World Bank Guarantee Products: The Basics June 29-30, 2005

2 What are the guarantee products designed to do? A risk mitigation tool:A risk mitigation tool: –Helps reduce fiscal burden –Catalyzes private sector finance in support of developmental objectives –Facilitates access to the international debt and capital markets on more favorable terms –Leverages Bank resources But guarantees can only help if there is credible movement towards reform (e.g. collection, losses, tariff, prospect of financial viability

3 The relevance in todays investment climate Increased investor risk aversion continuesIncreased investor risk aversion continues –Reduced number of strategic investors –Rating downgrades –Reduced availability of private PRI Requires Government demonstration ofRequires Government demonstration of –A track record which reduces Uncertainty in its market structures Uncertainty in its tariff framework –With dominant public sector presence Honoring of policy & contractual commitments Governance issues

4 Principal types of guarantees Partial Risk (PRG)Partial Risk (PRG) –Generally for private sector projects –Covers debt against specific sovereign obligations committed to project –Structured to provide minimum coverage necessary to mobilize private financing –Available in both IBRD and IDA countries Partial Credit (PCG)Partial Credit (PCG) –Generally for public sector projects and/or entities –Covers debt service default for specified payments –Alternative structures developed for different credits and market conditions

5 Partial Risk Guarantees Rationale: Catalyzes private sector interest through political risk mitigationRationale: Catalyzes private sector interest through political risk mitigation Purpose: Supports debt financing in the form of commercial debt or shareholder loans or provides cash flow supportPurpose: Supports debt financing in the form of commercial debt or shareholder loans or provides cash flow support Guarantee coverage: Critical sovereign risks related to Government commitments under the relevant contractual agreementsGuarantee coverage: Critical sovereign risks related to Government commitments under the relevant contractual agreements Modality: Greenfield projects, Privatizations, Concessions or other PPP structuresModality: Greenfield projects, Privatizations, Concessions or other PPP structures

6 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 commitmentsA Partial Risk Guarantee (PRG) can cover lenders in case the Government does not meet its commitments Commercial Lenders Project Company Government Guarantee Indemnity Agreement Government Undertakings Loans World Bank

7 PRGs offer flexibility in the guarantee coverage that it can offer Regulatory/ tariff frameworkRegulatory/ tariff framework Changes in law, decrees, or regulationsChanges in law, decrees, or regulations Changes in licensing arrangements or disconnection policiesChanges in licensing arrangements or disconnection policies Political force majeure, including expropriationPolitical force majeure, including expropriation Government agencies paymentsGovernment agencies payments Transferability & convertibility of foreign exchangeTransferability & convertibility of foreign exchange Frustration of ArbitrationFrustration of Arbitration But PRGs do not cover commercial risks.

8 Preferred guarantee modality Early involvement of the Bank may help to enhance investor interestEarly involvement of the Bank may help to enhance investor interest Guarantee structure to be incorporated in the bid documents as an optionGuarantee structure to be incorporated in the bid documents as an option Bids should demonstrate value added of the GuaranteeBids should demonstrate value added of the Guarantee Value added of the guarantee to be a part of the bid evaluationValue added of the guarantee to be a part of the bid evaluation

9 Partial Credit Guarantees can help in the following situations Government or State Owned Enterprise (SOEs) access to capital marketsGovernment or State Owned Enterprise (SOEs) access to capital markets Mobilize government share in PPPsMobilize government share in PPPs Bond issues by public intermediaries, or public entities, such as SOEsBond issues by public intermediaries, or public entities, such as SOEs Pre-privatization support for public entities through convertible bondsPre-privatization support for public entities through convertible bonds

10 Partial Credit Guarantees can help finance long term public investments01015 $100 m WB Support for Principal Bullet Repayment Pricing (250 bp* ) (250 bp* ) * Above US Treasuries Philippines: Leyte-Luzon Power Project Bond Structure Longest Term Available to the Philippines without WB Support Additional term provided by WB provided by WB Support Support

11 $150 million Average financing term for China without WB Guarantee Additional uncovered risk taken by commercial banks WB Guaranteed Total risk assumed by commercial banks $50 million China Ertan Power Project Syndicated Loan Structure Partial Credit Guarantees can help finance long term public investments

12 Guarantees help extend maturities China Philippines Pakistan Jordan Lebanon Morocco Russia/Ukraine Thailand Cote d'Ivoire Colombia Bangladesh Vietnam Maturity (years) without Guaranteewith Guarantee

13 … and at the same time reduce spreads 3.0% 4.5% 3.0% 3.4% 8.5% 6.5% 3.0% 5.0% 0.6% 2.0% 2.8% 0.75% 3.0% 2.0% 2.9% 2.0% 1.1% 1.0% 2.5% 5.0% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% China Philippines Pakistan Jordan Lebanon Morocco Thailand Cote d'Ivoire Colombia Bangladesh Vietnam Interest Spreads over UST without Guaranteewith Guarantee

14 …and have an important catalytic impact Each dollar of guarantee catalyzed $4 of private finance.

