Overview Of The World Bank Guarantee Program

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  • 1. The World Bank Guarantees: Overview and Key Features Risk Mitigation: Review of World Bank Group Guarantees. Board Technical Briefing. June 16 2005. 1
  • 2. WORLD BANK GUARANTEES: Key Features IBRD/IDA balance sheet Available to all countries eligible for borrowing from IBRD or IDA Bank Guarantees back government obligations Guarantees cover private debt against a government’s (or government entity’s) failure to meet specific obligations to a private or public project. Mobilize private sector participation and help catalyze debt with extended maturities and lower financing costs Flexibility – structured to meet borrower and project requirement An integral part of Country Assistance Strategy Counterguarantee from Member Country – Bank Articles requirement – Indicates project priority for Government and Bank Benefits from the ongoing sector and country engagement of the Bank Risk Mitigation: Review of World Bank Group Guarantees. Board Technical Briefing. June 16 2005. 2
  • 3. Benefits of World Bank Guarantees For governments… Catalyzes private financing for key sectors such as infrastructure Provides access to capital markets as well as commercial banks Reduces cost of private financing to affordable levels Facilitates privatizations and public private partnerships Reduces government risk exposure by passing commercial risk to the private sector Encourages cofinancing For the private sector… Reduces risk of private transactions in emerging countries Mitigates risks that the private sector does not control Opens new markets Improves project sustainability Risk Mitigation: Review of World Bank Group Guarantees. Board Technical Briefing. June 16 2005. 3
  • 4. Overview of the World Bank Guarantees Program Approved Operations: 28 guarantees approved for 26 projects Private capital catalyzed in the last 8 years: US$ 12 billion 2 PBGs, 8 PCGs, 18 PRGs; total exposure as of May 2005: US$ 1.4 billion Total amount of guarantees approved: US$ 2.9 billion dollars In FISCAL YEAR 2005: COUNTRY PROJECT West Africa West African Gas Pipeline Uganda Distribution Privatization Project (supported by an IDA credit) Romania Power Sector Distribution Project Peru Guarantee Facility Senegal Kounoune Power Lao PDR Nam Theun 2 Power Sierra Leone Bumbuna Hydropower (To be considered on June 16th) Future Operations: 26 transactions in pipeline; 58% in Africa; infrastructure focus. Risk Mitigation: Review of World Bank Group Guarantees. Board Technical Briefing. June 16 2005. 4
  • 5. Bank Guarantees: Financial Management Principles Bank Guarantees are managed as part of the IBRD and IDA portfolio of loans and credits. CAS envelope is increased by 75% of face value of guarantee commitments for investment projects for both IBRD (< 20% of CAS envelope & SBL) and IDA countries. Country Risk is managed at the Lending Program level, similar to IBRD loans and IDA credits. IBRD provisioning policies for loans govern IBRD guarantees. IDA provisioning policies govern IDA guarantees (currently, no provisioning policy is applicable for IDA credits or guarantees). IBRD maintains sufficient liquidity to meet any potential disbursements. IDA maintains liquidity of 50% of cumulative callable amounts. Risk Mitigation: Review of World Bank Group Guarantees. Board Technical Briefing. June 16 2005. 5
  • 6. Types of Guarantees Partial Risk Guarantees (PRGs) –in support of private projects: – Cover debt amounts against specific risks Partial Credit Guarantees (PCGs)- in support of public projects: – Cover part of bond/loan repayments against all risks Policy Based Guarantees (PBGs) – in support of development policy operations: – Cover part of bond/loan repayments against all risks Risk Mitigation: Review of World Bank Group Guarantees. Board Technical Briefing. June 16 2005. 6
  • 7. Partial Risk Guarantees (PRGs): Key Features Cover private lenders against the risk of a public entity failing to perform its obligations with respect to a private project. PRG reinforces obligations of the Government – does not add to them. Structured to provide minimum coverage necessary to mobilize private financing The World Bank also offers enclave guarantees which are PRGs structured for export oriented foreign exchange generating commercial projects in IDA-only countries. A flexible instrument – various structures available New developments: – Letter of Credit Structure for Greenfield projects – Privatization Guarantees – Guarantee Facilities – Local Currency Guarantees Risk Mitigation: Review of World Bank Group Guarantees. Board Technical Briefing. June 16 2005. 7
  • 8. PRGs help access finance at sustainable terms Debt Maturity Interest Spread1 Vietnam 5 5% (P. Risk) 16 2% Bangladesh 1 3% (P. Risk) 14 2% 1 3% Cote d’Ivoire (P. Risk) 12 2.75% 0 N/A Lao PDR (P. Risk) 16.5 2.25 % without Guarantee with Guarantee 1 Spreads at the time of the guarantee issuance Risk Mitigation: Review of World Bank Group Guarantees. Board Technical Briefing. June 16 2005. 8
  • 9. Partial Credit Guarantees (PCGs): Key Features Cover private lenders against all risks during a specific period of the financing term of debt for a public investment Specially designed to extend maturity and improve market terms Lengthen the maturity of the private debt financing beyond that available in private markets by covering a part of the scheduled repayments of private loans or bonds against all risks PCGs are flexible, allowing different structures for meeting different client needs, such as: – Bullet guarantee – Latter maturities – Rolling non-reinstatable – Amortizing syndicated loan At present, partial credit guarantees are available only for countries eligible for loans from IBRD. No overlap with MIGA or IFC instruments Risk Mitigation: Review of World Bank Group Guarantees. Board Technical Briefing. June 16 2005. 9
  • 10. PCGs help access finance at sustainable terms Debt Maturity Interest Spread Colombia 5 6.5% (P. Credit) 10 5% Thailand 0 8.5% (P. Credit) 10 2.9% Lebanon 5 3% (P. Credit) 10 1% Jordan 2 3% (P. Credit) 7 1% Philippines 7 3% (P. Credit) 15 2.5% 1 Spreads at the time of the guarantee issuance without Guarantee with Guarantee Risk Mitigation: Review of World Bank Group Guarantees. Board Technical Briefing. June 16 2005. 10
  • 11. Policy Based Guarantees (PBGs): Key Features An extension of partial credit guarantees beyond investment projects to adjustment / sector programs Facilitates sovereign borrowings in support of structural and social policy reforms Alternative/Complement to a Development Policy Loan Acceptable forms of PBGs – Bullet guarantee – Partial guarantees of payments – Latter maturities – Rolling Non reinstatable No overlap with MIGA or IFC instruments Risk Mitigation: Review of World Bank Group Guarantees. Board Technical Briefing. June 16 2005. 11
  • 12. Guiding Principles on Deployment of Risk Mitigation Instruments 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 – Clout of the Bank needed Joint transactions Coordination Risk Mitigation: Review of World Bank Group Guarantees. Board Technical Briefing. June 16 2005. 12