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Financing Environmental Exports - A Guide to the Fundamentals and Sources
Chapter 2 - How to Finance Major Types of Export Deals

When goods, services, and overseas infrastructure project development are being sold, export financing will come from debt, equity, or some combination of the two. Most sources of debt usually require some form of collateral or other guarantee of repayment. Occasionally, grants may be available to defray some
of the costs associated with exporting environmental goods and services.

Establishing an Overseas Presence

Firms considering entry into the export market may be required to invest considerable resources to evaluate potential opportunities, cultivate relationships, promote the product, and ultimately establish an overseas presence. Although some grant assistance may be available for these endeavors, the bulk of the start-up costs is typically financed directly from the firm's working capital. (Working capital is the sum of cash, inventory, accounts receivable, and other current assets minus accounts payable, current portion of long-term debt, and other current liabilities.) Working capital can be raised through debt, equity, or retained earnings.

Sizing Up the Market
Much low-cost or free information is available to firms seeking to quantify the potential market for their products abroad. Sources of this information include business libraries, foreign embassies and consulates, industry associations, state and local government export promotion programs, and Export Assistance Centers and Washington, DC, offices of the U.S. Department of Commerce. Specialized firms can also provide consulting services regarding potential export opportunities.

Making Contacts
In some cases, a U.S. exporter may make direct contact with potential customers through trade shows, trade missions, advertising, or responses to requests for proposals. In other cases, however, it may be more appropriate for a U.S. exporter to rely on an in-country representative or distributor to reach the eventual buyer.

The U.S. Department of Commerce can assist firms in locating agents and distributors, scheduling appointments with key contacts, identifying potential buyers or joint venture partners, and arranging for interpreters or translators when needed. U.S. embassies and consulates abroad often provide briefings about opportunities for and obstacles to conducting business in the host country. Commercial officers at the embassies and consulates can sometimes arrange introductions to firms, individuals, or foreign
government officials. International banks may also assist in locating overseas representation. In addition, freight forwarders, freight carriers, airlines, port authorities, and American chambers of commerce will often be able to recommend contacts in target markets.

The costs of making contacts may include telephone tolls, printing and mailing, subscriptions to periodicals and on-line databases, and charges for various types of matchmaking services. These
costs are usually absorbed as part of the exporter's account for sales and general administrative expenses. They are usually financed internally with the firm's working capital.

Traveling Abroad
Whether an exporter sells goods and services directly to customers or sells them indirectly through agents and distributors, the exporter should not underestimate the value of visiting the countries in which he or she conducts business.

The U.S. Department of Commerce and the United States-Asia Environmental Partnership periodically organize trade missions for U.S. producers of environmental goods and services. These trips can provide an excellent opportunity to meet with potential customers and distributors in target export markets. A typical two-week trade mission costs $10,000 to $15,000 per person for travel and incidentals plus an additional $2,000 to $4,000 participation fee. Some state and local departments of commerce may also
organize trade missions relevant to environmental businesses. The National Association for State Development Agencies (NASDA) supports state economic development agencies in organizing trade

Some local world trade centers provide small grants to help defray the cost of international travel. Most of the expenses, however, must be financed directly from the firm's working capital.

Using Intermediaries
Some environmental companies choose to outsource the entire exporting process and rely on specialized export intermediaries that market U.S. products and services abroad on behalf of manufacturers or distributors. These intermediaries are generally categorized as either export management companies (EMCs) or export trading companies (ETCs). In recent years, export intermediaries have become risk-takers, taking title to goods and working with banks, credit risk insurance firms, and government agencies to provide the capability required to carry foreign receivables.

EMCs act as the export arm of one or more U.S. manufacturers, helping to establish an international market for the company's products, usually on an exclusive basis. EMCs will often use the manufacturer's own letterhead, visit the manufacturing facility regularly to learn the details of new products, and develop marketing strategies for each targeted country in close cooperation with the producer. EMCs may take title to the goods they sell, making a profit on the markup, or they may charge a commission. Some EMCs also work on a retainer basis, especially if they are providing significant training and advice to their client or undertaking considerable up-front marketing.

