Co-published project finance guide: Dominican Republic


energy, reduction of material and fuel, strikes, costs escalation and others. The outcome of these factors may mark the project as a failure, as a result of a lack of assets or credit to repay the loan.


• The overlap between the construction phase and the start up phase is a key issue; taking into consideration that if the construction does not comply with the specifications required for efficient and timely operation of the project, the cost of operation may increase in a manner that would affect the viability of the project, including estimated debt service requirements.


• Finally, the project company is responsible for the operating risks associated with the project’s self- sufficiency: it must be able to return the equity invested and produce enough funds to cover operating costs and debt service. If the project company fails to meet the expected performance of the project, it shall face liabilities, penalties and the risk of termination for default, which in turn is a risk that the permanent lenders also undertake.


The instruments used in the DR’s


practice to mitigate risks are long term contractual agreements regarding fixing fuel prices, electricity off-takes, material supply, concession agreements, direct agreements with the government, construction, take-or-pay and put-or-pay agreements, as well as joint ownerships structures, and political and construction risk insurances.


IFLR: What are today’s biggest challenges for sponsoring projects? The biggest challenges for sponsoring projects are largely attributable to the regulatory and governmental interventions that frequently take place in order to make projects bankable. Often, permits relating to construction, environmental


issues,


municipalities, tax exemptions (if applicable) will take many months to be finalised and therefore affect business models for potential sponsors. On a positive note, President Medina issued Decree 626- 12 on November 10 2012, which seeks to implement a single centralised filing unit where all necessary permits and licences, relating to both local and foreign source investments may be requested jointly. Once this unit begins to operate, it is expected to help make the approval process much more efficient. Other key elements that make


sponsoring projects in the DR rather difficult are the operating costs (due to issues such as taxes as well as the continuing


www.iflr.com


elimination of tax exemptions), electricity bills, and the cost of registering security in the DR, which is considerable and often a deterrent to many financing deals (currently two percent of the secured amount for mortgages).


IFLR: And the common pitfalls for financiers? Although the DR has made serious strides in trying to update its legislation to modern business models, the largest issues for foreign lenders doing business here continues to be related to antiquated legislation in certain areas, particularly concerning security structures and enforcement. Lenders that are not accustomed to regularly doing business in the country often struggle with concepts in the local law that require extensive explanations, which in turn delay projects until the lenders feel completely comfortable. Other pitfalls that tend to annoy both


lenders and sponsors are related to the pace at which governmental entities tend to consider requests. For example, the DR issued Decree 162-11 (and its modifications) that requires any issued exemption to be first verified by the Ministry of Finance prior to the benefited party actually being able to enforce its rights (which are granted by laws). This process can take upwards of four months in many cases.


IFLR: Which recent and upcoming legislative and regulatory changes should foreign sponsors and financiers be aware of? The most significant piece of legislation that will likely affect sponsors is the recent passing of a comprehensive fiscal reform law which amongst other modifications, will now impose a 10% tax on repatriation of funds by local branches of foreign entities. Prior to this legislation it was fairly common for sponsors to set up equity structures whereby the operating project would often be entities incorporated offshore with a local DR branch for operating purposes. Once all applicable taxes were paid in the DR, the local branch was able to remit its funds offshore free of any taxes. On the financiers’ side, the most relevant


piece of legislation is the creation of the Security Agent through Law 189-11. Under this law, an applicable security agent may, in the benefit of all lenders current or future, represent and hold security for a determined transaction. Upon a foreclosure procedure, the security agent is also able to transfer any property to the lenders free of any additional taxes. This figure will surely enable syndication of larger deals in the DR


because prior to Law 189-11, it was advisable for each lender to directly register security in its name in order to avoid any litigation by procurement considerations. Although Law 189-11 has been in effect for over a year, the regulator has yet to pass the applicable ruling regarding security agents, and therefore has delayed the implementation of the instrument.


“Most commercial banks in the DR are


currently flush with deposits


” Two additional pieces of legislation that


are currently in congress and will require constant attention are a law regarding mercantile restructurings and a concessions law.


IFLR: Is there anything else foreign project participants should be aware of when developing projects in DR? 2013 looks to mirror 2012 in many


ways, particularly those relating to an economic recession highlighted by a huge fiscal deficit (expected to close at approximately 8% combining fiscal and Central Bank debt) by DR standards. As a consequence, most business are not expected to grow immensely, which will likely lead to more consolidation within certain sectors (2012 was particularly characterised by very important consolidations of the food and beverage industry, with the sale of the largest beer producer in the DR, Cervecería Nacional Dominicana to AMBEV, as well as the sale of Parmalat Dominicana to Induveca). Although the national budget does


contemplate a continuance of important civil works and new projects, government spending on infrastructure is also expected to be reduced from the levels reached in 2012. Furthermore, many of the more important projects have been consigned to entities that have tied up their financing as part of their bidding process (such as, Odebrecht).


IFLR/December/January 2013 73


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19