infrastructure integration initiatives of the Caribbean, South America (e.g.

IIRSA), Central and Mesoamerica (e.g. PM), or any other sub regional integration scheme or initiative;

benefit a subgroup of countries that belong to any of the aforementioned integration schemes; or

benefit one borrowing member country, provided that it can be demonstrated that the project contributes directly or indirectly to a greater regional or global insertion of that country. The Integration Strategy will guide the eligibility assessment in this case.

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F. Executing Agencies 2.11 Legally established entities may receive and administer technical cooperation operations

(TCs) financed by this fund such as: (i) borrowing member countries, including national and sub national institutions with legal capacity to enter into agreements with the Bank; (ii) regional and sub-regional agencies established by the same countries; (iii) private companies eligible to receive loans from the Bank; and (iv) not-for-profit institutions, including civil society associations (GN-2470-2).

2.12 With respect to TCs executed by the Bank, the resources of the Fund may also finance

the costs of delivering such operations (as contemplated in par. 2.32 of GN-2470-2). However, the resources of the Fund may not supplement the budget of a Bank department or division for routine or customary activities.

G. Other Provisions

2.13 Procurement: TCs financed with resources from this Fund will follow the Bank’s current

procurement policies and procedures. Beneficiaries assigned as Executing Agencies will be responsible for the selection and contracting of consultants and for the procurement of those goods that are required for the implementation of the TCs.

2.14 Activities: Projects financed with the resources of this fund will be consistent with the

Bank’s country or sub-regional strategies, as well as with its Integration Strategy. 2.15 Eligibility: All Bank borrowing member countries will be eligible to receive TCs

financed under this fund. 2.16 Reporting: Reporting on this fund’s activities will follow the reporting requirements as

established in the Technical Cooperation Framework (GN-2469-2). 2.17 Termination: Should the Bank decide to terminate this fund, any balance remaining after

paying or cancelling any outstanding obligations will be restored to the respective donors or used as a contribution to regional and global integration activities or as provided in the agreement with such donors.

III. Recommendations

3.1 This document recommends that Bank Management authorizes the creation of the Fund

as outlined in the present document. 3.2 The conditions of this fund shall be determined in an agreement to be negotiated and

signed between the Bank and the donors of this fund, consistent with this document and the standard terms and conditions used for multi-donor trust funds. Pursuant to the delegation of authority included in Resolution DE-44/08, the President, or the person he shall designate, will sign the agreement with donors once negotiations are concluded.

Annex I Page 1 of 1

RESULTS FRAMEWORK

Goal Contribute to increasing production and trade, fostering sustainable growth, and promoting the countries’ competitive integration at the regional and global level.

Purpose To support the preparation of strategic infrastructure integration projects in Latin America and the Caribbean.

Results Indicator Results Verification

Results Indicators

Strengthen FIRII’s current objective: Promote regional infrastructure connectivity and investment (public and private) in infrastructure (transport, energy, telecommunications).

# of cross border and transnational infrastructure projects supported. Target: In 2014, five (5) infrastructure investment projects supported, of which three (3) include IDB financing.

Documentation from countries’ Ministries responsible for infrastructure planning and financing; INE project pipeline; GCM data base and fund reports.

Expand the FIRII’s thematic focus: Complement preparation of hardware projects (investment in infrastructure) with software interventions to improve regional trade logistics and supply chains.

# of regional and sub-regional integration agreements and cooperation initiatives supported. Target: In 2014, negotiation of five (5) regional and sub-regional integration agreements or cooperation initiatives have been initiated or concluded.

Project reports (PCR, evaluations, etc.), GCM data base and fund reports.

Expand the FIRII’s geographical focus to the Caribbean.

Fund resources benefit the Caribbean. Target: In 2014, at least 10% of approved resources.

GCM data base and fund reports.