This document summarizes the information requested by the Executive Committee of the Western Hemisphere Transport Initiative (WHTI) during its June 20, 2000 meeting held in Mexico City in relation with best practices and innovative mechanisms for financing the development, enhancement and maintenance of transportation infrastructure.

The rest of the document is developed as follows. First, the major IDB´s role, operational policies, guidelines and strategies for transportation financing are presented. Secondly, it is enclosed an annotated list of papers on sound practices, case studies and policy in the field of transportation and infrastructure produced by the Social Programs and Sustainable Development Department (SDS) of the Bank. The list is by no means exhaustive. Further information about transportation policy, new financing mechanisms and additional papers can be found in our site:

(http://www.iadb.org).

In the past, the IDB supplied funds for infrastructure mainly through the public sector. This emphasis has changed in the past few years to give way to private participation in infrastructure (PPI). The mechanisms of governance, regulatory rules, and contract design and enforcement of individual countries need to be enhanced at the same time of letting PPI enter into operations. Countries must complete, consolidate and deepen the reforms in a context of increased economic integration. This in turn requires the search of further regulatory harmonization among countries.

In the new context, the IDB Group has established the Inter-American Investment Corporation (IIC), the Multilateral Investment Fund (MIF) and the Private Sector Department (PRI) to promote PPI.

IIC is established to promote and support the development of the private sector and the capital markets in its Latin American and Caribbean member countries by investing, lending, innovating, and leveraging resources as the IDB Group institution charged with fostering the development of small and medium-size enterprises to further sustainable economic development.

The Multilateral Investment Fund (MIF) was established in 1993 to accelerate private sector development and help improve the climate for investment in Latin America and the Caribbean. The MIF has received contributions from 28 countries, for a total of US$ 1.3 billion. 26 Latin American and Caribbean countries (plus the eastern Caribbean nations through the Caribbean Development Bank) are currently eligible for MIF support. Over the past six years, the MIF has approved 306 projects and two Lines of Activity, with a total financing of US$977.7 million and a MIF contribution of US$545.6 million. Over half of these resources are targeted to the less developed countries of the region.

The MIF seeks to demonstrate innovative approaches that will make markets work better, with particular attention to the issues affecting micro and small firms not addressed by early stage reforms. Helping to build the intellectual infrastructure needed for long term private sector growth, MIF projects focus on sustainable actions that will both accelerate an consolidate reforms.

In general, MIF projects should have the following characteristics:

Innovation: MIF will only finance programs that demonstrate effective new approaches to privatesector development, in terms of impact and/or financing mechanisms.

Sustainability:Beneficiaries should demonstrate a credible plan for financial sustainability of projects once MIF resources are expended.

Demonstration effect: Activities financed should be replicable in other sectors and other beneficiary countries.

Concentration on private sector and small and micro businesses: Activities financed should clearly advance private sector development in the region, with a focus on smaller enterprises.

Partnership: MIF projects are always done in partnership. MIF requires a minimum co-financing of 30% of project costs from its counterparts, half of this co-financing being in monetary contributions. Average co-financing for 1999 was 51%.

MIF addresses regulatory reform and, in some cases, privatization issues to facilitate PPI through its technical cooperation window (Window 1). MIF has also established a "fast-track" project approval system for the support of concessions (The MIF Line of Activity for Concessions.) Financing is available for the procurement of legal, financial and technical experts to support government efforts.

While the majority of projects in transportation supported concession systems, the MIF has backed other projects like the privatization of airports in Jamaica, and is considering the support for the strengthening of the Institutions and Regulatory Framework in the Aviation Sector in Central America.

As the private sector becomes more involved in areas previously held by the public sector (particularly in infrastructure) there is a need for long-term finance for private-sector operations. To help meet this need, the IDB established in 1994 the Private Sector Department (PRI), a specialized operational department within the Bank, to provide long-term financing and guarantees for private infrastructure projects in the region.

The Bank can lend directly to the private sector without government guarantees for infrastructure projects, whether greenfield or refurbishing operations, as a means to encourage other investors and lenders to participate in transportation (among other sectors.) The Bank's participation in a single project is limited to $75 million or 25 percent of the project's total cost, whichever is lower. Though pricing follows commercial terms, these loans can have up to 20-year maturities.

Unlike IDB projects in the public sector, investors do not have to be from member countries of the Bank, although more than 50 percent of the shares must be held by investors from member countries. There is no requirement that there be majority ownership by local investors.

