1. Nuevas tendencias de financiamiento de inversiones en Latinoamérica UNCTAD, Conferencia de las Naciones Unidas sobre Comercio y Desarrollo Lima, Peru – Diciembre 04-05, 2003

2. 2 IDB/PRI/CMU/October 2003 Contents Latin America Overview (2002-2003) Latin America Overview (2002-2003) Capital Flows to LATAM (1998-2003) Capital Flows to LATAM (1998-2003) Private Financing in the Region, Overview (2002-2003) Private Financing in the Region, Overview (2002-2003) IDB and its risk mitigation products: IDB and its risk mitigation products: Cross-border financing products Cross-border financing products Local currency financing products (financial guarantees) Local currency financing products (financial guarantees) Experience in Infrastructure and Financial Sectors Experience in Infrastructure and Financial Sectors

3. 3 IDB/PRI/CMU/October 2003 IDB : LATAM (2002-2003) Overview Slow economic growth between 2001 and 2003 (<1%). Expected improvement in 2004 (3% to 4% estimated average growth). Slow economic growth between 2001 and 2003 (<1%). Expected improvement in 2004 (3% to 4% estimated average growth). Impact of economic reforms throughout the 90s have had mixed results (net poverty reduction). Market-based reform model needs upgrade (social market- based reform model). Impact of economic reforms throughout the 90s have had mixed results (net poverty reduction). Market-based reform model needs upgrade (social market- based reform model). Increase in political demands for policy changes, however, governments at large will stick to fiscal prudence and sound macroeconomic management Increase in political demands for policy changes, however, governments at large will stick to fiscal prudence and sound macroeconomic management Decrease in capital flows to the region (2001-02), particularly in the bank and bond markets (debt) Decrease in capital flows to the region (2001-02), particularly in the bank and bond markets (debt) Deterioration of Sovereign Deterioration of Sovereign credit ratings. Member Countries Non-member Countries

4. 4 IDB/PRI/CMU/October 2003 Capital Flows to LATAM (1997-2003)

5. 5 IDB/PRI/CMU/October 2003 IDB : LATAM (2002-2003) Overview LAC Infrastructure investment needs remain high (US$ 70 MM per year in order to sustain a 4% growth). At its peak (1996-97) infrastructure finance in LAC reach US$ 25 MM. LAC Infrastructure investment needs remain high (US$ 70 MM per year in order to sustain a 4% growth). At its peak (1996-97) infrastructure finance in LAC reach US$ 25 MM. Argentinas crisis has stopped. Economic contagion was less than expected. Strong domestic growth is estimated in 2004. Debt renegotiation and stabilization of the utilities and the financial sector remain to be solved. Argentinas crisis has stopped. Economic contagion was less than expected. Strong domestic growth is estimated in 2004. Debt renegotiation and stabilization of the utilities and the financial sector remain to be solved. During 2003, Chile, Mexico, and selected countries in Central America are still important receivers of foreign capital flows. During 2003, Chile, Mexico, and selected countries in Central America are still important receivers of foreign capital flows. On a project selective basis, Brazil Peru and Colombia have also attracted FCFs Member Countries Non-member Countries

6. 6 IDB/PRI/CMU/October 2003 Infrastructure Needs : LATAM (2005-2010) Infrastructure Needs : LATAM (2005-2010) /1 Source : World Bank, Working Paper 3102, Fay-Yepes, 2003 Note : /1 Does not include rehabilitation, deferred past maintenance and upgrades

7. 7 IDB/PRI/CMU/October 2003 IDB : Private Financing (2002-2003) - Overview Difficult access to private financing by LATAM firms both in international and local markets (particularly second-tier corporations) Difficult access to private financing by LATAM firms both in international and local markets (particularly second-tier corporations) Privatized utilities need to have access to long-term local currency financing (mitigation foreign exchange risk exposure). Need to sustain the level of infrastructure investments. Privatized utilities need to have access to long-term local currency financing (mitigation foreign exchange risk exposure). Need to sustain the level of infrastructure investments. Need to improve financial intermediation through the development of long-term local capital markets (attract local investors as well as international investors). Redirect local savings into productive sectors. Need to improve financial intermediation through the development of long-term local capital markets (attract local investors as well as international investors). Redirect local savings into productive sectors. Need to improve access of selected Need to improve access of selected issuers and corporations to international markets (i.e., US$ generator and local markets with lack of critical mass markets with lack of critical mass) Member Countries Non-member Countries

