OBG talks to Mauricio Toledano, CEO, Eurofinsa

Interview: Mauricio Toledano

What are the constraints in financing large infrastructure projects in emerging markets?

MAURICIO TOLEDANO: There should be no constraints when financing large infrastructure projects in emerging markets, as long as those countries are not under IMF strictures. However, budgetary considerations generally force operators to seek innovative solutions, which requires time and the involvement of many parties such as consortia of banks, export credit agencies and government ministries. Therefore, pricing is the function of financing costs and the perception of risks, including, but not limited to, the payment record of a client, bureaucracy and local logistical conditions.

How can high operating costs be reduced for projects in emerging markets?

TOLEDANO: Lending rates are based solely on risk. Nowadays the price of infrastructure deals is based on the sovereign bond rates of the issuing country, plus a premium, depending on the complexity of the deal. High import tariffs for equipment are generally mitigated by temporary Customs exemptions that cover the execution time of the project. However, in international markets the rule of thumb is having a level playing field. In this regard, the rules should be the same for everyone. If everybody pays the same Customs tariffs this is not considered an issue.

What are the main challenges when working with public-private partnerships (PPPs) in Central Africa?

TOLEDANO: The challenges of working with PPPs can be divided into four main categories: payment, legal security, local regulations and political constraints.

Concerning payments, if the off-taker of the final product is a government entity, then the project's bankability is subject to that government's payment record on local debt. Unfortunately, those records are generally poor, and private insurance does not cover the tenors needed to repay the investment. We believe the Multilateral Investment Guarantee Agency (MIGA) and the African Development Bank (ADB) could provide a comprehensive insurance scheme for non-payment of local governments. This would immediately enhance the quality of the investment and, thus, facilitate access to competitive financing and risk-takers such as funds or operators willing to invest in PPPs.

Legal security is seen as a main obstacle to any project. Legal systems in many countries, not only in the developing world, are considered slow and inefficient. We would push for all major PPPs to be subject to International Chamber of Commerce supervision and dispute resolution mechanisms. However, this would involve devolution of sovereignty and major legal changes. In terms of local regulations, most PPP projects in developing countries face a myriad of outdated or non-existent laws dealing with repatriation of profits, taxation, permits, environmental issues, local community involvement or treaties with neighbouring countries. A concerted effort should be made by those countries interested in receiving PPP investments to standardise and modernise their applicable legislation. Again the World Bank and the ADB could provide a source of funding for such a framework.

Finally, as PPPs involve essential public services, they are subject to worldwide political vagaries. This is the most challenging problem. Governments need to be taken on board to weigh the benefits and risks involved in PPPs for essential public services. Operators, in turn, need to be transparent in their pricing structures.

To what extent are sovereign liquidity and solvency issues a concern for publicly funded projects?

TOLEDANO: Sovereign liquidity and solvency are crucial in any deal requiring financing or payment by a government in Africa or elsewhere. Non-payment or expropriation insurance is generally available via the export credit agencies, the World Bank and even private political risk insurers. The main concern is the price of the insurance premium and the tenor of the deal, as insurers may not wish to cover a long risk period.