EDC’s Approach to Municipal and

Regional Government Risk: A Central & Eastern Europe Perspective

Lorne Cutler, P.Eng

September 2004

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EDC - Who We Are

Established in 1944 as Canada’s export credit

agency, EDC provides trade finance and risk

management services to Canadian exporters and

investors in up to 200 markets.

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In carrying out its mandate, EDC...

Applies commercial principles

Operates on a user-pay basis premiums and fees for insurance all loans fully repayable with interest

Is financially self-sufficient with no Government appropriations Reinvests profits to support future export growth

Provides in-market support through a network of local representations in 7 of the world’s top emerging markets.

EDC support is provided in respect of transactions that provide acceptable Canadian benefits

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EDC Services 1) Financing

EDC provides financing based on corporate risk, sovereign risk and project risk Pre-export financing for exporters Support for foreign investment based on corporate risk

2) Political Risk Insurance EDC covers private sector investments and loans Coverage can be provided to equity investors and/or banks

3) Bonding Services EDC has variety of instruments to support bid bonds, performance bonds and

warranty bonds

4) Short Term Insurance EDC provides credits insurance to exporters to protect them against the risk that

their buyers do not pay them for a variety of commercial or political reasons.

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Risk Assessment Approach

Municipal risk assessment is very different than Sovereign or Commercial risk assessment – highly specialized

EDC traditionally relies on credit ratings from S&P, Moody’s or Fitch when considering sub-sovereign risk

EDC may also consider local rating agency on case-by-case basis For unrated entities, EDC may work with other experienced

lenders to consider their due diligence. Ex: EBRD in Central and Eastern Europe.

In May 2003, EDC and S&P entered into an MOU under which S&P will provide transaction-related credit assessments for unrated municipal and regional governments.

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Issues EDC AsksWhen Considering Municipal Risk

Does the sub-sovereign government have the legal right to borrow? Does it meet any borrowing criteria established by its government? Flexibility of municipality in its spending and revenue sources Rating of municipality vs. Central Government Spending mandate of municipality – does transaction meet criteria Role of Public Private Partnerships and Municipal Corporations Overall creditworthiness of Municipality Impact of World Bank negative pledge clause Transaction must meet normal EDC criteria

Creditworthiness Canadian Benefits Corporate Social Responsbility Criteria

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Role of Alternative Structures - Public Private Partnerships/Municipal Corporations

Challenges: Potential restrictions due to WB Negative Pledge Clause Implicit or explicit municipal government guarantees Credit strength of borrower

Sources of revenue Balance sheet support

Cost of developing acceptable structure

Opportunities New creditworthy couterparties, Additional resources, Circumvent legal obstacles Improved financial transparency

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Issues More Specific To Central & Eastern Europe

Transparency of municipality’s finances and other operations of the City

EU procurement requirements/limitations Role of private sector in municipality – public/private

partnerships Status/role of municipal corporations

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EDC Initiatives- S&P Credit Assessment Sub-sovereign government must be legally able to borrow in

hard currency under its country’s laws. Sub-sovereign government must have a rating of at least “B”

to be considered EDC Focus will be on transactions up to USD 5.0 million Borrower must agree to pay S&P directly and works with S&P

in obtaining assessment EDC to obtain preliminary guidance from S&P on expected

rating – will it be at least a B? Could be used for financing but not likely for insurance Can be used for cities in both OECD countries and emerging

markets

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Canadian Initiative – Sustainable Cities Initiative Partnership between the Government of Canada, NGO’s and

private sector to pursue sustainable economic development with municipal governments

SCI's main areas of focus are priority areas for sustainable urban development: clean water, waste management, clean energy, transportation, housing, capacity-building, urban planning, telecommunications, urban infrastructure projects, and port development

16 cities in Africa, Latin America, Asia and CEE have been chosen – including Katowice, Bucharest and Ulaan Baatar

EDC’s has recently become involved to assist in understanding how the Cities and their private sector fund/borrow for identified projects to ensure that lack of financing does not prevent Canadian companies from winning contracts

Bucharest is test case for EDC co-operation.

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EDC Contacts For more information on EDC and Municipal Risk, please contact

Lorne CutlerRegional Manager South Eastern Europe and the Black Sea RegionInternational Markets 151 O’Connor Street Ottawa, Ontario,.Canada K1Z 6Y7Tel: 1-613-598-2745Fax: 1-613-598-2503Email: lcutler@edc.ca

www.edc.ca