Infrastructure projects often involve government entities, whether they be regulators or suppliers of inputs or purchasers of outputs. These contractual undertakings are often determining factors in whether equity investors and lenders participate in an operation. The new guarantee program of the Bank is designed to address these risk factors. Both public and private projects are eligible for IDB guarantees, which are provided to lenders (not to equity holders). The Bank has established two guarantee structures, namely, partial risk guarantees and partial credit guarantees.

Partial risk guarantees may cover up to 100 percent of a loan for specific political risks, such as sovereign contractual obligations or transferability. These guarantees require a government counter-guarantee. Partial credit guarantees may cover a portion of financing provided by private financiers. The Bank's guarantees turn medium-term finance into a longer-term arrangement. This can be achieved through guarantees for longer maturities, liquidity guarantees in the form of put options and take-out financing or by rolling guarantees that cover a fixed number of scheduled payments. Up to 50 percent of a loan can be guaranteed, with or without a government counter-guarantee. Projects with IDB guarantees may be carried out in conjunction with an IDB loan or stand- alone. Project sponsors are not required to be from member countries of the Bank; however, the project company must be incorporated in the country where the operation is being carried out (in one of the Bank's 26 borrowing countries).

The Bank may finance projects for transportation by land, river, air, sea or pipeline. However, due to the limited resources assigned by the Bank to the transportation sector, the Bank's participation in large transport projects primarily may be catalytic in nature so as to encourage more massive financial assistance from other sources and to provide financing in those areas where other resources are less likely to be available.

The Bank's policy will cover financing of loans and technical cooperation for:

a) collaboration in the institutional strengthening of the transportation sector in the member countries, including training and manpower development;

b) the organization, rationalization and/or improvement of transportation services for the movement of passengers and freight to and from the various human settlements, production centers and consumption centers;

c) maintenance, rehabilitation and expansion of existing infrastructure with a view to the utilization, in the best possible way, of those modes of transport that will best support the economic development process of the Bank's member countries as well as new transportation projects necessary for the process of socioeconomic development; and

d) support for the transportation industry (this will be coordinated, whenever applicable with the Industrial Development policy, OP-722).

For all modes of transportation the Bank may finance the purchase of materials, equipment and vehicle needs that enhance construction of transportation projects and the Bank may also finance other materials and equipment that clearly complement physical infrastructure such as: cranes and loaders for freight stations, ports and airports, navigation aids and other equipment for the operation of land, air and maritime terminals with greater security and efficiency for the movement of passengers and freight.

Purchase of rolling stock or traction vehicles, aircraft or watercraft may be financed by the Bank to meet particular developmental needs. Developmental needs may be identified, for example, in the following areas: the overall rationalization of a public transportation system and regional integration projects. Provision of Bank financing for these items would take into account the availability of private sources of financing, which, in the opinion of the Bank, are reasonable for the borrower.

In addition, when the acquisition of such items is programmed within the context of agricultural, industrial, mining, energy or other such projects, the Bank will consider financing within the framework of the corresponding sectoral policy.

2. SUBSECTORS. In view of the great complexity of the transportation sector and the different stages found in each of the developing member countries, this policy does not establish priorities, this policy does not establish priorities among the different subsectors (road, railway, water transportation, etc.). The priorities may differ in each country according to its particular conditions and special characteristics.

However, in each of the subsectors indicated below the different activities are listed in general order of priority.

a) Road Transportation. The Bank will support the financing of roads, terminals or stations for passengers and freight, and complementary equipment of the physical infrastructure, in any of the various road systems making up the national and international systems of Latin America.

The Bank will place emphasis on: i) institutional strengthening of the subsector; ii) projects to rehabilitate and widen existing highways and roads, as well as projects for the maintenance and protection of road systems; and iii) construction of new projects with special emphasis on rural roads and penetration roads.

b) Railway Transportation. Railway projects considered by the Bank should contemplate:

i. strengthening the institutional capacity of railway enterprises through improvements in their management, administrative and technical systems. In any case the evaluation of such capacity and improvements, if necessary, should precede any investment in construction of infrastructure, in accord with the general policies of the Bank;

ii. rationalization, maintenance, rehabilitation, remodeling and/or extension of systems currently in operation; and

iii. construction of new rail lines, terminals and intermediate stations, and the acquisition of equipment for passenger and cargo-handling service, as well as traffic safety installations, etc.

c) Water Transportation. The Bank may finance infrastructure projects for maritime, lake or river transportation, under the following headings:

i. institutional strengthening of the subsector;

ii. rationalization, maintenance, rehabilitation, reconstruction or expansion of port systems and existing maritime, river or lake infrastructure, including facilities for service and maintenance of ships; and

iii. construction of new ports and new sea, river and lake infrastructure.

d) Air Transportation. In this subsector the Bank may extend financing for:

i. institutional strengthening;

ii. rationalization, maintenance, rehabilitation, remodeling or expansion of existing airports and their aerial navigation and safety systems;

iii. construction and/or expansion of aerial navigation and safety systems; and

iv. construction of new airports and their aerial navigation and safety systems, with preference for local traffic.

e) Transportation by Pipeline. The Bank may finance the construction, rehabilitation, maintenance and extension of pipelines, including the purchase and installation of pipe and necessary equipment.

