Private Partnership in
Infrastructure Facilitating
– World Bank Guarantees
October 25, 2004
Pushing the frontier of private
investments
IFC
MIGA
IBRD/IDA
IFC A Loan
IFC B Loan
IFC Guarantees
(partial credit structures
usually for local financing)
Political Risk Insurance
(expropriation, transfer restriction,
breach of contract, war & civil
disturbances)
Guarantees
-Partial Risk
-Partial Credit
-Policy Based
IBRD Loan
IDA Credit
Similar requirements on safeguards, development
impact
Joint transactions (e.g., MIGA/IFC/PFG)
World Bank Guarantees
Help to catalyze debt with extended maturities and lower
financing costs.
Risk mitigation for Government performance- backs
sovereign contractual obligations.
Key features:






Partial Guarantee
IBRD/IDA balance sheet
Counterguarantee
Cross defaults
Flexibility
Two types of guarantees commonly used with new products being
developed
• Partial Risk Guarantees (PRG): Privatization, LC, PRG Facility, FX Liquidity
Facility, Local Currency Guarantee
• Partial Credit Guarantees (PCG), Debt and Capital Markets, Policy Based
Guarantees (PBG)
Which risks can be covered by a
PRG?
Tariff
Regulatory risk
Collection risk
Arbitration
Change in law
Convertibility
Transferability
Subsidy payments (e.g., OBA)
How does the PRG relate to
IFC/MIGA 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
Joint transactions
Coordination
The WB Partial Risk Guarantee usually
does not 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.”.
“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.
Partial Risk Guarantees mitigate
concerns related to government
performance
A Partial Risk Guarantee (PRG) can cover lenders in
case the Government does not meet its commitments
Project
Company
Loans
Commercial
Lenders
Government
Undertakings
Guarantee
Indemnity
Agreement
Government
World Bank
Partial Risk Guarantees help access
private finance at sustainable terms
Debt Maturity
5
Vietnam
(P. Risk)
Uganda
(P. Risk)
Bangladesh
(P. Risk)
Cote
d’Ivoire
(P. Risk)
Interest Spread
5%
16
2%
0
8%
16
3.1%
1
3%
14
1
2%
3%
12
without Guarantee
2.75%
with Guarantee
Partial Credit Guarantees help
access private finance at sustainable
terms
Debt Maturity
5
Colombia
(P. Credit)
Thailand
(P. Credit)
Philippines
(P. Credit)
6.5%
5%
10
0
8.5%
10
Lebanon
(P. Credit)
Jordan
(P. Credit)
Interest Spread
2.9%
5
3%
10
1%
2
3%
7
1%
7
15
3%
2.5%
without Guarantee
with Guarantee
Policy Based Guarantees to
leverage adjustment loans
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 an adjustment
loan
Bank Guarantees have limited
impact on CAS envelope
Country’s total CAS envelope will be increased
by 75% of the face value of guarantee
commitments
This incentive will apply to both partial credit
and partial risk guarantees for investment
projects
PFG Risk Mitigation Instruments
 Privatization
New Applications
of PRG
 Letter of Credit structure
 Facilities
 Local Currency Guarantees
Application of PRGs to support
privatization
Government
Private
Investor
Equity
(US$50m)
Shareholder Loans
(US$ 25m)
Partly covered by WB-PRG
Sale Proceeds
Government
Support
Agreement
Indemnity
Guarantee
Regulator
License Agreement /
Regulatory Contract
Commercial Loans
(US$ 25m)
Partly covered by WB-PRG
Commercial
Lenders
PRG can mitigate Government
payment risk using letter of credit
Commercial
Bank
Letter of credit
can be drawn if
Government
defaults
Private
Entity
Commercial
Bank
Government
commits to repay LC
bank
World Bank
guarantees LC Bank
Payment obligations (e.g, OBA)
PRG facilities to support medium size
investments
World Bank
