The official project finance sources of funding and facilities discussed in this section include the World Bank, the International Monetary Fund (IMF), the New Development Bank (NDB) and its Contingent Reserve Arrangement (CRA), regional development
banks, export credit agencies, and other US government agencies. The discussion is based on the website materials of respective institutions and the OECD (2015); it should be noted that not all programs and instruments are available for all infrastructure projects in all countries.
12.1.1 World Bank and IMF
The World Bank and the IMF were created by the Bretton Woods Agreement to, among other major issues, promote economic development and support international monetary cooperation. Their role and participation in financings is changing in order to meet new economic challenges and development needs.
I. World Bank
The mandate of the World Bank is to promote long term economic development and alleviate poverty. It provides technical and financial support to help low income countries implement infrastructure and social need projects with funding from member country
contributions and issuance of bonds. The World Bank has played a major role in international project finance and roughly two thirds of World Bank financed projects
provided support for private sector development. World Bank support is provided through technical advice and financial backing via its three major arms:
A. International Bank for Reconstruction and Development (IBRD). This bank invests in economic development projects along with providing technical assistance and training to ensure adequate project support. IBRD provides loans at market rates for part of financing needed in a project and the rest is cofinanced by regional
development banks (RDBs).
B. International Finance Corporation (IFC). This corporation provides advisory services, direct loans, and equity investments in profitable projects to fill private sector financing gaps. IFC loans are cost based and at floating interest rates.
C. The Multilateral Investment Guarantee Agency (MIGA). This agency insures investments in developing countries against political risk and works closely with IBRD and IFC to provide financing packages for infrastructure projects.
The two other parts of the World Bank are the International Development Association (IDA) and the International Center for Settlement of Investment Disputes (ICSID). The former provides development aid to the poorest countries and the latter provides
assistance to settle project issues and disputes effectively.
II. International Monetary Fund
The IMF's mandate is to promote international monetary cooperation and provide advice and technical assistance to build strong market economies. The IMF helps member
countries with policy programs to address government deficits and balance of payments problems. It does not make loans directly to specific development programs or projects but it does help indirectly. IMF loans to governments help to manage their deficits, which may be due to borrowing accumulated from implementing vital infrastructure projects.
However, IMF facilities are conditioned on the receiving country agreeing to implement economic policies and directives in order to obtain IMF loans.
The World Bank and the IMF work closely to ensure effective collaboration and
coordination of programs through consultations on international economics, finance developments and trends, and resource requirements to fund low income country development.
12.1.2 New Development Bank and Contingent Reserve Account
The New Development Bank, also known as the BRICS Development Bank, and its
Contingent Reserve Arrangement were established in 2016 by the five BRICS countries:
Brazil, Russia, India, China, and South Africa to provide an alternative to the World Bank and the IMF. Led by China, it was created to counterbalance western financial institutions based in Washington, DC. However, the World Bank and other multilateral development
institutions intend to collaborate with NDB in infrastructure projects.
I. New Development Bank
The NDB's mandate is to mobilize financial resources for private and public sustainable infrastructure projects in BRICS and other emerging and developing countries. Its
primary focus is on renewable energy, telecommunications and transportation, irrigation, water treatment, and sanitation projects. NDB provides loans, guarantees, equity
participation, and other financial instruments. In 2016 it approved loans of $1.5 billion and in 2017 it will approve loans of $2.5 billion.
II. Contingent Reserve Arrangement
NDB established the CRA to be its own version and a competitor to the IMF. Its mandate is to support short term balance of payments problems by providing liquidity and loan support and to strengthen financial stability of member countries. CRA functions and support programs mirror those of the IMF.
12.1.3 Regional Development Banks
Regional development banks (RDBs) are owned by member countries, have developed skills that are specialized to their respective region's needs, and they serve as trusted advisors and partners of member country governments. They are well funded to finance economic development and social need projects through low interest loans, and foster innovation and support for large infrastructure project needs.
I. European Bank for Reconstruction and Development (EBRD). It was created to introduce private initiatives and stimulate market based economic systems in
central and eastern Europe. Now, it also has presence in southeastern Europe, the south and eastern Mediterranean, and Russia. EBRD provides assistance to projects that have substantial amounts of sponsor equity, pass stringent criteria, and benefit the host country's economic development. Its investments in project sector projects include fixed rate senior, subordinated, and mezzanine loans with project company insurance against insurable risks. EBRD also makes minority equity investments in profitable projects, provides guarantees to secure payments of letters of credit, bid and performance bonds, and other instruments.
II. European Investment Bank (EIB). It is a European Union (EU) member country owned bank which provides expertise and financing for sustainable projects that are in line with EU objectives. It provides up to 20% first loss support, mezzanine debt,
standby financing, loan guarantee instruments, and capital grants for availability
projects. EIB acts as a catalyst for financial institutions to fund projects by developing EU country capital markets.
