Environmental Technologies Industries

Environmental Technologies Industries

Finance

Financing Environmental Exports - A Guide to the Fundamentals and Sources

Chapter 5 - Variation in Financing by Type of Customer

No two customers are alike. Each client or potential client has different needs in terms of product specification, lead time for delivery, and credit requirements. Depending on the nature of their financing, some customers may also have specific limitations regarding the countries from which they can import goods and services and the process by which they can select vendors.

Multilateral Development Banks

In many ways, multilateral development banks (MDB) provide ideal clients for small to medium-sized environmental businesses seeking to enter the export market. The banks are well funded, have impeccable credit ratings, and evaluate potential vendors in a transparent manner according to pre-established criteria.

MDBs provide project-specific loans to governments, ministries, and private-sector clients in developing countries. These projects provide excellent opportunities for suppliers, consultants, and contractors eligible to supply goods and services. The borrowers themselves are responsible for all aspects of the development project, including the procurement of goods and services. U.S. firms must compete for contracts on MDB-financed projects. It is important to note that the customers are MDB borrowers and not MDBs themselves; the MDBs themselves do not provide financing directly for U.S. exports. It is common for U.S. companies to form a consortium that includes at least one in-country partner to bid on these large projects.

MDB operations are also potential clients for suppliers of environmental consulting services. In such cases, the customers are the MDBs themselves.

Credit
MDBs raise capital by issuing bonds. Credit rating agencies consider most MDB bonds to be comparable in risk to bonds issued by the U.S. government; therefore, MDBs are able to raise capital at very low interest rates. Given their low cost of capital, MDBs do not need to purchase goods and services "on credit." Accounts receivable from MDBs have a very low risk of default.

MDBs go to great lengths to make certain that MDB-financed projects have sufficient capital during the planning and construction phases when most goods and services are required. As MDBs typically oversee large disbursements made by their borrowers, MDB-financed projects do not usually require medium-or long-term credit financing from the suppliers exporting to them. Accounts receivable from MDB-financed projects have a low risk of default during the planning and construction phase.

Bidding Requirements
MDB borrowers are usually responsible for procuring goods and services for MDB-financed projects. The borrowers determine which goods and services will be required and when they must be delivered.

MDBs, however, typically require that the borrower follow International Competitive Bidding procedures for all contracts over a certain threshold value. These thresholds vary depending upon the lender, the country, and the sector of the project, but usually fall between $25,000 to $500,000 for goods and $100,000 to $1 million for civil works. Borrowers are usually given a bit more leeway in hiring consultants although the MDBs still encourage the borrower to use international advertising and short-listing.

What Are the Best Sources of Information about MDB-Financed Projects?

The U.S. Department of Commerce's Multilateral Development Bank Operations (MDBO) can provide procurement guidelines or other assistance for U.S. environmental firms pursuing opportunities with MDBs. For more information, contact Multilateral Development Bank Operations. Tel: (202) 482-3399.

On the Web: www.ita.doc.gov/mdbo

U.N. Development Business. Subscription cost is $495/year. Tel: (212) 963-1516.

Monthly/Quarterly Operating Summaries are available by subscription from most MDBs.

African Development Bank
African Development Bank Commercial
Liaison Office
U.S. Commercial Service
U.S. Embassy
01 BP 1712
Abidjan 01, Cote d'Ivoire
Tel: (225) 20-44-44
Fax: (225) 20-49-09
On the Web: www.iafdb.org

Asian Development Bank Commercial
Liaison Office
U.S. Commercial Service
U.S. Embassy
Manila
FPO AP 96515
Tel: (632) 890-9364 / 632-4444
Fax: (632) 632-6344
On the Web: www.adb.org

European Bank for Reconstruction and Development
Senior Commercial Officer
Office of the U.S. Director
European Bank for Reconstruction and Development
One Exchange Square
London EC2A 2EH
United Kingdom
Tel: (44) 171-338-7532 / 639-0333
Fax: (44) 171-358-9568
On the Web: www.ebrd.com

