Inter-American Development Bank

1. A New Approach to Infrastructure Finance June 2004 – Washington, DCJohn Graham, Investment Officer Private Sector Department, IDB

2. Inter-American Development Bank Private Sector Department of the IDB: • Privatizations, Concessions and Corporate Finance • Capital Markets Operations and Trade Finance Products: • Long-term Direct Loans (A Loans) • Syndicated Loan Participations (B Loans) • Credit and Partial Risk Guaranty Program Infrastructure Sectors: • Energy • Transportation • Water and Sanitation • Telecommunications

3. The Latin American Infrastructure Market Challenges: • Growing infrastructure deficit in Latin America and the Caribbean • Poor infrastructure constraining regional competitiveness • Sovereign governments facing severe fiscal constraints • Sovereigns increasingly turning to concessions and privatizations • Project finance lenders taking a more cautious approach • Uncertainty regarding global currency movements • Uncertain interest rate environment Opportunities: • Substantial liquidity in local pension and institutional markets • Governments seeking to tap local savings for infrastructure • Low existing global interest rate environment

4. Limitations on Hard Currency Lending Difficulties with traditional hard-currency financing: • Natural mismatch for projects generating local currency revenues • Dollar-indexed tariffs often commercially and politically unsustainable • Hedging products often unavailable or prohibitively expensive • Political risk insurance (C & T Risks) not designed to hedge devaluation • Difficult experiences in Latin America during the past decade • Less appetite among traditional project finance lenders for such risks

5. IDB: Private Sector Guaranty Program Overview: • Credit enhancements tailored to the unique risk profile of each project • Generating better options in local currency financing • Substantial flexibility in structuring the guaranty Political Risk Guarantees: • Breach of contract • Currency Convertibility & Transferability (C/T) • Other political risks Credit Guarantees: • All-risk credit guarantees (credit wraps) • Maturity guarantees

6. IDB Projects in the Marketplace IDB Guaranty Programs in the Marketplace: Financial Guaranty Programs: • Chile: Costanera Norte Toll Road Project (2003) US$75 million Credit Guaranty • Colombia: Colpatria Mortgage Bond (2002) US$5.2 million Credit Guarantee • Chile: Rutas del Pacífico Toll Road Project (2002) US$75.0 million Credit Guarantee Political Risk Guaranty Programs: • Brasil: Light Electricity Services (2000) US$100.0 million Political Risk Guarantee, Brazil • Dominican Republic: San Pedro de Macorís Energy Project (2000) US$142.0 million Political Risk Guarantee • Brasil: VBC Energía - Electricity Services (1999) US$100.0 million Political Risk Guarantee • Colombia: Río Bogotá Water and Sanitation Project (1997) US$31.3 million Political Risk Guarantee

7. IDB Participation in Chilean Highways Model highway transactions in Chile: • Highway concessions let by the Ministry of Public Works (MOP) • Long-term BOT concessions (over 20 years) • Construction, expansion, improvement and O&M • Investment of over US$400 million

8. Guarantor Rútas del Pacífico - Deal of the Year 2002 Structured Bond Issuance: Rútas del Pacífico S.A. UF 11,424,000 (approximately US$ 300 million) Series A UF 1.424,000 Series B UF 10,000,000 “AAA” Feller Rate “Aaa” Humphreys Co-Guarantor Project Finance Magazine – Latin American Transport Deal of the Year 2002 Project Finance International – LATAM Deal of the Year 2002

9. Guarantor Co-Guarantor Costanera Norte - Deal of the Year 2003 Structured Bond Issuance: Costanera Norte S.A. UF 9.500.000 (approximately US$ 256 million) Series A UF 1.900.000 Series B UF 7.600.000 “AAA” Feller Rate “Aaa” Humphreys Project Finance Magazine – Latin American Transport Deal of the Year 2003 Project Finance International – LATAM Deal of the Year 2003

10. Case Study: Costanera Norte S.A. Project Fundamentals: • Concessionaire led by Impregilo SpA of Italy • 30-year Concession Contract with the Ministry of Public Works (MOP) • Construction and O&M of a 42km system • 7 km of tunnels, 12 bridges, over 30 interchanges • Operation and Maintenance for 30 years • 100% electronic tolling system based on TAG y video • Congestion tolling • Minimum Revenue Guaranty from the MOP

11. Case Study: Costanera Norte S.A. Minimum Revenue Guaranty (MRG): • GOC guarantees a base level of income for 20 years • Concessionaire obligated to share revenues in excess of projections • IDB structures bond amortization based on free cash in MRG scenario • Downside traffic risks allocated to the Government of Chile 50/50 Revenue Sharing Guaranteed Revenue Level

12. Case Study: Costanera Norte S.A. Opportunities in the Chilean Market: • High level of liquidity with local pension funds and insurance companies • Capacity to fund the operations in local currency (Unidad de Fomento) • Long tenors available in excess of 20 years • Institutional investors require risk rating of AA/AAA (local scale) Constraints: • Greenfield toll road projects cannot reach AAA/Aaa rating • Large scale of the project requires project finance approach • Institutional investors unaccustomed to structuring project finance transactions • Construction, O&M, electronic tolling, greenfield traffic risks • Environmentally sensitive project

13. Case Study: Costanera Norte S.A. • Description of the Guaranty: • IDB structures the transaction on a “project finance” basis allocating the risks among the project participants • Acting as “Guarantor of Record,” IDB provides an unconditional and irrevocable “all risk” credit guarantee on the project bonds • Guarantee covers any shortfall of funds to make payment under the bonds • IDB guarantees up to US$75 million while syndicating the remaining risks to a private Co-Guarantor (monoline insurance company) • Credit-enhanced bonds receive the AAA/Aaa rating necessary to achieve placement with local institutional investors

14. Case Study: Costanera Norte S.A. Guaranty Structure for Costanera Norte: Pension Funds / Insurance Companies Assume the credit risk of IDB/Ambac IDB/Ambac Guaranty • IDB as “Guarantor of Record” • “Back to Back” Guaranty with Monoline Full Risk Transfer to the Guarantors Contingent Support Bond Proceeds Coupon Payments US$ Premium Payments

15. Case Study: Costanera Norte S.A. Results of the Issuance • Total Project Cost: UF18.6 million (US$520 million) • Bond Issuance: UF9.5 million (US$256 million) • IDB/Ambac “wrapped bond” rated AAA/Aaa (local and global scale) • Series A: coupon rate 5.0%, 12+ years • Series B: coupon rate 5.5%, 21+ years (lowest bond coupon rate in Chile) • Bond placement 2.5 times over-subscribed

16. Case Study: Costanera Norte S.A. Conclusions on Costanera Norte: • IDB Credit Guaranty permits borrowers to tap local financing sources • Well-adapted to projects charging tariffs and tolls in local currency • Local currency financing offers natural hedge to FX risks • Contributes to long-term viability and sustainability Benefits to Local Capital Markets: • Wrapped-bonds attract highly-capitalized institutional investors • Deepens and broadens local capital market by increasing volume of bonds • Offers AAA-rated portfolio diversification beyond sovereign paper • Allows countries to invest in their own infrastructure development

17. IDB Guaranty Program: Next Steps New areas of interest: • Credit Wraps with other private insurers • Credit Wraps with other Multilateral Agencies (WB, IFC, CAF) • Mezzanine Guarantees • Pool Guarantees • Rolling Guarantees • Maturity Guarantees (Put Option) • Corporate Bond issuances • Future Flows Receivables/Loan receivables • Support for Credit Intermediaries/On-lending