III. Asian Infrastructure Investment Bank (AIIB). It is a China sponsored and based infrastructure development bank created to influence the global financial architecture with focus on fostering economic development of Asian countries. It
provides private and sovereign financing for sustainable infrastructure and economic development projects with programs similar to those of other RDBs.
IV. China Development Bank (CDB). It is a state owned investment institution
created to raise funds for large infrastructure projects and support Chinese companies going abroad. It provides medium and long term financing for foreign investment in cooperation with the China EXIM Bank. Its products include loans and bond issues and interest rate, commodity, and foreign exchange risk management.
V. China Africa Development Fund. It is a Chinese private equity fund sponsored by the China Development Bank to facilitate investment in Africa by Chinese companies in natural resources, manufacturing, power generation, and transportation. It makes direct investments in companies and projects and quasi equity facilities; the likes of preferred shares and convertible bonds.
VI. Silk Road Fund. It is a Chinese, state owned holding company designed to promote China development and prosperity for countries along the Silk Road Economic Belt. It is the land based component that together with the oceanic Maritime Silk Road forms One Belt, One Road. The Chinese government created this economic development framework to integrate trade and investment in Eurasia. Its focus is on building ports, roads, and rail links, urban transportation, forestry, and energy efficiency projects along the Silk Road Economic Belt.
Silk Road, also known as Silk Route, is an ancient trade route connecting China with the West that carried goods and ideas between the two great civilizations of Rome and China. Silk was exported from China and wools and precious metals were imported to China from the West.
VII. Asian Development Bank (ADB). This is an Asia focused institution promoting development and cooperation in the poorest countries in the world. It works with governments and financial institutions to provide technical and financial assistance to infrastructure projects, financial market development, and education. ADB offers project development grants and loans in hard or local currency at LIBOR rates and co financing with ECA and commercial credit sources. Its Asian Development Fund (ADF) provides grants at concessionary terms to financial intermediaries to fund development projects and credit enhancement products.
VIII. African Development Bank (AfDB). This is focused on improving economic conditions and provides technical assistance and policy advice to regional member countries. AfDB mobilizes resources to fund development projects and eliminate poverty through funding of both public and private sector projects. It offers flexible multi currency enhanced variable spread loans to customize debt repayment and several risk management products such as indexed loans, commodity hedges, and interest rate swaps. It also offers loan guarantees for borrowers to access commercial funding.
IX. Inter American Development Bank (IDB). This is focused on financing
economic and social development projects in Latin America and the Caribbean and offers a number of financing products including flexible financing facility loans, local currency financing, and guarantees in local currency. IDB offers guarantees to public and private sector borrowers for political risk and partial credit risk guarantees. It also offers concessional financing through blended loans from its Fund for Special
Operations and ordinary capital at 0.25% and LIBOR based rates.
X. Islamic Development Bank (IsDB). This is an international Islamic financial institution fostering economic development and social progress of member Muslim countries. IsDB provides financing for infrastructure projects consistent with sharia law, which prohibits interest or fees on loans. Its debt like instruments include Morabaha, a short term working capital financing; Salam, a purchase of assets to be delivered in the future; and Sukuk, an ownership instrument with properties similar to ownership of a bond. The equity like instruments of IsDB include Modaraba and Mosharaka, which are both very much like western general partnership arrangements.
12.1.4 Export Credit Agencies
Export credit agencies (ECAs) are mostly government institutions created to support
exports of domestic producers of goods and services used in infrastructure projects whose participation in 2009–2010 amounted to 5% of total project finance loans. During the 2011 to 2014 period, US Exim Bank new export support was $79.3 billion. In comparison, 2011 project finance loans from OECD country ECAs were $213.5 billion. All developed countries have their own ECAs and their mandates vary widely between countries, but OECD member ECAs operate under the OECD Consensus Agreement. That agreement provides for a level playing field where competition is based on the price and quality of exported goods and services and not on the financial terms provided.
The US Export–Import Bank (US EXIM) is a major player in export financing of goods and services used in infrastructure projects and offers a number of support products typical of other ECAs' offerings. It offers several different programs to support project finance deals, which include the following:
1. Competitive, direct fixed rate loans up to 12 and 18 years to foreign buyers of at least 50% US export contents, covering up to 85% of project value (which includes principal and interest)
2. Medium and long term loan guarantees of 85% of exports plus 30% of local costs with a 15% buyer down payment
3. Working capital loan guarantees that are 90% loan backing guarantees to banks issuing standby letters of credit or bid and performance bonds
4. Export credit insurance policies for foreign accounts receivable protection against buyer nonpayment risk
5. Protection against political risk at 100% and commercial default at 95%
The major commercial default risk factors are deteriorating economic conditions, drops in demand, adverse tariff changes, unexpected competition, technical
obsolescence, and import–export restrictions.
