Private Partnership in Infrastructure Facilitating – World Bank Guarantees

Private Partnership in Infrastructure Facilitating – World Bank Guarantees

October 25, 2004

IFC MIGA IBRD/IDA

IFC A Loan Political Risk Insurance GuaranteesIFC B Loan (expropriation, transfer restriction, -Partial RiskIFC Guarantees breach of contract, war & civil -Partial Credit(partial credit structures disturbances) -Policy Basedusually for local financing) IBRD Loan

IDA Credit

Similar requirements on safeguards, development impactJoint transactions (e.g., MIGA/IFC/PFG)

Pushing the frontier of private investments

World Bank Guarantees

Help to catalyze debt with extended maturities and lower financing costs.Risk mitigation for Government performance- backs sovereign contractual obligations.Key features: Partial Guarantee IBRD/IDA balance sheet Counterguarantee Cross defaults Flexibility Two types of guarantees commonly used with new products being

developed• Partial Risk Guarantees (PRG): Privatization, LC, PRG Facility, FX Liquidity Facility,

Local Currency Guarantee• Partial Credit Guarantees (PCG), Debt and Capital Markets, Policy Based Guarantees

(PBG)

Which risks can be covered by a PRG?

TariffRegulatory riskCollection riskArbitrationChange in lawConvertibilityTransferabilitySubsidy payments (e.g., OBA)

How does the PRG relate to IFC/MIGA instruments?

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

Joint transactionsCoordination

The WB Partial Risk Guarantee usually does not increase contingent liabilities

“The host government’s indemnity of the World Bank does not increase the government’s liabilities when the government is already directly obligated to the private sector on the same liabilities.”.

“Involving the Private Sector in Forestalling and Resolving Financial Crises – Private Project Finance Flows to Developing

Countries,” IMF Board Paper SM/99/211, August 20, 1999, page 21.

Partial Risk Guarantees mitigate concerns related to government performance

A Partial Risk Guarantee (PRG) can cover lenders in case the Government does not meet its commitments

Commercial Lenders

Project Company

Government

Guarantee

Indemnity Agreement

Government Undertakings

Loans

World Bank

Partial Risk Guarantees help access private finance at

sustainable termsDebt Maturity Interest Spread

Vietnam(P. Risk)

5%2%

5

16

with Guarantee

without Guarantee

Cote d’Ivoire(P. Risk)

112

3%

2.75%

Uganda(P. Risk)

016 3.1%

8%

1Bangladesh(P. Risk)

3%2%14

Partial Credit Guarantees help access private finance at

sustainable termsDebt Maturity Interest Spread

with Guarantee

without Guarantee

Colombia(P. Credit) 10

6.5%

5%

Philippines(P. Credit) 15

7

2.5%3%

5

Thailand(P. Credit)

010 2.9%

8.5%

Lebanon(P. Credit)

Jordan(P. Credit)

510

3%1%

72 3%

1%

An extension of partial credit guarantees beyond investment projects to adjustment / sector programsFacilitates sovereign borrowings in support of structural and social policy reformsAlternative/Complement to an adjustment loan

Policy Based Guarantees to leverage adjustment loans

Bank Guarantees have limited impact on CAS envelope

Country’s total CAS envelope will be increased by 75% of the face value of guarantee commitments

This incentive will apply to both partial credit and partial risk guarantees for investment projects

PFG Risk Mitigation Instruments

New Applications of PRG

Privatization

Letter of Credit structure

Facilities

Local Currency Guarantees

Application of PRGs to support privatization

Government

Equity(US$50m)

Indemnity Guarantee

Private Investor

CommercialLenders

Privatized Distribution

Company(US$100m)

License Agreement /Regulatory Contract

RegulatorG

over

nmen

tS

uppo

rtA

gree

men

t

Shareholder Loans(US$ 25m)

Partly covered by WB-PRG

Commercial Loans(US$ 25m)

Partly covered by WB-PRG

Sal

e P

roce

eds

PRG can mitigate Government payment risk using letter of credit

Payment obligations (e.g, OBA)

Letter of credit can be drawn if

Government defaults

Government commits to repay

LC bank

World Bank guarantees LC Bank

Private Entity

Commercial Bank

Commercial Bank

PRG facilities to support medium size investments

World Bank

Intermediary for Retail of PRGs

A B Z

Projects

GovernmentIndemnity

C

Line of PRGs

Obligations

Regional Gas Project: Enclave Guarantee Structure (Rand

Guarantee)