Indemnity
Government
Line of PRGs
Intermediary for Retail
of PRGs
Obligations
Projects
A
B
C
Z
Regional Gas Project: Enclave
Guarantee Structure (Rand Guarantee)
(Sasol owned,
Moz company)
Loan Agreement
(Rand denominated)
Pipeline Agreement
ROMPCO
Indemnity
Agreement
SPT
GOM
Petroleum
Production
Agreement
Project
Agreement
Guarantee
Agreement SPT
(Sasol owned, RSA
company)
Project Agreement
Guarantee Agreement
ROMPCO
SCMB (Lead arranger)
Loan Agreement
(Rand denominated)
South African Regional Gas Project
World Bank Group participation…
Total Project Cost: US$ 1 billion
Upstream Development
CMH
Eq uity
Debt Facilities
Total CMH
– Unincorporated Joint Venture
Funding Origin
18.00
38.00
56.00
IFC
SPT
Equity
Debt Facility
Total
10.00
including political risk coverage
PRG
MIGA
ECAs
148.00
182.00
from:
20.00
25.7
50.00
Total SPT
330.00
Investments in Upstream Project
Gas Pipeline currently wholly- owned by Sasol
Equity
Debt Facilities
including political risk coverage from:
PRG
MIGA
ECAs
Investments in the Gas Pipeline
TOTAL Financing Required for the Project
396.00
285.00
320.00
10 .00
89.00
77.00
605.00
1001.00
Guarantee pricing*
Types of Fee
Stand-by
..Bank retains
Guarantee
..Bank retains
Initiation & Processing
Front-end
Payment of
Guarantee Fee
IBRD
IDA
75 bp
25 bp
75-100 bp
50 bp
25 bp
0 bp
75+ bp
75 bp
0.15-0.65%
0.15-0.65%
1%**
Periodic/one
time upfront
N/A
Periodic/one
time upfront
*Excluding PBGs provided under SSALs and for IBRD enclave guarantees in IDA only countries
** For FY 05 with the waiver the effective front end fee is 0.5%
Guarantees completed so far…
Total exposure as of March 2004: US$ 1.41 billion
PRGs: 10
PCGs: 8
PBGs: 2
Guarantee Allocation by Sector
Guarantee Allocation by Region
Total IBRD Guarantees: US$ 2,300 million Total IDA Guarantees: US$ 121 m
Other
16%
Finance
17%
EAP
26%
MENA
14%
Power
56%
Oil & Gas
1%
Telecom
10%
Power
AFRICA
2%
SA
16%
Telecom
LAC
17%
Oil & Gas
Finance
Other
AFRICA
ECA
25%
EAP
ECA
LAC
MENA
Future operations in the pipeline:
Africa: 14 EAP: 1 ECA:8 MENA: 3 SA: 1 LAC:1
SA
Cases:
PCG Structure
Vietnam Phu My 2-2 BOT Power
South African Regional Gas Project
BOAD Guarantee Facility
PCGs: Various structures
Example:
Borrower: Jordan Telecom Corp
Project: Modernization
Terms: 7 year US$ 50 million bond
matured in September 2002
Longest term
available to
Jordan at the
time
0
US $50m Bond
World Bank support
for principal
repayment at
maturity
Additional term provided
by WB support
2
7
US Treasury + 1.1%
Similar structures have been used in the past for project-based partial credit
guarantee in Lebanon, Philippines etc.
21
Partial Credit Guarantee
WB will guarantee debt service for specific
periods
$150 million
Example: China
Ertan Power
Project
$50 million
0
3
6
Average financing term for
China without
World Bank Guarantee
9
12
15
Additional uncovered World Bank
risk taken by
Guaranteed
commercial banks
Total risk assumed by commercial banks
Policy Based Guarantee: Leveraging
adjustment loans
Interest
Payments Guaranteed at Issuance
Principal
US $159m
Bank’s
max.
exposure
0.5
1
1.5
Fitch
S&P
2
2.5
3
3.5
4
4.5
5
5.5
6
6.5
7
7.5
8
8.5
Example: Colombia Policy Based Guarantee
BBB+
Moody’sBaa1
BBB
NAIC
2
9
9.5 10
Vietnam: Phu My 2-2 BOT Power Project
Key Contracts
IDA Indemnity Agreement
MOI
Government
Guarantee
ADB GOR
Private EPRI
MPI
Government
(MPI)
World
Bank
EPRI
BOT Contract
Investment
Licence
IDA Project
Agreement
IDA
PRG
EVN
Loan Agreement
Mekong
Energy
Company
Gas Supply
Agreement
Loan
Agreements
PV
Water
Supply
Agreement
BR-VT Water
Supply Co.
Shareholder
Agreement
Land Lease
Agreement
BR-VT People’s
Committee
(UDEC)
EPC
Contract
EDF-CNET
Commercial
Lenders
JBIC
ADB OCR
Proparco
Technical
Support Agreement
EDF
TEPCO
EDFI
Sumitomo
TEPCI
BOAD Guarantee Facility
WAEMU Country Government(s)
Guarantee Facility Agreement (GFA)
MIGA
World Bank
(VP Approval)
(RVP Approval)
Contract
of
Guarantee
Indemnity Agreements
AFD
(Board Approval)
Guarantee
Agreements
BOAD
Sub Project Company
Commercial
Debt, L/C
Commercial
Banks
EPC Contract
Equity
Investor
O & M Contract
Construction
Contractor
O&M
Contractor
- Equity
- Shareholders loans
Toll Roads Financing
The wave of toll road concessions in
1990s
12,000
60
10,000
50
8,000
40
6,000
30
4,000
20
2,000
10
0
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Investment in Road Projects with Private Participation in
Developing Countries
Source: World Bank PPI Database
No. Projects
Investment US$million
Financial Crisis
Issues in toll road financing
• Traffic
– New facilities (roads/ports/railway)
– Extensions/rehabilitation
• High local cost component
• Barriers to local funding
– Short maturities
– High cost of financing
– Insufficient capacity
• Barriers to foreign funding
– Country creditworthiness
– Devaluation of currency
– Political risks/government obligations
• Levels & type of government support
Risk allocation
• Risk allocation based on better understanding of project
risks, their impact on project outcomes, who can best control
them and the cost of bearing them
Risk/Obligation
Pre-construction
Concession Term
Construction
Operations
Agency
Land Acquisition/Right-of-Way
Environmental Approvals
GOC Financing Contribution
Project Design (Tunnels)
Project Design (Roads, Bridges)
Debt & Equity Financing
Political Force Majeure
(3)
Changes in Law
Expropriation
(4)
Natural Force Majeure
Currency Devaluation
Currency Inconvertibility
(1)
(2)
Cost Overrun (roads-bridges)
(5)
Cost Overrun (tunnels)
Construction delays/project completion
Tort Liability
Toll Evasion
Traffic Level (years 1-9)
Traffic Level (years 9+)
Toll Adjustment
Operations & Maintenance
1 / Actual amounts or level of comfort subject to bidding.
(6)
ü
ü

ü
Investors &
Lenders
Insurance
Third Party
Guarantee
ü
ü
ü
ü
ü
 (1)
 (1)
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
Sustainable schemes: Seeking more secure
debt structures
Example of variation of domestic interest rates
C
40%
Toll
Revenue
B
30%
20%
Expected Revenue
Toll x Traffic
10%
J-00
J-99
J-99
J-98
J-98
J-97
J-97
J-96
J-96
J-95
J-95
0%
Local financing: short amortization (3-5 years), high
interest rates, insufficient market depth
Loan 1
(3-5 years)
“Roll over” of short term instruments
(high refinancing risk)
Loan 2:
(10 years)
0
10
Years
5
Foreign financing: foreign exchange risk (mismatch with
local revenue), political and regulatory risks, sovereign risk.
Sustainable schemes: Seeking more
secure debt structures
Typical Project Cash flows with long-term financing
Sustainable schemes: Evolution of risk
during project phases
Institutional Investors
(long-term) financing)
Eng. & Const
Phase
Start Up
Phase
Operation Phase
Refinancing risk
Delay
Construction risk
Land/Ground condition
Financial risk
Design
Traffic (ramp up)
Toll adjustments
O&M
Traffic
Service quality-standards
Time
Sustainable schemes: Selecting
government support options
Impact on ability of project to raise debt
High
• Debt Guarantees
• Exchange Rate Guarantees
• Grants
• Subordinated Debt
• Minimum Traffic/Revenue Guarantees
• Shadow Tolls
• Revenue enhancements
• Concession Term Extension
Low
Government’s financial exposure
High
Trends in minimum revenue guarantees
a) A percentage of traffic
forecast (fixed, bid, bid within
ceiling) throughout concession
period, with share over agreed
value;
Additional revenue shared
Projected Traffic
Minimum Revenue Guaranteed
Outstanding debt
1
2
3
4
b) Bid within specified limits in
duration (e.g., “ramp up”) and
amount (e.g., debt service);
5
6
7
8
9 10 11 12 13 14 15
Projected Traffic
Minimum Revenue Guaranteed
1
2
c) Present value of cumulative
revenue, fixed through bidding.
Concession ends when:
3
4
5
6
7
8
9
10 11 12 13 14 15
Actual Revenue
Term expires upon reaching Present Value
of Revenue (fixed at bid)
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15
Colombia: Salgar Toll Road Project
Project Cost: US$400-430 million
 Borrower: Concessionaire selected by competitive bid
 Amount: US$ 80-100m syndicated loan/bond
 Maturity: At least 12 years
 Bank support:


Partial Risk Guarantee: political events, toll collection &
adjustments set in contract

Contingent Bank loan; construction cost increases (tunnel only),
Liquidity Facility: minimum revenue guarantee
(capped annually, limited duration, revolving)


Evaluation based on minimum use of Government
support
Partial Risk Guarantees - Toll Road
What was covered
Not covered
Toll adjustment & collection
Expropriation
Currency Inconvertibility
Political Force Majeure:
• Sabotage, war
• civil disorder, national &
regional strikes
• finds (archaeological-mineral)
• delay in award of permits
Changes in Law
No competing road
Access roads
Min. Traffic/Revenue
Guarantees
Non-political F.M.:
• employee strikes
• earthquakes, hurricanes,
fires, floods, slides
• accidents on roadway
Toll evasion
Design shortfalls
Inefficient O&M
Construction delays & cost
overruns
Bank Guarantee Program
Procedures
Selecting Guarantee Operations
1. Government & Bank dialogue
2. Government undertakes
competitive bid for sponsor
3. Sponsor proposes project to Bank
Operational Procedures:
Appraisal and Negotiations
Discrete Steps Vs. Ongoing Process
Same appraisal standards as Bank loans/credits
Can accept 3rd party assessments/appraisals
Disclosure requirements:
IBRD Guarantees: different that IBRD loans
IDA Guarantees: same as IDA credits
Standard Bank environmental guidelines
Private sponsor prepares EA, flexible timing
Negotiations
Contractual arrangements: Govt.-sponsors
Financial arrangements: Bank-lenders
Operational Procedures:
Appraisal and Negotiations
Discrete Steps Vs. Ongoing Process
Same appraisal standards as Bank loans/credits
Can accept 3rd party assessments/appraisals
Disclosure requirements:
IBRD Guarantees: different that IBRD loans
IDA Guarantees: same as IDA credits
Standard Bank environmental guidelines
Private sponsor prepares EA, flexible timing
Negotiations
Contractual arrangements: Govt.-sponsors
Financial arrangements: Bank-lenders
Procurement Guidelines
Paragraph 3.15:
If the Bank Guarantees the repayment of a loan made by another lender,
the goods and works financed by the said loan shall be procured with
due attention to economy and efficiency and in accordance with
procedures which meet the requirements of paragraph 1.5.
Paragraph 1.5:
….Goods and Works to be procured:
a) are of satisfactory quality and are compatible with the balance of the
project
b) will be delivered or completed in timely fashion; and
c) are priced so as not to affect adversely the economic and financial
viability of the project.
Environment Assessment
In accordance with OP/BP 4.01
Guarantees – Disclosure Policy.
Category A EA report - no later than 60 days at
the Infoshop
Category B EA report - no later than 30 days at
the Infoshop
Operational Procedures:
Documentation
Project Information Document
After government request
Send to PIC 30 days prior to Board date
PCN/PAD for Guarantees
Legal Documents:
Indemnity Agreement between Govt. and IBRD/IDA
Guarantee Agreement between Lenders and IBRD/IDA
Project Agreement between Sponsor/s and IBRD/IDA
Sponsor’s Role
Early consultation with government & Bank
ensures project priority
Sponsor takes lead
Project structuring
Financial arrangements
Provides data for Bank appraisal
Sponsor selects arranging banks
Bank reviews selection/structure for guaranteed amount
Sponsor’s Role
Early consultation with government & Bank
ensures project priority
Sponsor takes lead
Project structuring
Financial arrangements
Provides data for Bank appraisal
Sponsor selects arranging banks
Bank reviews selection/structure for guaranteed amount
IBRD or IDA
PRG
Government Request
PID and
IM (or PCN)
Processing of
Guarantees
Management approval
to make the PRG
available in the bidding
documents
Concept Review
Corporate Review
(Operations Committee)
Appraisal Start
PAD and MOP
Approval by RVP,
ENV, LEG
World Bank
Board Approval
Signing of Agreement and
Effectiveness
Negotiations with
Government,
Sponsors,
and Guaranteed
Lenders
For further information contact:
Suman Babbar, Sr.Adviser
The World Bank
1818 H Street, NW
Washington, DC 20433 (USA)
Ph: +1 (202) 473-2029
Fax: +1 (202) 522-0761
Email: [email protected]
or visit our web site: www.worldbank.org/guarantees