Environmental Financial Advisory Board Publications

                          Cooperative International
                              Environmental Bond
                                  Guaranty Fund
                       United States Environmental Protection Agency

                          Environmental Financial Advisory Board

                                      on a proposed

                International Cooperative Environmental Bond Guaranty Fund

     The Board would like to propose a Cooperative International Environmental Bond Guaranty Fund
(the "Cooperative Fund"). The purpose of this fund would be to provide, on a global basis, a contingent
guaranty for bonds or loans which fund environmental projects. This guaranty would be contingent
because participating countries would be required to fund a first loss reserve from the financial resources
of their own indigenous environmental funds. The Cooperative Fund, whose capital would be furnished
by the U.S. Government, would then assume a second loss position being each of the indigenous first
loss providers. The Board proposes that, rather than restricting the operation of the program to one
country or one group of countries, such program be available to all countries with emerging capital
markets, which are willing to finance environmental infrastructure with municipal debt and which are
willing either to create appropriate environmental funds or to use existing funds as a first loss reserve for
bonds which the Cooperative Fund would guaranty.

     The Office of Internationa! Activities has already made environmental bond guaranty proposals to
Russia and the New Independent States (MS) and to the Peoples' Republic of China. In addition, the
U.S. Agency for International Development has done work along broadly similar lines in several other
countries, including Thailand, Indonesia, South Africa and the Czech Republic.

     An illustration of how the Cooperative Fund might operate can be provided using a hypothetical
National Ecological Fund (the "National Fund") as an example.

     This National Fund would have a reasonably reliable income source from effluent or emission
permit fees or from fines and penalties. Under the instant proposal, the National Fund would set aside a
specific amount of its funds in a trust to be used as a first loss guaranty on loans or municipal bonds
issued for environmental projects, and the EPA-sponsored Cooperative Fund would take a second loss
position on ail qualifying loans or bonds guarantied by the National Fund.

     Now, assuming that this National Fund guarantied four, five-million dollar bonds issued by
municipalities which were counter-guarantied by the municipalities' respective creditworthy regional
governments. Of these, $20 million of bonds, assume that the National Fund were to pledge $10 million
as a first loss reserve. The Cooperative Fund would then guaranty an additional $10 million in a second
toss position. In order for the Cooperative Fond to sustain a loss, 1) three of the four municipalities
would have to default, totally, on their obligations, 2) all three of the, otherwise creditworthy, regional
governments would have to abrogate, and default on, their counter-guaranties, and, 3) the National Fund
would have to pay out all $10 million of its first loss reserve.

      As you can see, this structure would reward those municipalities which are creditworthy with
lower interest rates and longer terms - hence less cash flow needed to pay for environmental projects. It
would facilitate the development of municipal finance markets in each country where the guaranties are
used, by clearly differentiating superior municipal credits and by permitting these credits to come to
market in an orderly fashion. It would also involve a substantial  financial commitment of the host
government which should assure both local and international investor,  as well as the U.S. Government,
that municipal obligers will make good on their underlying financial obligations.

      There is a further benefit to this structure.

      If this double guaranty program is successful, it should be able to achieve substantial leverage.
Although dollar-for-dollar guaranties will be required for the first $100-$200 million of projects,
thereinafter no further commitments should be required of the Cooperative Fund up to approximately
lOx the combined funds available. In short, a commitment of $100 million of U.S. funds should be able
to leverage approximately $2 billion of environmental infrastructure projects at any one time. Assuming
an average five-year term for guarantied bonds,  the Cooperative  Fund should be able to guaranty about
$6 billion of environmental infrastructure projects over a ten year period.

      The Board proposes that $100 million of U.S. Government funds be appropriated to  capitalize the
Cooperative Fund. It proposes that the Cooperative Fund be organized as an independent corporation
whose shares are held by the U.S. Treasury. The Cooperative Fund should be headquartered in a major
international financial center such as London or New York. It should have a board of directors appointed
by the Administrator of the U.S. Environmental Protection Agency, the Secretary of State and the
Secretary of the Treasury, or whomsoever the President directs. Finally, it should be staffed by a small
cadre of professionals recruited from the  financial guaranty insurance industry.

      The Board views the actual creation and organization of the Cooperative Fund as a relatively
straightforward matter. Implementing its  goals, however, will  take considerable work.

