Finding funding

26 Jan 2016
All angles: IDB provides financing for both port infrastructure and handling equipment. Credit: IDB

All angles: IDB provides financing for both port infrastructure and handling equipment. Credit: IDB

Financing is not a hurdle to development for most Latin American ports, explains Alex Hughes

Politics, posturing and infrastructure challenges have all played a role in the sluggish development of port sectors in Latin American countries. But Latin American ports do have one enviable detail on their side when it comes to pushing forward with expansions and constructions: access to financing options.

True, governments wishing to fund expensive port projects anywhere in the world can seek finance from a variety of potential lenders. But those in Latin America and the Caribbean have exclusive access to the Inter-American Development Bank (IDB), the leading development bank for countries in the region. Owned by 48 members countries, the bank also includes capital providers such as the US, China and Japan, all of whom help to ensure that the IDB maintains a 'Triple A' rating, allowing it to raise market funding where necessary.

Esteban Diez-Roux, IDB principal transport specialist, notes that the bank mainly provides sovereign-guaranteed loans for governments, leaving its affiliate, the Inter-American Investment Corporation (IIC), to deal with private sector operators.

“We do provide financing for both port infrastructure and handling equipment, although in most cases we are asked to provide sovereign-guaranteed loans covering infrastructure, since this tends to the be the area governments and public entities are most active in. However, there is nothing in our policy that says we can't finance equipment acquisition for ports, if that request is linked to the state,” says Mr Diez-Roux.

Aid and assistance

As a development bank, the IDB not only provides financing for governments, but also technical assistance, which has the effect of giving a seal of quality to those projects that it subsequently finances, making it more attractive to other potential investors.

“Our rates are some of the lowest on the market, especially when compared to rates that a commercial bank could provide. Terms would be advantageous, too, since our financing can extend to periods of up to 25 years, in some cases,” he says.

The IDB currently works with 26 member countries in Latin America and the Caribbean. Cuba and some of the smaller islands in the Eastern Caribbean, however, are not members.

Mr Diez-Roux stresses that it is up to each government to put projects forward for the bank's consideration and this includes those for ports. In all cases, this is part of an ongoing dialogue between the IDB and its member countries, with each government putting forward a programme to the bank, outlining those areas where they are seeking to invest in. The IDB will then study those programmes and see where it can add to proposed development.

“For public sector loans, our interest rates are the same for all countries,” he says, adding that this is similar to how the World Bank operates. “However, for private sector borrowers, the IIC sets rates depending on each project's specific conditions.”

Roads tends to seek the most IDB support, accouting for 70% of the bank's portfolio. Urban transport is also another key area, although ports, historically, have not figured that highly.

“However, we have given a lot of technical assistance to the ports sector, helping governments build institutional capacity and draw up master plans, which might, for example, also include providing an access road for a port,” he says. “The reason why port projects have tended not to have figured so highly is purely down to policies pursued by individual governments, because it's up to them what they want us to work on.”

Mr Diez-Roux stresses that the IDB's role is not entirely passive as it undertakes analyses of the projected needs of certain countries in certain sectors. Even so, he concedes that Brazil, in particular, is one of those countries where the government has adopted a ports expansion policy that might require significant funding in the near future.

Total costs

As for how much of the total cost of a port project the bank would provide, Mr Diez-Roux says that this can vary considerably.

“In theory, we could provide 100% of the funding for a port project, but that would depend on the size and the economic development of the country involved. So we might be seeking some form of counter-funding from the government, although this wouldn't necessarily be matching funding as such. In fact, there is no specific policy, so we might provide half the financial backing, 80% or even 100%. Nevertheless, from some of the bigger countries, we might well ask them to provide matching funding, although there is no reason that smaller states could get almost all the money they are asking for,” he says, pointing out that less developed nations in Central America and the Caribbean might therefore seek more support.

Once a government does get IDB support for a specific project, for example a major new port, it can't then switch the financing to, for example, roads. Over time, negotiations might take place for a country to restructure a loan or do something with it other than what was originally agreed. However, Mr Diez-Roux stresses that, were this the case, the arrangement would have to be sent back to the bank's Board of Directors.

Finally, in respect of what commodities are currently benefiting from port infrastructure development supported by the IDB, he points out that many commodities, such as coal, iron ore and agribulk, tend to be mostly handled by the private sector, which is responsible for obtaining its own funding.

“So, in these areas, governments have a lesser role to play. We are however seeing ports looking for funding in respect of container handling, but that tends to be more because of the way ports structures are set up. Containers tend to be handled in public service ports and not private terminals,” he says.



ICTSI KEEPS ITS FINANCING OPTIONS OPEN

ICTSI is involved with a number of container terminal projects in the Americas, including in Brazil, Colombia, Mexico, Honduras and Ecuador.

Rafael J. Consing, the company's senior vice president and chief officer, notes that in Latin America it has a mix of greenfield and brownfield concessions. In some of these, the state was responsible for building the quay and surrounding infrastructure, while ICTSI, as operator, built the superstructure and equipped the terminal.

“We do have other projects, too, where we were wholly responsible for the entire civil works within the terminal. In addition, we have one project where we even had to build a road leading to the terminal,” says Mr Consing.

He explains that most of the initial funding for an acquisition is funded directly by the parent company and once the project is completed and operational, a risk transfer is undertaken and the parent company's advances are refinanced with non-recourse project loans.

“There is invariably an element of time decay in any concession contract. Thus, by funding it directly, we are able to limit value erosion from delays in financing,” he says.

As for funding for superstructure, to date ICTSI has not encountered any material difficulty in financing its various projects across Latin America.

Even though the Philippines-based terminal operator has gone into several politically challenging countries, such as Honduras and Ecuador, Mr Consing stresses that banks are not more wary of lending money to companies working in these states.

“We have not encountered any issues at all in financing any of our projects, either in terms of public bonds or in respect of the loan markets,” he says.

Nevertheless, he concedes that the extent of guarantees required and credit spreads charged by banks are always risk-adjusted for sovereign credit risk and project finance structure, so can vary from country to country.

In Brazil, where funding for port projects can potentially be sourced from the Social and Economic Development Bank (BNDES), ICTSI approached both the International Finance Corporation (IFC) and Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden, the Dutch development bank, to secure finance for its terminal at the Port of Suape. Use of such large institutions is quite normal, says Mr Consing, pointing out that ICTSI also recently concluded a non-recourse $260m financing with both the IFC and the Inter-American Development Bank for its Contecon terminal operation at Manzanillo, in Mexico.