ETCs, in contrast, act as independent distributors, linking buyers and sellers to arrange specific transactions. ETCs identify what international customers want to buy and work with a variety of
U.S. manufacturers to fulfill such requirements. In some cases, ETCs perform a "sourcing" function, shopping the U.S. market to fulfill specific requests from international customers. Most ETCs take title to the products involved, but some work on a commission basis. They stay close to the markets they serve by traveling, participating in trade shows in the United States and abroad, and working closely with distributors and customers.

For more information regarding these services and a schedule of upcoming trade missions, the U.S. Department of Commerce's office of Environmental Technologies Exports is an excellent place to begin. Useful publications include the Guide to U.S. Government Resources, the National Environmental Exporter's Resource Guide, and the Environmental Export News newsletter. Tel: (202) 482-5225. On the Web: http://www.environment.ita.doc.gov

The United States-Asia Environmental Partnership (US-AEP). Tel: 1-800-818-9911.
On the Web: www.usaep.org

For more general information, contact the nearest Export Assistance Center of the U.S. Department of Commerce or Export Promotion Services, International Trade Administration, U.S. Department of Commerce, 14th Street and Constitution Avenue, NW, Washington, DC 20230. Tel: (202) 482-2505. On
the Web: www.doc.gov

For information about export trading companies, contact the U.S. Department of Commerce's Office of Export Trading Company Affairs at (202) 482-5131.

Names and contact information for commercial officers in international embassies and consulates are published in Key Officers of Foreign Service Posts, U.S. Government Printing Office, Washington, DC 20402-9371. Tel: (202) 783-3238. Issued three times per year, annual cost $5.

Selling Products

Selling products internationally entails greater risks and greater transaction costs than selling products domestically does.

Dozens of different types of export service providers can be involved in international trade transactions. Service providers handle specific aspects of the export process, such as transporting the product, clearing it through customs, and collecting or transmitting the payment. Before quoting a price to potential customers, exporters should consult the potential service providers to quantify the costs associated with specific transactions. The most important service providers include:
An exporter's financing needs depend on the kinds of payment arrangements made with customers. If a customer provides cash in advance of the product delivery, the exporter may not require any additional financing to complete the transaction.

Many customers, however, cannot pay for goods before delivery. Some may be unwilling to accept the risk associated with prepayment for goods sight unseen, while others simply do not have sufficient cash on hand. In these cases, the exporter may require preshipment debt financing as well as specific guarantees to complete the transaction.

Export-Related Services Provided by the Department of Commerce
Export Contact List Service - Provides mailing lists of prospective overseas customers from Commerce's database of foreign firms. It identifies manufacturers, distributors, retailers, service firms, and government agencies.

Trade Opportunities Program - Provides timely sales leads from overseas firms seeking to buy or represent U.S. products and services. Details such as specifications, quantities, end use, and delivery and bid deadlines are posted daily on Commerce's Economic Bulletin Board at 1-800-STAT-USA.

Agent/Distributor Service - Locates foreign import agents and distributors. It provides a custom search overseas for interested and qualified foreign representatives on behalf of a U.S. exporter.

International Company Profile - Provides background information on specific foreign firms, prepared by commercial officers overseas. International Company Profiles describe the type of organization, year established, relative size, number of employees, general reputation, territory covered, language preferred, product lines handled, principal owners, financial references, and trade references. The fee is $100 per report.

Commercial News USA - Provides worldwide exposure for U.S. products and services through an illustrated catalog-magazine and electronic bulletin boards. The catalog-magazine is distributed through U.S. embassies and consulates to business readers in 140 countries. A standard one-sixth page lists an average of 40 to 60 words and costs $250.

Trade Missions and Matchmaker Trade Delegations - Enable firms to meet prescreened prospects who are interested in their products or services in overseas markets. Matchmaker delegations usually target major markets in two countries and limit trips to a week or less. Delegation members pay their own expenses and a share of the operating costs of the event.