GOMSPT SPT

(Sasol owned, (Sasol owned, Moz company)Moz company)

ROMPCOROMPCO(Sasol owned, RSA (Sasol owned, RSA

company)company)

SCMB (Lead arranger)

Petroleum Production Agreement

Pipeline Agreement

Project Agreement

Project Agreement

Inde

mni

ty

Agr

eem

ent

Loan Agreement

(Rand denominated)Loan Agreement

(Rand denominated)Guarantee

Agreement SPTGuarantee Agreement

ROMPCO

South African Regional Gas Project

World Bank Group participation…

Upstream Development – Unincorporated Joint Venture Funding Origin Total

CMH Eq uity 18.00

Debt Facilities 38.00 Total CMH 56.00

IFC 10.00

SPT

Equity 148.00 Debt Facility including political risk coverage from: 182.00

PRG 20.00 MIGA 25.7

ECAs 50.00 Total SPT 330.00

Investments in Upstream Project 396.00

Gas Pipeline currently wholly- owned by Sasol Equity 285.00 Debt Facilities including political risk coverage from: 320.00

PRG 10 .00 MIGA 89.00

ECAs 77.00 Investments in the Gas Pipeline 605.00 TOTAL Financing Required for the Project 1001.00

Total Project Cost: US$ 1 billion Total Project Cost: US$ 1 billion

Types of Fee IBRD IDA

Stand-by 75 bp 25 bp

Guarantee 75-100 bp 75+ bp

Initiation & Processing 0.15-0.65%

Front-end 1%** N/A

Payment ofGuarantee Fee

Periodic/one time upfront

Periodic/one time upfront

0.15-0.65%

Guarantee pricing*

..Bank retains 50 bp 75 bp

..Bank retains 25 bp 0 bp

*Excluding PBGs provided under SSALs and for IBRD enclave guarantees in IDA only countries** For FY 05 with the waiver the effective front end fee is 0.5%

Guarantees completed so far…

PRGs: 10 PCGs: 8 PBGs: 2Total exposure as of March 2004: US$ 1.41 billion

Future operations in the pipeline:

Africa: 14 EAP: 1 ECA:8 MENA: 3 SA: 1 LAC:1

Guarantee Allocation by Sector

Power56%

Telecom10%

Oil & Gas1%

Finance17%

Other16%

Power Telecom Oil & Gas Finance Other

Guarantee Allocation by Region

AFRICA2%

EAP26%

ECA25%

LAC17%

MENA14%

SA16%

AFRICA EAP ECA LAC MENA SA

Total IBRD Guarantees: US$ 2,300 million Total IDA Guarantees: US$ 121 m

Cases:

PCG Structure

Vietnam Phu My 2-2 BOT Power

South African Regional Gas Project

BOAD Guarantee Facility

21

0 2 7

US $50m Bond

World Bank support for principalrepayment at maturity

Additional term provided by WB support

Longest term available to Jordan at the time

US Treasury + 1.1%

Similar structures have been used in the past for project-based partial credit guarantee in Lebanon, Philippines etc.

PCGs: Various structures

Example: Borrower: Jordan Telecom Corp Project: ModernizationTerms: 7 year US$ 50 million bond matured in September 2002

WB will guarantee debt service for specific periods

Partial Credit Guarantee

$150 million

Average financing term forChina without

World Bank Guarantee

Additional uncoveredrisk taken by

commercial banks

World BankGuaranteed

Total risk assumed by commercial banks

$50 million

0 3 6 9 12 15

Example: China Ertan Power

Project

Policy Based Guarantee: Leveraging adjustment loans

US $159mBank’s max.

exposure

0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8 8.5 9 9.5 10

Interest

PrincipalPayments Guaranteed at Issuance

Example: Colombia Policy Based GuaranteeFitch BBB+ Moody’s Baa1S&P BBB NAIC 2

Vietnam: Phu My 2-2 BOT Power Project Key Contracts

IDA Indemnity Agreement

BR-VT Water Supply Co.