3. URBAN TRANSPORTATION. Because of the special characteristics of urban transportation, Bank assistance in this field will be considered within the context of the Urban Development Policy (OP-751) and with preference given to integrated urban projects.

In general, the Bank will encourage mass transportation systems to provide better and more facilities to users, rationalize services, encourage the saving of fuel, and minimize pollution. Within the above considerations the Bank may finance: rationalization, construction, remodeling, rehabilitation, expansion and maintenance of streets and urban transport systems, including terminals or stations for passengers and freight and complementary equipment of the physical infrastructure.

4. TECHNICAL ASSISTANCE. The Bank may provide technical cooperation to its developing member countries for the transportation sector, either on a reimbursable or nonreimbursable basis, utilizing all of the Technical Cooperation measures normally employed by the Bank. In the case of this sector, special consideration will be given for Technical Cooperation in institution strengthening (including training of personnel at managerial, technical-operational, and technical-administrative levels), sectoral studies and plans, encouraging regional integration, project preparation and design, including final design, energy use rationalization, analysis of alternate and combined transportation modes, adaptation of intermediate and less capital intensive technologies.

5. MAINTENANCE. The Bank will place emphasis on technical and financial assistance for the improvement of such aspects as programming, planning, administration, operation and execution of the maintenance of the transportation infrastructure and of the transportation systems, in general.

In this regard, the Bank will extend priority support to specific projects for the maintenance and rehabilitation of transportation systems for the purpose of prolonging the useful life and service efficiency of the infrastructure and related materials and equipment. In addition, all Bank loans for the transportation sector will include standard maintenance clauses to assure that the project will be adequately maintained, in accordance with generally accepted technical standards for a period of at least ten years from the date of completion of the works financed with loans from the Bank.

Basic Criteria

In addition to applying the general criteria set forth in the Operations Policies Manual, the Bank will take into account that the programs and projects submitted for its consideration will:

• Preferably be part of short, medium or long term investment plans for financing the transportation sector or its subsectors as well as being integrated with the socioeconomic planning at the national level.
• Have the capacity to provide a speedy and efficient transportation service that makes it possible to link up the different areas each member country and helps to facilitate foreign trade.
• Consider investments that make it possible to combine and complement the various modes of transport that can be efficiently exploited in each member country.
• Contribute to rationalization of the consumption of energy, promoting especially the saving of energy generated with nonrenewable resources. Offer possibilities to promote new socioeconomic benefits for the population.
• Ensure the utilization of appropriate technologies, with emphasis on intensive use of labor and local materials in the execution and maintenance of infrastructure projects.
• Protect the environment through the adoption of measures to eliminate or reduce the negative effects that the project might have and facilitate sustained utilization of the country's natural resources.
• Offer solutions to the problems of those displaced due to execution of transport programs and projects.

By Paulina Beato

The objective of this paper is to analyze some issues and challenges related to private toll road developments in Latin American countries, and explore new schemes to mitigate problems that often appear in road concessions.

By Paulina Beato

This article analyzes the reforms introduced in the "traditional" model of providing port services in Buenos Aires, Montevideo, y Valparaíso.

By Remy Cohen, Xavier Freixas, Robert Sheehy, José A. Trujillo

Concession schemes of the Build-Operate-Transfer (BOT) type for the development of infrastructure projects by the private sector are a means to address the shortage in public resources and the relative inefficiency of the public sector in the provision of certain services. However, such schemes have problems, which are aggravated in the case of emerging economies. The issues presented in this paper as problems affecting BOT mechanisms, and the proposals made based on unbundled schemes, refer to those projects where the required investment is relatively large in relation to the importance of the net cash flows generated by the infrastructure, after maintenance and operating costs. They also refer to projects whose revenues have a high degree of uncertainty. The paper argues that BOT schemes, defined by the concentration of all responsibilities (building, management and financing) in a unique private agent (or a joint venture of private agents) are inefficient in the case of projects with the mentioned characteristics (high relative investment and high uncertainty), and can be challenged on the grounds that the unbundling of these responsibilities is a more efficient alternative.

