_pledge of anounts collected in an escrow account as well as title_<sup>_to thefixed assets of the project._The latter, however, is</sup> not easily achieved due to lacking mortgage legislation or factuai lity ty ooenfo rcerightsincaseofforeclosure ... Inrcerightsincaseofforeclosure ... In... In order to structure financing in such a way that it becomes a bankable transaction extremely creative structures have to be worked out..."<sup>9</sup> Specialattention ispaidbyprojectspoisorstotransferrisk, _pledge of anounts collected in an escrow account as well as_ i.e.thecountry'sabilitytomakepaymentsinforeignexchange, _title_<sup>_to thefixed assets of the project._The latter, however, is</sup> where investments are financed in foreign currency but not easily achieved due to lacking mortgage legislation or receipts are in local currency. A critical consideration is factuai lity ty ooenfo rcerightsincaseofforeclosure ... Inrcerightsincaseofforeclosure ... In... In whether the country as a whole will have sufficient foreign order to structure financing in such a way that it becomes a exchange available over the life of the projecL _In critical_ bankable transaction extremely creative structures have to be _cases, where a country ceases its external debt service_ worked out..."<sup>9</sup> _payments for lack of foreign exchange, or agrees on a_ Offtake refers to the prior sale of output to specializedsale of output to specializedspecialized _restructuring of its obligations, the value of a transfer guar-_ trading companies whoarrange for the sale of given volumes _anteefrom the central bank is questionablefrom the_<sup>_com-_</sup> in hard currency. Examples were cited of CEE daiiy and _mercial banks. viewint._ This is currently the c.se **in** two poultry products being pre-sold to CFA Zone African councountries in the region, Bulgaria and Poland. tries or other LDC governmental food importers who agreed Offtake refers to the prior sale of output to specializedsale of output to specializedspecialized trading companies whoarrange for the sale of given volumes in hard currency. Examples were cited of CEE daiiy and poultry products being pre-sold to CFA Zone African countries or other LDC governmental food importers who agreed to pay hard currency. In general, Austrian trading companies associated with banks were able to arrange for such tainsactions relatively easily since they say they have over 80 years of experience doing such deals with eastern Europe. Alternatively, there are often leasing arrangements with creative financing. Forexample, theSwedish fumituremanufacturer IKEA has been active in Poland and Hungary for 20 years. It accepts pieces of furniture as installnent payments for factories that it has set up in the region.

The situation is different if the project output is exported and sold for foreign exchange at world market prices. In this case the project generates the necessary foreign exchange itself. The banks then have the possibility of channelling the receipts,withthecentralbank'sconsent,initiallytoaccounts outside the country and of servicing the debt in foreign exchange from these accounts (offshore escrow accounts). This is a method of substantially limiting the transfer risk. Table _5_ is an example of commercially available risk assessment for the region that was published in September 1991. It shows the 5-year outlook for Transfer Risk, InvestmentRisk,andExportRisl "A+" indicates leastriskand"D-;indicates ighest risk. The previous forect is shown **in** parenthesi **if** there has been a change; (nc) .dicates.no parenthesifhrehsen hng;()inats change.

Most market sources said that, except for Hungary, the interestelsewhere was in _trading rather than manfacturing._ This is consistent with the weak legal frameworks which do not provide enough seewity to equity investors, and are not conducive to strucwringcreativearrangements asmentioned above. _Bankers and investors were very clear that the only factor they considered was the legalframework and repatriation ofprofits._ Low wages and other characteristics of the labor force reporedly would not enter their decision making process.

**The** Current **Situation** in **the** Region-Seniority **Accorded to Project** inance

All banks interviewed for this paper stated that as long as therewasnorealconvertibilityoflocalcunrency,onlyprojects _which generated sufficientforeign exchange revenueswould in principle qualiyforfinance in hard carrency._ The cost of this financing is likely to be high for the particular project, since as a prerequisite, according to an experienced banker lenders would require therewasnorealconvertibilityoflocalcunrency,onlyprojects The share of the German speaking countries (Germany, _which generated sufficientforeign exchange revenueswould_ Austria and Switzerland) in Hungarian foreign trade and DFI _in principle qualiyforfinance in hard carrency._ The cost of reached 40% in 1991-this corresponds to the share of the this financing is likely to be high for the particular project, CMEA area prior to 1989. Bankers in both Germany and since as a prerequisite, according to an experienced banker Austia mentioned that Hungary had adopted a legal framelenders would require work almost identical to the GermanJAustrian one. This is " adequate cover to be provided in "adequate cover to be provided in favor of ft lender av wf the se also the case in CSFR, which has had about a third of itsbusiness dealings with **the** German speakers since 1989. againstall risks inaherent to the project itself as well as utose Answers to the question of whether foreign investors were risks atibutable to the economic environ ment in the country succeeding in mobizng domestic resources, were mixed. the~~~~isdmc.di **~** ~~ **~** bliyo h orwrt .oroe Most bankers felt that foreign investors were coming in with freely dispose of its hard curency receivables would require thei own fudn d thatith domestic ciac in special permit from the authorities, available only in excepthei ron were etr too ual dortoo financialsc tori tional _cases...Financings arestructured as purchase of re-_ the region were eia too unfamliaror too bureaucatic to be . . _ . . tap~~~~~~~~Lped. Several bankers felt tha foreign investors were _ceivables, offtake or factoring type arrangements..._ Due to.insufficiency or even total lack of legal provisions [on . istanly assumed **to** be totaly creditworthy by nationals bankruptcy], restrictive foreign exchange policies and uneagerly looking for joint venture partners. settledrestitutionclaims,thestructuringofasecurity/seniority According tothe Central Statistical Office, 3000 newjoint arangementacceptabletowesternbanksoftentumsouttobe ventures were set up in Hungary in the first six months of a dreadful exercise ... In general a two level security arrange1991, with the investment of foreigners amounting to some ment is demanded comprising direct access to the hard US$350million.Thetotalnumberofjointventuesoperating _cwurencycashflow ...bytheassignmentofreceivablesandthe_ in Hungary at end-June 1991 was 8700. The accumulated According tothe Central Statistical Office, 3000 newjoint ventures were set up in Hungary in the first six months of 1991, with the investment of foreigners amounting to some US$350million.Thetotalnumberofjointventuesoperating in Hungary at end-June 1991 was 8700. The accumulated 9 Rosenmayr, Edgar in "HardCurrency Borrowings from Private Sector Banks". p.23, Creditanstalt Bankvereirn Vienna, September 1991.

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