A New Approach to Infrastructure Finance June 2004 – Washington, DC John Graham, Investment Officer Private Sector Department, IDB

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

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

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

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

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

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

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 Guarantor Project Finance Magazine – Latin American Transport Deal of the Year 2002 Project Finance International – LATAM Deal of the Year 2002 Co-Guarantor

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

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

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

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

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

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

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

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

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