Major Projects Program - Helps U.S. firms win contracts for planning, engineering, and constructing large foreign infrastructure and industrial systems projects, including equipment and turnkey installations. Assistance is provided when requested by a U.S. embassy, a prospective foreign client, or a U.S. firm, either to encourage U.S. companies to bid on a particular project or to help them pursue overseas contracts. Office of International Major Projects, Room 2015B, Trade Development, International Trade Administration, U.S. Department of Commerce, Washington, DC 20230. Tel.: (202) 482-5225.

Gold Key Service - Customized matchmaking service that combines orientation briefings, market research, appointments with potential partners, interpreter service for meetings, and assistance in developing follow-up strategies. Offered throughout the world.

Other Sources of Trade Leads

USAID's Global Technology Network - Provides a free trade-lead system to U.S. companies through its extensive database of leads compiled by in-country technical representatives throughout the developing world.

The National Association of Trade Development Agencies, TradeNet, Intellibanc, Commodity Developers Trade Group, state trade development agencies, and world trade centers.
Methods of Payment from Customer
MethodUsual Time of PaymentGoods Available to BuyerRisk to ExporterRisk to Importer
Cash in advancebefore shipmentafter paymentnonerelies on exporter to
ship goods
Letter of creditafter shipment, when documents complying with the letter of credit are presentedafter paymentvery little or none (depending on terms of the letter of credit)relies on exporter to
ship goods
Documentary collection sight drafton presentation of draft to buyerafter paymentif draft is unpaid, exporter must dispose of goodsrelies on exporter to
ship goods
Documentary collection time drafton maturity of draftbefore paymentrelies on buyer to pay draft; no control of goodsalmost none
Consignmentafter salebefore paymenthigh; goods in control of buyerlow
Open accountafter shipment, as agreedbefore paymentrelies on buyer to pay the accountnone
Adapted from Breaking Into the Trade Game: A Small Business Guide to Exporting,
U.S. Small Business Administration, 1995.

Case Study: American Standard Products - Export Working Capital
American Standard Products, Inc. of Freehold, N.J. sells aquaculture feeds and medicines along with environmental and water cleaning products. The company was established in May 1994.

During its early years, American Standard Products found it difficult to obtain financing from commercial lending institutions and working capital demands proved problematic (particularly for inventory).

American Standard was able to obtain a $200,000 loan guaranteed by the U.S. Small Business Administration (SBA) through its Export Working Capital Program (the SBA provides no direct loans).

Banks can provide long-term debt, short-term debt, or revolving credit to exporter-borrowers.

Exporters can use short-term loans to temporarily increase working capital to purchase inventory and raw materials or to provide short-term credit to customers who cannot pay in advance. Exporters can use long-term loans to extend long-term credit to customers or to fund capital expenditures or production modifications required for export sales. These loans typically come from the exporter's local bank or from federal programs such as the Small Business Administration, the Overseas Private Investment Corporation (OPIC), or the Export-Import Bank of the United States (Ex-Im Bank).

The Ex-Im Bank and OPIC can also provide loans directly to importers seeking to purchase goods from U.S. firms.

Most loans to small and medium-sized companies must be secured with some form of collateral. Although U.S. lenders are usually comfortable accepting purchase orders and accounts receivable as collateral for loans when the customers are in the United States, lenders are often hesitant to accept non-U.S. obligations as collateral because it is so much more difficult to evaluate the credit worthiness of non-U.S. customers. Several instruments are available to mitigate the risk of nonrepayment by importers or to guarantee that commercial lenders will be repaid even if the foreign accounts receivable prove uncollectible. These instruments can enable exporters to borrow the money necessary to offer credit to customers or increase their working capital. Such instruments include:

Export credit insurance and loan guarantees are provided by government financing agencies such as the Ex-Im Bank, OPIC, and state export credit agencies. Letters of credit and banker's acceptances are provided by the customer's bank and must be "confirmed" by the exporter's bank before they can be used
as collateral for a loan.

Grants and Subsidies
Grants may be available for customers purchasing goods that achieve certain environmental goals. Such grants may be provided by local governments, donor governments, or multilateral organizations. Grants may take the form of credit enhancement, tax breaks, or rebates. These programs will generally make it easier for customers to purchase goods without requiring credit from the producer.

Grants and subsidies are sometimes provided to projects themselves to defray the additional costs that may be associated with environmentally friendly technologies. Such grants may take the form of credit enhancement, tax breaks, or direct transfers of capital. The ability of some municipalities to raise money cheaply through tax-free municipal bonds can also be viewed as a form of subsidy. Again, these programs make it easier for customers to purchase goods and services without requiring credit from the producer.

Producers of environmental goods and services should be aware of the grants and subsidies available to potential customers.

Secondary Markets
Exporters facing liquidity problems can receive immediate cash for goods sold on credit by selling their insured or guaranteed accounts receivable in secondary markets. Promissory notes and accounts receivable can be sold to factoring or forfeit houses at a discount below the face value of the receivables.
Banker's acceptances can also be sold for cash.

Case Study: Tempest Environmental Systems - Short-Term Insurance
Tempest Environmental Systems is a designer and manufacturer of state-of-the-art drinking and industrial process water purification equipment for residential, commercial, industrial, and small municipal use.

One of Tempest's clients is a large multinational trading company based in South Africa. Each month, the trading company inventories and distributes products manufactured by Tempest.

After the end of apartheid, the new government of South Africa was concerned about capital flight and the export of currency. The country placed strict limitations on payment in advance for imported goods. Funds typically could not be released to the exporter until the goods arrived on the docks of South Africa.

For a premium of 75 cents per $100 of coverage, Tempest has been able to purchase a short-term export insurance policy from the U.S. Export-Import Bank to protect against commercial risks. Applying for the export insurance policy was relatively simple and required little more than a letter of good standing from the customer's bank and a Dun and Bradstreet credit report attesting to the good credit of the customer.

With the export insurance policy in hand, Tempest was able to open a revolving line of credit with its local U.S. bank for export receivables. Because of the insurance, Tempest's bank charged a favorable interest rate of prime + 1 percent Thus, Tempest was able to extend credit to customers for 90 days without adversely affecting its cash position.

Selling Services
As with product exporters, the financing needs of environmental service exporters will depend on the kinds of payment arrangements made with customers. The intangible aspect of environmental services, however, can present an obstacle to financing international trade. Financial institutions are often reluctant to provide loans for service exports.

The Office of Service Industries within the Department of Commerce's International Trade Administration (ITA) can help identify business opportunities. ITA's Office of Finance can help address the more difficult aspects of financing service exports. The office maintains specialists in various sectors, including energy and environmental services.

For more information, contact the Office of Service Industries at (202) 482-3575 or the Office of Finance at (202) 482-3277.

Because environmental service exporters lack significant inventory and capital assets, they may be unable to provide lenders with the collateral necessary to secure loans for working capital. Lending institutions are also weary of using accounts receivable as collateral because of the difficulties inherent in valuing services and the extent to which customers may contest fees for services deemed unsatisfactory.

Most environmental service exporters require customers to prepay a portion of all fixed-price contracts. Environmental consulting firms typically receive between 20 and 50 percent of such contract fees up front. Clients who are billed by the hour are usually required to provide the service exporter with some form of
retainer. In typical environmental consulting firms, accounts remain in receivable for 30 to 100 days.

Commercial risk insurance is not readily available for service accounts receivable. Environmental service exporters seeking to borrow money typically rely on other assets to secure loans.

Grants and Subsidies
Grants and subsidies may be available for certain environmental service customers.

The international development assistance programs of donor nations sometimes fund consulting assignments, training programs, environmental audits, and environmental impact assessments in less developed countries. Contracts for these assignments, however, frequently go to service providers from
the donor country. The U.S. Agency for International Development (USAID) funds a large number of environmental consulting projects throughout the world. USAID advertises export opportunities for both goods and services in the Commerce Business Daily as well as the AID Procurement Information Bulletin. The AID Procurement Information Bulletin is available for free from the USAID Office of Small and Disadvantaged Business Utilization/Minority Resource Center. Tel: (703) 875-1498.