GovernmentGuarantee

Power Purchase Agreement

IDAPRG

Water SupplyAgreement

BOT ContractIDA ProjectAgreement

Investment Licence

Gas SupplyAgreement

Land LeaseAgreement

LoanAgreements

Loan Agreement

EPRI

BR-VT People’s Committee

(UDEC)

EDFISumitomo

TEPCI

MekongEnergy

Company

EVN

Government(MPI)

MPI ADB GORPrivate EPRI

WorldBank

CommercialLenders

JBICADB OCRProparco

PV

EDF-CNETEDF

TEPCO

EPCContract Technical

Support Agreement

Shareholder Agreement

MOI

BOAD Guarantee Facility

World Bank(RVP Approval)

Commercial Banks

ConstructionContractor

- Equity- Shareholders loans

Commercial Debt, L/C

MIGA(VP Approval)

O&M Contractor

EPC Contract

O & M ContractEquityInvestor

Sub Project Company

AFD(Board Approval)

GuaranteeAgreementsBOAD

Indemnity AgreementsGuarantee Facility Agreement (GFA)

Contract of

Guarantee

WAEMU Country Government(s)

Toll Roads Financing

The wave of toll road concessions in 1990s

Investment in Road Projects with Private Participation in Developing CountriesSource: World Bank PPI Database

0

2,000

4,000

6,000

8,000

10,000

12,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Inve

stm

ent

US

$mill

ion

0

10

20

30

40

50

60

No

. Pro

ject

s

Financial Crisis

Issues in toll road financing

•Traffic–New facilities (roads/ports/railway)–Extensions/rehabilitation

•High local cost component•Barriers to local funding

–Short maturities–High cost of financing–Insufficient capacity

•Barriers to foreign funding–Country creditworthiness–Devaluation of currency–Political risks/government obligations

•Levels & type of government support

Risk/Obligation Agency Investors &Lenders Insurance

Third PartyGuarantee

Pre-construction Land Acquisition/Right-of-Way Environmental Approvals GOC Financing Contribution

(1) Project Design (Tunnels) Project Design (Roads, Bridges) Debt & Equity Financing

Concession Term Political Force Majeure (2)

Changes in Law(3)

Expropriation Natural Force Majeure

(4) Currency Devaluation Currency Inconvertibility

Construction Cost Overrun (roads-bridges) Cost Overrun (tunnels)

(5) (1) Construction delays/project completion

Operations Tort Liability Toll Evasion Traffic Level (years 1-9)

(6) (1) Traffic Level (years 9+) Toll Adjustment Operations & Maintenance

1/ Actual amounts or level of comfort subject to bidding.

•Risk allocation based on better understanding of project risks, their impact on project outcomes, who can best control

them and the cost of bearing them

Risk allocation

Sustainable schemes: Seeking more secure debt structures

Toll Revenue

Expected RevenueToll x Traffic

5 10 Years

Loan 1(3-5 years)

Loan 2:(10 years)

“Roll over” of short term instruments (high refinancing risk)

Foreign financing: foreign exchange risk (mismatch with local revenue), political and regulatory risks, sovereign risk.

Local financing: short amortization (3-5 years), high interest rates, insufficient market depth

0

Example of variation of domestic interest rates

0%

10%

20%

30%

40%

J-9

5

J-9

5

J-9

6

J-9

6

J-9

7

J-9

7

J-9

8

J-9

8

J-9

9

J-9

9

J-0

0

B

C

Sustainable schemes: Seeking more secure debt structures

Typical Project Cash flows with long-term financing

Sustainable schemes: Evolution of risk during project phases

Time

Pro

ject

ris

k

Operation PhaseEng. & ConstPhase

Construction riskDelay

Financial riskLand/Ground condition

Design

Traffic (ramp up)

O&M

Toll adjustments

Service quality-standards

Traffic

Start UpPhase

Refinancing risk

Institutional Investors(long-term) financing)

Sustainable schemes: Selecting government support options

Imp

act

on

ab

ilit

y o

f p

roje

ct t

o r

aise

deb

t

High

Government’s financial exposureLow High

• Concession Term Extension

• Revenue enhancements

• Grants

• Subordinated Debt

• Minimum Traffic/Revenue Guarantees

• Shadow Tolls

• Exchange Rate Guarantees

• Debt Guarantees

Trends in minimum revenue guarantees

a) A percentage of traffic forecast (fixed, bid, bid within ceiling) throughout concession period, with share over agreed value;

