No amount of planning could have prepared us for the stark realities we face today. COVID-19, rising temperatures, poverty, food insecurity, Russia’s war on Ukraine, energy crisis—these key words are not enough to bring the dire reality into focus. Things are getting worse in real time.
The scale and range of investments needed for the climate transition will require a comprehensive approach, which is why the Evolution Roadmap emphasizes ways to expand the World Bank Group’s use of guarantees and make them more fit for purpose under a stronger One World Bank Group approach. Now is the time to deploy our most transformative approaches to meet the immense challenges of our time.
Since its inception, the World Bank guarantee program has filled this role, committing $11.3 billion in guarantees across 67 projects and supporting $65 billion in investments across various countries and sectors.Guarantees mitigate risks, boost investor confidence, and ensure that development projects can proceed even in contexts where private capital is scarce or costly.
World Bank guarantees are first movers that pave the way. For transformational PPP projects, World Bank guarantees are often deployed alongside commercial and DFI loans and MIGA Political Risk Insurance. Here, World Bank guarantees backstop payments from public sector counterparts that lack sufficient creditworthiness and track record. Such guarantees have a strong signaling effect and come with the Bank’s direct involvement in vetting the project.
World Bank guarantees open doors for state-owned enterprises (SOEs) and public entities to access international finance, alongside supporting reforms. For sustained private sector flows, SOEs must be creditworthy counterparts. Furthermore, a SOEs and public entities in EMDE will require financing of around $200-400 billion annually to finance energy transition and adaptation investments. However, over a quarter of emerging markets face restricted market access. World Bank guarantees complement MIGA’s Credit Enhancement for issuers of higher risk. The World Bank can provide partial guarantee of an SOE’s new debt. This enables significant interest savings, tenor extension, and access to international finance and institutional investors at blended terms for countries with sustainable debt levels.
World Bank guarantees create options for local currency finance. Given foreign exchange risks -such as volatility and the limitations of swap markets - it is essential for EMDEs to develop the local investor base and local currency finance. In nascent markets, World Bank guarantees can backstop loan portfolios of financial intermediaries by developing risk-sharing facilities. This facilitates and accelerates the ability of lenders to understand and underwrite new risks and build a track record of performance—bringing in much needed local and international currency finance for development and climate.
Guarantees in Action
Here are just a few examples of World Bank guarantees in action.
- Enhancing energy security and affordability: World Bank guarantees, alongside IFC loans and MIGA political risk insurance, have enabled international project finance, including for well-designed hydro projects that provide clean, low-cost energy in 17 countries. The program has so far supported over 13 GW of generation capacity globally to reduce GHG emissions.
- Boosting renewables investment: Carefully targeted World Bank guarantees have contributed to significant increases in renewable energy, including a jump from 2.5% to 10% of the share of renewables in the energy mix in Argentina through the FODER program. World Bank guarantees are also part of the World Bank Scaling Solar program alongside IFC products and MIGA Political Risk Insurance. In total, World Bank guarantee commitments have extended support to close to 4 GW of new investments in wind and solar.
- Facilitating access to new finance and institutional investors: Guarantees have enabled the first access to institutional investors for select African issuers through a combination of World Bank guarantees with second loss commercial reinsurance, a model which has been able to attract commercial reinsurers to higher risk issuers at the back of targeted reforms and WB involvement. Risk sharing facilities in India and Vietnam are creating new pools of local currency financing for energy efficiency investments, with a new project in the pipeline to help finance new climate technologies.
Lessons learned and way forward
Guarantees are certainly not a new instrument. In fact, the Bank’s Articles of Agreement envisioned guarantees as its main tool to promote private investment., continuing World Bank involvement in the country and the relevant sectors following project close, close supervision and monitoring, and working with governments on developing programmatic approaches that enable continued private sector engagement.
In its 30 year history, World Bank guarantees have proven their ability to mobilize private capital for development.