Things were going well for Curtiembre Arlei, S.A., an Argentine leather tanning company, until its managers decided that in order to compete internationally they would have to undertake a major expansion. In 1998, the company’s executives began making the rounds for the $4 million they would need.
One of Arlei’s first stops was the Inter-American Investment Corporation (IIC), a member of the IDB Group, whose mission is to promote and support development of the private sector and capital markets in the region. “The IIC was willing to finance the operation only if Arlei complied with a list of requirements,” says Jacques Rogozinski, the IIC’s general manager. At the top of that list was the establishment of a waterwater treatment program, given the fact that the leather tanning process dumps unacceptable amounts of chrome into the local water system.
When Arlei’s managers determined that this requirement would add $2 million to the cost of their expansion, they said “no thanks” and turned to other financial institutions. However, after many unsuccessful attempts to obtain funding through other sources, Arlei returned to the IIC. In an effort to underscore its commitment to finding a solution, the IIC sent an expert to the Arlei facilities in Las Toscas, Argentina, to assess the proposal. He found that Arlei was a successful company that provided jobs for 10 percent of the town’s 15,000 inhabitants. But while expanding the business would directly benefit the community, the water pollution issue was, in fact, an unavoidable and significant problem.
“Ultimately we persuaded the company that it would have to increase the loan to $6 million to cover wastewater treatment costs and other requirements on the list,” says Rogozinski. “With these changes, it obtained the export certificates that enabled it to supply leather to the most prestigious automobile firms in Europe, such as BMW and Mercedes Benz. With us, the company did a different kind of project. Arlei won, the town won and the environment won.” Moreover, adds Rogozinski, “by virtue of being an export-oriented company they have been able to stay afloat during the country's current crisis.”
What is additionality? Rogozinski tells the story of Arlei in order to define “additionality,” a concept that is gaining currency within the development community and one that the IIC has fully integrated into its capital investments program. “We have to go beyond just lending money and getting a return,” explains Rogozinski. “For that, there’s commercial banking. Our work also includes advising enterprises on what has worked in similar cases, and we can even end up cutting costs.”
“The term ‘additionality’ isn’t found in any dictionary,” says Jorge Roldán, chief of the IIC’s Finance, Risk Management and Administration Division. “It was coined in Washington to express the notion that multilateral institutions should be able to justify the use of scarce resources for investments by showing that these operations meet concrete development goals.”
In practice, additionality refers to a list of measurements of an investment project’s impact on development that the IIC applies on a case-by-case basis, according to flexible criteria. In the case of Arlei, for example, in addition to the water treatment program, the IIC required a series of administrative and accounting changes that would put the company on a more equal footing with the business framework of more developed enterprises.
More profitable in the long run. Rogozinski explains that, in the short term, some companies perceive these requirements as a burden that they try to avoid, because they don’t see a direct benefit. “But, when they see successful examples, they react differently,” he adds. “It surprises them that, in many cases, the IIC’s demands help to reduce the ‘bureaucratic burden’ of their business.”
When an enterprise “puts its house in order”—either by creating independent governing bodies, adopting international accounting standards, or undergoing rigorous audits—it improves its ability to compete in the international market and obtain credit from private banks.
According to Roldán, small and medium-size enterprises have a particularly hard time obtaining loans in Latin America and the Caribbean, because private banks often demand excessively high interest rates. But by working with the IIC, these companies can obtain loans at reasonable rates, so long as they are willing to take steps that will improve their businesses’ performance in all respects, not only the financial one.
The IIC now applies additionality criteria to all its loans. Each proposal must undergo a series of matrix-based evaluations of its impact on development, resource mobilization and the enterprise’s governance. An enterprise may be above, below or at the average desirable levels of additionality. The system is flexible enough to make allowances for special situations. Different matrixes are applied to enterprises involved in finance or capital markets.
Creating jobs, generating foreign exchange, transferring and acquiring technical know-how, innovating in ways that can be replicated elsewhere, and complying with environmental standards and occupational health and safety rules are some of the requirements that Arlei ran into when it came to the IIC to submit its loan application. But although they seemed overwhelming at first, these requirements ultimately yielded concrete dividends for the company.
“At the IIC, we work to turn companies into good corporate citizens. achieve more transparent management practices and gain better control over their finances,” says Roldán. Still, he acknowledges that the IIC and other multilateral institutions that wish to apply this concept need to do a better job of explaining it to potential clients. Last May, the IIC, along with the International Finance Corporation, organized a roundtable in Washington, D.C., to discuss ways of strengthening the private sector and developing deeper financial markets in Latin America. The concept of additionality was one of the central ideas discussed among the 15 international development institutions that attended the meeting. “It was an attempt to think about this issue and publicize the conclusions,” said Rogozinski.