The U.S. Trade and Development Agency (TDA) is an export promotion agency providing grants for feasibility studies and planning services for large projects in emerging markets and less developed countries. The TDA grants for feasibility studies help position U.S. firms for millions of dollars in goods
and services contracts that are awarded after the completion of the feasibility study phase. Because all studies funded by TDA grants are awarded to U.S. firms, TDA feasibility studies can be an excellent opportunity for environmental services exporters with expertise in priority areas such as agribusiness,
energy, minerals, and waste management. TDA Definitional Missions can also provide excellent opportunities for small environmental-service firms.

Case Study: Ecology and Environment - TDA Consulting Contract

Founded in 1979, Ecology and Environment is a consulting firm providing a wide range of client services from environmental impact assessment to hazardous waste management and soil remediation. Approximately 15 to 20 percent of the company's business is international. The majority of the firm's service exports go to multinational companies and projects sponsored by multilateral development banks.

In January 1997, Ecology and Environment was awarded a 12-month, $347,000 consulting contract from the U.S. Trade and Development Agency (TDA). The firm was to conduct voluntary inspections of industrial facilities in the Philippines and write 20 investment proposals for Philippine companies seeking to address air pollution from inefficient combustion processes in stationary sources.

The technical assistance project was fully funded by a grant from the U.S. Government to the Government of the Philippines. TDA provided the grant in the hope that it would generate $20 million in sales of U.S. equipment.

Although many U.S. consulting firms competed for the contract, Ecology and Environment had a distinct advantage because the firm had worked with the Philippine government to craft the initial proposal and application for the TDA grant. Ecology and Environment received no compensation for its assistance with the TDA application process. The entire project development cost was financed out of the firm's overhead budget.

The TDA contract specified a payment schedule in which 20 percent of the contract amount was paid up front, and additional disbursements occurred at various project milestones. The final 20 percent of the contract was payable on completion of the assignment.

Although TDA contracts do not pose significant credit risks, Ecology and Environment did not obtain project-related loans secured by accounts receivable from the TDA. Instead, the company financed wages and other expenses through a line of credit with its local bank. The line of credit is secured by assets of the firm.
Case Study: Energy Service Company

Unnamed ESCO is an energy services company (ESCO) that provides performance-based energy-efficiency projects for clients all over the world. In 1997, Unnamed ESCO received a contract to improve the energy efficiency of a large European apartment complex by upgrading the decrepit heating, ventilation, and air conditioning equipment installed in the 1950s.

Under the energy services agreement, Unnamed ESCO agreed to install new equipment in the housing complex in exchange for payments of 70 to 100 percent of the project's savings for the first six years after installation. After a fixed amount of profits was recovered, the shared savings payments would cease and ownership of the equipment would transfer to the owner of the housing complex.

Because the performance-based contract was essentially an operating lease, the new equipment did not appear on the customer's balance sheet, and the customer assumed no additional liability to finance the acquisition.

To limit its liability in the event of equipment failure or customer default, Unnamed ESCO created a shell company to purchase the equipment and hold the associated assets and liabilities. The shell company was a single-purpose entity wholly owned by Unnamed ESCO. The shell company obtained a loan from a European bank to purchase the equipment. The equipment itself served as collateral, so the loan was nonrecourse to Unnamed ESCO.

Once the equipment was installed and operating, the customer was required to pay a portion of its energy savings into an escrow account which then made loan payments to the bank. Additional shared savings were retained by the shell company and ultimately flow back to the ESCO.

Infrastructure Projects
Large-scale infrastructure projects can provide excellent opportunities for exporters of environmental goods and services. When bidding on such projects, potential exporters should understand how the projects themselves are financed.

This section describes some of the basic principles of infrastructure project financing.

In most countries, basic infrastructure and utilities are owned and operated by government entities. Federal or local agencies retain the equity stake in telecommunications, transportation, municipal waste, electric, and water and sewerage companies. Proponents of this ownership structure contend that
utilities and infrastructure are natural monopolies that must be controlled by the government to prevent price gouging. They also argue that utilities are critical sources of national security and should not be controlled by the private sector.

