The WorldBank Guarantee The World Bank Guarantee

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					The World Bank Guarantee:
Leveraging Private Finance
for Emerging Markets

Public Private Partnership
Conference
Damascus, S i
D           Syria
30 October – 1 November 2009

Henry E. Russell
Manager, Finance
Finance, Economics and Urban
Fi       E       i   dU b
World Bank
    Why Guarantees?
 Guarantees highly effective in specific circumstances.
 E        i t      t      it l d        ti     d
  Engage private sector capital and expertise and
  mobilizes resources from non Bank sources.
 Efficient use of World Bank balance sheet/IDA
  allocations (significant leverage)
 Conserve scarce sovereign guarantee capacity
                                            capacity.
 Facilitate innovation and specifically tailored solutions
  to meet client needs
  Sources of “Innovation”
              Innovation

 IBRD                        IFC



            GUARANTEES
               OBA
PUBLIC         CTF         PRIVATE




Two party    Three Party   Two Party
      Benefits of Guarantees
        p
For the private sector:
   Mitigates critical perceived political and regulatory risks
   Makes privatizations financeable by facilitating direct access to financial
    markets
   Catalyzes l
    C t l       long tterm “ ff balance sheet” d bt fi
                           “off b l      h t” debt financing; th b reducing th
                                                           i    thereby d i the
    risk profile of the investment and overall capital costs


For the Government:
   Facilitates access to the international debt and capital markets on more
    favorable terms
   Helps to reduce risk premium of investors
   C
    Could reduce contingent liabilities
   Can be additional to the IMF external debt ceiling
   Additional to the country lending program
   Creates market confidence through Bank leverage and track record
   Provides for risk sharing with the private sector
   Helps to catalyze private sector finance


For the World Bank:
   Leverages Bank resources
       Key Features of Bank Guarantees

 Rationale: To help extend the reach of private financing by mitigating
  perceived risk and encourage private sector involvement in developing
  countries
 A il bl t all countries eligible f b
  Available to ll   ti                      i from IBRD /IDA
                           li ibl for borrowing f
 Mobilize private sector participation and help catalyze financing with
  extended maturities and lower financing costs
 Guarantees provide support to lenders or project companies against a
  government’s (or government entity’s) failure to meet specific
                  g            private or p
  contractual obligations to a p                 project.
                                          public p j
 Requires a counter-guarantee from Government (MOF)
 The guarantee is “Partial:” The Bank only assumes a portion of risk
 Flexible instrument: Different currencies (local, FOREX), available for
  all infrastructure sectors and variety of structures to fit the project and
  lenders needs
 Integral part of CAS/CPS
Guarantees help Extend Maturities…

                                                  16       17       16
      15       15
                                     14


                         10



                    5                                  5
           3
                                                                         2
                                          1                     0
                               0




                    With Guarantee            Without Guarantee
                              (              y    )
                              (maturities in years)
  t th       ti   R d    S    d
…at the same time Reduce Spreads
                            8.5%




                                                    5.0%
       4.5%

                 3.4%
                         2.9%           3.0%                              3.0%
                                                           2.3%        2.3%
   2.0%       2.0%                   2.0%       2.0%



                                                                  0%


   Pakistan   Morocco   Thailand   Bangladesh   Viet Nam   Lao PDR     Uganda

                     With Guarantee         Without Guarantee
 Partial Risk Guarantees (PRGs)
Role in support of Privatizations,
  Concessions and other PPP
             World Bank Guarantees in
             Support of Privatizations /
                             (cont )
               Concessions (cont.)
o     Tariff commitments            o Non payments of
o     Regulatory process              Governments / agency bills
o     Disconnection policies        o Termination amounts
o     Interference in arbitration   o Changes in law




      …and as a result enhance privatization
                               p
      response
    o Increased investment          o Lower tariffs
      commitments
            it    t                 o Increase in sale proceeds /
    o More bidders                    concession fees for the
                                      government
Examples of Risks Covered by PRGs…
  Breach of Government or parastatal obligations

  Regulatory risk

  Changes in law / decrees / regulations

  P liti l f        j     (including War, Revolution and E
   Political force majeure (i l di W R         l ti              i ti )
                                                        d Expropriation)
  Transferability & convertibility of foreign exchange

  Frustration of Arbitration

  Backstop of Government Subsidies (e.g. Minimum Revenue
   Guarantees)
  Natural Force Majeure relating to government / parastatals
    bli ti
   obligations
PRG Structures
            1. Lender Guarantees

                   Counter-guarantee
                                       Government
      World Bank




Guarantee                                      Project




    Commercial
    C       i l                        Project Company
       Bank              Loans              (SPV)
2. Project Company Guarantees
         a. Letter of Credit (L/C) Structure


                  Counter-guarantee
                                         Government
     World Bank



                         L/C Repayment



Guarantee                                         Project
                    Letter of
                    Credit




   Commercial                            Project Company
      Bank                Loans               (SPV)
2. Project Company Guarantees
 b. Guaranteed Deferred Shareholder Loan

