Hans Schulz, vice president for the private sector and non-sovereign guaranteed operations at the Inter-American Development Bank (IDB), speaks to Michael Washburn about the bank’s role in Latin America and the possibilities for developing the resource-rich region.
The Central American Electrical Interconnection System (SIEPAC) and the IDB play a critical role in regional energy integration. Are you satisfied with the current level of integration, or is there still room for improvement here?
SIEPAC has progressed well in recent years. The Central American Regional Electricity Market (MER) and SIEPAC, developed with support from the IDB, recently achieved a number of important milestones, including commercially operating infrastructure, the development of a regional institutional architecture and the implementation of the final MER rules (RMER) as of June 2013. However challenges still exist. Examples of ways to continue to strengthen the Central American system include increasing the number of sales and purchases; developing long-term contracts between countries so that energy can be exchanged to address short-term needs as well as longer term shortfalls and overages; and strengthening the development of transmission rights through continued engagement with the inter-regional regulators and ministerial advisory board.
Broadly speaking, how much success have you had with the PPP (public-private partnership) model, as applied in projects such as road expansion and development in Peru?
Although not under a specific PPP framework, there have been many infrastructure concessions – with PPP features - developed throughout the region since the mid-1990s. Overall, the model has been positive. Peru in particular has been quite effective in the last few years with their PPP model, and we have seen many projects including some under the “private initiative concept” well developed. The IDB supported one of the first regional integration projects known as IRSA Norte, a road connecting Peru and Brazil for which the IDB provided a partial credit guarantee to credit enhance the obligations of the Government of Peru and allow the concessionaire to issue a bond locally. Since then the Peruvian market has become quite familiar with this type of project and risk, reducing the dependence upon support from IDB and other international development finance institutions.
Last month, the IDB made an announcement regarding Chile’s development of two innovative marine energy pilot programs, undertaken with IDB support. How did these programs come about? Were there regulatory obstacles to overcome, or were the programs welcomed from the start?
IDB financed a marine energy resource assessment for Chile in 2009, which estimated that the total technically extractable resource is between 100 and 200 GW. The government then started to take action to develop this type of energy in Chile including securing public grant funding for these two pilots and preparing a public bidding for a marine energy center of excellence amongst others. One thing to keep in mind here is that the energy sector in Chile is 100% privatised and vertically disintegrated, so the regulatory obstacles have to be overcome by the private sector when developing its projects. The government is aware of that and currently working to improve the regulatory framework and facilitate this process for marine energy projects.
Also the IDB program is tied to a Chilean government bid offering public funding to the private sector for two pilot projects. So the winning private sector companies will be responsible for developing the projects including all necessary concessions with the relevant authorities.
Do you see tidal, wave, or other clean technologies being more widely utilised in the region?
Yes, most definitely, because there is huge potential in Latin America and the Caribbean for both wave and tidal energy as well as solar, wind and geothermal energy, which can complement conventional electricity generation by using an indigenous clean energy resource. Furthermore, a number of tidal energy technologies can be adapted for deployment in river systems with the advantages of lower capital cost, higher energy capture and a less challenging operating environment.
In the same announcement, Panama was identified along with Chile as one of the least self-sufficient Latin American countries in terms of energy. They are both heavily dependent on imports. What other countries in the region would you like to see become more self-sufficient, and in what specific sectors?
Reducing the dependence on fossil fuel imports is critical to Central America and, with the exception of Trinidad & Tobago, the Caribbean. A July 2012 World Bank report, “Mitigating Vulnerability to High and Volatile Oil Prices,” revealed that the two sub-regions are significant net oil importers yet receive more than 90% of their energy needs from oil (statistics from the World Bank). The most recent figures estimate oil imports in the Caribbean at $4 billion and in Central America at $13 billion.
The IDB is working hard to fill this gap in Central America, for example, through recent loans, consisting of a sovereign guaranteed and a $200 million A loan without sovereign guarantee to the Reventazon Hydropower Project in Costa Rica. I am happy to say we were able to raise over $600 million in B loans from US-based institutional investors and local banks for this emblematic project, which will provide 10% of Costa Rica’s installed generation capacity.
In the Caribbean, I recently returned from a mission where I saw first hand how it is affected by the high and volatile price of electricity. Most Caribbean countries use diesel and heavy fuel oil for electricity generation and there is a linkage between the difficulty to lift people out of povertyand the reality of paying some of the highest per capita energy costs worldwide. However, I also witnessed opportunities to leverage renewable energy resources, maximise energy efficiency and adapt recent developments in natural gas technology and supply to transform the energy market.
In the Chilean projects mentioned above, the IDB is playing a dual role. It is providing crucial technical assistance, in addition to a monetary grant. Could this portend a new, hybrid role for non-sovereign guaranteed operations?
