Compared to their investment needs, developing countries have very limited concessional financing available to them. International commercial banks are constrained in terms of the size and tenors of credits to Emerging Markets and Developing Economies. A key challenge therefore, is to channel large savings and capital into productive investments in developing countries, partly by ‘de-risking’ investments and borrowings. Pakistan is at the forefront of these efforts, recently making use of two World Bank guarantees to access over 1 billion US dollars in two international commercial loan financings.
A $420 million IBRD Policy Based Guarantee (PBG) was approved by the World Bank Board alongside a $500 million IDA credit in June 2016. The PBG guarantee partially takes over the risk of a commercial bank’s loan to a government. The PBG and the IDA credit supported a program of reforms including the adoption of a new and more inclusive poverty line, efforts to broaden the tax base, enhanced transparency of State Owned Enterprises, improved debt management and a significant overhaul of the regulatory framework of the financial sector. Improved access to international financing through the PBG will reduce the government’s dependence on domestic financing and free up resources for private sector investment. The guarantee also signals the World Bank’s confidence in Pakistan’s economic reforms program – a signal that is particularly important after the successful completion of the IMF program. The government used the US$420 million PBG to partly guarantee a 10-year US$700 million loan, extending tenor significantly and achieving cost savings.
A further $350 million Loan Facility by Water and Power Development Authority (WAPDA), a public utility in Pakistan, was raised with the support of an IDA loan guarantee. The proceeds will be used to partly finance the first phase (2,160 MW) of the DASU Hydropower project. Again, tenor extension and long grace period achieved with the support of the guarantee was critical in matching the cash flow profile of the DASU Hydropower project. This is the first of a series of IDA guaranteed loan/bond financings for the project. In total, it is expected that $800-1,000 million will be mobilized by IDA guarantees for DASU.
This DASU guaranteed financing sets a successful example for WAPDA to borrow, first time ever, in the international markets and helps it to build its capacity in negotiating international loans, paving the way for the Authority to eventually raise debt in the international debt markets entirely on its own credit. An additional innovation introduced through the guarantee is that while it was already approved in 2014 alongside a US$588 million credit, the commercial financing for this project is only raised when major machinery purchases are undertaken and construction contracts are awarded. This sequenced financing approach saves WAPDA from paying large amount of interest and other fees during construction. A further $ 1.5 billion (equivalent) local currency financing was secured for the project in the form of a Sukuk structure through a local Pakistan banking consortium, taking comfort from the World Bank’s support to the international commercial tranche and overall engagement in the project.
The loans mobilized for Pakistan with the support of the World Bank guarantees exemplifies the “cascade approach” which encourages private capital participation, while leveraging and preserving scarce public resources. In addition to significant tenor extension from 3 years to 10 years coupled with long grace periods, both guarantees helped with interest cost savings estimated at $120 million during the life of the two financings.