Inter-American Development Bank
U.S. Commercial Service Liaison Office
Inter-American Development Bank
1300 New York Avenue, NW
Mailstop E 209
Washington, DC 20577
Tel: (202) 623-3821
Fax: (202) 623-1928
On the Web: www.iadb.org

International Finance Corporation
Corporate Relations Unit
International Finance Corporation
2121 Pennsylvania Avenue, NW
Washington, DC 20433
Tel: (202) 477-1234

North American Development Bank
700 N. St. Mary's Street
Suite 1950
San Antonio, TX 78205
Tel: (210) 231-8000
Fax: (210) 231-6232
On the Web: www.nadbank.org

World Bank
U.S. Commercial Service Liaison Office
World Bank
1818 H Street, NW
Washington, DC 20433
Tel: (202) 458-0120
Fax: (202) 522-1500
On the Web: www.worldbank.org
Gopher users: gopher.worldbank.org

The International Competitive Bidding Process
Notification: Bidding opportunities are announced to the international business community and firms
are invited to bid (or prequalify to bid). Notification often takes the form of a General Procurement Notice describing the nature of the goods or services required and the expected timing for delivery. This notice is usually published in newspapers in the borrower's home country, international trade publications, and UN Development Business.
Prequalification: Firms may be required to submit basic company information as part of a prequalification screen prior to the bidding process.
Invitation to Tender: The Invitation to Tender or Tender Notice lists the specific items to be procured and establishes the deadlines and addresses for submitting bids. Potential bidders may be required to purchase bidding documents that contain the detailed specifications. Invitations to Tender are often published in newspapers in the borrower's home country, international trade publications, and UN Development Business.
Tender Evaluation: All bids received by the specified deadline are opened and read publicly. The borrower and/or lender then evaluate the bids over a period of several weeks in a manner consistent with the bidding documents. The lowest evaluated bid is selected based on factors such as price, quality standards, and delivery time. The low-cost bid will not always win the contract. Some lenders will permit borrowers to apply domestic or regional preferences to the evaluation process.
Contract Award: The lender multilateral development bank (MDB) must approve (or give "no objection" to) the bid selected by the borrower. The borrower then publicly award the contract to the bidder.
Note: MDBs have separate procurement guidelines for consulting purposes. These guidelines are usually less stringent than the standard international competitive bidding procedures for physical goods. (Adapted from MDB Handbook, Department of Commerce, July 1997)

When MDBs seek goods and services for their own internal operations, the contracts are generally too small to merit international competitive bidding, advertising, or short-listing. Individual consultants needed for specific projects are often hired directly by MDB staff.

Multinational Companies

Multinational companies are often excellent clients for small to medium-sized environmental businesses seeking to enter the export market. The companies usually have strong credit, good access to capital, and experience with import/export transactions. Multinational companies can also be important partners for small to medium-sized environmental firms seeking to supply goods and services to large-scale MDB-financed projects but unable to bid on such projects directly. If a company has a good business relationship with a multinational company here in the United States, then a good export strategy would be to contact that company's business development manager about its overseas business activity.

Credit
Multinational companies are able to finance most of their operations using retained earnings, bank loans, and stock or bond offerings. Although they do not pay in advance for all purchases of goods and services, multinational companies typically do not seek medium-or long-term credit from their international suppliers. Firms exporting to multinational companies will find it easier to obtain export-related loans than will firms exporting to small or local firms outside the United States.

Credit reports on multinational firms are readily available from Dun & Bradstreet and Graydon America.

Bidding Requirements
Multinational companies are not required to adhere to procurement processes as transparent and accessible as international competitive bidding. As profit seekers, however, multinational companies typically engage in some form of competitive bidding for significant purchases of goods and services.

Local Companies

Local companies tend to be challenging customers for small to medium-sized environmental businesses seeking to enter the export market. The companies often have uncertain credit, poor access to capital, and little or no experience with import/export transactions.

Credit
Compared to MDB-financed projects and large multinationals, small local companies often suffer from limited access to debt and equity financing. This problem is particularly acute in emerging markets and developing countries.