8. 8 IDB/PRI/CMU/October 2003 Member CountriesNon-member Countries IDB - Overview Established in December 1959 to help accelerate economic and social development in Latin America Established in December 1959 to help accelerate economic and social development in Latin America Oldest and largest regional multilateral institution Oldest and largest regional multilateral institution –authorized capital of US$101 billion 46 member countries, 26 borrowing member countries 46 member countries, 26 borrowing member countries Largest multilateral lender Largest multilateral lender to Latin America and the Caribbean in 2001 AAA/Aaa Rating AAA/Aaa Rating

9. 9 IDB/PRI/CMU/October 2003 IDBs Preferred Creditor Status The Banks participation helps mitigate political risks: The Banks participation helps mitigate political risks: Oldest regional MDB. Oldest regional MDB. Largest multilateral lender to LATAM and the Caribbean: Largest multilateral lender to LATAM and the Caribbean: US$ 6-7 billion annually of lending program US$ 6-7 billion annually of lending program Cooperative, long-term relationship with member countries Cooperative, long-term relationship with member countries IDB enjoys certain privileges in its member countries IDB enjoys certain privileges in its member countries de jure: exemption from withholding taxes de jure: exemption from withholding taxes de facto: preferred creditor status de facto: preferred creditor status IDB has never been included in a general country rescheduling IDB has never been included in a general country rescheduling

10. 10 IDB/PRI/CMU/October 2003 Private Sector Department (PRI) Responsible for IDB´s support of private sector operations in LATAM and Caribbean Responsible for IDB´s support of private sector operations in LATAM and Caribbean First Mandate (1995) : Support Private Investment in Infrastructure First Mandate (1995) : Support Private Investment in Infrastructure Eligible infrastructure sectors: water / sanitation water / sanitation transportation (roads, railroads, pipelines, ports, airports) transportation (roads, railroads, pipelines, ports, airports) energy (power generation, transmission, distribution) energy (power generation, transmission, distribution) telecommunications telecommunications Second Mandate (2000) : Support development of Capital Markets in the Region Second Mandate (2000) : Support development of Capital Markets in the Region Eligible capital market transactions project bonds corporate bonds asset backed securities (including mortgage backed securities) future flow s securitization Third Mandate (2003) : Support reactivation of Trade Finance in the Region Third Mandate (2003) : Support reactivation of Trade Finance in the Region

11. 11 IDB/PRI/CMU/October 2003 IDB (PRI) Financial Instruments: Overview A-Loans (for IDBs own account) & B-Loans (for market participants) Up to US$75 million or 25% of total project costs (in small countries can go as high as 40%) Up to 20 years (typically in 10-15 year range) Market-based pricing Private Placement (similar structure as the A/B but placement among 144A institutional investors) Political Risk Guarantees sovereign (transfer & convertibility) and selected non-commercial risks (contract frustration) for infrastructure development in the Region (up to 50% of project costs or US$150 million). Streamlined approval process (3 months). Could include selected non-commercial risk [regulatory risks] such as breach of contract by the grantor of the concession (e.g., San Pedro de Macoris, IPP, Republica Dominicana) 1. Cross - Border Financing Products :

12. 12 IDB/PRI/CMU/October 2003 IDB (PRI) Financial Instruments: Overview IDB Financial Guarantees (partial credit guarantees) IDB Financial Guarantees (partial credit guarantees): credit enhancements to improve credit risk profiles of local issuers to enable them to access market financing under better conditions (tenor and pricing). Same limitations as the A/B loans. Instruments [mechanism] that cover or protect debt service payments to institutional investors (bondholders). Products can be structured to guarantee an specific layer of credit risk,in order to elevate the risk profile of the overall transaction and thereby attract investors. By guaranteeing an intermediate part of the debt (I.e., guaranteeing to pay a portion of the obligation after the internal cash reserves or sponsor support has been exhausted) the local investor maybe more willing to put its capital at risk for the remaining exposure. commercially and developmentally. co-insurers The IDB is willing to adapt its financial guarantee products to whatever forms make sense commercially and developmentally. The risk not guaranteed by IDB can be covered by co-insurers or taken by the investors. 2. Local currency Financing Products :

13. 13 IDB/PRI/CMU/October 2003 Local Capital Market Development Objectives: des-intermediation Financial des-intermediation is a key component of a sustainable economic development strategy. diversify Support of good quality credit rating private sector instruments as a way to diversify investors portfolio (e.g., pension fund development in LATAM – increased sovereign risk cases of Argentina, Uruguay, Brazil, Colombia) Develop local currency funding instruments that could mitigate cross-border risk (FX risk). Projects that are typically local currency generators Water & sanitation, toll roads, irrigation, etc. will have a tough time getting finance in the US$ markets (even with the best build-in contracting clauses for US$ tariff based there is a degree of tolerance to FX adjustments in a particular economy Develop local currency funding instruments that could mitigate cross-border risk (FX risk). Projects that are typically local currency generators Water & sanitation, toll roads, irrigation, etc. will have a tough time getting finance in the US$ markets (even with the best build-in contracting clauses for US$ tariff based there is a degree of tolerance to FX adjustments in a particular economy)

