Cash buyers are becoming rare as companies, governments and quasi-government agencies continue to "tighten their belts." Budgets are being constantly squeezed and resources are continuing to be finitely allocated. Buyers, whether located in Western Europe, Latin America or Southeast 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 and provide sufficient funding for extended payment plans.

History of Trade Finance

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 caused 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 1960s. 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 forfeit finance. Forfeiting (the non- recourse discounting of export receivables or promissory notes that support supplier credits) 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.

The next major change occurred in the 1970s with the "oil shock' that produced revolutionary economic changes affecting global trade. As all non-OPEC nations were adversely affected, the need for new longer-term financing techniques was 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 bud- gets 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 was the creation of the Private Export Funding Corporation (PEFCO).

The 1980s witnessed defaults and reschedulings by many Latin American nations. More new techniques and creative schemes needed 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 Southeast Asia, Korea, Japan, Russia, China, Ecuador and Brazil. At least Southeast 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 saw strong demands by private and government buyers or extended payment terms. Today, very few Western financial institutions will support the large financing requirements needed in China. Currently, we are working on a large Wastewater Treatment Facility in China and Chinese State banks are interested only in supporting the project financing debt requirements. There continues to be gaps between the needs of the world's buyers and suppliers unable or unwilling to provide extended payment terms to these potential customers.

Export, Trade, Leasing and Project Finance

Export Financing: Virtually all exporting countries have institutional arrangements to protect exporters (as well as the banks that provide them with funding support) from the risks of exporting. In the United States, the government's official export financing vehicle is the US Export- Import Bank The Ex-Im Bank provides a variety of financial supports including direct loans, guarantees and insurance. Quite often Ex-Im Bank's programs also are used 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 everything from small businesses 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 Ex-Im Bank coverage with the private sector's capabilities.

Ex-Im Bank covers only a maximum of 85 percent of the U.S. content of an export sale. In addition, there also are times that the Ex-Im Bank is closed to a particular country due to economic or political considerations. Compounding the situation is the fact that many buyers are requiring 100 percent 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 that appropriately support the supplier's objective of minimizing risk at minimal cost and still winning the order.

Trade Financing: A very broad area of short-term financing mechanisms that support exports is included in trade financing. Some of the schemes included are insurance for contract frustration, unfair calling of letters of credit and exchange rate fluctuation. Forfaiting (discounting from 90 days to seven years) is another form of trade financing usually at no cost to the supplier. The balance of the cost is provided by bank financing structures. There also are a host of government and quasi-government agencies that provide a variety of credit enhancements to support water-related exports. In the United States, some of these organizations include the Agency for International Development (AID), Overseas Private Investment Corporation (OPIC) and the Trade Development Agency (TDA). There also are 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) and European Bank for Reconstruction and Development (EBRD).

Leasing: As a cross-border financing vehicle, leasing is relatively new to export financing. The attraction of leasing to corporations as well as to governments is that leased products do not appear on the balance sheet. Lease payments also are made from an operating expense account rather than a capital acquisition account. Leasing has the added benefit of often being able to adjust the rental payments to the budget profile of the buyer. Therefore, leasing must be considered in the total context of alternatives available.

Project Financing: When developing a viable financial structure for a water or wastewater project, project financing brings a host of variables to consider. True project financing often obviates the need for outside guarantees, since 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 utilized. These mechanisms can include Eximbank, OPIC, equity investors, various forms of debt structures, private sector insurance and other hi- and multi-lateral support such as AID, EBRD, ADB and IADB.

Proactive Approach

Available financing resources in sup- port of water and wastewater related equipment and services are quite broad. 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 customers the extended payment term financing they require, in order to not only win the initial order but to have a long term strong relationship that 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 market- ing tools to secure the order. Financing resources available in support of water and wastewater equipment and services are quite diverse and should be actively pursued to be a winner in the massive global marketplace. The ultimate objective is to make the sale.

About the Author: Stephen Sohn is president of Schneider-Sohn & Associates, Inc. (SSAI), and Global Services, Inc. (GSI), multidiscipline consultancies specializing in financial engineering, strategic marketing, offsets and countertrade, export controls and export licensing, joint ventures, strategic alliances, diplomatic/political support, global> business and finance seminars.

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