Project Financing by John D. Finnerty

Author:John D. Finnerty
Language: eng
Format: epub
Publisher: Wiley
Published: 2013-04-08T16:00:00+00:00

Local Sources of Capital

Borrowing funds or raising equity in the local capital market is often a good way to reduce political risk. Any event that harms the profitability of the project will affect local lenders and investors. This prospect tends to furnish a disincentive for the local government to take adverse actions. The strength of the disincentive depends on how much local investors and local lenders have at stake in the project.

The capital markets in the developing countries are potentially good sources of funding. However, in many of these markets funds availability is limited and maturities are short. As of year-end 2010, Argentina, Brazil, Chile, China, India, Indonesia, Kazakhstan, South Korea, Malaysia, Mexico, the Philippines, Russia, South Africa, and Ukraine all had viable corporate debt markets.19 Brazil has taken several steps to attract foreign investors to its local bond market, including exempting them from withholding tax on interest income. In Mexico, the longest maturity available for corporate debt is 30 years. For example, Southern Copper Corporation sold $200 million of 10-year bonds and $600 million of 30-year bonds in Mexico in 2005 (World Bank, 2006). Issuance of corporate debt in Latin America reached nearly $100 billion in 2010 alone.20

As the economies within the emerging markets develop, so will the local capital markets. Where such markets exist, project sponsors should carefully consider raising at least a portion of the funds they need in those markets.

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