High credit costs and inflation, coupled with the recent banking crisis that began in 1994, has made Venezuela a difficult place for financing environmental projects through the private sector. Commercial lending for environmental projects occurs primarily through balance sheet financing to the large state-owned companies.
Two issues compound the problem of privately financing environmental projects in Venezuela. First, most projects are not privately financeable due to low-cost recovery ratios resulting from the inability to bill end-users for services rendered. Second, weak regulatory and enforcement capabilities do not provide the proper environment to ensure steady revenue payments for environmental infrastructure projects.
Therefore, Venezuela faces a situation where the vast majority of environmental projects are financed through four sources:
1. The federal government through HIDROVEN for the water and sanitation sector.
2. The World Bank, Inter-American Development Bank (IDB), and the Corporación Andina de Fomento or CAF (Andean Development Bank).
3. Bilateral agencies such as the Export- Import Bank of the United States (Ex-Im Bank), Overseas Private Investment Corporation (OPIC), and U.S. Trade and Development Agency (TDA).
4. The two largest industrial conglomerates: Petroleos de Venezuela (PDVSA), the state petroleum holding company, and Corporación Venezolana de Guayana (CVG), the government-owned steel and aluminum company.
The financing of exports to Venezuela follow international procedures. No government restrictions apply to open accounts and letter-of-credit financing for the environmental sector. Letters of credit are the standard trade finance vehicle, allowing for up to 360 days for small equipment, and for up to three years for medium-sized equipment.
Ex-Im Bank facilitates export financing of U.S. goods and services. American equipment manufacturers are encouraged to seek Ex-Im Bank's assistance to gain competitive advantage through its low financing rates.
Sources of Finance
Federal Government
As the Venezuelan economy recovers, the federal government will be able to allocate more resources to the environmental sector. Funds provided by the federal government are channeled first through the Ministry of the Environment and Renewable Natural Resources (MARNR), and are often complemented with support from the World Bank, IDB, and CAF. On several occasions, the federal government has been unable to meet investment requirements for projects (for example, the Caracas sewage system rehabilitation and expansion project), and called on the CAF as a last resource.
The federal government will gradually become more involved in financing projects as the economy and the oil sector recover. This financing will be done either through direct expenditures (through the MARNR) or through providing guarantees to support increased private participation at the local level.
Municipal Governments
Municipalities are generally weak and have limited investment budgets. They are unable to finance large-scale environmental projects such as lake cleanups, potable water plants, and sewage networks. Municipalities are responsible for services such as garbage collection and disposal, for which federal and multilateral aid is often necessary to finance projects.
It is unlikely that municipalities will play a more important role in financing environmental projects in the medium term, due to limited investment budgets coupled with low debt bearing capacities. Still U.S. companies should continue to follow developments in the water sector as local municipalities, often aided by federal or international funds, begin to exert more authority in spending decisions.
Multilateral Funding Sources
Multilateral institutions will likely continue to be a dominant source of environmental project investment in Venezuela over the short and medium term. Multilateral funds in Venezuela typically go in part to finance institutional improvements, as well as investments in system efficiency gains to promote private participation in environmental projects. Other funds are targeted directly to improving the existing physical infrastructure.
World Bank
The World Bank has been a major financing source for environmental infrastructure projects in Venezuela. For example, it has provided $39 million for a program to improve efficiency and quality of water supply and sewerage services through the development of a model for decentralization, institutional strengthening, and expanded private sector participation in the Venezuelan water and sanitation sector.
The International Bank for Reconstruction and Development, the International Finance Corporation, the Multilateral Investment Guarantee Agency, and the International Development Association together form the World Bank. Only developing countries can borrow from the World Bank. Under its Articles of Agreement, the World Bank can only lend to a member government or under a member government's guarantee.
Point of Contact: Operational Officer, (202) 473-9553.
Further information about the World Bank is available at its Internet site: http://www.worldbank.org
International Bank for Reconstruction and Development
The International Bank for Reconstruction and Development (IBRD) mainly lends to governments and government agencies, but it also makes loans to the private sector backed by the host government's counterguarantee. IBRD can also provide guarantees to commercial lenders for public and private sector projects.
