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Private Partnership in Infrastructure Facilitating – World Bank Guarantees
October 25, 2004
IFC MIGA IBRD/IDA
IFC A Loan Political Risk Insurance GuaranteesIFC B Loan (expropriation, transfer restriction, -Partial RiskIFC Guarantees breach of contract, war & civil -Partial Credit(partial credit structures disturbances) -Policy Basedusually for local financing) IBRD Loan
IDA Credit
Similar requirements on safeguards, development impactJoint transactions (e.g., MIGA/IFC/PFG)
Pushing the frontier of private investments
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?
TariffRegulatory riskCollection riskArbitrationChange in lawConvertibilityTransferabilitySubsidy 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 transactionsCoordination
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
Commercial Lenders
Project Company
Government
Guarantee
Indemnity Agreement
Government Undertakings
Loans
World Bank
Partial Risk Guarantees help access private finance at
sustainable termsDebt Maturity Interest Spread
Vietnam(P. Risk)
5%2%
5
16
with Guarantee
without Guarantee
Cote d’Ivoire(P. Risk)
112
3%
2.75%
Uganda(P. Risk)
016 3.1%
8%
1Bangladesh(P. Risk)
3%2%14
Partial Credit Guarantees help access private finance at
sustainable termsDebt Maturity Interest Spread
with Guarantee
without Guarantee
Colombia(P. Credit) 10
6.5%
5%
Philippines(P. Credit) 15
7
2.5%3%
5
Thailand(P. Credit)
010 2.9%
8.5%
Lebanon(P. Credit)
Jordan(P. Credit)
510
3%1%
72 3%
1%
An extension of partial credit guarantees beyond investment projects to adjustment / sector programsFacilitates sovereign borrowings in support of structural and social policy reformsAlternative/Complement to an adjustment loan
Policy Based Guarantees to leverage adjustment loans
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
New Applications of PRG
Privatization
Letter of Credit structure
Facilities
Local Currency Guarantees
Application of PRGs to support privatization
Government
Equity(US$50m)
Indemnity Guarantee
Private Investor
CommercialLenders
Privatized Distribution
Company(US$100m)
License Agreement /Regulatory Contract
RegulatorG
over
nmen
tS
uppo
rtA
gree
men
t
Shareholder Loans(US$ 25m)
Partly covered by WB-PRG
Commercial Loans(US$ 25m)
Partly covered by WB-PRG
Sal
e P
roce
eds
PRG can mitigate Government payment risk using letter of credit
Payment obligations (e.g, OBA)
Letter of credit can be drawn if
Government defaults
Government commits to repay
LC bank
World Bank guarantees LC Bank
Private Entity
Commercial Bank
Commercial Bank
PRG facilities to support medium size investments
World Bank
Intermediary for Retail of PRGs
A B Z
Projects
GovernmentIndemnity
C
Line of PRGs
Obligations
Regional Gas Project: Enclave Guarantee Structure (Rand
Guarantee)
GOMSPT SPT
(Sasol owned, (Sasol owned, Moz company)Moz company)
ROMPCOROMPCO(Sasol owned, RSA (Sasol owned, RSA
company)company)
SCMB (Lead arranger)
Petroleum Production Agreement
Pipeline Agreement
Project Agreement
Project Agreement
Inde
mni
ty
Agr
eem
ent
Loan Agreement
(Rand denominated)Loan Agreement
(Rand denominated)Guarantee
Agreement SPTGuarantee Agreement
ROMPCO
South African Regional Gas Project
World Bank Group participation…
Upstream Development – Unincorporated Joint Venture Funding Origin Total
CMH Eq uity 18.00
Debt Facilities 38.00 Total CMH 56.00
IFC 10.00
SPT
Equity 148.00 Debt Facility including political risk coverage from: 182.00
PRG 20.00 MIGA 25.7
ECAs 50.00 Total SPT 330.00
Investments in Upstream Project 396.00
Gas Pipeline currently wholly- owned by Sasol Equity 285.00 Debt Facilities including political risk coverage from: 320.00
PRG 10 .00 MIGA 89.00
ECAs 77.00 Investments in the Gas Pipeline 605.00 TOTAL Financing Required for the Project 1001.00
Total Project Cost: US$ 1 billion Total Project Cost: US$ 1 billion
Types of Fee IBRD IDA
Stand-by 75 bp 25 bp
Guarantee 75-100 bp 75+ bp
Initiation & Processing 0.15-0.65%
Front-end 1%** N/A
Payment ofGuarantee Fee
Periodic/one time upfront
Periodic/one time upfront
0.15-0.65%
Guarantee pricing*
..Bank retains 50 bp 75 bp
..Bank retains 25 bp 0 bp
*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…
PRGs: 10 PCGs: 8 PBGs: 2Total exposure as of March 2004: US$ 1.41 billion
Future operations in the pipeline:
Africa: 14 EAP: 1 ECA:8 MENA: 3 SA: 1 LAC:1
Guarantee Allocation by Sector
Power56%
Telecom10%
Oil & Gas1%
Finance17%
Other16%
Power Telecom Oil & Gas Finance Other
Guarantee Allocation by Region
AFRICA2%
EAP26%
ECA25%
LAC17%
MENA14%
SA16%
AFRICA EAP ECA LAC MENA SA
Total IBRD Guarantees: US$ 2,300 million Total IDA Guarantees: US$ 121 m
Cases:
PCG Structure
Vietnam Phu My 2-2 BOT Power
South African Regional Gas Project
BOAD Guarantee Facility
21
0 2 7
US $50m Bond
World Bank support for principalrepayment at maturity
Additional term provided by WB support
Longest term available to Jordan at the time
US Treasury + 1.1%
Similar structures have been used in the past for project-based partial credit guarantee in Lebanon, Philippines etc.
PCGs: Various structures
Example: Borrower: Jordan Telecom Corp Project: ModernizationTerms: 7 year US$ 50 million bond matured in September 2002
WB will guarantee debt service for specific periods
Partial Credit Guarantee
$150 million
Average financing term forChina without
World Bank Guarantee
Additional uncoveredrisk taken by
commercial banks
World BankGuaranteed
Total risk assumed by commercial banks
$50 million
0 3 6 9 12 15
Example: China Ertan Power
Project
Policy Based Guarantee: Leveraging adjustment loans
US $159mBank’s max.
exposure
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
Interest
PrincipalPayments Guaranteed at Issuance
Example: Colombia Policy Based GuaranteeFitch BBB+ Moody’s Baa1S&P BBB NAIC 2
Vietnam: Phu My 2-2 BOT Power Project Key Contracts
IDA Indemnity Agreement
BR-VT Water Supply Co.
GovernmentGuarantee
Power Purchase Agreement
IDAPRG
Water SupplyAgreement
BOT ContractIDA ProjectAgreement
Investment Licence
Gas SupplyAgreement
Land LeaseAgreement
LoanAgreements
Loan Agreement
EPRI
BR-VT People’s Committee
(UDEC)
EDFISumitomo
TEPCI
MekongEnergy
Company
EVN
Government(MPI)
MPI ADB GORPrivate EPRI
WorldBank
CommercialLenders
JBICADB OCRProparco
PV
EDF-CNETEDF
TEPCO
EPCContract Technical
Support Agreement
Shareholder Agreement
MOI
BOAD Guarantee Facility
World Bank(RVP Approval)
Commercial Banks
ConstructionContractor
- Equity- Shareholders loans
Commercial Debt, L/C
MIGA(VP Approval)
O&M Contractor
EPC Contract
O & M ContractEquityInvestor
Sub Project Company
AFD(Board Approval)
GuaranteeAgreementsBOAD
Indemnity AgreementsGuarantee Facility Agreement (GFA)
Contract of
Guarantee
WAEMU Country Government(s)
Toll Roads Financing
The wave of toll road concessions in 1990s
Investment in Road Projects with Private Participation in Developing CountriesSource: World Bank PPI Database
0
2,000
4,000
6,000
8,000
10,000
12,000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Inve
stm
ent
US
$mill
ion
0
10
20
30
40
50
60
No
. Pro
ject
s
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/Obligation Agency Investors &Lenders Insurance
Third PartyGuarantee
Pre-construction Land Acquisition/Right-of-Way Environmental Approvals GOC Financing Contribution
(1) Project Design (Tunnels) Project Design (Roads, Bridges) Debt & Equity Financing
Concession Term Political Force Majeure (2)
Changes in Law(3)
Expropriation Natural Force Majeure
(4) Currency Devaluation Currency Inconvertibility
Construction Cost Overrun (roads-bridges) Cost Overrun (tunnels)
(5) (1) Construction delays/project completion
Operations Tort Liability Toll Evasion Traffic Level (years 1-9)
(6) (1) Traffic Level (years 9+) Toll Adjustment Operations & Maintenance
1/ Actual amounts or level of comfort subject to bidding.
•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 allocation
Sustainable schemes: Seeking more secure debt structures
Toll Revenue
Expected RevenueToll x Traffic
5 10 Years
Loan 1(3-5 years)
Loan 2:(10 years)
“Roll over” of short term instruments (high refinancing risk)
Foreign financing: foreign exchange risk (mismatch with local revenue), political and regulatory risks, sovereign risk.