      Successful implementation will involve five major technical assistance efforts. First, it will
involve familiarizing the senior management of indigenous environmental funds  with the benefits of a
programmatic financing mechanism capable of accessing the international capital markets  - thus
achieving the longest possible terms at the lowest possible rates. Second, it will involve persuading
senior government policy makers - in each country having an environmental fund - of the same benefits.
Third, it will involve training the staffs of these  indigenous funds on the operation of financial guaranties
and the credit criteria required of the underlying municipal debt issuers. Fourth, it will involve the
training of municipal finance officers from each county in project finance methodology and municipal
credit requirements for environmental infrastructure projects. Fifth,  it may also involve working with
legal, financial and regulatory authorities within certain countries to assure the proper legal and
administrative procedures are in place for fully effectuating bondholders rights and the rights of the
respective funds.

      In  this regard, much reliance would have to be placed on the Office of International Activities
whose staff has developed strong rapport with the senior management of many of these environmental
funds in other countries. They would also have to be relied upon for the significant work of persuading
senior government policy makers of the wisdom of using their indigenous environmental financial
resources for these purposes.

      As far as the training of indigenous environmental fund credit personnel, foreign municipal
finance officers, and foreign legal and regulatory officials is concerned, the Environmental Finance
Centers,  under the supervision of the Office of the Comptroller, could be of invaluable assistance in
organizing such an effort. As you know, within  the United States there are several states which offer
financial  guaranties on municipal bonds of various types. There are also six major, private  financial
guaranty insurance companies which offer such guaranties. A well-considered technical assistance
program  with a quasi-academic component and  a practical component  - organized by the Centers - could
provide the staffs of these indigenous environmental funds and appropriate municipal finance officers
from their respective countries with the fundamentals of municipal finance, environmental project

finance and the administration of bond guaranties, which they need to successfully issue municipal
bonds and to operate their own guaranty funds. Furthermore, the Centers are capable of organizing the
legal, administrative and regulatory resources needed to train foreign government personnel in these
matters, as well. The Environmental Finance Center at the Maxwell School at Syracuse University is
especially well positioned to assist in these matters.

     In summary, the creation of a permanent international financial institution, such as the
Cooperative Fund, will give authoritative U.S. leadership and direction to the many countries struggling
to establish permanent, viable systems for financing their environmental infrastructure. This benefit
cannot be understated. It will  firmly establish the leadership of the United States in the vital and
emerging area of environmental finance. This leadership position will be especially significant as the
international environmental community struggles to deal with the vast financial implications of issues
such as global warming - where there  is much to be learned from  financial structures such as those
proposed for the Cooperative Fund.

     In addition, the Cooperative Fund will lower the cost of environmental infrastructure projects for
emerging market countries across the globe. It will have positive effects in Eastern Europe, Africa, Asia
and Latin America - wherever the financing of such projects is beginning to devolve from strict central
government control. It will aid countries caught in the current miasma created by the turmoil in the
emerging market financial crisis. The Cooperative Fund would especially assist countries such as the
Baltic Republics in emerging from the penumbra of the Russian financial implosion.

     The Cooperative Fund will advance the U.S. Government's international efforts to achieve
transparent fiscal procedures and serious financial market reform. Achieving access to international
capital  markets is a vague and ill-defined goal for many developing nations. All the more so for regions
and municipalities within such countries. Proposals such as the Cooperative Fund give a clear direction
to these goals. The Cooperative Fund will spell out for these developing countries the ABCs of the legal,
administrative and fiscal disciplines necessary for a small city in a third world country to enjoy the
considerable financial benefits of the longest bond terms and the lowest bond rates only available in the
international capital markets.  Furthermore, it will show them that the people of the United States are
backing up our free advice  with our valuable financial resources. And, we are doing  so with great
leverage - where billions of dollars of benefits will flow from the  investment of just $100 million of U.S.
Government funds.

     Finally, and most importantly for the U.S. Environmental Protection Agency, the Cooperative
Fund will provide significant worldwide environmental benefits. It will put safe, drinkable water in the
households of millions of people. It will remove the  open sewage from many of the planet's most
important waterways. It will clean filthy air from major cities. And it will provide a safe disposal  for
millions of tons of solid waste that plague the globe.

     In sum, the Cooperative Fund will confer broad benefits not only on the people of the countries in
which it operates, but also on the people of the United States and the world at large. For these reasons,
we commend the Cooperative Fund proposal to you  for your utmost consideration.

June 1999