Additional revenue shared

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Minimum Revenue Guaranteed

Projected Traffic

Outstanding debt

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Projected Traffic

Minimum Revenue Guaranteed

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Term expires upon reaching Present Value of Revenue (fixed at bid)

Actual Revenue

b) Bid within specified limits in duration (e.g., “ramp up”) and amount (e.g., debt service);

c) Present value of cumulative revenue, fixed through bidding.Concession ends when:

Project Cost: US$400-430 million

Borrower: Concessionaire selected by competitive bid

Amount: US$ 80-100m syndicated loan/bond

Maturity: At least 12 years

Bank support: Partial Risk Guarantee: political events, toll collection &

adjustments set in contract Contingent Bank loan; construction cost increases (tunnel only), Liquidity Facility: minimum revenue guarantee

(capped annually, limited duration, revolving)

Evaluation based on minimum use of Government support

Colombia: Salgar Toll Road Project

Partial Risk Guarantees - Toll Road

What was coveredToll adjustment & collectionExpropriationCurrency InconvertibilityPolitical Force Majeure:

• Sabotage, war• civil disorder, national &

regional strikes• finds (archaeological-mineral)• delay in award of permits

Changes in LawNo competing roadAccess roads

Not coveredNon-political F.M.:

• employee strikes• earthquakes, hurricanes,

fires, floods, slides• accidents on roadway

Toll evasionDesign shortfallsInefficient O&MConstruction delays & cost overruns

Min. Traffic/Revenue Min. Traffic/Revenue GuaranteesGuarantees

Bank Guarantee ProgramProcedures

Selecting Guarantee Operations

1. Government & Bank dialogue

2. Government undertakes competitive bid for sponsor

3. Sponsor proposes project to Bank

Operational Procedures: Appraisal and Negotiations

Discrete Steps Vs. Ongoing ProcessSame appraisal standards as Bank loans/creditsCan accept 3rd party assessments/appraisalsDisclosure requirements:

IBRD Guarantees: different that IBRD loansIDA Guarantees: same as IDA credits

Standard Bank environmental guidelinesPrivate sponsor prepares EA, flexible timing

NegotiationsContractual arrangements: Govt.-sponsorsFinancial arrangements: Bank-lenders

Procurement Guidelines

Paragraph 3.15:If the Bank Guarantees the repayment of a loan made by another lender, the

goods and works financed by the said loan shall be procured with due attention to economy and efficiency and in accordance with procedures which meet the requirements of paragraph 1.5.

Paragraph 1.5:….Goods and Works to be procured:a) are of satisfactory quality and are compatible with the balance of the projectb) will be delivered or completed in timely fashion; and c) are priced so as not to affect adversely the economic and financial viability of

the project.

Environment Assessment

In accordance with OP/BP 4.01

Guarantees – Disclosure Policy.Category A EA report - no later than 60 days at the Infoshop

Category B EA report - no later than 30 days at the Infoshop

Operational Procedures: Documentation

Project Information DocumentAfter government request

Send to PIC 30 days prior to Board date

PCN/PAD for GuaranteesLegal Documents:

Indemnity Agreement between Govt. and IBRD/IDA

Guarantee Agreement between Lenders and IBRD/IDA

Project Agreement between Sponsor/s and IBRD/IDA

Sponsor’s Role

Early consultation with government & Bank ensures project prioritySponsor takes lead

Project structuringFinancial arrangementsProvides data for Bank appraisal

Sponsor selects arranging banksBank reviews selection/structure for guaranteed amount

Processing of Guarantees

IBRD or IDAPRG

Government Request

PID andIM (or PCN)

Appraisal Start

Management approval to make the PRG available in the bidding documents

Approval by RVP, ENV, LEG

World Bank Board Approval

Corporate Review(Operations Committee)

Concept Review

Signing of Agreement and Effectiveness

PAD and MOP

Negotiations withGovernment, Sponsors, and Guaranteed Lenders

Suman Babbar, Sr.AdviserThe World Bank

1818 H Street, NWWashington, DC 20433 (USA)

Ph: +1 (202) 473-2029Fax: +1 (202) 522-0761

Email: [email protected]

or visit our web site: www.worldbank.org/guarantees

For further information contact:

Private Partnership in Infrastructure Facilitating – World Bank Guarantees

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