Available financing resources in support of water and wastewater related equipment and services are quite broad. As you'll read in this article, the combination of U.S. government resources and the creative financial engineering obtainable in the private sector, can provide the appropriate package to support almost any product or project exported to most countries.

Contents

• History of trade finance
• Export financing
• Trade financing
• Leasing
• Project financing

Cash buyers are becoming fewer and fewer as companies, governments and quasi-government agencies continue to "tighten their belts." Budgets are constantly squeezed and resources are continuing to be finitely allocated.

Buyers, whether located in Western Europe, Latin America or South East Asia, are requesting extended payment terms as a precondition to placing an order. Some emerging markets are even demanding forms of barter and countertrade as a prerequisite to an order.

Often buyers and competitive pressures combine to demand credit terms for spare parts. On the other hand, many suppliers have learned that extended payment terms represent a key marketing tool in consummating a sale.

Although most water and wastewater related suppliers have reasonable profit margins, a large portion of these profits repay the high costs of marketing and research and development. Few companies can afford to take their customer's credit risk by providing sufficient funding for extended payment plans.

History of finance shows honor code ceased to work when horizons expanded (top)In the often-cozy arrangements that existed in the 19th century, tradesmen concluded transactions based on an individual's word of honor. However, the honor code was impractical when selling overseas, where in many cases the underlying buyer was unknown and frequently came from a different culture. In those days exporters bore the risks and were faced with losses in the event of non-payment.

The economic upheavals of the 1930s brought about the need for extended payment terms but with the assurance the supplier would be paid. A bank issued letter of credit was the natural vehicle to provide the assurance the buyer would pay.

The demand for extended credit terms beyond 180 days came about in the buyer's market of the 1950s and '60s. The buyers demanded the suppliers provide their own extended payment terms. To fill the void between what the buyer demanded and what the seller was prepared to provide certain innovative financial institutions created forfait finance. Forfaiting was developed in Switzerland and Vienna to be a supplier-financing vehicle to the Soviet Union. Once proven for that difficult market it was simply applied to support western buyers and sellers.

Need for longer terms surfaced in 1970s

The next major change occurred in the 1970s with the "oil shock" which produced revolutionary economic changes affecting global trade. As all non-OPEC nations were adversely impacted, the need for new longer-term financing techniques were demanded by all. U.S. Government agencies such as the Export-Import Bank (as well as its foreign counterparts), the Overseas Private Investment Corp. and others received boosts to their budgets to support the demands of the global marketplace.

Concomitantly, the private sector developed needed financing methods to fill the gaps not supported by government programs. The syndicated bank credit was one of the key ingredients as well as the creation of the Private Export Funding Corporation (PEFCO).

The 1980s brought defaults in loans

The 1980s witnessed defaults and reschedulings by many Latin American nations. Again new techniques and creative schemes had to be developed so the private sector could still support exporters.

Now, in the beginning of the 21st century, we again have sporadic regional economic crises and continued problems in South East Asia, Korea, Japan, Russia, China, Ecuador and Brazil. At least South East Asia, Korea and Brazil are now showing a marked dramatic improvement, (except for Indonesia) although certain problems still exist.

As soon as these problems surfaced the private sector immediately pulled back and we again see strong demands by private and government buyers for extended payment terms. In China today, very few Western financial institutions will support the large financing requirements. We are right now working on a large Wastewater Treatment Facility in China and can only get Chinese State banks interested in supporting the project financing debt requirements.

Today, and for the foreseeable future, we continue to have gaps between the needs of the world's buyers and suppliers unable or unwilling to provide extended payment terms to these potential customers.

Special financing needed to support exporters

Virtually all-substantial exporting countries have institutional arrangements to protect exporters (as well as the banks that provide them with funding support) from the risks of exporting. Here in the United States, the government's official export financing vehicle is the U.S. Export-Import Bank. The Ex-Im Bank (or Eximbank) provides a variety of financial supports including direct loans, guarantees and insurance. Quite often we also use Eximbank's programs for working capital and pre-export financing to support the extra costs and risks of doing business overseas, especially for smaller exporters.

