Principles of Project Finance

Business undertaken by members of the Berne Union in recent years has been

as follows:

The use of export credits declined in the 1990s as lenders were increasingly

willing to assume risk in developing countries without this cover, and investment

insurance followed a similar trend, but this trend reversed after the Asian crisis of

1997, in which significant losses were made by uninsured investors and lenders.

Berne Union members’ outstanding exposure of $516 billion of export credits

(short and medium/long term) at the end of 1999 represented about a quarter of

developing countries’ $2200 billion of debt.

As the figures indicate, a large proportion of ECA business is for short-term

trade finance; this aspect of ECA business is increasingly being privatized (i.e.,

carried out without public-sector support) and of course has no relevance to proj-

ect finance.

Project finance is a relatively new area of business for ECAs; their finance for

major projects had traditionally been in the form of buyer credits to large utilities

in the country concerned, often secured by a Host Government guarantee. They

have now had to adopt new financing products, as such major projects have been

increasingly financed in the private sector rather than by the Host Government.

ECAs have only a small number of staff working on project finance: a number

of ECAs therefore use outside financial advisors to help them assess project fi-

nance risks.

§11.3 EXPORT CREDITS

Export credits used in project finance are normally buyer credits (i.e., direct

loans provided to the importer by the exporter’s bank or the ECA itself) rather than

supplier credits (i.e., loans provided by the exporter to the importer, with finance

from the exporter’s bank or ECA). Therefore, formally speaking, ECAs deal with

§11.3 Export Credits 219

Table 11.1

Business Undertaken by Berne Union Members

($ billions) 1995 1996 1997 1998 1999 2000

Export credits 398 407 349 373 465 491

of which: medium / long term

a

87 79 64 61 62 71

Outstanding exposure at year end 570 561 469 482 446 453

Investment insurance 10 15 9 12 14 13

Outstanding exposure 36 43 40 43 61 57

a

Project finance is included in this category.

Source: Berne Union Yearbook, 2002

the exporter or the exporter’s bank rather than the Project Company, although

Sponsors of major projects usually have their own direct discussions with ECAs.

§11.3.1 E

XPORT

C

REDIT

S

TRUCTURES

ECA financial support for exports (i.e., offering finance at low rates) is pro-

vided in two different ways:

Direct loans. Some countries, such as the United States, Canada, and Japan,

have Export–Import Banks that can lend directly to the Project Company in a

similar wayto a private-sector commercial bank, but at lowfixed interest rates.

Interest rate subsidies. Other countries, such as France (COFACE), Italy

(SACE), and the United Kingdom (ECGD), rely on the commercial banking

market to fund export credits, but provide an interest rate subsidy. In effect,

the ECA enters into an interest rate swap agreement with the commercial

banks (cf. §9.2.1), enabling them to provide the Project Company with a low

fixed rate of interest. (In some countries the interest rate support is provided

by a different body than the provider of the export credit insurance—

cf. §11.5.)

Similarly, ECA credit support for exports (i.e., assumption of political and

other risks) is also provided in two different ways:

Direct loans. If the ECA provides a direct loan it takes the whole credit risk of

the project on to its own books, although in some cases a commercial bank

guarantee is needed (e.g., for the completion risk).

Credit insurance. Other ECAs insure or guarantee loans made by private-

sector banks (i.e., provide full cover) or specific risks under the loans, such

as political risks (i.e., provide political risk cover). ECA-covered loans are

attractive to commercial banks because their banking regulatory authorities

normally allow them to allocate less of their own capital to support such

loans.

In most cases where the ECAs insure loans, an insurance payment is trig-

gered only if the covered risks lead to a default in payment by the Project

Company (i.e., these are payment guarantees not performance guarantees).

Many ECAs do not then repay the commercial banks’ loan immediately, but

only according to its original repayment schedule (with interest).

Some countries, such as the United Kingdom, are now advocating abolition of

financial support (i.e., low-rate loans or subsidized interest rates) for exports, with

the aim of restricting ECAs to providing “pure cover” (i.e., credit insurance for ex-

ports, but with finance at market interest rates).

220 Chapter 11 Political Risk Guarantees, Insurance, and Finance