Local financing: short amortization (3-5 years), high interest rates, insufficient market depth
0
Example of variation of domestic interest rates
0%
10%
20%
30%
40%
J-9
5
J-9
5
J-9
6
J-9
6
J-9
7
J-9
7
J-9
8
J-9
8
J-9
9
J-9
9
J-0
0
B
C
Sustainable schemes: Seeking more secure debt structures
Typical Project Cash flows with long-term financing
Sustainable schemes: Evolution of risk during project phases
Time
Pro
ject
ris
k
Operation PhaseEng. & ConstPhase
Construction riskDelay
Financial riskLand/Ground condition
Design
Traffic (ramp up)
O&M
Toll adjustments
Service quality-standards
Traffic
Start UpPhase
Refinancing risk
Institutional Investors(long-term) financing)
Sustainable schemes: Selecting government support options
Imp
act
on
ab
ilit
y o
f p
roje
ct t
o r
aise
deb
t
High
Government’s financial exposureLow High
• Concession Term Extension
• Revenue enhancements
• Grants
• Subordinated Debt
• Minimum Traffic/Revenue Guarantees
• Shadow Tolls
• Exchange Rate Guarantees
• Debt Guarantees
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
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Minimum Revenue Guaranteed
Projected Traffic
Outstanding debt
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Projected Traffic
Minimum Revenue Guaranteed
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Term expires upon reaching Present Value of Revenue (fixed at bid)
Actual Revenue
b) Bid within specified limits in duration (e.g., “ramp up”) and amount (e.g., debt service);
c) Present value of cumulative revenue, fixed through bidding.Concession ends when:
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
Colombia: Salgar Toll Road Project
Partial Risk Guarantees - Toll Road
What was coveredToll adjustment & collectionExpropriationCurrency InconvertibilityPolitical Force Majeure:
• Sabotage, war• civil disorder, national &
regional strikes• finds (archaeological-mineral)• delay in award of permits
Changes in LawNo competing roadAccess roads
Not coveredNon-political F.M.:
• employee strikes• earthquakes, hurricanes,
fires, floods, slides• accidents on roadway
Toll evasionDesign shortfallsInefficient O&MConstruction delays & cost overruns
Min. Traffic/Revenue Min. Traffic/Revenue GuaranteesGuarantees
Bank Guarantee ProgramProcedures
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 ProcessSame appraisal standards as Bank loans/creditsCan accept 3rd party assessments/appraisalsDisclosure requirements:
IBRD Guarantees: different that IBRD loansIDA Guarantees: same as IDA credits
Standard Bank environmental guidelinesPrivate sponsor prepares EA, flexible timing
NegotiationsContractual arrangements: Govt.-sponsorsFinancial arrangements: Bank-lenders
Operational Procedures: Appraisal and Negotiations
Discrete Steps Vs. Ongoing ProcessSame appraisal standards as Bank loans/creditsCan accept 3rd party assessments/appraisalsDisclosure requirements:
IBRD Guarantees: different that IBRD loansIDA Guarantees: same as IDA credits
Standard Bank environmental guidelinesPrivate sponsor prepares EA, flexible timing
NegotiationsContractual arrangements: Govt.-sponsorsFinancial 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 projectb) 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 DocumentAfter government request
Send to PIC 30 days prior to Board date
PCN/PAD for GuaranteesLegal 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 prioritySponsor takes lead
Project structuringFinancial arrangementsProvides data for Bank appraisal
Sponsor selects arranging banksBank reviews selection/structure for guaranteed amount
Sponsor’s Role
Early consultation with government & Bank ensures project prioritySponsor takes lead
Project structuringFinancial arrangementsProvides data for Bank appraisal
Sponsor selects arranging banksBank reviews selection/structure for guaranteed amount
Processing of Guarantees
IBRD or IDAPRG
Government Request
PID andIM (or PCN)
Appraisal Start
Management approval to make the PRG available in the bidding documents
Approval by RVP, ENV, LEG
World Bank Board Approval
Corporate Review(Operations Committee)
Concept Review
Signing of Agreement and Effectiveness
PAD and MOP
Negotiations withGovernment, Sponsors, and Guaranteed Lenders
Suman Babbar, Sr.AdviserThe World Bank
1818 H Street, NWWashington, DC 20433 (USA)
Ph: +1 (202) 473-2029Fax: +1 (202) 522-0761
Email: sbabbar@worldbank.org
or visit our web site: www.worldbank.org/guarantees
For further information contact: