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

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

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

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  1. Catalyzing private financeThe 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. Commercial Lenders Loan Project Company Guarantee Implementation Agreement PPA Indemnity Project Finance & Guarantees Agreement Government 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

  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” Government commits to repay LC bank Letter of credit can be drawn if Government defaults World Bank guarantees LC Bank Government payment obligations Privatized entity

  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 Guarantee Framework Agreement/ Indemnity Governments Intermediary Retail of partial risk guarantees Government obligations Projects A B C Z

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

  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 government’s indemnity of the World Bank does not increase the government’s 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 d’Ivoire Senior DebtAmount Tenor (US$ millions)(years) IFC A 32 14 IFC B 30 10 PRG-Guaranteed 30 12 CDC Club 48 12 Subordinated Debt Fixed IFC 4 12 Fixed CDC Club 6 12 Convertible IFC 4 12 Convertible CDC 6 12 Total Debt 160

  13. $150 million $50 million 0 3 6 9 12 15 Average financing term for World Bank Additional uncovered China without Guaranteed risk taken by World Bank Guarantee commercial banks Total risk assumed by commercial banks Partial Credit Guarantee • WB will guarantee debt service for specific periods Example: China Ertan Power Project

  14. Policy Based Guarantee: Leveraging adjustment loans Interest Payments Guaranteed at Issuance Principal US $119m Bank’s max. exposure as of Apr 9, 01 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8 8.5 9 9.5 10 Example: Colombia Policy Based Guarantee Fitch BBB+ Moody’s Baa1 S&P BBB NAIC 2

  15. Various PCG structures can be developed • Example: • Borrower: National Power Corporation, Philippines • Terms: 15 year US$ 100 million bond maturing in July 2009 US $100m Bond World Bank support for principal repayment at maturity Longest term available to Philippines at the time Additional term provided by WB support 0 7 15 US Treasury + 2.50% Similar structures have been used in the past for project-based partial credit guarantee in Lebanon, Jordan etc.

  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 Maturity Interest Spread Colombia (P. Credit) 5 6.5% 5% 10 Philippines (P. Credit) 7 3% 15 2.5% Uganda (P. Risk) 0 8% 16 3.1% Bangladesh (P. Risk) 1 3% without Guarantee 14 2% with Guarantee Cote d’Ivoire (P. Risk) 1 3% 12 2.75%

  18. For further information contact: Mr. Suman Babbar Director, Project Finance & Guarantees Group Infrastructure Economics and Finance Department The World Bank 1818 H Street, NW Washington, DC 20433 (USA) Ph: +1 (202) 473-2029 Fax: +1 (202) 522-0761 Email: Sbabbar@worldbank.org

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