USA: An Introduction to Projects: Agency Financing

Set forth below is an overview of current considerations, shifting trends and evolving legal issues that are at the forefront of financings with multilaterals, development finance institutions (DFIs), national government agencies and export credit agencies (ECAs) in energy and infrastructure projects in the U.S. and globally.

Energy Transition and New Technologies 

There has been a push amongst agencies to support the commercialization and large-scale deployment of technologies that are crucial to the energy transition. In the United States, the Loan Programs Office of the Department of Energy (DOE) has been at the forefront of providing concessional financing to developers investing in innovative energy projects that reduce carbon emissions and for the manufacturing of advanced technology vehicle and vehicle components (including electric and alternative fuel vehicles and batteries), supply chains (e.g., critical minerals for battery components) and infrastructure (eg electric vehicle charging stations). These projects would struggle to raise funding from commercial debt providers, especially because of the volatility in demand and lack of long-term revenue contracts. More recently, the Department of Commerce’s CHIPS Program Office (DOC) has started a similar push for the financing of semi-conductor manufacturing and its supply chain in the United States. At the global level, multilateral and development finance agencies such as the International Finance Corporation (IFC), IDB Invest and U.S. International Development Finance Corporation (DFC) have been actively supporting solar, battery and wind projects, not only to greenify the grid and displace thermal generation, but also to supply industries that are looking to reduce their carbon footprint (eg mining companies). Amongst multilateral agencies in particular, one of the main challenges has been how to treat the continuing role of gas as a transition fuel, with some agencies gradually shying away from gas-to-power and LNG-to-power projects in emerging markets due to Paris treaty commitments, with exceptions for projects located in countries lacking baseload power. Small modular reactors and nuclear-related infrastructure are a nascent, but rapidly growing, area of interest for agencies in the European Union (eg EIB) and the U.S. who have expressed support due to the absence of commercial funding sources. Although a number of green hydrogen projects have been announced in countries with abundant and cheap renewable energy, it remains to be seen if the larger export projects will be able to attract agency funding because of the difficulty of securing long-term committed offtakes and an uncertain regulatory environment. Recognizing this challenge, in the U.S., DOE is seeking to help establish a hydrogen market through grants, instead of loans, for regional hydrogen “hubs” that will encourage longer-term usage demand.

Critical Minerals and Supply Chain 

Ongoing geopolitical tensions have led to a prioritization of the financing of projects that produce critical minerals for batteries, semi-conductors and smart devices. Whilst ECAs have traditionally led mining financings, in particular K-EXIM, K-SURE, EDC and JBIC, certain DFIs have also started to actively support projects involving not only extraction but also the processing of copper, nickel, lithium, graphite and other critical minerals as well as technologies to recycle or synthetically produce minerals. Commonplace issues in securing long-term offtake and sourcing minerals from countries considered safe and reliable have prompted a wave of interest in on-shoring and near-shoring projects, such as graphite mining in the US and Canada and lithium mining in Argentina. Project-on-project risk may be present either on a single agency basis or on a whole-of-government basis where agencies are supporting the sourcing of one or more critical minerals and the manufacturing of battery components or other goods using those minerals. Another issue faced by agencies is the extent to which value-added activities related to the mining activity (eg, refining, manufacturing of battery components) will be co-located in emerging market countries with the relevant resources. With the CHIPS Act being implemented under the aegis of the DOC, we expect to see further activity in gigawatt factory financings in the U.S., supported not only by European and Asian ECAs but also by and in conjunction with DOC and DOE. In addition, the Export-Import Bank of the U.S. has begun supporting projects on U.S. soil, having now (as of May 2024) approved three transactions in its “Make More in America” program, which is focused on transformational industries (including renewables, energy storage, AI, biotech, water treatment, fintech, semiconductors and advanced computing) and has potentially broad availability to finance both manufacturing and infrastructure projects, generally requiring that at least 15% (for small business) to 25% of products or usage of a the financed project being dedicated to export.

Innovations in Risk Mitigation Products 

A number of agency products have evolved in the past few years to pick up innovative uses, especially amongst Washington DC-based multilaterals and DFIs. This innovation has been driven by political pressure for greater capital mobilization and in some cases (particularly amongst certain DFIs) increased geopolitical and economic competition. IDB Invest has deployed its “B-bond” product (where bond investors fund projects under the umbrella of the IDB) across a variety of sectors and jurisdictions whilst the Multilateral Investment Guarantee Agency (MIGA) has made versatile use of its Non-Honoring of Financial Obligations’ insurance cover for default risk by sovereigns, sub-sovereigns and state-owned borrowers, including coverage for swap termination costs arising under dollar-funded local currency financings, as seen in the Findeter transaction in Colombia. We see potential for further innovation in MIGA’s “upstream” initiatives, including in designing frameworks to support off-grid power projects in Africa. Meanwhile, DFC, with its wider mandate under the BUILD Act, has made innovative use of both its investment guarantee and political risk insurance products to support local currency financings of infrastructure, such as in the Rio Smart Cities project, as well as coverage for sovereign debt swaps to help countries raise cheaper debt, with cost savings being deployed for conservation and development projects (eg marine conservation in Gabon). It is anticipated that these products will be deployed further to support financings for greenfield projects in countries facing political instability or security challenges.

Water, Food Security and Health 

Traditionally agencies have been at the forefront of supporting healthcare, agriculture and water supply and treatment projects that are small-scale and have limited scope for private sector capital mobilization. Post-COVID, the agencies participation in the healthcare space has expanded with several initiatives in Africa, Asia and Latin America to finance the construction of vaccine manufacturing facilities and distribution infrastructure, where European DFIs and regional multilaterals have provided substantial support (eg Aspen Pharmacare’s injectables facility in South Africa). Larger scale water treatment, desalinization and cold storage transportation projects have also taken off due to concerns about food security and climate change, attracting significant investments from agencies both on the debt and equity side. The key to the successful funding of these capital intensive projects has been the application of public-private partnership models, where agencies, through their product offerings and innovative structuring solutions, have been well-placed to tackle the challenge of marrying the profitability and bankability priorities of private investors with the delivery of essential public goods and services at an affordable cost.