It’s not always easy to convince the private sector to participate in public infrastructure projects—especially in developing countries and emerging economies. Why is this a problem? Because there simply is not enough public money to meet the growing demand for infrastructure, which is a key element of development and poverty alleviation. The need is great, numbering in the trillions of dollars.
But there is good news—the market has both the trillions and the expertise to use it, if the conditions are right. And the World Bank Group has a number of instruments that can help create an environment that meets the needs of the private sector in financially, environmentally, and socially sustainable ways. Guarantees are one of those instruments, a tool that is highly effective in leveraging limited resources for mobilizing commercial financing for critical infrastructure projects.
What are guarantees in this context?
World Bank guarantees protect commercial lenders from the risk of debt service or payment defaults —specifically, from those arising from a government’s or any of its agencies’ failure to meet its performance and/or payment obligations.
A guarantee from the World Bank signals that a given project is well-prepared and solid, so much so that it is prepared to assume all or part of the risk that a government might pose . By mitigating these risks, guarantees help get private investment money working for development. Guarantees often strengthen Public-Private Partnership (PPP) transactions, complementing lending by the International Finance Corporation (IFC) and political risk insurance by the Multilateral Investment Guarantee Agency (MIGA). In doing so, they support the World Bank Group’s Maximizing Finance for Development (MFD) initiative, which looks for private-sector solutions to development challenges.
Guarantees in action
To illustrate, here are several innovative examples of infrastructure projects enabled by World Bank guarantees:
- In Cameroon, the World Bank provided a guarantee for the 216 megawatt Kribi Gas Power Project, which is managed under a 20-year PPP. The government wanted participation of local banks, in part to reduce foreign exchange risks and in part to develop the capacity of the local lending market in long-term project finance. But local lenders had limited experience in project finance and faced restrictions on lending. The World Bank backstopped refinancing risk for local lenders to ensure longer tenors and provided protections against government-related risks, such as breach of electricity license agreements or termination of the concession by the power purchaser. These guarantees provided local banks with the comfort they needed to participate.
- In Ukraine, the national oil and gas company, Naftogaz, faced creditworthiness issues resulting from serious economic and political challenges. A Euro equivalent of $500 million revolving loan facility, supported by the World Bank, was established with the participation of two commercial banks. The World Bank provided a Payment Guarantee for principal and interest to the participating lenders. This provided payment security to lenders financing gas supply contracts and gave Naftogaz the necessary liquidity for its gas purchases. The gas purchase facility enabled 33 gas contracts with seven suppliers within three months. It contributed to Ukraine’s gas supply security, expanded its gas supply sources, and helped Naftogaz build gas storage reserves during summer months. As a result, more than 12 million Ukrainian households had access to heating during the winter.
- In Pakistan, the $5 billion Dasu Hydropower project was supported by a $460 million World Bank guarantee, along with a credit of $588 million. This in turn mobilized $2.4 billion from local and international private banks, in two tranches—one guaranteed and another unguaranteed, thereby enabling Pakistan to expand its power capacity through a sustainable, climate-friendly resource. The 2,160-megawatt hydropower plant, located on the main Indus River, can be expanded to 4,320 megawatts in future at very low cost. You can learn more about the project in this video.
The World Bank’s Guarantee Program today
Demand for the World Bank’s guarantees is strong and continues to diversify beyond energy and extractives. The Bank’s Guarantee Program has a current portfolio of over 38 investment and policy operations and about $3 billion of exposure. Since the program was established 23 years ago, the World Bank Board of Directors has approved 75 operations in 43 countries. Less than $7 billion of financial exposure on the part of the World Bank mobilized $43.3 billion in financing for infrastructure projects, of which about $29.1 billion is from private commercial sources.
The center for excellence for the Bank’s Guarantee Program is the Financial Solutions unit. Now part of the World Bank Group’s newly-created Infrastructure, PPPs & Guarantees (IPG) group, the Guarantee Program is modernizing its operational policy to ensure continued availability of risk mitigation instruments to meet changing market needs.
Guarantees today are more relevant than ever, and in line with the World Bank Group’s emphasis on tapping into private sector solutions for maximizing financing for development. Our job is to provide the private sector with the confidence and incentives to put their resources to work for development.
Guarantees are just one part of our financial tool chest. Meeting the objectives of MFD that we have set for ourselves will require a change of mindset, and a better understanding of what financial markets are looking for. We, as an institution, can start first by deploying its only market-facing financial product more than what we have done to date (~3% of the World Bank’s portfolio). Growing the commercial mobilization business both at portfolio and project level will require a deep understanding of the needs of the front lines in emerging markets—both those of government clients and those of potential private sector finance players.
Ultimately, the proof is in the pudding—the Bank’s Guarantee Program has moved the needle by mobilizing significant finance in a timely and sustainable manner. Keep an eye on this space for more posts about this important work.
This is the first in a series of posts about the World Bank’s Guarantee Program.
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World Bank guarantees help Pakistan get cheaper, longer term loans from international market
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Coming together is the way forward: Maximizing Finance for Development
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