IBRD’s guarantee is intended to act as a catalyst for private financing in developing countries. Accordingly, the bank offers only partial guarantees, and risks are clearly shared between the bank and private lenders. IBRD offers two types of guarantees:
The Partial Risk Guarantee: It covers specified risks rising from the nonperformance of a sovereign contractual obligation, such as maintaining certain tariff formulas. It also compensates for delays and interruptions due to government action or political events. Partial risk guarantees do not cover commercial risks.
The Partial Credit Guarantee: It extends the maturity of loans beyond what private creditors could otherwise provide. It is typically used for public projects involving sovereign borrowing.
International Finance Corporation
The International Finance Corporation (IFC) is a financially independent agency of the World Bank Group. Its essential role is to assist the economic development of developing countries by promoting the growth of the private sector and by helping to mobilize domestic and foreign capital for this purpose.
Infrastructure projects have become a primary focus of IFC activity. In 1996, they accounted for nearly 25 percent of all investments and for cumulative investments of $2.5 billion in more than 100 projects worth more than $18 billion in 36 countries.
IFC has supported projects in water and sanitation, transportation, and power and telecommunications in Argentina, Chile, Colombia, Venezuela, Mexico, Guatemala, Jamaica, Costa Rica, and El Salvador.
IFC’s project financing activities in Latin America and the Caribbean have doubled in the last five years, from $1.2 billion in fiscal 1992 to $2.8 billion in fiscal 1996. In 1996, IFC provided $3.6 billion in financing for 63 companies in 14 countries in Latin America and the Caribbean.
The IFC provides financing to private sector projects as a lender or equity investor. It is limited to 25 percent of the total project cost for the initial financing, and up to 40 percent for a secondary financing. In addition to lending to the project, the IFC may also take an equity stake in the project company and thereby play the role of catalyst for other investors from the private sector.
The IFC’s largest environmental project to date is the 1993 renovation and expansion of the Buenos Aires water system by the recently privatized utility Aguas Argentinas.
Point of Contact: Office of Latin America & the Caribbean, (202) 473-0558.
Multilateral Investment Guarantee Agency
The Multilateral Investment Guarantee (MIGA) was established in 1988. Its purpose is to encourage the flow of foreign direct investment into developing member countries for economic development. As a means to accomplish this goal, MIGA provides insurance to private investors against political risks: currency transfer, expropriation, and war and civil disturbance.
MIGA has 141 member countries and authorized capital of more than $1 billion. Twenty-eight Latin American countries, including Venezuela, are currently members of MIGA. Up to mid-1995, MIGA had provided insurance valued at $150 million in Latin America and the Caribbean. About 25 percent of MIGA's active applications for guarantees are for projects in Latin America, including more than 100 infrastructure projects.
Point of Contact: Latin American Operations, 202 473-7153.
Inter-American Development Bank
The Inter-American Development Bank (IDB) is the largest source of public finance for development projects in Latin America, lending between $6 and $7 billion per year. Over the last two decades, the IDB committed an annual average of $1.8 billion for infrastructure projects. It is expected that annual infrastructure lending will be about $3 billion during the next five years. In the water and sanitation sector, the IDB committed an annual average of $300 million during 1971-93.
The IDB is putting increased emphasis on the environmental aspect of its projects, as well as on environmental infrastructure support. IDB plays an important role in major cleanup projects throughout Latin America. In Venezuela, the IDB is aggressively advocating decentralization and allocates funds destined towards institutional improvements for the environmental sector. In 1997, the IDB approved a loan for $100 million for the sanitation and recovery of Lake Valencia. Also under consideration are loans for a decentralization program for the water and sanitation sector and a support program for HIDROCAPITAL.
Point of Contact: Senior Investment Officer, (202) 623-1088.
Guarantee Program: IDB is attempting to mobilize private sector resources for infrastructure creation through the implementation of a loan and risk guarantee facility directed mainly at private infrastructure projects. IDB’s guarantee program aims to mitigate selected risks of commercial banks and institutional investors. The bank has established two guarantee structures, namely, partial risk guarantees and partial credit guarantees. Partial Risk Guarantees: These are designed to ensure the performance of certain sovereign contractual obligations like transfer risks, nondelivery of inputs, nonperformance of off-take agreements or other publicly backed contracts; or changes in the regulatory environment. The aim is to reduce the risk of public sector entities reneging on their contractual obligations. For example, in the case of a private wastewater plant selling its treatment services to the municipal government, the IDB would offer guarantee of payment.
