The World Bank Guarantees:

Overview and Key Features

Risk Mitigation: Review of World Bank Group Guarantees. Board Technical Briefing. June 16 2005. 1
 WORLD BANK GUARANTEES: Key Features

ƒ IBRD/IDA balance sheet

ƒ Available to all countries eligible for borrowing from IBRD or IDA
ƒ Bank Guarantees back government obligations
ƒ Guarantees cover private debt against a government’s (or government
entity’s) failure to meet specific obligations to a private or public
project.
ƒ Mobilize private sector participation and help catalyze debt with
extended maturities and lower financing costs
ƒ Flexibility – structured to meet borrower and project requirement
ƒ An integral part of Country Assistance Strategy
ƒ Counterguarantee from Member Country
– Bank Articles requirement
– Indicates project priority for Government and Bank
ƒ Benefits from the ongoing sector and country engagement of the Bank

Risk Mitigation: Review of World Bank Group Guarantees. Board Technical Briefing. June 16 2005. 2
Benefits of World Bank Guarantees

For governments…

ƒ Catalyzes private financing for key sectors such as infrastructure

ƒ Provides access to capital markets as well as commercial banks
ƒ Reduces cost of private financing to affordable levels
ƒ Facilitates privatizations and public private partnerships
ƒ Reduces government risk exposure by passing commercial risk to
the private sector
ƒ Encourages cofinancing

For the private sector…

ƒ Reduces risk of private transactions in emerging countries

ƒ Mitigates risks that the private sector does not control
ƒ Opens new markets
ƒ Improves project sustainability

Risk Mitigation: Review of World Bank Group Guarantees. Board Technical Briefing. June 16 2005. 3
 Overview of the World Bank Guarantees Program

ƒ Approved Operations:
ƒ 28 guarantees approved for 26 projects
ƒ Private capital catalyzed in the last 8 years: US$ 12 billion
ƒ 2 PBGs, 8 PCGs, 18 PRGs; total exposure as of May 2005: US$ 1.4 billion
ƒ Total amount of guarantees approved: US$ 2.9 billion dollars
ƒ In FISCAL YEAR 2005:
COUNTRY PROJECT
West Africa West African Gas Pipeline

Uganda Distribution Privatization Project (supported by an IDA credit)

Romania Power Sector Distribution Project

Peru Guarantee Facility

Senegal Kounoune Power

Lao PDR Nam Theun 2 Power

Sierra Leone Bumbuna Hydropower (To be considered on June 16th)

ƒ Future Operations: 26 transactions in pipeline; 58% in Africa; infrastructure

focus.

Risk Mitigation: Review of World Bank Group Guarantees. Board Technical Briefing. June 16 2005. 4
 Bank Guarantees: Financial Management Principles

ƒ Bank Guarantees are managed as part of the IBRD and IDA portfolio of
loans and credits.

ƒ CAS envelope is increased by 75% of face value of guarantee

commitments for investment projects for both IBRD (< 20% of CAS
envelope & SBL) and IDA countries.

ƒ Country Risk is managed at the Lending Program level, similar to IBRD

loans and IDA credits.

ƒ IBRD provisioning policies for loans govern IBRD guarantees.

ƒ IDA provisioning policies govern IDA guarantees (currently, no

provisioning policy is applicable for IDA credits or guarantees).

ƒ IBRD maintains sufficient liquidity to meet any potential disbursements.

IDA maintains liquidity of 50% of cumulative callable amounts.

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 Types of Guarantees

ƒ Partial Risk Guarantees (PRGs) –in support of private projects:

– Cover debt amounts against specific risks

ƒ Partial Credit Guarantees (PCGs)- in support of public projects:

– Cover part of bond/loan repayments against all risks

ƒ Policy Based Guarantees (PBGs) – in support of development

policy operations:

– Cover part of bond/loan repayments against all risks

Risk Mitigation: Review of World Bank Group Guarantees. Board Technical Briefing. June 16 2005. 6
 Partial Risk Guarantees (PRGs): Key Features

ƒ Cover private lenders against the risk of a public entity failing to

perform its obligations with respect to a private project.
ƒ PRG reinforces obligations of the Government – does not add to them.
ƒ Structured to provide minimum coverage necessary to mobilize
private financing
ƒ The World Bank also offers enclave guarantees which are PRGs
structured for export oriented foreign exchange generating
commercial projects in IDA-only countries.
ƒ A flexible instrument – various structures available
ƒ New developments:
– Letter of Credit Structure for Greenfield projects
– Privatization Guarantees
– Guarantee Facilities
– Local Currency Guarantees

Risk Mitigation: Review of World Bank Group Guarantees. Board Technical Briefing. June 16 2005. 7
 PRGs help access finance at sustainable terms

Debt Maturity Interest Spread1

Vietnam 5 5%
(P. Risk) 16 2%

Bangladesh 1 3%
(P. Risk) 14 2%

1 3%
Cote d’Ivoire
(P. Risk) 12 2.75%

0 N/A
Lao PDR
(P. Risk) 16.5 2.25 %

without Guarantee with Guarantee

1
Spreads at the time of the guarantee issuance

Risk Mitigation: Review of World Bank Group Guarantees. Board Technical Briefing. June 16 2005. 8
 Partial Credit Guarantees (PCGs): Key Features

ƒ Cover private lenders against all risks during a specific period of the
financing term of debt for a public investment
ƒ Specially designed to extend maturity and improve market terms
ƒ Lengthen the maturity of the private debt financing beyond that
available in private markets by covering a part of the scheduled
repayments of private loans or bonds against all risks
ƒ PCGs are flexible, allowing different structures for meeting different
client needs, such as:
– Bullet guarantee
– Latter maturities
– Rolling non-reinstatable
– Amortizing syndicated loan
ƒ At present, partial credit guarantees are available only for countries
eligible for loans from IBRD.
ƒ No overlap with MIGA or IFC instruments

Risk Mitigation: Review of World Bank Group Guarantees. Board Technical Briefing. June 16 2005. 9
 PCGs help access finance at sustainable terms

Debt Maturity Interest Spread

Colombia 5 6.5%
(P. Credit)
10 5%

Thailand 0 8.5%
(P. Credit) 10 2.9%

Lebanon 5 3%
(P. Credit) 10
1%

Jordan 2 3%
(P. Credit) 7 1%

Philippines 7 3%
(P. Credit)
15 2.5%

1
Spreads at the time of the guarantee issuance without Guarantee with Guarantee

Risk Mitigation: Review of World Bank Group Guarantees. Board Technical Briefing. June 16 2005. 10
 Policy Based Guarantees (PBGs): Key Features

ƒ An extension of partial credit guarantees beyond investment

projects to adjustment / sector programs
ƒ Facilitates sovereign borrowings in support of structural and social
policy reforms
ƒ Alternative/Complement to a Development Policy Loan
ƒ Acceptable forms of PBGs
– Bullet guarantee
– Partial guarantees of payments
– Latter maturities
– Rolling Non reinstatable
ƒ No overlap with MIGA or IFC instruments

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Guiding Principles on Deployment of Risk Mitigation Instruments

ƒ 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
– Clout of the Bank needed
ƒ Joint transactions
ƒ Coordination

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