Although U.S. government export finance programs are quite extensive, covering small business through giant energy projects and Boeing 747's, there are still many gaps in the government export finance spectrum that can only be filled by the private sector. Financial engineering must be utilized to develop solutions that optimally combine Eximbank coverage with the private sector's capabilities. Firstly, Ex-Im only covers a maximum of 85% of the U.S. content of an export sale; then there are times that the Eximbank is closed to a particular country due to economic or political considerations. Compounding the situation is that more and more buyers are requiring 100% extended term financing or leases.

Other export financing "tools" include: public and private sector risk insurance; commercial bank loans; bond offerings; private placements and a host of methods and techniques which appropriately support the supplier's objective of minimizing risk at minimal cost and still win the order.

Trade financing mechanisms support exporting

Trade financing includes a very broad area of short term financing mechanisms that supports exports. It covers a variety of schemes which includes insurance for contract frustration; unfair calling of letters of credit; and exchange rate fluctuation.

Another of the methods is forfaiting (from 90 days to seven years), which is the non-recourse discounting of export receivables or promissory notes that supports supplier credits, usually at no cost to the supplier. The many forms of bank financing structures cover the balance. There are also hosts of government and quasi-government agencies, which provide a variety of credit enhancements to support water related exports.

In the U.S. these include the Agency for International Development (AID), Overseas Private Investment Corporation (OPIC) and the Trade Development Agency (TDA) amongst others. There are also a plethora of bilateral and multilateral financial institutions such as the World Bank, International Finance Corporation (IFC), Asian Development Bank (ADB), Inter American Development Bank (IADB), European Bank for Reconstruction and Development (EBRD) and a host of others.

Leasing is new to export financing

Leasing, as a cross border-financing vehicle, is relatively new to export financing. The attraction of leasing to corporations as well as to governments is leasing's off balance sheet treatment and lease payments are made from an operating expense account rather than a capital acquisition account. It has the added benefit of often being able to adjust the rental payments to the budget profile of the buyer. Leasing must be considered in the total context of alternatives available, in order to conclude a commercial contract.

Project financing brings it all together

Project financing brings a host of variables to be considered in developing the optimum combination of mechanisms in developing a viable financial structure for a water or wastewater project. True project financing often obviates the need for outside guarantees as the project should pay for the cost of the financing and generate a profit.

A prime example is a wastewater treatment system where the consumer pays for the cost of the facility through user fees. The size and complexity of the project will determine the financing mechanisms that will be utilized. These mechanisms can include Eximbank, OPIC, equity investors, various forms of debt structures, private sector insurance and other bi- and multi-lateral support, such as AID, EBRD, ADB and IADB etc.

Financing resources for water industry broad

Available financing resources in support of water and wastewater related equipment and services are quite broad. As you can readily see the combination of U.S. government resources and the creative financial engineering obtainable in the private sector, can provide the appropriate package to support almost any product or project exported to most countries. It is vitally important to provide to your customer the extended payment term financing they require, in order to not only win the initial order but to have a long term strong relationship which precludes the competition.

Companies that are the most successful in international business are those that do not wait to react to the market's demands but have taken a proactive approach in utilizing extended payment terms and other non-traditional marketing tools to secure the order. Financing resources available in support of water and wastewater equipment and services are quite diverse and should be proactively pursued to be a winner in the massive global marketplace. The ultimate objective is to make the sale.

About the author: An expert in international business and finance, Stephen Sohn is president of Global Services, Inc. and Schneider-Sohn & Associates, Inc. The two multidiscipline consultancies specialize in financial engineering, extended payment trade and project financing; strategic marketing; project development; offsets and countertrade; international investment, export controls and export licensing; joint ventures; strategic alliances; global business and finance seminars as well as a variety of "boutique" merchant/investment banking activities. Founded in 1986, Global Services, Inc. focuses on the environment and in particular water and wastewater opportunities in the global marketplace. Sohn has more than 25 years of experience in international business specializing in finance and market development. Contact Sohn at Global Services, Inc.; PO Box 5237; Westport, CT 06881 USA; Tel: 203-255-5466; Fax: 203-227-9590; e-mail: ssohn@globl.serv.com.

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