By Eduardo Engel, Ronald Fisher, Alexander Galetovic

Given the difficulties facing regulators in developing countries, a particularly promising approach for private participation is to auction infrastructure franchises. There are many well-known advantages to be gained from franchising infrastructure projects; unfortunately, there also are a number of important pitfalls that need to be avoided to obtain these advantages. In this paper, the authors argue that most of the pitfalls arise from the fixed duration of the normal franchise contract and propose a new auction mechanism in which the term of the franchise adjusts endogenously to demand. This mechanism, which they call Least Present Value of Revenue (LPVR) auction solves many of the problems that have hindered the use of fixed lower term franchises when privatizing infrastructure projects. First, the franchise holder bears a demand risk and, as a result, users pay lower fees. Second, LPVR auctions reduce the scope for opportunistic behavior, both by the franchise holder (lowballing) and by the government (creeping expropriation). Third, socially desirable changes to the original contract (such as user fees or capacity expansions) can be implemented at low cost.

By Daniel Artana, Fernando Navajas, Santiago Urbiztondo

This paper evaluates a set of contractual adjustments, renegotiations and disputes that have taken place in Argentina since 1991, including the transportation sector. The approach considers different aspects:

• whether the decisions analyzed are inside the initial contract or represent a modification of it (i.e., are outside the initial contract)
• whether they were motivated by unexpected shocks (which were very difficult or even impossible to foresee), by loopholes in the initial contracts (ambiguities) which shouldn't have existed, or just responded to a contractual failure (holdup by one of the parties) to respect the initial contract
• the actors involved in the disputes and "production" of these innovations, i.e., the regulatory agencies, the ministries involved, the legislators, the industry associations and regulated firms, the consumer representatives and advocates, etc.
• how these disputes were resolved
• the solutions, which are evaluated in three dimensions: i) the degree of respect to the letter and spirit of the existing contract; ii) their effect on static and dynamic efficiency (in terms of welfare); and iii) the transfers between users and regulated firms, on the one hand, and among different types of users, on the other hand

By Federico Basañes, Eduardo Saavedra, Raimundo Soto

This paper analyzes a series of post-privatization disputes and renegotiations that have taken place in Chile since the late 1980s in the electricity sector. This sector was chosen because the privatization process was, to a large extent, completed a decade ago, providing enough time to properly evaluate renegotiations and disputes. The paper also assesses how the lessons learned in the reform of electricity were internalized in the design of the regulatory framework for highway concessions.

By the Infrastructure and Financial Markets Division.

This report provides a review of IDB Group activities supporting private participation in infrastructure.

By Antonio Vives

This Directory, the fourth one published, describes some of the most significant infrastructure finance transactions of 1998. It does not attempt to be comprehensive and includes only those deals that have a demonstration effect. As in past issues, even though we include deals from countries in Africa, Asia and Europe, the goal is to present as many cases as possible from Latin America and the Caribbean. The major users of this report are anticipated to be the officers and managers of the Inter-American Development Bank Group (IDB Group), and officers, sponsors and investors in the region. Nevertheless, the Directory is expected to be of help to other bilateral and multilateral institutions and sponsors, developers and financiers of private infrastructure.

The Directory includes all private infrastructure projects financed by the Inter-American Development Bank and the Inter-American Investment Corporation (IIC) during the year, as well as other trend-setting transactions. Project descriptions emphasize their special financial aspects, hoping to stimulate the search for more creative and effective financing structures, and a better understanding of the conditions that make a given financial instrument or structure possible.

This conference was held on June 3, 1997. The conference discussed problems of BOTs schemes for financing infrastructure projects in particular road projects. Problems deriving from sponsor’s opportunistic behavior, traffic risk and foreign exchange risk. The conference discussed other mechanisms for financing large projects with large initial investments. Unbundled mechanisms were analyzed. Two features distinguish these private sector mechanisms from traditional concession. First, financial responsibility and construction and management responsibility may relay on different entities. Second, the financial concession term may not be equal to management concession term.

Based on a series of examples from Latin American and Caribbean countries, the workshop participants discussed and analyzed the problems encountered as well as the solutions chosen during the transition to competition and private participation in public service provision, including transportation. The analysis focused on post-privatization disputes and renegotiations between governments and the private sector, and on the regulations implemented to promote competition.

© 2000 Executive Committee of the Western Hemisphere Transport Initiative, and, Office of Summit Follow-Up, Organization of American States.
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