14. 14 IDB/PRI/CMU/October 2003 Development of local currency debt instruments Matching of revenue generation (productive assets) and liabilities for private corporations. Mitigation of economic regulation framework under volatility scenarios (I.e., US$ based tariffs in utilities – public services) Development of local savings capacities (I.e., diversification from investments in government related securities). Incorporation of local debt holders as stake holders in infrastructure projects (mitigate regulatory risk) Introduce market performance benchmarks to improve risk & return remuneration for local savings (domestic investment)

15. 15 IDB/PRI/CMU/October 2003 Transaction Experience in the Infrastructure and Financial Sectors

16. 16 IDB/PRI/CMU/October 2003 Infrastructure : Energy Sector Energy generation, transmission & distribution, and gas transportation projects Energy generation, transmission & distribution, and gas transportation projects Transaction examples: Transaction examples: –Edenor, electricity distribution in Argentina (A/B Loan) –Redesur, electricity transmission in Peru (A/B Loan) –Monterrey III, power generation plant in Mexico (A/B Loan) –TGS, gas transportation in Argentina (A/B Loan) –Hermosillo, power generation in Mexico (A/B Loan) –Edesur/Edenorte, power generation plant in Dominican Republic (A/B Loan) –LIGHT Expansion of Electricity Distribution Network in Brazil (Political Risk Guarantee)

17. 17 IDB/PRI/CMU/October 2003 Infrastructure : Transport Sector Greenfield B.O.T. projects, rehabilitation and expansion projects Greenfield B.O.T. projects, rehabilitation and expansion projects Transaction examples: Transaction examples: –Ecovias, in Brazil (A/B Loan) –Yellow Line toll road, in Brazil (A/B Loan) –Anhangüera - Bandeirantes Highway System, in Brazil (A/B Loan) –Santiago-Valparaíso-Viña del Mar, in Chile (Financial Guarantee)

18. 18 IDB/PRI/CMU/October 2003 Example: Santiago-Valparaíso, Financial Guarantee Concession awarded to a consortium led by ACS and SACYR Group (Spain) in 1998 in Santiago de Chile, Chile. The toll-road concession consists in the expansion and refurbishing of 110 km linking Santiago-Valparaíso and Viña del Mar Investment program of US$ 450 million to be partly financed through a local currency bond issue for the equivalent of US$ 300 million. IDB provided a credit guarantee to enhance the bond´s rating to a level acceptable to local institutional investors. The IDB is Guarantor of Record for up to US$75 million with the remaining amount provided by private insurers. FSA (USA based private insurer) acted as co-guarantor of the transaction. The issue before the IDB/FSA credit enhancement has been rated Baa2 by Moodys, which is the highest investment grade rating ever given to a toll road project in Chile. This is also the largest infrastructure bond sold primarily to Chilean pension funds and insurance companies, paying a coupon of 6.02 percent (Unidad de Fomento), with a maturity of 23 years. The issue was rated AAA by local rating agencies after the IDB/FSA enhancement. It was successfully placed in April 9, 2002

19. 19 IDB/PRI/CMU/October 2003 Infrastructure : Water and Sanitation Sector Water and sanitation projects, privatizations, B.O.T.s Water and sanitation projects, privatizations, B.O.T.s Transaction examples: Transaction examples: –Aguas Argentinas, in Argentina (A/B Loan) –Aguas Provinciales de Santa Fe, in Argentina (A/B Loan) –Aguas del Illimani, in Bolivia (A/B Loan) –Rio Bogotá, in Colombia (Private Placement)

20. 20 IDB/PRI/CMU/October 2003 Financial Sector Asset Backed Securities Colombia, Colpatria: Mortgage backed-security. Securitization of the future payments flows from mortgage loans. Use of a partial credit guarantee as an external credit enhancement to the structure. Peru: Grana & Montero, Asset backed security. Securitization of the future payment flows from concession contracts and construction contracts. Use of a partial credit guarantee as an external credit enhancement to the structure. Trade Finance Facilities Brazil: Bradesco, Trade finance Facility. Short term credit facility via an A/B loan structure to fund the origination of trade finance assets for a major Brazilian bank.