2023-Public-Sector-Perspectives

The bilateral debt-for-infrastructure case study shown below was executed for Uruguay in 2003, where the Spanish government agreed to cancel US$10.5 million of Uruguay’s sovereign debt. In return, the amount was deployed to build a 10 MW wind farm. This structure can be replicated with commercial debt since it includes renewable energy, capacity building and carbon credit elements. Figure 8: Debt-for-infrastructure swap: Uruguay Background • Uruguay owed Spain US$77 million. • Spain and Uruguay executed several debt swaps specifically related to infrastructure projects amounting to more than US$9.3 million. • In its debt swap transactions with Heavily Indebted Poor countries (HIPC), Spain usually applies around 50% on the underlying debt. • Since Uruguay is non-HIPC, no discount was offered and the total outstanding debt subject to the swap was to be fully repaid. Counterpart Fund (Uruguay) Spain Wind Park Construction Uruguay’s Electricity Company Spanish Carbon Fund World Bank Clean Development Mechanism 2- Investment US$30 million Certified Emission Reduction Technical Support 1- Investment US$18.9 million Administrators 1- Grant: US$0.7m 1- Debt cancelled (US$10.5 million) Original Repayment Schedule Oversight Committee Transaction In 2003, the Spanish government agreed to cancel US$10.5 million providing that the full amount released were used to build a 10 MW wind plant using Spanish turbines . Agreement • Total project cost of US$30 million: i) US$10.5 million debt cancellation ii) U S$18.9 million investment from Uruguay’s electricity company iii) Outcome payer: US$0.7 million grant • The deal stipulated restrictions on tendering, ensuring “the project will be 75-80% Spanish” (i.e., buy the necessary technology from Spanish companies). • Payments by the Uruguayan government were made in USD into a counterpart fund and according to the original debt repayment schedule. • Spain to receive purchase priority on carbon credits associated with production under the Emission Reductions Purchase Agreement (ERPA). • Once commissioned, the plant to be owned by the Uruguay state. Target Project Renewable Energy. Outcome Overall, the construction of the Uruguayan wind park was estimated to save 25,6 ktCO 2 e annually which corresponded to the generation of 179,000 CERs for the period between 2010 and 2016. Source: IKEM “Evaluating the Fiscal and Environmental Efficacy of debt-for-climate Swaps” 2020, Sheikh, P. A. 2018. “Debt-for-Nature Initiatives and the Tropical Forest Conservation Act (TFCA): Status and Implementation.” Congressional Research Service Report, Debt Relief International “Overview of Debt Conversion”, World Bank. Citi Perspectives for the Public Sector 73