# E. Direct Foreign Investment-Project Finance<sup>5</sup> :

may be briefly sunmarized here in the context of the discussion that follows on conditions specific to the CEE region.

A very limited subsector of investors may be ready to acquire fixed assets in the region if they feel the investment is "safe", and furthermore, that they may lose by going in . ,, , . . later rather than now.<sup>6</sup> Which of the commonly mentioned factors-educated labor force, low wages, manufacturing skills, political stability- is more important to new foreign investors? Again, why are some countries preferred over others for DFI? What is the situation with regard to repatriation of profits in the newly adopted foreign investment laws of the region? Are investors responding to particular incentives, either in the host country or in their home countries? Does the attitude of export credit agencies (willingness to provide cover only in some countries) have a major effect? The mixed answers and lack of clear trends in response to these questions indicates that banks and investors are still operating on a case by case basis.

. . ~~~~~~~~~~~~cial Thecforeig bank, which will then conduct a credit assessment of thetreneur approahe asforen omme projecL Traditionaly, ths will be based on the analysis of prjc.Taionlytiswlbebednthaayisf laterrather noed financial statements, and/or in the case of a start-up project, the analysis of security (mortgages, escrow accounts etc.) ta must be furished by the project sponsors.

others for DFI? What is the situation with regard to repaA drawback of financial statementanalysis is thatbalance triation of profits in the newly adopted foreign investment sheets provide information on past performance, and such laws of the region? Are investors responding to particular analysis implies that ratios calculated from these numbers incentives, either in the host country or in their home will not change materially in the futwe. It may be argued that countries? Does the attitude of export credit agencies such a static view is not admissible in the case of long term (willingness to provide cover only in some countries) have finance in an uncertain environment, especially if the size of a major effect? The mixed answers and lack of clear trends investmen **t** o be fuianced is large relative to the size of the in response to these questions indicates that banks and existing assets. _Security therefore becomes more inportant,_ investors are still operating on a case by case basis. _although itposes similarproblem_ **_s_** _ince its valuation is also_ Most of the DFI is assumed to be undertaken in the for _based on present considerations._ Furthermore, in case of recourse, the valie of assets pledged as security will depend of a clearly defined, self-contained project that generates . .er .haa -r .tyi intpafoiath.w its own income. The project is financed with a commercial tm. th.i has a curious effecb highly paliz and bank loan. In other words, information on DFI and joint eive mach i oul in heory pe sfient ventures is taken here as a qualitative proxy for enterprise claerin term shvalu as meary pro hase price access to prjc . E,mpiaecmm ilsucs .ucn collateral in terms of its value as measured by purchase price a roject financ ing of prvaeommential res. in the west. However, the complementary technological and Project finance at this stage of development Inthepregio managerial sit requirements alone may constitute a barrier ihpaesanongtevio inteestentbyaforeasingneisreturen _onequiwh_ to entry for the particular activity. This would limit the has an obvious interest in _increasing his return on equaty_ demand localy for the equipment in the event of liquidation _e .lyd i h leerg e'ec of de acn. 7_ Th* a of the business,and thus _depress its value as collateral. Given_ for lending is the future cash flow from this project, and the loans are l y sthe scarcity of westem style managerial knowhow in the CEE loans are largely secured by i) the project's assets and Lii thle reio at p it is liel .wt .wcmecaak contractual arrangements with the project participants. An regonn at pesent iiselikely that commerci alb ewssntial featur of project flnancing is that the eseta fe.r of prjc fiacn is. _actual ini-_ continue to be veo' consevative in their valuation of collateaL _tiators and owners of the project no longer assune full_ Politicalriskcomprisesallmeasuresbypublicauthorities _liability for the loans and thus the risks of the investment_ thatimpairthecourseoftheprojectorthreatenitscommercial _project. Commercial banks, and other project sponsors_ success as a result of changes in the origina **l** egal frameworkL _assume a part of the risks._ Examples would be unilateral changes in licensing, tax, Politicalriskcomprisesallmeasuresbypublicauthorities thatimpairthecourseoftheprojectorthreatenitscommercial success as a result of changes in the origina **l** egal frameworkL Examples would be unilateral changes in licensing, tax, environmental and other regulations, belated export restrictions or expropriation.

Commercil bank attudes toward project f. based on a number of criteria which are widely known, but _TableS:_ Country Risk Forecasts.<sup>8</sup>

||Insfik||Inve|l, Risk|Ex=|rtRisk|Qrw|QiUt<br>_(%fla_|I|n<br>_oCwT_|_A_|_fs.$b)_|
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|Bulgaria|B|(nc)|A|(B)|B+|(B-)|2.0|(nc)|10.0|(6.0)|-0.6|(-0.4)|
|CSFR|B|(nc)|A|(nc)|B|(nc)|2.0|(nc)|10.0|(nc)|-1.5|(nc)|
|Hungary|B-|(nc)|A|(nc)|B+|(nc)|1.5|(nc)|22.0|(nc)|-0.75|(-0.8)|
|Poland|B|(C+)|A+|(C-)|B-|(nc)|2.0|(2.5)|25.0|(20.0)|-0.55|(-0.5)|
|Romania|C|(nc)|C|(nc)|C-|(nc)|2.0|(nc)|15.0|(10.0)|-2.0|(nc)|

5. Note: in some countries eg. Hungary. a portion of DFI is classified as imports and the remainder is "other private creditors". For all countries in the region, it is not clear what system is used to keep track of DFI as opposed to suppliers' credits etc.

6. It may be interesting to consider the impact of IFI involvement in attracting foreign investment-do long-time (pre 1989) foreign investors in general prefer (for arbitrage reasons) the distorted policy environmen **t** hat prevails prior to IFI conditionality, and are they likely to withdraw once the subsidies are removed? To date there appears to have been no exodus of such longtime investors. This would indicate that there is still a premium on market knowledge and personal contacts.

7. "Project Finance from the Banks' Perspective". Paul Grosse, Deutsche Banl AG.

**'.** Source: Political Risk Services, Syracuse NY.

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