1. The 4G Programme offers substantial new financing opportunities across a broad range of sectors and for a broad range of players. What is the scale of the opportunity for ECAs and what sectors or projects do you see as the main drivers for EDC’s participation?
The 4G programme could be considered the biggest milestone in the history of Colombia’s infrastructure sector. It has attracted the attention of a broad range of actors, including commercial lenders, debt funds and multilaterals. ECAs, however, are an additional and important source of funding that have not yet been tapped and should be explored further given both the scale of the 4G program and the number of projects that have still to reach financial close. In the case of EDC, we are very familiar with the 4G contract and have looked at a few projects that at some point were being considered by Canadian sponsors. However, to date there is no significant Canadian participation that would allow us to play a role in the financing of these projects.
Beyond 4G, other sectors where we see interesting opportunities include the development of social infrastructure projects on a PPP basis (schools, hospital, etc), which could benefit from the lessons learned in the 4G program. The power sector, particularly non-conventional renewables, is also a sector with great potential that may draw further attention from international players once some adjustments to the current regulatory framework are introduced. These are sectors where Canada has strong capabilities and EDC has the appetite to participate.
2. What are some of the core criteria that make a project bankable for EDC?
As Canada’s ECA, we must first be satisfied that our participation will directly or indirectly benefit Canada and that we are fulfilling our mandate. This can take different forms, for example: the supply of goods and/or services from Canadian companies or local subsidiaries or equity contributed by Canadian companies or investors. We may also provide financing to projects for strategic reasons where there is no Canadian content at present but the project sponsor is willing to consider Canadian suppliers.
Once the mandate piece is satisfied, our criteria are similar to that of any other bank. We will look for predictable cashflows that will produce adequate debt service coverage ratios over the life of the loan, capable counterparties that can develop, build and operate the project including strong sponsors with “skin in the game” (i.e. adequate leverage), a solid contractual structure and stable legal and business environment, among others. Importantly, we will also ensure that the project fulfills EDC’s internal policies in regards to CSR and environmental standards.
3. With the low yield environment globally, we’ve heard more about new lenders or investors looking to take on Andean risk. To what extent are you seeing a broader range of investors and lenders joining 4G-related deals? Has there been any realignment in terms of the stakeholders engaging EDC or jointly participating with deals?
As previously mentioned, the 4G program has attracted the attention of a broad range of lenders. In addition to local banks, some international banks, multilaterals and debt funds have also issued financing commitments. As projects from the first wave begin construction and some of the initial doubts about the program are dissipated, new lenders are also seeking to join 4G deals at the syndication stage. Similarly, there have been developments on the equity side with new infrastructure funds investing in some projects.
We have also seen increasing interest from Canadian institutional investors exploring opportunities to acquire equity stakes in 4G projects. Some of these opportunities may materialize as sponsors look for alternatives to reduce their significant equity commitments and re-deploy capital. EDC will be prepared to consider support to these deals.
4. Following the elections in Peru, many seem optimistic about the government both unclogging the current infrastructure pipeline and creating new opportunities in infrastructure finance. What are your views on the opportunity landscape there following this year’s elections? Is EDC spotting new opportunities there?
Historically, Peru has enjoyed one of the most active PPP markets in Latin America, but the sector has lost momentum in the last couple of years as some landmark projects have failed to achieve financial close. In our view, however, Peru remains one of the top destinations for infrastructure investment in the Americas. The new government is sending the right signals to reactivate the sector including the announcement of a series of decrees aimed at accelerating infrastructure investment, the creation of an infrastructure fund, and the unblocking of $18.8 billion in PPP’s that had been stalled because of red tape or other problems.
The government’s plan to revamp ProInversión and model it after similar agencies in developed PPP jurisdictions will also contribute to attracting further private sector investment. In this regard, EDC has been working with ProInversión to establish technical cooperation mechanisms with Canadian infrastructure agencies such as Infrastructure Ontario and Partnerships British Columbia. Canada is already one of the largest investors in Peru with over USD 8 billion in FDI. Some of the largest Canadian institutional investors are already present in the market in sectors such as gas transportation, toll roads and irrigation. We are bullish about the Peruvian infrastructure sector and expect to see more Canadian activity in the future.
5. What do you think will be the single most important challenge for the Andean economies in 2017?
Given that Andean economies are heavily dependent on commodities, a common challenge will be how to achieve economic growth in a low commodity price environment and successfully adopt the measures required to address the fiscal deficits that governments face. Even if commodity prices start showing signs of recovery in 2017, this will be a gradual process and won’t be enough to compensate budget gaps in the short term. Hence, economic growth derived from other sectors such as infrastructure and the successful implementation of tax reforms will contribute to the financial health of the Andean economies for the coming years. In regard to the former, most Andean countries are investing significant resources to develop ambitious infrastructure programs which are expected to drive growth. Consequently, an additional challenge for these governments is the implementation of stable regulatory frameworks, or the adjustment of existing frameworks, to attract local and international players.
The new international political landscape can’t be ignored either. News coming out of the UK and the US and increasingly unpredictable events, may also have an impact on Latin America given the region’s strong economic ties particularly with the US.