In the project finance area, US EXIM provides loans and guarantees for new projects above $50 million in structures of 25% equity and 75% debt with the option of financing loans of 85% of export value to private borrowers with the following options:
a. Political risk coverage only in the pre completion period
b. Political risk coverage only in pre completion and comprehensive coverage post completion
c. Political risk guarantee in pre completion or no pre completion coverage but only post completion political risk coverage
One of the other US EXIM programs is the Engineering Multiplier Program, which involves support for architectural, industrial design, and engineering services in international projects. Also, the medical initiative program is helping the export of medical equipment from US based companies to borrowers who are unable to obtain
financing without US EXIM support. Another program is tied aid financing, a government to government based program, which is a mix of a large grant with a standard export
credit of up to 10 years, or a credit with a repayment term of 20 to 30 years and interest rates lower than market rates.
12.1.5 Other US and State Government Agencies
There are several private and US government agencies created to provide long term funding for projects within the United States and overseas. The funding and support of these agencies is of a relatively small scale with the exception of the US Agency for International Development (USAID) and the Overseas Private Investment Corporation (OPIC).
I. US Agency for International Development (USAID). Its focus is on eliminating poverty and promoting the development of democratic societies abroad. The USAID's Development Credit Authority made $4.0 billion in private finance available in the 1999 to 2016 period using risk sharing agreements to mobilize local private capital to fill financing needs. First, it offers a 50% guarantee on loan principal backed by the US Treasury and guarantees on private sector debt capital for up to 20 years. Additionally, the USAID provides grants to identify project requirements and for market research, business forecasts, bid solicitations and evaluations, and negotiation; that is, for project development.
II. Overseas Private Investment Corporation (OPIC). This US government agency works with financial institutions and mobilizes private capital to support development projects. OPIC provides long term financing and guarantees to investments in
developing and emerging market countries and cooperates with private funding
sources to increase their lending capacity with commitments from one third for equity or debt to two thirds of total fund capitalizations. OPIC is also known for offering
several types of political risk insurance; namely, currency inconvertibility, expropriation, political violence, regulatory risks, and other host government interference.
III. Private Export Funding Corporation (PEFCO). This is a US, privately owned institution; owned by commercial banks, industrial companies, and financial services companies. It makes medium and long term fixed rate loans to foreign borrowers when such loans are not available from private sector lenders; these loans have long disbursement and repayment periods. It is included with government funding entities because it supports commercial bank securitizations of US EXIM guarantee
obligations
IV. Maritime Administration (MARAD). This US government agency is an arm of the US Department of Transportation that is responsible for ensuring the adequacy of the merchant marines to handle domestic and foreign waterborne commerce. MARAD and US EXIM bank have an arrangement to provide EXIM guaranteed working capital loans for shipping, logistics, and other companies involved in the ocean transportation of US exports to foreign countries. Under this agreement, US EXIM increases its
working capital guarantee to 95% of exported goods that ship on US flagged vessels.
V. Energy Research and Development Administration (ERDA). This is an agency of the US Department of Energy (DOE) that supports energy commercialization
projects of DOE technologies and project management to deliver projects on schedule, within budget, and required performance. ERDA support to projects also requires compliance with environmental and health and safety standards. It performs independent reviews and cost estimates of projects and helps in the acquisition of capital assets for energy related projects. Furthermore, ERDA provides guarantees, assists investors in demonstrating the commercial viability of energy projects, and promotes the development of such projects.
VI. Transportation Infrastructure Finance and Innovation Act (TIFIA). The programs of this agency of the US Department of Transportation support only large domestic transportation infrastructure projects including highway, passenger rail, ports and airports, intelligent transportation systems, and other related projects.
TIFIA invests in PPPs along with private investors in terms of direct loans, loan guarantees, and standby letters of credit to projects of national and regional
importance. Credit assistance is usually capped at 33% of reasonably estimated project costs and senior debt and TIFIA loans must have investment grade ratings.
VII. State Infrastructure Banks (SIBs). Established by the US Department of Transportation, these are revolving infrastructure investment funds for surface
transportation projects that are created and managed by individual states. A SIB, much like a private bank, can offer a range of loans and credit assistance enhancement
products to public and private sponsors of highway construction projects, transit capital projects, and railroad projects. SIBs offer loans for all or part of the cost of a project with flexible terms and at market or below market rates and short term
construction funding or long term financing. They also provide letters of credit, bond insurance and loan guarantees, and security for bond or debt financing instruments.