15 Guarantee benefits to the government: Transaction Benefits Catalyzes financing through market access, longer tenors and lower financing costsCatalyzes financing through market access, longer tenors and lower financing costs Facilitates privatization & PPPs by enhancing investor interestFacilitates privatization & PPPs by enhancing investor interest Accelerates pace of new investment for expansion of relevant servicesAccelerates pace of new investment for expansion of relevant services Sustains more attractive retail tariff regimes by materially improving the financings debt profileSustains more attractive retail tariff regimes by materially improving the financings debt profile Enhances the potential sale value of existing assets or of the businessEnhances the potential sale value of existing assets or of the business

16 Guarantee benefits to the government: Fiscal Perspective No additional contingent liabilityNo additional contingent liability Can be additional to the IMF external debt ceilingCan be additional to the IMF external debt ceiling Additional to the country lending programAdditional to the country lending program Creates market confidence through Bank leverage and track recordCreates market confidence through Bank leverage and track record Provides for risk sharing with the private sectorProvides for risk sharing with the private sector No associated costs for PRGs (guarantee fee would be payable by the investor as part of project costs)No associated costs for PRGs (guarantee fee would be payable by the investor as part of project costs) Transitional - can be structured to fall awayTransitional - can be structured to fall away

17 The WB Partial Risk Guarantee usually does not increase contingent liabilities The host governments indemnity of the World Bank does not increase the governments 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.

18 Guarantee benefits to the private sector Mitigates critical perceived political risks and regulatory risksMitigates critical perceived political risks and regulatory risks Makes privatizations financeable by facilitating direct access to financial marketsMakes privatizations financeable by facilitating direct access to financial markets Catalyzes long term off balance sheet debt financing; thereby reducing the risk profile of the investment and overall capital costsCatalyzes long term off balance sheet debt financing; thereby reducing the risk profile of the investment and overall capital costs

19 Pre-Conditions for Use of Guarantees Subject to Bank appraisalSubject to Bank appraisal –Sector reform programs acceptable to the Bank Counter-Guarantee from the governmentCounter-Guarantee from the government –Required from the government

20 Guarantee Pricing and Loan Equivalency Loan-Equivalency Principle - The loss suffered by the Bank from a member countrys failure to make timely payment on a Bank-guaranteed loan obligation is equivalent to that suffered from the countrys failure to make timely payment on an equivalent loan-service obligation to the Bank. - Charges on IBRD loans and guarantees are aligned. IBRD GuaranteesLoans Front-end fee Standby fee Commitment fee Guarantee fee Lending spread IDA GuaranteesCredits Standby fee Commitment Charge Guarantee fee Service Charge - The pricing for IDA guarantees is consistent with IDAs service charges on credits.

21 IBRD/IDA PRG Fees (Charges for FY05 in basis points) 1. Determined on a case by case basis. Exceptional projects can be charged over 50 bps of the guaranteed amount. Fee TypeFee charged to the borrower/ retained by IBRD Upfront charges Front End Fee (on the maximum guaranteed amount) 50 bp Initiation Fee15 bp on the guaranteed amount or USD 100,000 (whichever is higher) Processing Fee 1 Up to 50 bp of the guaranteed amount Recurring charges Guarantee Fee (on the maximum guaranteed amount during an interest period) 55 bp per annum Standby Fee (on the undisbursed amount of the guarantee) 25 bp per annum Fee TypeFee charged to the borrower/ retained by IDA Upfront charges Initiation Fee15 bp on the guaranteed amount or USD 100,000 (whichever is higher) Processing Fee 1 Up to 50 bp of the guaranteed amount Recurring charges Guarantee Fee (on the maximum guarantee amount during an interest period) 75 bp per annum Standby Fee (charged on undisbursed amount of the guarantee) 25 bp per annum IBRD PRG IDA PRG

22 Fee TypeFee charged to the borrower 1 Upfront charges Front End Fee (on the maximum guaranteed amount) 50 bp Recurring charges Guarantee Fee (on the present value of the guarantee exposure) 50 bp per annum Standby Fee (charged on the undisbursed portion of the guarantee exposure) 25 bp per annum IBRD PCG Fees (Charges for FY05 in basis points) 1. Fee charges net of applicable waiver. IBRD PCG

23 Guarantee support for government reform agenda can be very flexible… Government Priority in Agreement with the World BankGovernment Priority in Agreement with the World Bank –Privatizations –Investments & PPPs –Municipal Funds and Guarantee facilities