Increasingly, however, governments are involving the private sector in the development and management of utility and infrastructure projects. Public-private partnerships are emerging to take advantage of the efficiency, technical knowledge, financial capabilities, and entrepreneurial spirit of the business sector without compromising the public-interest concerns of the government. Some of these partnerships take the form of mixed-capital companies in which both the public and the private sectors share an equity interest in the project. Privatization is another model in which the equity stake is transferred from the public sector to the private sector.

The equity interest in an infrastructure project may change during the life of the project. In many instances, a private company is granted a temporary concession for a fixed number of years. Build-operate-transfer (BOT) is one of the most common types of this arrangement. In a BOT structure, a concession company builds the project, operates it for a preestablished period of time, and then transfers it back to the relevant state authority.
Project developers are often expected to hold an equity stake in these kinds of projects. The requirement that sponsors risk some of their own money reassures lenders and other equity holders that the incentives of the key parties are properly aligned. In addition, lenders or vendors may make an equity investment in infrastructure projects to share some of the upside potential. Other potential equity investors include infrastructure funds, pension funds, insurance companies, and venture capital funds.

Alternative Approaches to Project Ownership
Responsibilities are allocated to:

Management Lease BOT or BOO Full Utility Asset
Contracts Contracts Concessions Concession Sale
Tariff Collectionpublic/privateprivatepublicprivateprivate
Adapted from David Haarmeyer and Ashoka Mody, "Private Capital in Water and Sanitation,"
Finance and Development, March 1997.

For large infrastructure projects, senior and subordinated debt are generally provided by a syndicate of investors such as commercial banks or nonbank financial institutions. In syndication arrangements, the lead lending institution creates a credit facility and sells off portions of the loan to other lenders. All members of the syndicate share a single syndicate loan agreement governing the relationship with the borrower, and the credit risk is spread among the members of the syndicate. Loans may be divided into several tranches in which portions of the debt are subordinate to other portions in terms of repayment and liquidation rights.

Lenders for infrastructure projects include banks, multilateral lending institutions, export credit agencies, infrastructure funds, insurance companies, pension funds, and other nonbank financial institutions. Some infrastructure projects may also raise debt by selling bonds to institutional investors or the general public.

Infrastructure projects tend to have a capital structure in which the debt-to-equity ratio ranges from 50 percent debt and 50 percent equity to 70 percent debt and 30 percent equity.

Lenders do not usually accept construction and operation-related risks. Fixed-price, date-certain turnkey contracts are a form of construction guarantee in which the construction company can be penalized if the project fails to meet schedule and performance objectives. Construction insurance is also commercially available for large projects. Lenders will usually require project companies to absorb operational risks through the use of maintenance agreements, business interruption insurance, and performance-based compensation contracts.

To reduce commercial risk, many infrastructure projects will obtain guarantees from end users (often referred to as off-takers) promising to honor contractual obligations. In "take or pay" contracts, purchasers agree to pay pre-established amounts for products or services whether or not they are actually received. In power-purchase agreements for independent power projects, state-owned utilities agree to buy electricity at preestablished prices and quantities for periods that can extend as long as the expected life of the power equipment.

As infrastructure projects tend to be long-lived, they are particularly vulnerable to major political risks. Lenders will often seek political risk insurance to mitigate the potential losses resulting from expropriation, war, or other civil disturbance. Political risk insurance for large infrastructure projects is available from OPIC, the Ex-Im Bank, and the World Bank's Multilateral Investment Guarantee Agency.

Grants and Subsidies
In developing countries, some infrastructure projects are funded by the international development assistance programs of donor countries. Often times, procurement decisions for these projects favor vendors from the donor country. In the case of "tied aid," procurement is restricted to vendors from the donor country.

Some governments and international organizations provide subsidies that are targeted specifically toward environment-related projects. The Global Environment Facility (GEF) offers grants to subsidize the incremental costs associated with the environmentally sensitive aspects of large projects in developing countries. The GEF's primary areas of concern are global climate change, ozone depletion, biodiversity, and water. Subsidized loans for environmental projects are also available through GEF-supported financial intermediaries.

