Foreign Financing for Coastal Infrastructure in Developing Countries

Foreign Financing for Coastal Infrastructure in Developing Countries

Ginsel, D.

Civil Engineering and Geosciences

Hydraulic Engineering

2004-01-01

While foreign investments in developing countries are declining each year, the need for help and funding grows steadily. In the coastal zone the effects of over-population, pollution and changes in climate are becoming ever clearer. This requires a suitable policy to tackle the increasing number of problems and provide the coast with the necessary infrastructure for development. These works call for large sums of money, which the developing countries often do not have at their disposal. An alternative approach is necessary to increase the financial means available for coastal infrastructure and policy. Project financing is a suitable way of arranging financing between multiple financiers when the project generates revenues. For project finance a separate company is founded which manages the projects finances. The most important roles for financiers in project financing are lender and sponsor. They invest in the project based on future cash flows with the projects assets as collateral. This type of financing is non-recourse, stating that no recourse from sponsors or government is possible at default. This increases the risks for participants and also the arrangements costs. The available international financing sources are divided in three categories: Bilateral institutes, multilateral organisations and private investors. The criteria found to be of most importance for the financing decision of the party are development goal realisation and economic feasibility for multilateral and (often with addition of off-take obligation) bilateral institutes. Private financiers determine their investment decision mostly on a return on investment as high as possible compared to the risk of financing, together called the commercial attractiveness. Other criteria researched are: financial feasibility; inter party agreement; environmental sustainability and country risk. Taking two examples, the actual arrangements in financing is examined as well as the working of the cash flow model to execute project feasibility studies. For the Cartagena Tidal inlet project in Colombia is found that the FMO grants mostly because of development goals and Dutch export incentive. Environmental protection is also and important issue. For the Maputo Port concession in Mozambique the estimated returns for sponsors are high enough to explain their interest in the project without even considering secondary benefits. The lenders have a much lower rate of return on this project, especially compared to the estimated risk adjusted required return. This poses some questions about the risk modelling. It can be concluded that the involvement of development institutes can bring down perceived risks and thereby limit the cost of financing. Regarding the policies of financiers and the examples examined, the criteria and how their fulfilment is assessed by financiers, provides a handhold for developing country's policies. Addressing the criteria of development finance institutes is best done by striving for development goals fulfilment and economic development. Environmental aspects are also very important, while the eligibility for development financing is of hardly any influence for the government. Private financiers can best be attracted by limiting risks through government involvement in the financing or development finance participation and by improving profitability for financiers by tax incentives or subsidies. Contractors have the option to advice on financing, arrange financing with other parties or participate in financing. Lately, the latter option is demanded more often requiring the contractors to invest in a project as sponsor. This investment should be compared to the additional benefits of goodwill and surety of work. The financial risks need to be assessed properly and a partnership with a financial party would be beneficial. Optimally, if demands for participations keep growing, a standard financial partnership for multiple projects could be beneficial. In South Africa development assistance is hardly given anymore because of the average welfare. Some funds are available for small local initiatives or particular environmental issues, other than infrastructure. Within the scope of this research, private financing would have to be addressed if foreign financing is required. South Africa has understood this and promoted foreign investment by tax relief programmes, and investments assistance. What could still be improved is the allocation of needed projects to prosperous development opportunities. Especially tourism and transport seem attractive developments to co-finance coastal infrastructure. In general the advice to developing countries is: 1.To aim at grants for financing first, second soft loans, third commercial loans and fourth commercial investments, because of the costs of capital. Secondary benefits like import of knowledge and efficiency can make the fourth option more attractive. 2.Developing countries' governments can best attract bilateral foreign finance by creating political relations and address development goals. 3.Developing countries can best attract multilateral finance by aiming at development goals like spread of welfare and economic development. 4.Developing countries can best attract commercial financiers by limiting the perceived risk by financiers and provide tax incentives for higher returns. 5.Also demanding sponsorship from contractors or operators or an export credit is a possibility. 6.Even though a country may not be entitled to receive development assistance, the involvement of a development financing institution is helpful in reducing perceived risks by investors.

investment
project financing

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Student theses

master thesis

(c) 2004 Ginsel, D.