The IDB has for many years coupled selected non-sovereign guaranteed instruments with technical assistance in order to strengthen the capacity of our clients and maximise the developmental benefits of our projects. Technical assistance may include capacity building, knowledge creation or other project design support for entities across all sectors and company sizes. We can provide between $100,000 and $2 million for projects with an execution period typically up to three years, and counterpart financing is generally required.
Let’s talk about regulatory issues in the region. The IDB has played a crucial role in various types of infrastructure development in Latin America, including roads, airports, and energy infrastructure. Are there certain legal issues or obstacles that come up repeatedly, or does it always vary from country to country?
The issues we face in the region are generally very similar and relate first to a learning curve for the governments to adjust their public work experience into a concession and PPP model which requires different skills and expertise to manage over a long period of time. Legal issues vary depending on the countries in terms of legal security and stability, but overtime they converge. In the last few years several countries have passed specific PPP legal frameworks to provide more comfort and clarity for investors. The latest examples of this include Uruguay, Mexico and Colombia. Colombia, specifically, is interesting to follow as it has recently launched a major road program.
Which countries have regulatory frameworks that are most suited to foreign sponsorship of infrastructure projects?
The IDB seeks to develop tools to better understand regulatory frameworks. For example, the Multilateral Investment Fund recently launched the Infrascope tool, which ranks 19 countries from a PPP perspective based on legal and regulatory frameworks, investment environments and in-depth industry analysis. The tool and methodology were developed in partnership with the Economist Intelligence Unit (EIU) originally in 2009, and they have been revised slightly each year in order to produce a final product that best represents current regulatory frameworks.
Sometimes complaints are heard about the complexity of Brazil’s tax code. Does this ever pose problems for the IDB’s project financing initiatives?
Project financing is based on accurately modeling cash flows, including anticipated taxes. Of course, a really simple tax code is always preferable and reduces transaction costs. However, many countries have developed relatively complex codes. This reality is taken into account by investors when comparing opportunities internationally.
Is there a law in any country in the region that should be modified or repealed?
IDB’s mandate is to contribute to the economic and social development of our 26 borrowing member countries throughout Latin America and the Caribbean. For each project in any country we will assess as part of our due diligence the legal and regulatory framework as it could affect the individual project and our financing, and we will seek to mitigate any risk or impediment that such framework may present.
Roughly what is the division of external/internal legal work for the IDB?
The extent to which external law firms are involved in a transaction depends on a variety of factors, including the complexity and size of the transaction. For a smaller corporate financing, for example, the legal work may be handled primarily in-house with the involvement of external counsel being more limited. By contrast, the involvement of external counsel in a large project financing necessarily will be more extensive.
What do you look for when choosing a law firm to represent you in the region? Do you use both global and local firms, or one or the other?
In selecting law firms, the IDB considers a variety of factors, including in-country, multilateral and sectorial experience, relevant language skills and fee proposals. The IDB almost always engages local counsel for transactions, whereas the hiring of international counsel will depend on the nature and complexity of the project and whether the financing documentation will be subject to local law.
Do you work with a lot of law firms on Latin America projects, or a few?
The IDB has a shortlist of international law firms that represent us in our private sector transactions. We do not have a similar short-list of local law firms but over the years have built an extensive network of local firms that work on our transactions throughout the region.
Do you have a preference with respect to fixed or hourly fee structures?
The IDB uses a variety of fee structures, including fixed and hourly fee structures. When using hourly fee structures, we typically request law firms to present budget estimates based on specific project assumptions.
Briefly, what is the ideal strategy for the growth of the IDB’s Latin America operations over the next couple of years?
The IDB fosters private sector investment as a way to drive sustainable and socially inclusive development throughout the region. Our financing and knowledge products are designed to support market development and mobilise resources into valuable investment opportunities. Our priorities are micro, small and medium enterprises; socially-inclusive sectors, such as health, education, technology solutions, etc., that empower vulnerable and base of the pyramid populations; and sectors that seek to mitigate or adapt to the effects of climate change, including but not limited to sustainable infrastructure, renewable energy and the development and adoption of energy efficiency or cleaner production technologies, specifically in agricultural and manufacturing sectors.
Vice president for the private sector and non-sovereign guaranteed operations
Inter-American Development Bank (IDB)
Hans Schulz is vice president for the private sector and non-sovereign guaranteed operations, a.i., of the IDB. Mr. Schulz continues to be the general manager of the structured and corporate finance department. Under his leadership, the bank has tripled its private sector portfolio, while focusing on climate friendly investments, addressing the financing needs of SMEs and maximising the benefits of investments on people’s lives.