The partial risk guarantee may cover up to 100 percent of a loan for political risks. It requires a government counterguarantee.
Partial Credit Guarantees: These seek to extend the maturity of medium-term financial instruments to support the long-term financing of infrastructure. Up to 50 percent of a loan can be guaranteed, with or without a government counterguarantee.
IDB Private Sector Lending: In September 1994, the IDB formed a new department charged with allocating 5 percent of the bank's lending portfolio to private infrastructure projects without government guarantees. Up to $350 million will be set aside for the program per year. Bank participation may not exceed $75 million or 25 percent of the total financing. Though pricing follows commercial terms, these loans can have up to a 20-year maturity. Private sector infrastructure projects eligible for financing include those in
transportation, power, telecommunications, and water and sanitation.
In 1994, IDB launched a new publication, IDB Projects, specifically designed to provide information for businesses seeking procurement opportunities on bank-financed projects. This publication includes key information on new projects, as well as those in the bank's pipeline, contract award information, and calls for bids.
Additional information about the IDB is available through its home page at http://www.iadb.org.
Inter-American Investment Corporation
The Inter-American Investment Corporation (IIC) was set up by the IDB in 1989 to provide financing for private sector projects. It is a separate institution with $200 million in authorized capital, almost $900 million in financing capacity, and operations of $100 million per year. Its activities are directed to small and medium-sized enterprises in the private sector of Latin America and the Caribbean. Thirty-four of the IDB’s 46 member countries are members of IIC. IIC makes loans between $2 and $10 million directly to project companies and indirectly through financial intermediaries that make subloans that are smaller than those IIC could provide directly. The maximum loan term is 12 years, with a grace period not to exceed five years. IIC does not require government guarantees for its loans.
Point of Contact: General Manager, (202) 623-3901.
Multilateral Investment Fund
The Multilateral Investment Fund (MIF) is the third member of the IDB Group. Its mission is to implement strategies that will encourage private sector activities. MIF makes grants for technical assistance and invests, principally with equity, in intermediate institutions that support small enterprises. Almost all borrowing countries are eligible to receive MIF funds, and beneficiaries can be both public and private sector entities.
Until January 1997, MIF had approved 24 grants for infrastructure reform, privatization, and/or regulatory framework development, for a total of $24 million. Seventeen percent of these grants were channeled to the water sector.
Point of Contact: Senior Coordinator, (202) 942-8201.
Andean Development Bank
The Andean Development Bank (Corporación Andina de Fomento- CAF) is a multilateral financial institution that supports the sustainable development of its shareholder countries, namely, Bolivia, Colombia, Ecuador, Peru, and Venezuela. As a financial intermediary, it attracts resources from industrialized countries into Latin America. Among CAF’s main activities is the financing of projects that promote sustainable human development among the low-income segments of the population.
With a total asset base of $3.4 billion, CAF has attained an investment grade rating from Standard and Poors. It is increasing its loan portfolio, which stood at $2.7 billion in 1996. Loans to Venezuela totaled $443 million in 1996, of which $89 million was for loans made to projects in the water sector.
CAF financed the following environmental projects in 1996:
North Maracaibo Water Re-use Project in the El Tablazo Petrochemical Complex: CAF loan amount, $64 million.
Rehabilitation of the Caracas Metropolitan Water Supply System: CAF loan amount, $25 million.
The CAF is expected to continue to play an important role in the Venezuelan environmental market and, in particular, the water market.
Point of Contact: Vice President, (582) 209-2486.
Additional information about CAF can be found through its Internet home page at http://www.caf.com.
Bilateral Funding Sources
U.S. companies interested in seeking finance for exporting environmental goods and services to or investing in environmental projects or companies in Venezuela should contact one of the three U.S. agencies that provide financing, guarantee, and insurance programs. These agencies are the Export-Import Bank of the United States, the Overseas Private Investment Corporation, and the U.S. Trade and Development Agency.
All three institutions aggressively promote exports and projects in the environmental sector, and all are actively involved in Venezuela.
