There''s real cash to be had for sound port developments; and on reasonable terms too, as Alex Hughes discovers
International Financial Institutions (IFIs) are becoming ever more active in support of projects designed to help reduce capacity bottlenecks at ports around the world. Container terminal developments in Uruguay and Brazil mark the latest countries to bask in the benefits of support from these financial big hitters. Although the European Investment Bank (EIB) undertakes 85% of its activities within the European Union (EU), specific mandates do allow it to lend money to other regions. In Latin America, it invests in support of EU participation in projects involving direct investment, transfer of technology and know-how, but only where these are of mutual interest for all concerned.
In December 2006, scope for funding was widened still further to encompass projects demonstrating a clear environmental dimension, even when no direct EU interest was involved.
The EIB will provide up to a maximum of 50% of any total project cost, although theoretically there is no upper limit to the total amount the bank is willing to lend. However, funding is limited to capital investment; re-financing is prohibited under its mandate. Terminal Cuenca de la Plata (TCP), Montevideo's new container terminal, is receiving EIB funding because both its main promoter, Belgium-based stevedores Katoen Natie, and financial guarantor, Fortis, are European-based companies.
According to Juan Manuel Sterlin, of the EIB's communications department: "TCP will help convert Montevideo into a transhipment container hub for the region, whilst at the same time helping Uruguay diversify its economy." He adds that all port projects given EIB backing have to be financially, economically, technically and environmentally sound.
TCP is receiving $41.6m of EIB financing; the repayment period is not yet in the public domain, nor has the Bank revealed whether a period of grace is being incorporated into the transaction. However, total capital expenditure is approximately $150m, meaning that the EIB is lending well below its 50% threshold. Broken down, $8.4m was financed by the state-owned Banco de la Republica Oriental de Uruguay, with the support of the IADB; $70m will be financed by a commercial bank; and the remaining amount will be supported by equity contributions.
As for rates of interests levied on its loans, Mr Sterlin points out that the EIB has a AAA rating, thanks to its shareholders being the 27 EU member states. This allows it to borrow money from capital markets at very advantageous rates. Furthermore, because the EIB has to cover costs and not return a profit, it can lend its money at very good rates to the borrower.
While the rates are an obvious reason for using the Bank, Mr Sterlin says that extended repayment periods, which can be over 20 years, are also an enticement for some borrowers. Loans can also be arranged in a variety of currencies. However, the presence alone of EIB in any development project can also act as a catalyst for commercial lenders to come on board, since it only backs financially sound schemes.
Once the loan has been disbursed, the EIB does exercise some monitoring of the project, but essentially leaves it is up to the company involved to use the money how its sees fits. Local monitoring authorities do, however, ensure transparency.
If things do ultimately go belly-up, the guarantor, in this case Fortis, ensures that the EIB does get its money back. Additionally, in Latin America, the European Commission provides additional guarantees covering political risk.
John Graham, investment officer of the Inter American Development Bank's (IADB) Structured & Corporate Finance Department, notes that the performance of Latin American economies has been mostly upbeat over the last five years. However, growth potential could be undermined if governments are unable to follow through with transport and logistics investment, particularly those involving upgrades to the port sector. In this area, the IADB is available to provide the necessary financial tools for eligible projects throughout Latin America and the Caribbean.
In recent years, several new port projects have emerged in Brazil, where the government's Programme for Accelerated Growth makes specific reference to the port sector as a priority area for infrastructure investment. The IADB is therefore supporting this initiative, having been invited to participate in a series of new private sector container terminal developments, several of which are expected to close in the short term.
For the IADB to become involved in such projects, voting control must rest with entities from an IADB member country. However, member countries can be found throughout the Americas, in most of Western Europe and in many countries of the Far East.
Provided that a proposed scheme meets market-based credit, legal and technical - including environmental and social - criteria for project finance transactions, the Bank will seek to add its support if there is a clear developmental impact on the member country involved.
To date, in Brazil, the IADB has approved financing for the TECON Santa Catarina container port development, which is being structured in partnership with the German institution WestLB. This particular project, says Mr Graham, represents a unique opportunity, given that the port has deep draught near the shoreline, will be built on a greenfield site near critical infrastructure and poses few environmental or social problems.
The largest shareholder is the Battistella Group, which is participating in a holding company that also incorporates BRZ Investimentos (part of GP Investimentos), which is one of the largest and most successful private equity funds in Latin America. Alongside these two is the Aliança group, which works as an affiliate of the global shipping line Hamburg Sud. Mr Graham points out that the commitment of such leading sponsors has give the Bank confidence in the long term success of the project.
This is particularly important, given that the IADB's Structured & Corporate Finance Department does not work with sovereign guarantees, but rather takes project risk in the traditional project finance sense. In other words, it does not rely on the sovereign to backstop repayment of loans.
In terms of repayment, the IADB typically provides a grace period covering construction plus some additional time to allow operations to commence, while door-to-door tenors for the IADB portion of the financing can extend as much as thre to five years longer than available in the commercial market.
"Although terms and conditions of our loans must be derived from the marketplace, the Bank is often willing to provide additional flexibility to investors when the project presents a strong credit case and positive developmental impacts."
Going forward, IADB is increasingly seeking to get involved in markets where international commercial bank financing is not so readily available; where it is often hard to entice debt and equity to come into port and related logistics projects. Mr Graham says: "In these cases, we often work in parallel with other multi-laterals and development finance institutions, but we are always seeking ways to enlist fully-private sector partners that will accompany the IADB in investing in our member countries."
Finally, unlike some other IFIs, the IADB's mandate does allow it to participate in re-financing operations, although the developmental criteria governing these investments are typically met with increased scrutiny.
The European Bank for Reconstruction and Development (EBRD) provides finance for ports projects in Central and Eastern Europe, as well as in the former Soviet Union. Policy is to provide capital investment and also to re-finance existing schemes.
"When evaluating projects, we take into account both the internal rate of return (IRR) and the economic internal rate of return," says senior press office coordinator Svitalana Coppola.
Two recent port projects supported by the EBRD have been Illichevsk, in Ukraine, and Ploce, in Croatia. The former involved a loan of ¢26m ($39.8m) and a 15-year tenor, while the later amounted to ¢11.2m ($17.1m), with repayment also over 15 years.
The EBRD does offer grace periods on principal repayment.
Once money is released to a project, how it is implemented has to comply closely with strict procurement rules. "Any proven mis-procurement results in immediate repayment of disbursed loan funds. However, to date, we have not had any mis-procurement/acceleration cases in the port sector," says Ms Coppola.
Interestingly, the Bank does use convertible debt as one of its financing instruments. However, where it does take equity, the EBRD will never become a majority shareholder.
It is also happy to work with other funding agencies in its target investment region.
