Catalyzing private finance The relevance of World Bank Guarantees at time of risk aversion

2 After September 11, risk aversion in the market has increased… September 11, Argentina crisis, Enron bankruptcy have increased risk aversion Banks capital eroded Reduced availability of private PRI Strategic investors reconsider portfolio in emerging markets

3 A Partial Risk Guarantee can mitigate Government performance risk A Partial Risk Guarantee (PRG) will cover lenders in case of a default on a covered contractual obligation to a project company leading to a Debt Service Default Project Company Government Commercial Lenders Project Finance & Guarantees Implementation Agreement PPA Indemnity Agreement Guarantee Loan

4 A PRG can be effective when key risks include: Tariffs Regulatory framework Rights of way Licenses Expropriation Termination amounts Interference in arbitration process Rule of law…

5 Novel type of PRG: L/C Structure Letter of credit can be drawn if Government defaults Government commits to repay LC bank World Bank guarantees LC Bank Privatized entity Government payment obligations

6 PRGs can be used to enhance privatization response Use of a PRG can result in –More bidders (halo effect of the Bank) –Increased upfront investment commitments –Increased sale value for the privatization –Lower tariffs (more attractive financing terms) –Mobilizes both local and foreign investors

7 PRGs can be used for a series of smaller projects World Bank Intermediary ABZ Projects Governments Guarantee Framework Agreement/ Indemnity C Retail of partial risk guarantees Government obligations

8 PRGs can backstop municipal undertakings World Bank Intermediary ABZ Projects Municipality Indemnity agreement C Retail of partial risk guarantees Municipal obligations Clawback Government

9 Criteria for deployment of the PRG PRGs can be considered in the following situations: –Sectors in early stages of reform –Larger size/riskier operations –Operations highly dependent on support/undertakings of governments

10 The WB Partial Risk Guarantee does not usually increase contingent liabilities The host governments indemnity of the World Bank does not increase the governments liabilities when the government is already directly obligated to the private sector on the same liabilities., IMF. Involving the Private Sector in Forestalling and Resolving Financial Crises – Private Project Finance Flows to Developing Countries, IMF Board Paper SM/99/211, August 20, 1999, page 21.

11 Collaboration with MIGA: PRG MIGA CUP

12 Collaboration with IFC & ECA Azito power project in Cote dIvoire Senior Debt Amount Tenor (US$ millions) (years) IFC A IFC B PRG-Guaranteed CDC Club Subordinated Debt Fixed IFC 4 12 Fixed CDC Club 6 12 Convertible IFC 4 12 Convertible CDC 6 12 Total Debt 160

13 WB will guarantee debt service for specific periods Partial Credit Guarantee $150 million Average financing term for China without World Bank Guarantee Additional uncovered risk taken by commercial banks World Bank Guaranteed Total risk assumed by commercial banks $50 million Example: China Ertan Power Project

14 Policy Based Guarantee: Leveraging adjustment loans US $119m Banks max. exposure as of Apr 9, Interest Principal Payments Guaranteed at Issuance Example: Colombia Policy Based Guarantee FitchBBB+MoodysBaa1 S&PBBBNAIC2

15 07 US $100m Bond World Bank support for principal repayment at maturity Additional term provided by WB support Longest term available to Philippines at the time US Treasury % Similar structures have been used in the past for project-based partial credit guarantee in Lebanon, Jordan etc. Various PCG structures can be developed Example: –Borrower: National Power Corporation, Philippines –Terms: 15 year US$ 100 million bond maturing in July 2009

16 PCGs can help in the following situations… Government or parastatals access to capital markets Finance government share in Private Public Partnerships Bond issues by public intermediaries, or public utilities

17 Partial Guarantees help access private finance at improved terms Debt MaturityInterest Spread Colombia (P. Credit) Philippines (P. Credit) % 5% 2.5% 3% with Guarantee without Guarantee 5 Cote dIvoire (P. Risk) % 2.75% Uganda (P. Risk) % 8% 1 Bangladesh (P. Risk) 3% 2% 14

18 Mr. Suman Babbar Director, Project Finance & Guarantees Group Infrastructure Economics and Finance Department The World Bank 1818 H Street, NW Washington, DC (USA) Ph: +1 (202) Fax: +1 (202) For further information contact: