Presentation at iwc 2005 by John Wasielewski Director, Office of Development Credit, USAID

1. 1
USAID Partial Credit Guarantees
Supporting Private Investment
in
Infrastructure Finance
John Wasielewski
Director, Office of Development Credit, USAID

2. 2
Need for Private Financing
Financing needs are too large to be met solely
by donor and host government funds
• need for sustainable solutions
Conducive legal and regulatory environment critical
to attract private capital
• banks will still be reluctant to undertake new projects in new
sectors
Partial guarantees can serve as a catalyst for:
• private financing in new sectors and new projects
• development of capital markets.

3. 3
Partial Credit Guarantees
A catalyst for private financing in new sectors and new projects
 USAID offers loan, portable, portfolio and bond guarantees
 Cover up to 50% of the loss to private lenders from local
currency loans for development activities
 Projects are primarily identified and designed by USAID
Missions in the field with support from
USAID/Washington

4. 4
Impact of Partial Guarantees
 Promote lending of local private capital
 Shared risk
 Enhance capacity of Financial Partner
 Demonstrate economic viability of new investments
 Sustainable – lending without further donor support
 Development of Capital Markets
 USAID guaranteed lending:
• 14 projects totaling $208 million in infrastructure loans,
• guaranteed portion $100 million,
• cost to US Gov’t (taxpayers) just over $7 million.

5. 5
Example – Municipal Infrastructure
Partnering with Local Guarantor
Philippines
Type: Loan Guarantee
Amount: $28,500,000
Purpose: provides a 30% guarantee
on municipal infrastructure
guarantees made by a private
guarantor of local government
infrastructure projects.
USAID
30% Guarantee
LGUGC
Banks
Loans
100% Guarantee
Municipalities

6. 6
Revolving Funds and LDCs
Revolving Funds can be applied in several forms to
developing countries.
Distinguishing features of such pooled-financing can include:
 Targeted technical assistance for individual project
identification, design and implementation as well as municipal
capacity building
 USAID or other donor partial loan or bond guarantees
 Donor or State Reserve Fund support for revolving funds
and initial capitalization of such funds

7. 7
U.S. Clean Water State Revolving Funds
 Clean Water State Revolving Fund (CWRF) program in U.S. has
significantly reduced the cost of financing to U.S. cities and towns.
 CWRF relies on state bond bank as a financial intermediary that
borrows from capital markets and on-lends to participating local
governments.
 CWRFs receive credit enhancements from national gov’t – e.g.,
reserve funds, initial capital.
 Models can be replicated in developing countries

8. 8
Example – Clean Water and Sanitation
India
Type: Bond Guarantee
Amount: $6,400,000
Purpose: Provides a
partial guarantee to cover
repayments to bond
investors. Proceeds from
the bonds’ sales are pooled
in a fund, to finance water
and sewerage
infrastructure projects in
seven selected
municipalities in Tamil
Nadu, a south-eastern state
in India.
Water & Sanitation
Pooled Fund (WSPF)
Funds from
bond issue
Private
Placement
Bondholders
 Escrow Account
 Debt Service
Reserve Fund
 USAID Guarantee

Sub-loan
Disbursement
Debt Service Payments


Municipalities
Water
and
Sewerage
Projects
MUNI
Cash
Flows
Bonds
issued

9. 9
(e.g. cont.) Features of the Bond Offering
· Indian Rupee equivalent of $6.4 million U.S Dollars issued – Fitch
rating of India AA, Bonds have 15-year term - very long for India.
· Water & Sanitation Pooled Fund is special purpose-vehicle,
independent from State of Tamil Nadu and privately managed.
· Repayment of bonds supported by portfolio of loans on-lent to small
municipalities and several credit enhancements: USAID’s partial
guarantee and a State-financed Debt-Service Reserve Fund.
· Pooled-financing reduces aggregate transaction costs and interest rates
due to larger issuer size, higher credit rating and wider (larger) group
of investors willing to purchase bonds.

10. 10
Benefits of a WSPF Bond Offering
 Adds depth to capital markets – long tenor and new
type of issuance
 Encourages good governance and fiscal reform of
municipalities
 Easily replicated – WSPF is a Revolving Fund
 Other Indian states are seeking similar revolving
funds for their water and sanitation projects

11. 11
USAID Experience – Key Lessons Learned
Comprehensive approach works best - guarantees implemented with other
interventions (legal and regulatory reform, improved transparency) can…
• promote legal and regulatory reforms to attract private sector involvement;
• focus on improved municipal governance: more transparency, better financial
analysis and loan monitoring through TA;
• support feasibility studies to help design good projects.
Sustainability crucial - Structure projects to encourage technical investments
• risk assessment or asset management capacity, to increase likelihood of
sustained activity;
• 100% guarantees often fail to generate sustained private-sector investment (i.e. after
first loans have matured, private sector fails to invest on their own).
Flexibility is key to helping private sector manage risk
• Donor credit enhancements should be tailored to address “gaps” not filled by
private sector;
• anything more may crowd out private sector; anything less may eliminate private-sector
financing and project won’t happen.

12. 12
Donor Coordination
USAID and JBIC are working jointly
to address local water and sanitation needs
in developing countries
to implement applicable systems and sustainable financing:
- Identified 4 pilot countries (Indonesia, India, Philippines and Jamaica)
- Signed 2 Memorandums of Understanding to initiate projects in the
Philippines
- recent monitoring meeting in Washington DC

13. 13
Other New USAID Guarantee Activities
Enhancing USAID guarantee products
(introducing tenor extension guarantees and
subordinated (first loss) credit guarantees)
Spearheading introduction of financing
technologies used in developed financial
markets (e.g., revolving fund in Philippines
with JBIC)
Developing a local currency Tier II capital
investment initiative to address part of the
asset/liability mismatch that inhibits local
currency lending