Although some local companies are able to pay in advance for all purchases, many firms require some form of financing - whether from their suppliers or from their local lenders. As local companies do not typically maintain significant foreign currency reserves, they may find it burdensome to purchase goods in U.S. dollars. Firms exporting to local companies will generally find it harder to obtain export-related loans than will firms exporting to MDB-financed projects or multinational companies. However, if the foreign buyer has audited financial statements and bank and trade references, the U.S. Export-Import (Ex-Im) Bank can offer medium- and long-term credit for the purchase of U.S. goods and services.

Dun & Bradstreet and Graydon America offer credit reports on some local companies outside the United States. These reports tend to be limited in scope and available only for firms with extensive import experience.

Bidding Requirements
Local companies are not required to adhere to procurement processes as transparent and accessible as international competitive bidding. Because of the perceived difficulty associated with importing goods, many local companies tend to purchase goods and services from local businesses or international suppliers with a local presence. Some firms may not be aware that goods of greater quality or lower cost could be available from suppliers abroad.

Project Finance

In project finance, unlike commercial lending, lenders rely on the project itself (and not the borrower's assets) to provide adequate cash flows to repay the loans. Thus, project developers are able to obtain financing that dwarfs the value of the physical assets involved and exceeds the collateral that could be offered by the sponsors.

Not surprisingly, lenders are closely involved in planning the project and the associated feasibility studies. Financing may come from a combination of equity, bank debt, and bonds.

Project finance transactions such as large power and water facilities can provide excellent opportunities for exporters of environmental goods and services.

Credit
Project lenders go to great lengths to make certain that the project has sufficient capital during the planning and construction phases when most goods and services are required. Projects are typically of such a large scale that they do not require postshipment financing from the suppliers exporting to them. Exporters might be expected to sell on credit and assume some of the project risk only when they are supplying very expensive goods or services integral to the project itself (e.g., the manufacturer of turbines used in a large power project).

Bidding Requirements
Projects financed by loans from MDBs typically follow international competitive bidding procedures for all contracts over a certain threshold value. These thresholds vary depending on the lender, the country, and the sector of the project, but usually fall between $25,000 to $500,000 for goods and $100,000 to $1 million for civil works. Projects financed by non-MDB loans will usually require some form of open bidding, although they may not strictly follow the international competitive bidding process.

Local Governments

Local governments can be good clients for small to medium-sized environmental businesses in search of export opportunities. Most national and provincial governments are able to access capital far more easily than local businesses can, and government credit risks are generally lower and easier to evaluate than those of local businesses.

Before entering into business arrangements with local governments, however, U.S. environmental exporters should be mindful of potential difficulties including bureaucratic delays and changes in the local administration.

Credit
National and provincial governments can raise capital through taxation, fees, international aid, and bank borrowing. Municipal governments, particularly those from small towns and cities, often have more difficulty obtaining revenue, loans, and international aid. In many well-developed markets, governments can also issue bonds that may offer tax-exempt interest payments to bond holders.

A local government's credit needs for a particular project will depend on how the project is financed. Projects financed by loans from MDBs are usually a low-risk proposition for exporters. MDB-financed projects typically have sufficient capital during the initial phases of a project when most goods and services are required. MDB-financed projects do not usually require medium-or long-term credit financing from the suppliers exporting to them. Similarly, projects funded by foreign aid from other countries do not usually require postshipment credit financing from exporters. Government projects undertaken independently of MDBs and donor countries are more likely to require credit from suppliers and have a greater risk of defaulting on payments to their suppliers.

Bidding Requirements
Government projects with MDB financing are usually required to award contracts according to the international competitive bidding process. The invitation to tender usually indicates whether preference will be given to local or regional firms submitting bids.

Government projects funded by foreign aid may be limited as to the countries from which they can import goods. Countries bestowing development assistance (donor countries) will sometimes provide "tied aid" - funds that can be spent only on goods and services provided by firms from the donor country.

Sovereign Guarantees
Exporters providing credit to local companies may be able to request a sovereign guarantee - a guarantee that the national government will assume responsibility for the debt should the local company default on repayment. Sovereign guarantees are most common for large infrastructure projects such as power plants or other projects relevant to national development.

Donor Governments

Projects funded by donor governments can be as attractive for exporters as projects financed by MDBs. A number of donor governments provide untied aid to developing countries where procurement is open to U.S. and other firms. The largest and best-known of these programs is operated by Japan, where the Overseas Economic Cooperation Fund provided some $11 billion in untied loan commitments in Fiscal Year 1996. However, certain other governments provide smaller amounts of untied aid. For a listing of these projects, access the U.S. Department of Commerce untied aid Internet home page at www.ita.doc.gov/untiedaid or the Organization for Economic Cooperation and Development's Development Assistance Committee home page www.oecd.org/dac.

Credit
When a donor country provides aid to a recipient government, funds become available for purchase of goods and services. Projects funded by foreign aid do not usually require medium-or long-term credit financing from the suppliers exporting to them. To the extent that the donor government maintains control of the aid and disburses funds directly to suppliers, the risk of nonrepayment is quite low.

As lenders understand the low risk of default associated with donor-sponsored development projects, exporters will usually be able to obtain the revolving credit or working capital loans necessary to fill the orders from such projects.

Bidding Requirements
Some donor countries tend to blur the distinction between foreign aid and export finance. To them, foreign aid serves the dual purpose of global philanthropy and domestic economic stimulation. U.S. competitors tend to focus their tied-aid programs on capital-intensive infrastructure projects in transportation, energy, and telecommunications. These projects typically require the import of high value-added equipment with ongoing contracts for operation and management.

OECD Tied Aid Disciplines

The Organization for Economic Cooperation and Development (OECD) has developed rules that govern the provision of official export credits by its member governments. These rules, embodied in the "OECD Arrangement on Guidelines for Officially Supported Export Credits," or simply the "Arrangement," incorporate restrictions on the use of trade-distorting tied aid. These restrictions were negotiated by the United States and other OECD governments as part of the 1992 Helsinki Accord. Today, the Arrangement incorporates the so-called "Helsinki tied aid rules." These rules:

prohibit the use of tied aid for projects in countries that are ineligible for 17-year World Bank loans;
restrict the use of tied aid for commercially viable projects (i.e., projects that could be financed by private capital markets because the project cash flows are expected to cover all costs);
require that donor countries notify the OECD regarding proposed tied-aid projects and allow OECD
member governments to challenge the proposal if it is in violation of the OECD guidelines (note: in exceptional circumstances, the donor government can still proceed with a project opposed by the OECD as long as it writes a "derogation letter"); and
permit other countries to make matching tied-aid offers.

The Export-Import (Ex-Im) Bank of the United Stated maintains a "war chest" for countering the tied-aid practices of other countries.

In contrast, U.S. tied-aid focuses more on noncommercial (and hence nontrade-distorting) "human needs" projects such as agriculture, health care, rural development, population, energy, and environmental assessment. The majority of these projects are administered by the U.S. Agency for International Development. U.S. tied-aid tends to flow back to U.S. charitable organizations and consultants providing technical assistance.

Although many projects funded by donor governments are open to international bidding, tied-aid continues to be a hurdle that sometimes impedes the procurement of goods and services from U.S. firms.

Case Study: Zond Wind Systems - Tied-Aid

The Export-Import (Ex-Im) Bank authorized three tied-aid loans to the government of China to support $12.5 million in sales of U.S. windpower products. The Ex-Im Bank was matching existing foreign tied-aid offers for these contracts. Because of this tied aid, Zond Systems was able to win three separate wind-energy contracts in China. (Zond was acquired by Enron Renewable Energy Corp. in January 1997.)

Tied aid is government-to-government financing of public sector capital projects. Tied aid usually involves debt with maturities of longer than 20 years, interest rates equal to 50 to 66 percent of the market rates in the currency of denomination, or large grants (equal to more than 35 percent of the contract value) offered in conjunction with export credits. The Ex-Im Bank does not initiate tied aid offers, but it can provide terms to match offers of competing governments.