1 USAID Credit Guarantees Effective Catalysts for Private Investment in Municipal Finance

2 Need for Private Financing Financing needs are too large to be met solely by donor and host government funds –need for sustainable solutions Critical to have a legal and regulatory environment that attracts 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 Premise of Credit Guarantees  Abundance of creditworthy but underserved sectors – bankable projects exist!  Huge reserves of dormant private capital in developing countries  Long-term private sector led growth depends on mobilization and use of private capital locally.

4 USAID’s Partial Credit Guarantees 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

5 Impact of Partial Guarantees Mobilize local private capital; can increase tenors as well as reduce collateral requirements and interest rates, Demonstrate economic viability of new investments to the local banking sector and private investors Coupled with USAID technical assistance, can enhance capacity of risk-sharing partners to perform thorough due diligence and prudent risk management Add depth to local capital markets Sustainability – can produce new and continued lending without further need for donor guarantees or other credit support.

6 Example - Bond Guarantee for Water India Amount: $6,400,000 Purpose: Provides a partial bond guarantee for a pooled funding vehicle for financing water and sewerage infrastructure projects in seven selected suburban municipalities in Tamil Nadu, India. USAID State Government 50% Guarantee Escrow Pooled Water & Sanitation Fund Institutional Investors General Obligation Revenue Resources Projects 100% Guarantee Municipalities

7 (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.

8 Additional Benefits of 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

9 Example - Municipal Energy Infrastructure Bulgaria Type: Loan Portfolio Guarantee Amount: $6,250,000 Purpose: Provides a guarantee to a bank that lends long-term funds to municipalities seeking to invest in energy efficient technologies. USAID UBB 50% Guarantee Loans Municipalities

10 Example – Water Infrastructure South Africa Type: Loan Guarantee Amount: $25,000,000 Purpose: Provides a partial loan guarantee to a private sector bank for a loan made to the City of Johannesburg for the financing of water, sewerage, utilities, and other infrastructure projects in the metropolitan area. USAID ABSA City of Johannesburg 50% Guarantee Loan

11 Example - Partner with Local Guarantor Philippines Type: Loan Guarantee Amount: $28,500,000 Purpose: provides a 30% partial re-guarantee of municipal infrastructure guarantees made by a private guarantor of local government infrastructure projects. USAID Municipalities 30% Guarantee Loans 100% Guarantee Banks LGUGC

12 John Wasielewski Director - Office of Development Credit USAID Washington, D.C