The arrival of natural gas is imminent in Central America. The cleaner burning fuel will be a driver of energy sector diversification, bringing with it important economic and environmental upsides echoed a succession of speakers at the Institute of the Americas’ 2nd Annual Forum on the Prospects for LNG and Natural Gas in Central America.
BY CHARLES SHAPIRO
This article was posted by the Miami Herald on October 27
At the business meetings around the recent Ibero-American Summit in Panama, almost every speaker — presidents and cabinet ministers, business leaders, and development bank presidents — spoke passionately about the need to help small and medium-sized enterprises in Latin America.
While macro-economic growth is the single most important factor for reducing poverty in a developing country, by itself it is insufficient. According to Costa Rican Minister of Economy Mayi Antillón, 99 percent of businesses in her country are small businesses. Leaving small businesses behind while large businesses thrive is a recipe for political instability.
Helping SMEs makes good economic and political sense. But no one explains how.
The World Bank’s Ease of Doing Business report provides a comprehensive work plan for facilitating SME growth. The first step is to make it possible for Latin American SMEs to get commercial loans from banks. Not subsidized loans. Not risky loans. But loans based on a business’s assets.
Compared to SMEs in Latin America and the Caribbean, U.S. businesses have it easy.
Article 9 of the U.S. Uniform Commercial Code enables businesses to use as collateral any kind of asset a bank will accept, such as inventory, warehouse receipts, equipment, intellectual property and accounts receivable.
Not so in Latin America and the Caribbean where banks will only accept real estate and vehicles as loan collateral. SMEs, like all businesses, need working capital, but 70 percent of SMEs in developing countries do not own the land under their stores, restaurants and repair shops and cannot obtain commercial loans.
Micro-loans are great for informal micro-businesses with few assets, but micro-loans are too small to help SMEs that want to compete in the formal economy.
When countries modernize their laws so that banks can extend loans secured with assets other than real estate, then small businesses will be able to get larger loans at lower rates of interest. This type of small business lending, called asset based lending, is currently impossible in most of Latin America.
The Organization of American States has a model law and model regulations that countries can modify to fit their own legal system. The Inter-American Development Bank (IDB), the World Bank’s International Finance Corporation (IFC), and U.S. Treasury’s Office of Technical Assistance can provide the expertise and funding to countries to help reform their laws and set up the supporting financial infrastructure.
Once laws are passed, electronic registries of pledged collateral must be established. Bankers, lawyers and judges have to learn how to use the new system. Credit bureaus must be established, and small business development centers need to mobilize to provide credit and business management advice.
On Sept. 18-19 in San José, Costa Rica, the Institute of the Americas and the IFC held their second annual conference on asset-based lending. Eighteen countries from Uruguay and Peru to Mexico and Haiti met with technical experts, bankers and political leaders to discuss how to build political consensus to support reforms, understand what other actions are necessary, and to learn from each other. A Spanish representative was there to see what Spain could learn from Latin America.
There are success stories. Honduras established a system of asset based lending in 2011, with the number of loans in 2013 running 30 percent ahead of 2012. Mexico has the gold standard of electronic asset registries and records 5,000 to 7,000 loans per month. Colombian President Santos signed a bill into law in mid-August of this year and the new system will be running by March 2014. El Salvador passed a bill that awaits President Flores’ signature. Costa Rica has a bill pending before its Legislative Assembly. Jamaica, Haiti, Trinidad, Guyana, Panama, Peru and Guatemala are drafting bills or reforming existing laws so the system will function better.
Asset-based lending is not dramatic or sexy or even expensive. It’s the equivalent of “small ball” baseball — the many small actions that add up to a winning game.
Latin American governments can help their own SMEs prosper by implementing the laws that will facilitate their access to credit. Helping small business borrow at lower rates of interest will allow them to compete, expand and hire more employees.
SAN JOSE, COSTA RICA — Natural gas’s time is near in Central America, and the cleaner burning fuel will be a driver of energy sector diversification with important economic and environmental upsides echoed a succession of speakers at the Institute of the Americas’ 2nd Annual Forum on the Prospects for LNG and Natural Gas in Central America.
But also clear is that the region must pursue appropriate solutions given its market size. Or as one speaker summed it up: “small markets require small solutions.”
The good news is that several solutions exist. From examples in Norway, Southeast Asia and closer to home in the Dominican Republic, a variety of small scale and hub-and-spoke concepts offer the capacity for landing natural gas in the region.
Indeed, with a strong anchor in the region’s booming power market and the benefits of breaking the financially and environmentally debilitating dependency on imported petroleum products, natural gas has Central America poised to diversify its dual energy matrix of hydropower and petroleum derived products.
Take Costa Rica, long one of the region’s if not the world’s most important proponents of renewable energy and “green development;” the country has a formal policy goal of carbon neutrality by 2021.
Due to the complexity of developing sufficient renewable resources, particularly large scale hydropower, state power company ICE has focused on natural gas as its “Plan B” for meeting the nation’s roughly 4% annual power demand growth and emission reduction targets of 6 million tons of CO2.
Costa Rica’s minister of energy and the president of ICE concurred that it is difficult to see the country meeting its carbon reduction targets and long-term power supply without natural gas.
Panama and El Salvador also underscore the urgency and desire of the region’s energy policy makers to seize the natural gas opportunity for their countries.
In Panama, policymakers have focused the first stage of natural gas use in the country’s power sector. Panama has advanced with plans to develop the nation’s first natural gas import project through a liquefied natural gas terminal located at Telfers Island. The project, auctioned in early 2013 and awarded to Empresa Panama NG Power, SA, counts a 400MW power plant set to initiate in 2017.
In El Salvador, a just-concluded power supply auction of 350MW organized by the government together with electric distribution companies actively pursued natural gas-fired power as part of the auction process and directly excluded bidders from submitting fuel oil or diesel projects.
Central America does not yet count any natural gas production. A lack of domestic resources means that the region will have to turn to the global marketplace in order to satisfy its desire to avail itself of natural gas’s upsides. The need to import natural gas most likely means LNG and supplies one day from Trinidad & Tobago, the next Peru, and the day after Colombia, North America or any of the 18 LNG exporting countries across the globe.
Not dissimilar from the potential of diversifying its energy matrix, many analyses favor the diversity of supply that LNG offers, with examples of Chile and Spain important to consider as Central America moves forward with the imminent inclusion of natural gas in its energy matrix.