               Counter-guarantee
                                      Government
  World Bank



                        Termination
      Guarantee         Payments

                        Loan with              Project
                        deferred
                        payments up
                        12 months




                                         Project
                                        Company
            Case Study:

    IBRD Partial Risk Guarantee
                  15

Albania OSSH Electricity Distribution
           Privatization
             Albania OSSH Electricity y
             Distribution Privatization
 PRG aimed at mitigating key perceived investors risks:

     Changes in Government policy causing a change in the Regulatory
       Framework
     Non-compliance with pre-agreed regulatory framework by the Regulator

     Limited track record of regulatory agency

     Albania’s energy sector in early stages of reform

 Key risks covered under PRG includes non compliance by the Regulator and
  change or repeal by GoA of pre-agreed framework regarding distribution tariff
         ,                 pp y                           p
  formula, Retail Public Supply tariff formula and the Compensation
  Mechanisms.
 Timely approval of tariffs
 Th Letter of Credit (L/C) Structure (in a
  The L tt   f C dit        St   t    (i
         )
 nutshell):
  1. Under L/C structure the PRG is designed to provide risk mitigation through

     a standby L/C facility opened by a governmental entity in favor of the
     project company.

  2. The project company is entitled to draw on the L/C upon a cash flow

     shortfall resulting from a government/regulatory non-compliance of its
     contractual undertakings to the project company as set out in a
     Government Support Agreement which is backstopped by the PRG.

  3. In the event of a drawing under the L/C by the project company, the

     government’s repayment obligation to the L/C bank of the amounts drawn
     is guaranteed by the PRG under a Guarantee Agreement concluded with
     the L/C bank.
         Albania OSSH Electricity Distribution
            Privatization: Guarantee Terms

 PRG backstops repayments of principal and interest by Ministry of
  Finance of each L/C drawing
 Triggering mechanism: Breach of Regulatory Framework or delays in
  approval of tariffs
 Letter of Credit (L/C)
                   (   )
       Issuer: Citibank Hungary
                 y
        Beneficiary: OSSH Distribution System Operator
                                        y      p
       Amount: EUR 60 million
       Validity Period: 6 years
       Repayment: Ministry of Finance within 12 months following each
        drawing. The L/C would be reinstateable for each repaid amount.
                 Albania OSSH Electricity Distribution
                    Privatization: Project Structure

                                                                                                  Indemnity
                                                                                                  Agreement
                 Government of Albania (MOF)
                                                                                                                      World Bank




                                                                                                      rsement &
                                                                                                      greement
                                          Government
           ase




                                                 ent
                                                 rt
                                                               (Regulator)
                                                           ERE (R   l t )
Share Purcha




                                                                                              Credit Ag
  Agreement




                                          Agreeme




                                                                                               Reimbur
                                            Suppor
                                                            Regulatory Framework




                                                                                                                         ent
                                                                                                                         ee
                                                                                                                  Agreeme
                                                                                                                  Guarante
                                                                          L/C*             Citibank
                                 Equity            Distribution                            Hungary
                 CEZ                                 System
                                                    Operator
                                                      OSSH
                                                                                      j     g
                                                                                   Project Agreement


            * Letter of Credit
                             IBRD and IDA Guarantees
                                g (           p     )     FY10
                        Fee Charges (in basis points) for FY10
                                                                            IBRD                                              IDA
                       Fee Type
                                                     PRG                PRG Enclave            PCG and PBG                    PRG
                                                                   25 bp                                                      N/A
                  Front End Fee
                                                (on the maximum exposure under the guarantee)
 Upfront                                    15 bp on the guaranteed amount or                                        15 bp on the guaranteed
 Ch
 Charges                                                    100,000
                                                       USD 100 000                                    N/A                   amount or
                  Initiation Fee1
(one-time                                          (whichever is higher)                                                  USD 100,000
  fees)                                                                                                                (whichever is higher)

                                     1, 2
                                      ,
                                            A maximum cap of up to 50 bp of the                                     A maximum cap of up to 50
                  Processing Fee                         t d
                                                   guaranteed amount t                                N/A              bp f th        t d
                                                                                                                       b of the guaranteed
                                                                                                                             amount

                                             50 bp per annum                                                            75 bp per annum
                                              (on guaranteed
                                              ( g                         200 bp per
                                                                               pp                  50 bp per
                                                 amount)                    annum                   annum
                  Guarantee Fee                                                                  (charged on
Recurring                                                                                         the present
Charges                                                                                          value of the
                                                                                                   guarantee
                                                                                                   exposure)
                                                                                                                                     3

                  Standby Fee                                                N/A                                              0 bp

1   For all Private sector borrowers, i.e. only applicable to Partial Risk Guarantees.
2   Determined on a case by case basis, Exceptional projects can be charged over 50 bps of the guaranteed amount.
3   Equivalent of Commitment Charge on IDA Credits in FY2010.
                 Thank you !!


                       Henry Russell
                         Manager
                Finance & Guarantees Group
          Finance, Economics and Urban Department
                  Email: hrussell@worldbank.org




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