Infrastructure represents one of the fundamental pillars of a country’s development. Without it, economic growth, as well as the social welfare of its population, will inevitably be adversely affected. A key factor in the development of infrastructure has always been financing. However, obtaining it has always been challenging, mainly for two reasons. First, the financing needs are usually very high. Second, as a result of the first, the debt will be repaid solely from the cash flows generated by the project, and lenders will have no recourse to the shareholder.
Over the past few decades, private banks have developed significant experience in financing this type of project, establishing solid and rigorous criteria that differentiate between bankable and non-bankable operations. However, in many cases, private financiers consider that even if a project meets the minimum bankability criteria, it presents “other” risks and/or characteristics that mean there are insufficient economic incentives to finance the operation. Clear examples include country risk or the size of the projects.
The presence of these market failures justifies the participation of public financing entities.
Types of Public Financing: The Spanish Case
Public financing can be divided into two main groups: risk coverage instruments and direct financing instruments. Risk coverage instruments are offered by so-called Export Credit Agencies. In Spain, this role is assumed by the Spanish Export Credit Insurance Company (CESCE). Through its credit insurance policies and guarantees, it offers banks between 50% and 99% coverage of credit risk when granting a loan or guarantee.
Additionally, some countries, including Spain, have public entities capable of directly financing a project. This is the case with the Spanish Development Financing Company (COFIDES) and the Official Credit Institute (ICO).
COFIDES can provide direct financing both through debt instruments (senior, subordinated, and mezzanine) and equity instruments. This financing is offered from the various funds it manages (FIEX, FONPYME, FOCO, and FIS). As for the ICO, it provides senior debt and both technical and financial guarantees from its own balance sheet.
Finally, it is worth highlighting the Company Internationalization Fund (FIEM). This fund, directly managed by the Directorate General of International Trade and Investments of the Ministry of Commerce, offers long-term loans at fixed interest rates.
Both the operations covered by CESCE and those financed by ICO, COFIDES, and FIEM must be based on a “national interest” as a necessary condition for financing. This concept, particularly relevant for projects outside Spain, is flexibly interpreted and can be justified either by the majority participation of a Spanish company in the foreign SPV’s shareholding or by the supply of Spanish goods and services to the project.
In this context, it is particularly relevant to highlight that all four institutions show a strong interest in infrastructure and energy projects. These sectors are closely aligned with the strategic priorities of the Spanish Government, such as ecological transition, digitalization, sustainable mobility, and the internationalization of Spanish companies.
The Need for a Framework for Public Financing
The Spanish governance framework for public financing is not an exception at the international level. In fact, all neighboring countries with comparable economic levels have similar institutional networks to support their companies abroad.
These institutions are used as strategic tools to strengthen national competitiveness. Currently, China represents the most evident example of unfair competition in this area. However, in previous decades, this situation also occurred among Western countries. To mitigate these distortions, in 1976 an informal agreement was reached among the G6 countries, known as the OECD Consensus on Export Credits with Official Support. This agreement, now supported by the 27 EU Member States, as well as by the United Kingdom, Norway, Switzerland, Turkey, the United States, Canada, Australia, New Zealand, Japan, and South Korea, establishes common rules that promote competition based on the quality of goods and services rather than financial conditions, thus ensuring a level playing field.
On the other hand, public financing can generate unintended effects, such as crowding out the private sector in cases where no market failure exists. Precisely to avoid such distortions, the European Union has the State Aid Regulation, which establishes a clear regulatory framework to ensure that public intervention does not unjustifiably displace private investment, thereby preserving the essential role played by financial institutions in analyzing and structuring complex energy and infrastructure projects.
By Iván Sánchez Saugar, Partner in charge of Infrastructure and Project Financing in PwC’s Transactions practice, and Jorge Zapico, Senior Manager in PwC’s Transactions practice
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