Export-Import Bank of the United States
The Export-Import Bank (Ex-Im Bank) is an independent U.S. Government agency with the primary purpose of facilitating the export of U.S. goods and services. Ex-Im Bank meets this objective by providing loans, guarantees, and insurance programs on market-related credit terms.
Point of Contact: International Business Development, (202) 565-3492.
Loan and Guarantee Program: Ex-Im Bank's loan and guarantee program offers medium- and long-term support for environmental projects. While the Ex-Im Bank traditionally only covered the U.S. export component of a project, new rules allow it to finance an additional 15 percent in local costs for environmental projects. The program also allows capitalization of interest during construction as part of the overall financial package.
Small Business Environmental Exports Program: Ex-Im Bank has recently focused on assisting the export efforts of small businesses. Perhaps the most important program for small U.S. environmental technology firms exporting to South America is the Environmental Exports Program. The key to qualify for this program is that the equipment and services exported must be instrumental in having a positive impact on the environment. They must aid in the abatement, control, or prevention of air, water, and groundwater
contamination or pollution, or provide protection in handling hazardous substances.
One of the program's main features is the Environmental Export Insurance Policy, which offers enhanced short-term, multibuyer and single-buyer insurance with 95 percent coverage against commercial losses and 100 percent coverage against political risk, with no deductible. The U.S. content for goods must be at least 51 percent, while for services it must be 100 percent.
In 1994, in a further move to aid small businesses, the Ex-Im Bank blended its working capital loan program with that of the Small Business Administration.
Project Finance: In response to the movement away from sovereign-guaranteed lending, Ex-Im Bank established the Project Finance Division in June 1994, which provides loans and guarantees on the basis of expected project revenues.
Ex-Im Bank offers considerable flexibility in the structuring of projects. For example, there is no upper or lower size limit for projects nor is there a predetermined debt-equity ratio. Further, virtually any combination of risk insurance and loans may be utilized to complete project financing.
In order to receive Ex-Im Bank project financing, it is imperative to have long-term contracts from creditworthy entities for the purchase of the project's output and supply of its inputs. Such contracts should usually extend beyond the period of requested Ex-Im Bank financing.
Additional information about Ex-Im Bank can be found through its Internet home page at http://www.exim.gov.
Overseas Private Investment Corporation
The Overseas Private Investment Corporation (OPIC) is the agency of the U.S. Government that provides loans, loan guarantees, and risk insurance for investments in cases where commercial lenders may be unwilling to step in. It is essentially a project finance institution, in that its commitments do not rely on a “sovereign guarantee.” Many OPIC commitments are undertaken in conjunction with other institutions, and it may even take equity stakes in selected projects.
One of OPIC’s specialties is its willingness to customize and devise solutions to various financing problems in cooperation with private banks, investment funds, multilateral agencies, or other agencies of the U.S. Government, such as the Ex-Im Bank.
Point of Contact: Regional Business Development, (202) 336-8400.
Loan Guarantees and Direct Loans: For larger projects, both new ventures and expansions, OPIC primarily offers loan guarantees ranging from $10 to $200 million.
Direct loans are reserved for projects involving U.S. small businesses and cooperatives and range from $2 to $30 million. OPIC will usually participate up to a level equaling 50 percent of the total cost of a new venture and up to 75 percent when the project involves the expansion of an already successful business.
Risk Insurance: One of OPIC’s primary missions over the years has been to provide U.S. companies with political and economic risk insurance. OPIC’s economic and political risk insurance enables project sponsors to seek debt financing in investment grade capital markets. In fact, OPIC support often acts as a signal of quality to other investors.
OPIC insurance offers coverage against the following risks:
Currency inconvertibility
Expropriation
Political violence
Coverage is available for the parent company and third party loans and loan guarantees, technical assistance agreements, cross-border leases, and other forms of investment exposure. OPIC also insures contractors, exporters, and financial institutions. Moreover, coverage is also available for equity investments in new ventures or expansions.
OPIC-Supported Direct Investment Funds: OPIC provides financing to U.S. companies involved in private-sector projects through several private OPIC-supported, direct investment funds.
Some funds are exclusively dedicated to certain types of projects. For example, one fund solely invests in environmental projects; another exclusively works with small businesses. Generally, OPIC-supported funds invest 5 to 40 percent of the equity capital of each of their portfolio companies. Each portfolio company must have a significant business connection with the U.S. economy. The fund manager is usually active in guiding the portfolio company, especially in strategic planning and maintaining effective access to capital markets needed for growth.
