Mending project finance

Global Finance, May 2003 by Johnson, Mark

In fact, players are mixing public and private capital much more vigorously in an attempt to unblock choke-points in capital flows to emerging markets. When Digitel, Venezuela's leading GSM cellphone operator, wanted to borrow $500 million in 2001, its 70% owner Telecom Italia Mobile had hoped phone set makers including Siemens would provide vendor financing. But gathering political storm clouds made that unattractive; instead TIM anted up $230 million of the cash when the deal closed in September 2002. That was made easier by a guaranty from SACE, the first time the Italian export credit agency had wrapped equity in this way.

That growing nexus between public and private is being strengthened in other ways. In April, Zurich North America said it was teaming up with the African Trade Insurance Agency to provide political risk cover in emerging markets, including infrastructure developments. Nairobi-based ATI is the only multilateral export credit agency on the continent, and CEO Bernard de Haldevang says the new operation will provide an important link to the mature capital markets of the developing "world.

That's important, but bankers have known for some time that the old financing model-where international banks advanced hard-currency loans to projects with domestic-currency cashflows-needed a rethink. Post-devaluation defaults in Argentina have rammed home the lessons of the 1998 Asian crisis on the dangers of currency mismatches in project financing.

"We've focused more on local-currency deals," says Citigroup's Beale. With revenue streams denominated in local currency, toll roads, power plants and telecom projects all make natural targets for local currency funding. Where local banks have enough cash, the sums raised can be substantial. Beale points to the $661 million equivalent stumped up by Chinese lenders towards the $1.5 billion financing for nine ethylene crackers at the Integrated Petrochemical Site in Nanjing, China. No one claims it's easy to find local investors in many emerging market countries-and hefty local interest rates can also be a turn-off. But the growing importance of local currency financing is just one facet of the changing face of project finance.