Introduction

The first article in this series set out the fundamentals of ECA financing and its critical role, historic, present and future, in funding large infrastructure projects. This article, the second of three, will examine the advantages and disadvantages which accompany ECA financing and, by extension, the factors which should be considered by the parties to any project contract.

Historical ECA financing of critical infrastructure 

ECA financing has long been a cornerstone of funding for the construction of critical infrastructure projects worldwide. Large-scale infrastructure projects often involve significant imports of equipment, technology and services and therefore present a natural opportunity for tied-ECA support; allowing suppliers to win contracts while host countries secure long-term financing on favourable terms. This can have particular merits in markets where commercial banks are reluctant to lend on a purely uncovered basis, but where provision of ECA guarantee support unlocks their involvement.

In addition, infrastructure assets are typically capital-intensive and often generate steady returns over the long-term (rather than short-term windfalls). These distinctive characteristics necessitate a certain type of stakeholder and require patient capital. Commercial banks may not be in a position to provide that long-term patient capital at scale, especially if political, technological, regulatory or commercial risks are perceived as high. ECAs serve to mitigate these risks and can absorb country or counterparty risk in a way that commercial lenders may otherwise find challenging on an uncovered basis, particularly given ongoing capital adequacy challenges. 

Furthermore, the policy objectives of ECAs align perfectly with the strategic infrastructure plans of most host governments. ECAs have a policy-based aim to crowd-in capital to achieve wider economic growth and decarbonisation targets; this means providing support for the ‘right’ kinds of projects and borrowers and historically that has manifested in a significant amount of support for critical infrastructure financing including, for example, renewable energy projects, road projects, mass transit systems and social infrastructure. 

Considerations for developers and procurers of critical infrastructure

ECA financing undoubtedly has a number of benefits for developers and procurers:

• Commercial: access to long-tenor, competitively-priced debt that may not be available in commercial markets, with extended grace periods during construction. This can lead to a lower overall cost of financing, enabling developers to enhance returns, whilst also satisfying value-for-money considerations for procuring authorities. 
• Liquidity: critical infrastructure projects often entail substantial capital costs; this can frequently run into the multiple billions for giga-scale projects. The involvement of ECAs helps to mobilise private capital and crowd-in investment on a scale which may not otherwise be possible. For example, the $2.45bn Dubai Metro Red line extension was supported by over $1.4bn in ECA-backed financing[1]. 
• Partnering: ECAs tend to be long-term, patient and supportive partners to infrastructure project developers, which is ideal for what will inevitably be a long-term venture. Once capital has been deployed, the ECAs will generally control decision-making under finance documents and that decision-making tends to be carefully considered, with a focus on long-term outcomes. For developers and procurers, this stability can be the difference between a project collapsing in times of volatility or distress or weathering the storm and continuing to provide an essential function (and return to key stakeholders).

However, ECA financing also presents challenges that require careful management:

• Timing: the process of securing ECA support is typically lengthy and complex, with extensive due diligence and multiple layers of approval. This can extend financing and project delivery timelines. In this regard, untied ECA financing can be advantageous in that it may entail less diligence of the supply chain for example. In the context of a competitively-bid project, this may be particularly useful as the winning bidder (and thus the source of certain country content) will be uncertain until the procurement process is significantly advanced. On the other hand, a pro-active procurer may be able to identify the likely source of equipment and services up-front, enabling it to (or to direct bidders to) engage with ECAs earlier in the procurement cycle. 
• E&S considerations: ECAs generally impose stringent environmental and social (E&S) requirements both in the upfront diligence process and on an ongoing basis through construction and operations. They are typically consistent with international laws, regulations and standards including the IFC Performance Standards, as well as drawing on internal ECA lived experience. While these requirements can improve project quality and sustainability, they also add to compliance costs and may necessitate project redesign or additional mitigation measures. In addition, they may also result in extension to project timelines with certain institutional requirements to publish ESIAs for fixed time periods ahead of financial close. 
• Documentation: financing terms and structuring tend to be more rigid and precedent-led than in private financings, which can take longer to negotiate and ultimately leave the developer with more onerous terms than may otherwise be available in the market. Where multiple ECAs are involved in the larger multi-sourced financings, this approach can also require significant negotiation to bring together the requirements of each of the financing institutions and to address intercreditor decision-making, especially where there are World Bank institutions involved alongside the ECAs.
• Regulatory: public sector procurements are generally subject to specific regulatory requirements which can affect ECA financing. For example, a short-term (less than 5 years) EPC+F (engineering, procurement, construction and financing) contract in Saudi Arabia may be subject to the Government Tenders and Procurement Law, while a longer-term (5+ years) EPC+F contract (including PPP Contracts) will be subject to the Private Sector Participation Law. Sector-specific laws (e.g. power, water, rail) may apply in addition to or instead of the generally applicable regimes. Finally, as noted above, tied ECA financing is conditional upon purchasing goods and services from the ECA provider’s home country, which may impact a project’s ability to comply with local content requirements in the procuring authority’s jurisdiction. Accordingly, ECA-financed procurements may require government support to exempt the procurement from one or more regulatory requirements in order to meet the requirements for ECA financing. 

Conclusion

Overall, ECA financing is a powerful tool for delivering critical infrastructure, but developers and procurers must weigh its cost and risk-mitigation benefits against longer lead times, compliance burdens, and procurement constraints. Successful use requires early planning (particularly when selecting key equipment and service providers), alignment with E&S standards, and careful management of the approval process (including navigating regulatory requirements).

The final article in this series will explore the current trends in ECA financing within the broader global political and economic climate.

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[1] See Emirates News Agency’s article here: Dubai's Department of Finance completes US$2.45b financing for Metro's Route 2020 extension

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