The Role of Political Risk Insurance in Catalyzing Private Investments in Infrastructure

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1 The Role of Political Risk Insurance in Catalyzing Private Investments in Infrastructure Edith Quintrell Director of Operations Multilateral Investment Guarantee Agency

2 Attracting Private Investment in Latin American Infrastructure Public spending on infrastructure is not enough to meet the growing demand for new infrastructure investments Private investments are needed to make up for the financing gap yet private flows have not kept pace with the need for new infrastructure The challenge is how to attract private sector participation in infrastructure development, especially in the most challenging regions of Latin America PRI (political risk insurance) can play an important role, especially in today s volatile economic context 2

3 What Does This Mean For Infrastructure Finance In Latin America? International Investment Banks are still lending to projects, but under increasingly tightened terms: increased margins tightened covenants Market flex clauses are back With less equity funding available from traditional sources (corporates, private equity), new investors are looking for high-quality investment opportunities: sovereign wealth and pension funds private infrastructure funds South-South investors Additional focus on the quality of the underlying asset the project itself 3

4 The Role of Political Risk Insurance Degree of political risk in a country is a key factor in investment decisions, especially in infrastructure Political risk insurance can mitigate the following risks: Inability to convert revenues into hard currency and transfer back to home country Expropriation (including certain types of regulatory risks) War and civil disturbance Breach of contract (protects against the host government breaching its obligations under project agreements such as power purchase agreements, concession agreements, etc.) Demand for political risk mitigation has been shifting from traditional political risks to coverage of risks that arise from government actions or inactions that adversely influence the operation of a private company 4

5 Benefits of Political Risk Insurance Adds comfort to equity investors ( umbrella effect, facilitation of settlement of disputes and compensation for the losses) and improves risk and return profile of projects Case1: Vila do Conde Transmissora de Energia in Brazil Can support innovative types of financing and mitigate certain regulatory risks Case2: BioEnergia carbon finance in El Salvador Improves access to sources of long-term financing and lowers cost of borrowing Case3: Securitization of a toll road in Dominican Republic Case4: Project Financing of Autopistas del Sol 5

6 Case Study: Vila do Conde Transmissora de Energia (Brazil) Project Construct, operate, and maintain a 328 km 500-kV transmission line in the state of Pará, 30-year concession $175 million total projected cost Key Risk for Investor Breach of the Concession Transfer Restrictions Key Impact Improved risk and return profile

7 Case Study: Vila do Conde Transmissora de Energia (Brazil) Cobra Isolux Elecnor Equity $6 million Equity $6 million Spain Equity $6 million Brazil Vila do Conde Transmissora de Energia Loan $73 million Banco Nacional de Desenvovimento Economico e Social

8 Case Study: BioEnergia (El Salvador) Project capturing and flaring of methane gas generated by a large municipal waste landfill in El Salvador Credits generated by the flaring are sold on the carbon market $2 million project Key Risk for Investor Breach of the Letter of Support (Kyoto related risk) Expropriation of or damage to assets Political or regulatory events which reduce waste deposits in the landfill Key Impacts Reduced carbon credit delivery risk, improves access to carbon finance

9 Case Study: BioEnergia (El Salvador) $2 million financing for future Certified Emission Reductions ( Carbon Credits ) Biothermica Carbon FundEnergy Biothermica Energy $2 million Equity Canada El Salvador Biogas Right Agreement MIDES: Private Landfill owner Bio Carbon Dev. BioEnergia S.A. Waste Disposal Contract Municipalities of El Salvador Government of El Salvador Letter of Approval

10 New Project: Boulevard Turistico del Atlantico (Dominican Republic) Project Construction, rehabilitation, and operation of a toll road on the Samana peninsula, 30 year concession $200 million total project cost, no project finance available Key Risks for Investors Breach of contract (minimum revenue guarantee) Transfer restrictions Expropriation (creeping) Key Impact: Improved ratings, oversubscribed bond issue, 18-year tenors

11 Case Study: Autopistas del Sol (Costa Rica) Project Design, build, rehabilitate, operate and maintain a 77 km toll road from San Jose to the port of Caldera, 25-year concession $327 million total projected cost Key Risk for Lenders Breach of contract (minimum revenue guarantee) Transfer Restrictions Expropriation War and Civil Disturbance Key Impacts: 16-year tenors, lower cost of financing Latin America PPP Deal of the Year

12 Case Study: Autopistas del Sol (Costa Rica) 35% FCC 35% 35% Itinere 35% Central American Bank for Economic Integration Caja Madrid 13% 17% M&S SDC Construcao 13% 17% Loans Loans Equity Equity Costa Rica Autopistas del Sol S.A. EPC Contract Constructora San Jose- Caldera S.A. Concession Agreement Operations & Maintenance Minimum Revenue Guarantee (EPC Contractor) Design/Construction National Concession Council (Gov. of Costa Rica)

13 Conclusion Political Risk Insurance (PRI) can be used to reduce the cost of capital and improve the risk-return equation for private investors in Latin American infrastructure projects The market for PRI is broad, competitive and constantly evolving Availability and pricing will depend on the specific country and product MIGA is the only multilateral political risk insurer 13