1. Growing risk aversion in emerging markets and the need for risk mitigation Workshop on Tools for Risk Mitigation in Small-scale Clean Infrastructure Projects November 19, 2003 Infrastructure Financing

2. 2 Drop in private financing of infrastructure is affecting all developing countries… 0 10 20 30 40 50 60 70 80 1990199119921993199419951996199719981999200020012002 US$ billions Low Lower middle Upper middle Source: PPI Database, World Bank Asian Financial Crisis Tech Bubble Collapse Russian Financial Crisis Argentina Financial Crisis Enron Crisis

3. 3 … in all sectors Source: PPI Database, World Bank

4. 4 Risk aversion in the market has increased … Environment for financing emerging market private infrastructure has become increasingly challenging 9/11 Corporate Bankruptcies Argentina crisis Unstable global political situation Reduced availability of private Political Risk Insurance Reduced number of strategic investors Reconsideration of portfolios in emerging markets

5. 5 Global economic conditions are dampening appetite and capacity Banks capital has eroded Credit decline widespread both in developed and in emerging markets Increasing number of ratings downgrades Infrastructure debt rating in Latin America dropped into default Collapse of tenors and favorable lending terms Limited private sector interest in infrastructure projects

6. 6 Signs of investors withdrawal - stalled projects, failed privatizations Average number of bidders power projects: 4 in 1998 down to 2 (LAC) Failures of power privatizations: Senegal, Georgia, Mauritania, Ukraine, PNG, Ecuador Failures of privatizations in other sectors Telecom in Czech Republic, airport in Algeria

7. 7 Enron Energy BBB+/StableD NRG Energy Inc. Energy BBB-/StableD Reliant Energy Power. Energy BBB+/StableB/Neg. Endesa Energy A+/Neg.A/Neg. CMS Energy Energy BB/StableBB/Neg. ABB Energy AA+/Neg.BB+/Positive AES Corp. EnergyBB/PositiveB+/Neg. Cogentrix Energy Corp Energy BB+/StableBB/Watch Neg. Edison Mission Energy Energy BBB-/StableB/Watch Neg. El Paso Corp. Gas BBB+/StableB+/Neg. Millcom International Telecom B+/StableD Developer SectorS&P Rating S&P Rating August 2001 November 2003 Many investors involved in emerging countries have been downgraded

8. 8 Project debt ratings downgrades increased in 2003 Source: Standard & Poor’s

9. 9 US utilities worse than before … Source: Standard & Poor’s

10. 10 Corporate Water companies investing in emerging countries are severely penalized …

11. 11 While emerging market sovereign debt issuance has increased … 0 Mutual Fund Flows (4-week moving average) Mutual Fund Flows (4-week moving average) EMBIG versus High Yield Spread Evolution (bps) Total Returns (%) EM Monthly Debt Issuance (US$ billion) 0 5 10 15 20 JanFebMarAprMayJunJulAugSepOctNovDec 0 20 40 60 80 100 Average 1998-20022003 YTD Source -JPMorgan

12. 12 … and emerging market spreads are declining …

13. 13 Equity indexes are recovering …

14. 14 Emerging trend in the global market is that … Credit to projects declining while sovereign debt increasing Traditional investor appetite/capacity has changed significantly and for the worse Political, regulatory, and project risk matters more than ever The supply of “easily” bankable projects is diminishing … new approaches to project finance, risk mitigation and International Financial Institution support are needed

15. 15 Which conditions are important? Legal Protection of Investors' Rights Minor 2.98 2.91 2.83 2.68 2.66 2.49 2.43 2.00 3.57 3.11 Major Critical “Deal-breaker” 63% Legal Protection of Investors 36% Consumer Payment Discipline 40% Government/Multilateral Guarantee 13% Government Efficiency 15% Judiciary's Independence 19% Clear Rules for Exit 19% Investment Grade Debt Rating 8% Transition to Competitive Market 10% Corruption Index Ranking 4% Domestic Borrowing 4% Competitive Selection 13% Possibility of Vertical Integration Rated “Dealbreaker”

16. 16 Legal protection and framework defining investor rights 63% of firms rated it a “deal-breaker” “Contract enforceability” “Clarity in market rules” [Brazil , Guatemala  ] “Protection ‘to do business’ – labor laws, property rights; laws that work” “Enforceable exit strategy” Payment discipline and enforcement 36% of firms rated it a “deal-breaker” Both generation and distribution investors considered it important “We cannot fix it on our own” – government support essential “Worsening payment discipline – strong negative” Guarantee from Government or Multilateral 40% of firms rated it a “deal-breaker” “Support needed till the business becomes commercial” “Why should we take on the risk of a bankrupt business?” Interestingly not a determinant for success – mitigation is not an incentive for default or mismanagement by government or sponsor Top three concerns affecting investment

17. 17 Source: DeloitteTouche Tohmatsu 0.0 20.0 40.0 60.0 80.0 100.0 120.0 140.0 160.0 1990199219941996199820002002200420062008201020122014201620182020 Cumulative Sum ($Bn) $2,300Bn $1,900Bn High Investment Demand Scenario (3%) Low Investment Demand Scenario (2%) HistoricFuture Private Capital Mobilized in Power Sector Gap covered by public financing, self-financing, donor funding, and rationing. Total Power Investment ($Billion) Source: DeloitteTouche Tohmatsu Investment needs still remain… Financing required for the Power Sector in Emerging Markets 1990 - 2020

18. 18 Private capital can be attracted even to the least developed countries … With risk mitigation through… PRI Bilateral institutions e.g. ECAs Multilateral Risk mitigation instruments can reduce risks that would discourage or otherwise make borrowing for/or investing in developing countries’ projects unfeasible by… Enhancing credit worthiness Improving lending terms Encouraging risk sharing Providing additional leverage with the government

19. 19 World Bank Guarantees can help… Risk mitigation for Government performance No cover for commercial risk Specificities: IBRD/IDA balance sheet Counterguarantee Cross defaults Two types of guarantees: Partial risk guarantees Partial credit guarantees Help to catalyze debt with extended maturities and lower financing costs

20. 20 Partial risk guarantees help access private finance at sustainable terms Debt MaturityInterest Spread Vietnam (P. Risk) 5% 2% 5 16 with Guarantee without Guarantee Cote d’Ivoire (P. Risk) 1 12 3% 2.75% Uganda (P. Risk) 0 16 3.1% 8% 1 Bangladesh (P. Risk) 3% 2% 14

21. 21 Each dollar of guarantee catalyzes close to 5 dollars of private finance

22. 22 Private Participation and Finance Department The World Bank 1818 H Street, NW Washington, DC 20433 (USA) or visit our web site: www.worldbank.org/guarantees For further information contact: Mr. Suman Babbar Acting Director Ph: +1 (202) 473-2029 Fax: +1 (202) 522-0761 Email: Sbabbar@worldbank.org