Secondary Markets
Lenders to large infrastructure projects may choose to remove the debt from their portfolio before the debt reaches maturity. The debt can be sold at prices other than book value, depending on the current financial status of the project issuing the debt.

Equity holders concerned about eventually exiting from the investment may obtain "put options" at the time they buy into the project. A put option is the right to sell one's interest to another investor for a set price at a given point in time.

Case Study: Aguas Argentinas - Project Finance
Until 1993, a state-owned enterprise called Obras Sanitarias de Nacion (OSN) provided municipal water supply and sanitation services to the city of Buenos Aires, Argentina. Financial performance was poor and the water company had difficulty raising the capital necessary to expand coverage to poorer neighborhoods in the outlying areas of the growing city. Only 70 percent of the city's households were connected to the drinking water network and a mere 5 percent of the city's sewerage flow was processed by the one existing wastewater treatment facility. OSN was renowned for its excessive administration costs, inadequate metering and billing, and high rates of water losses. Failure to develop sufficient sewage treatment facilities also resulted in severe pollution of the city's groundwater and the River Plate.

In the early 1990s, the government of Argentina determined that the water system could be better managed in private hands. Rather than selling the assets themselves, the government offered a 30-year concession for operating the city's water facilities. The concession was awarded on the basis of tariff level, that is, prices the concessionaire would charge customers for the services. The winning bidder would not be expected to pay for the concession directly; instead, the bidder would be required to make specific capital investments to upgrade service quality and coverage within a fixed time.

In May 1993, the concession was awarded to Aguas Argentinas, a company led by French water operator Lyonnaise des Eaux. The Aguas bid proposed a 27 percent reduction in the existing water tariffs and a $4 billion investment plan. By the end of the 30-year concession, water coverage was expected to reach 100 percent of the city's households and sewerage coverage to 90 percent.

Since taking over the concession, Aguas Argentinas has had many successes in operating efficiency, financial performance, and capital investment. Water quality and reliability have increased dramatically while average tariffs have been reduced from the levels charged by OSN.

For the first eight years of the concession, required capital investments amount to approximately $300 million per year. To date, these investments have been funded by a combination of debt and equity as well as retained earnings from operations.

A particularly creative round of debt financing occurred in the summer of 1997, when the European Investment Bank (EIB) provided Aguas Argentinas a $100 million loan facility to develop the Planta Norte wastewater treatment plant in northwest Buenos Aires. EIB's 10-year credit has several innovative features including a 5-year grace period and a floating interest rate of the London Inter-Bank Offering Rate (LIBOR) plus a 3 percent premium that will adjust over time according to project risk. The loan is secured by a syndicated guarantee from the Banque Nationale de Paris.

Case Study: Ormat Leyte Geothermal - Project Finance
Ormat Leyte Co., Ltd., of Sparks, Nevada, will build, own and operate four geothermal power plants about 530 kilometers from Manila at a cost of $66.5 million.

To finance this project, the U.S. Export-Import Bank (Ex-Im) will make a direct loan to Ormat on a limited-recourse project finance basis. This means that the repayment is based on project revenues and is devoid of sovereign guarantees or non-project-related cash flows from Ormat. The project will be able to repay the debt based on extensive long-term viability studies and an agreement with the Philippine National Oil Company to purchase power from the plants. The commercial obligations of the Philippine National Oil Company are fully supported by the government of the Philippines.

Most of the project's revenues are denominated in U.S. dollars to cover the dollar-based fixed charges such as debt service. The remaining revenues are denominated in Philippine pesos to cover the peso-based operating expenses.

Ormat will provide 25 percent of the project's cost in the form of equity. The remaining 75 percent of the project's cost will be financed by debt from the U.S. Ex-Im Bank, the sole senior lender. During the construction phase, loans will be provided by a syndicate of commercial banks to which the Ex-Im Bank will furnish political risk guarantees. Ex-Im will provide its debt financing when predefined conditions are met after the completion of construction or completion of the project.

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