INTER-AMERICAN DEVELOPMENT BANK Private Sector Department Financing Private Investment

1. INTER-AMERICAN DEVELOPMENT BANK Private Sector Department Financing Private Investment in Infrastructure in Latin America and the Caribbean July 2004 Natacha C. Marzolf

2. Private Sector Department (PRI) • An Operational Window to finance private participation in infrastructure investments without government guarantees. • Began Operations in 1/1/95 • Debt (versus equity) focus • Limited recourse (project finance) or corporate finance basis. • Catalytic role: each $1 of IDB financing mobilizes almost $6 of overall investment. Up to date, IDB has supported investments of over US$12 billion.

3. Eligible Sectors for PRI financing • Energy • Transportation • Water and sanitation • Communications • Capital markets • Health and Education

4. Eligibility of Projects • At least 50% private participation • Greenfield, capital expansion or rehabilitation. Typically large projects (> US$40 M) • Technical, financial, economic and environmental viability • Positive developmental impact (additionality) • PRI supports private companies that engage in the provision of public services.

5. PRI Products • Lending • A-Loans • B-Loans • Guarantees • Political Risk Guarantees • Credit Guarantees • Trade Finance Facilities (mandate expired 02- 05)

6. Financial Instruments - Loans • A-Loans (IDB’s own resources) • US$ 75 million or 25% of total project cost (40% in smaller economies) • Long-term financing (up to 20 years) • Pricing: Market pricing based on B-loans • B - Loans (market participation) • Cofinancing with banks & institutional investors through sale of participations • IDB is lead lender and lender of record • Typically work with Arranger/Placement Agent • Commercial banks and institutional investors may participate • IDB “umbrella”.

7. Examples of Energy Projects in Brazil financed through A/B Loans • Termopernambuco: comprises the development, operation and maintenance of a natural gas fired, combined-cycle power generation facility with a total capacity of 520-MW, in the State of Pernambuco, Brazil. • The project was the first private thermal project in Brazil selling all of its power to a private offtaker and to the market. • Sponsors: Celpe and Guaraniana • Project Costs: US$ 404 million approximately. • A-Loan: US$42 million. • B-Loan: US$150 million. • BNDES: US$ 90 million.

8. Example of Health and Education Project currently being structured through an A/B Loan: Ulbra University and Hospital Project (Brazil) • Capex includes: (i) university hospital and research center construction, and (ii) education facilities construction such as campus, library and conference center. • One of the largest private university in Brazil with headquarters in the state of Rio Grande do Sul. • Sector eligibility: (i) private sector status; (ii) infrastructure construction, and (iii) religious-based considerations and non-profit status do not preclude eligibility. • Project currently in the due diligence process with expected Board presentation late 2004/early 2005. • PRI is actively seeking opportunities to finance more projects in the health and education sector in Latin America and the Caribbean.

9. Financial Instruments - Guarantees (I) • Political Risk Guarantees • Cover political and sovereign risks • Up to 50% of project costs or $150 million maximum • Convertibility & transferability risk: covers the specific risk of non-payment of debt service to the guaranteed lender exclusively due to the inability of the borrower to convert local currency into foreign exchange and/or effect its remittance outside the host country. This coverage does not include losses due to devaluation. • Breach of contract risks: coverage to debt financing for risks of selected contractual undertakings by host country governments in project agreements with private investors.

10. Financial Instruments - Guarantees (II) • Credit Risk Guarantees • All-risk coverage for a portion of market financing • up to 25% or 40% of total project costs or $75 million • usually for capital markets or other borrowings in domestic Latin American markets • Flexible instrument –comprehensive, rolling, selected tenors, local currency US$ • IDB guarantee enhances underlying credit profile of debt issue

11. Examples of Energy Projects Supported by Political Risk Guarantees • Convertibility + Transferability: • VBC Distribution Companies (CPFL + RGE): convertibility and transferability guarantee covering a portion (US$100 million) of a syndicated loan for the financing of the company’s capital expenditure program. The loan formed part of the financing of the expansion of the distribution networks of VBC’s subsidiary companies. • Light Distribution Company: convertibility and transferability guarantee covering a portion (US$100MM) of a syndicated loan for the financing of the company’s plan to expand and upgrade itselectricity distribution network in Rio de Janeiro.

12. Examples of Projects supported by Credit Risk Guarantees Santiago-Valparaíso-Viña del Mar Toll Road: The project consists of the engineering, construction, upgrading, operation and maintenance of a toll road, between Santiago and Viña del Mar, in Chile. The project raised long-term domestic financing (US$459 million) through the issuance of a local currency bond. The IDB guaranteed principal and interest payments for up to US$75 million. The Bank issued a financial guarantee that allowed the issuance to be rated investment grade, as required by the local private bondholders (i.e. pension funds and insurance companies).

13. Transaction Cycle Approval Process, financial closing and after: • Eligibility and mandate • Due diligence and environmental review • Credit committee • Negotiate terms and conditions • Board of Executive Directors • Complete syndication • Financial closing and disbursement • Ongoing administration

14. Consulting Opportunities with PRI Due Diligence Areas: • Technical • Market • Economic • Environmental and Social • Financial • Legal Due Diligence Process: • RFPs • Proposal Evaluation • Consultants selection • Consultant Services Agreement

15. Distribution by sector as of December 31, 2003

16. Approved Project Portfolio1995-2003

17. Closed A-Loans and Guarantees by Country