Additional information on OPIC can be found through its Internet home page at http://www.opic.gov.
U.S. Trade and Development Agency
The U.S. Trade and Development Agency (TDA) provides grants for U.S. firms to fund feasibility studies, desk studies, definitional missions, technical symposia, technical assistance, orientation visits, and reverse trade missions (cosponsored with U.S. industry). Of these programs, the one that stands out most is TDA’s program for providing grants for project feasibility studies. Feasibility study grants help U.S. companies get a decisive edge over foreign competitors in overseas markets and often provide the crucial first step toward securing long-term participation in a given project.
One of TDA’s active markets is environmental infrastructure. A good example of TDA’s activity in the market is its support for SIDOR, a major Venezuelan steel producer. SIDOR is undertaking a $36 million project to upgrade its wastewater treatment and hazardous waste disposal system so that it can comply with local environmental regulations. TDA believes that good business opportunities exist for wastewater treatment facilities in the steel industry throughout Latin America.
One of PDVSA’s subsidiaries, MARAVEN, was recently awarded two TDA grants totaling $685,000 for the purpose of evaluating several environmental cleanup projects. One grant will fund a $145,000 feasibility study for three hazardous waste management projects. TDA will be funding 70 percent of this study. The study will:
Evaluate treatment and disposal options of polychlorinated biphenyl in equipment belonging to MARAVEN. The study includes a pilot test for whichever option is chosen.
Evaluate MARAVEN’s current drill equipment. The study will generate recommendations on options to reduce spillage and for the procurement of new drilling rig equipment.
Investigate treatment and disposal options for boiler water at offshore drill sites.
MARAVEN will also receive $540,000 from TDA for a feasibility study on the remediation of waste oil pits, and storage lagoons that the company uses near Lake Maracaibo. This particular study will involve identification of testing, dredging, and treatment equipment; waste analyses of five of the seven sites; and the design of laboratory and treatment facilities. Contractors who become involved in this cleanup plan will be offered cost recovery incentives.
The TDA has also funded a project to upgrade and modernize the air monitoring system in the Caracas metropolitan area. Initial funding has gone towards a feasibility study recently concluded by Radian International LLC. The MARNR is in the process of reviewing the study and will most likely approve it as the basis to issue international bids.
Point of Contact: Director, Latin America and the Caribbean, (703) 875-4357.
Additional information about TDA can be found through its Internet home page at http://www.tda.gov.
Private Sector
Project Financing: Private capital flows into Venezuelan environmental projects are restricted primarily to PDVSA and its subsidiaries, CVG, and major multinational players. There have been no private sector investments in potable water supply or sewage collection or treatment projects to date. These projects will not be attractive to private capital in the medium term. The emergence of private project financing options in Venezuela will require improvements in several areas. First, the country must develop better systems for recouping costs via user fees for environmental projects. Second, the country must demonstrate macroeconomics and policy stability so that the country's overall investment rating improves. Trade Financing: Standard practice in Venezuela is to have the exporter ship the goods and send the documents (bill of lading, etc.) through a merchant bank. Payments must be made to get the original documents from the bank necessary to clear customs.
Among the two most used options open to exporters, are:
Advance Payment: The best manner to secure payment is to receive it in advance. The U.S. exporter receives an up-front retainer for production and a subsequent payment upon shipment. Until a time-tested relationship has been established, an exporter may not want to give direct credit to the Venezuelan counterpart, though this will frequently be requested. Letter of Credit: A letter of credit is by far the most common trade-financing tool used in the environmental sector. It is strongly advised that before undertaking any production, an exporter should receive a letter of credit for 110 percent of the merchandise value (for insurance) opened by a first-class bank. The letter of credit should not have a cancellation clause or be a “standby letter of credit,” and should contain within it the term “irrevocable.” A foreign bank, especially given Venezuela's still fragile banking structure, should also confirm it. The exporter must meticulously check the wording within the letter of credit. In terms of insurance, a provision should be made in the favor of the exporter for fire, flood, and war occurrences.
U.S. exporters are encouraged to practice due diligence no matter what trade financing mechanism is used.
