TRENDS AND POLICY OPTIONS No. 4 40530 HELPING TO ELIMINATE POVERTY THROUGH PRIVATE INVOLVEMENT IN INFRASTRUCTURE Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments Tomoko Matsukawa Odo Habeck TRENDS AND POLICY OPTIONS No . 4 HELPING TO ELIMINATE POVERTY THROUGH PRIVATE INVOLVEMENT IN INFRASTRUCTURE Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments Tomoko Matsukawa Odo Habeck ©2007 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved 1 2 3 4 10 09 08 07 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. 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For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; telephone: 978-750-8400; fax: 978-750-4470; Internet: www.copyright.com. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org. ISBN-10: 0-8213-7100-2 ISBN-13: 978-0-8213-7100-8 eISBN-10: 0-8213-6988-1 eISBN-13: 978-0-8213-7101-0 DOI: 10.1596/978-0-8213-7100-8 Library of Congress Cataloging-in-Publication Data has been applied for. TABLE OF CONTENTS Authors vii Acknowledgments viii Foreword ix Background x Introduction xi 1. Types of Risk Mitigation Instruments 1 Credit Guarantees 2 Export Credit Guarantees or Insurance 4 Political Risk Guarantees or Insurance 4 2. Recent Trends in Risk Mitigation 6 Regulatory Risk 6 Devaluation Risk 7 Subsovereign Risk 7 3. Characteristics of Risk Mitigation Providers and Compatibility of Products 9 Multilateral Agencies 9 Bilateral Agencies 9 Private Financial Entities 10 Complementary Arrangements 10 4. Innovative Application of Risk Mitigation Instruments 12 Multilateral Wrap Guarantees by Combining Partial Credit Guarantees 12 PCG Combined with Contingent Loan Support 12 PCG for Pooled Financing 12 Complementary Guarantees by Combining a PRG and PRI 13 Corporate Finance with PRG and PRI 13 Privatization Guarantees 13 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments iii Brownfield Project Support 13 Country-Specific Guarantee Facilities 13 Global or Regional Guarantee Facilities 13 Guarantee Initiatives for Local Capital Markets 14 5. Challenges Ahead 15 Appendix A. Profiles of Transaction Cases 17 Appendix B. Profiles of Multilateral and Bilateral Risk Mitigation Instruments 36 List of Tables 1 Broad Category of the Availability of Instruments 3 Appendix A. Profiles of Transaction Cases A1 Summary, Philippines Power Sector Assets and Liabilities Management Corporation 18 A2 Summary, Philippine Power Trust I 18 A3 Summary, Tlalnepantla Municipal Water Conservation Project 19 A4 Summary, City of Johannesburg 20 A5 Summary, Privatization of Romanian Power Distribution Companies 20 A6 Summary, Joint Kenya-Uganda Railway Concession 21 A7 Summary, AES Tietê 22 A8 Summary, Phu My 2.2 BOT Power Project 24 A9 Summary, Rutas del Pacifico 25 A10 Summary, IIRSA Northern Amazon Hub 26 A11 Summary, Tamil Nadu Pooled Financing for Water and Sanitation 27 A12 Summary, West African Gas Pipeline Project 28 A13 Summary, Southern Africa Regional Gas Project 29 A14 Summary, Afghanistan Investment Guarantee Facility 30 A15 Summary, SME Partial Credit Guarantee Program 31 A16 Summary, Private Infrastructure Development Group 31 A17 Summary, BOAD Infrastructure Guarantee Facility 33 A18 Summary, African Trade Insurance Agency 34 Appendix B1. Profiles of Major Multilateral Risk Mitigation Instruments B1.1 World Bank: International Bank for Reconstruction and Development (IBRD) and International Development Association (IDA) 37 B1.2 International Finance Corporation (IFC) 38 B1.3 Multilateral Investment Guarantee Agency (MIGA) B1.4 African Development Bank (AfDB) 40 B1.5 Asian Development Bank (ADB) 41 B1.6 European Bank for Reconstruction and Development (EBRD) 42 B1.7 Inter-American Development Bank (IDB) 43 B1.8 European Investment Bank (EIB) 45 iv Table of Contents B1.9 Andean Development Corporation (CAF) 46 B1.10 Islamic Corporation for Insurance of Investments and Export Credits (ICIEC) 47 B1.11 Inter-Arab Investment Guarantee Corporation (IAIGC) 49 Appendix B2. Profiles of Major Bilateral Risk Mitigation Instruments B2.1 Export Development Canada (EDC) 50 B2.2 Agence Française de Développement (AFD) 51 B2.3 Coface 52 B2.4 Deutsche Investitions und Entwicklungsgesellschaft mbH (DEG) 54 B2.5 Foreign Trade and Investment Promotion Scheme (AGA) 55 B2.6 Italian Export Credit Agency (SACE) 56 B2.7 Japan Bank for International Cooperation (JBIC) 57 B2.8 Nippon Export and Investment Insurance (NEXI) 58 B2.9 Atradius Dutch State Business NV 59 B2.10 The Netherlands Development Finance Company (FMO) 61 B2.11 Norwegian Guarantee Institute for Export Credits (GIEK) 61 B2.12 Swedish Export Credit Guarantee Board (EKN) 63 B2.13 Swiss Investment Risk Guarantee Agency (IRG) 64 B2.14 Swiss Export Risk Guarantee (SERV) 65 B2.15 Department for International Development (DFID) 66 B2.16 Export Credits Guarantee Department (ECGD) 67 B2.17 United States Agency for International Development's (USAID's) Development Credit Authority (DCA) 68 B2.18 Export-Import Bank of the United States (Ex-Im Bank) 69 B2.19 Overseas Private Investment Corporation (OPIC) 70 Box 1.1 Guarantees vs. Insurance 1 Figure 1.1. Key Parameters of Risk Coverage 2 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments v AUTHORS Tomoko Matsukawa (tmatsukawa@worldbank.org) is Odo Habeck (oghadvisors@optonline.net) is the Senior Financial Officer of Infrastructure Finance and Managing Partner of OGH Advisors, LLC, a financial Guarantees (IFG), the Infrastructure Economics and consulting firm focused on emerging capital markets Finance Department of the World Bank. Since joining and project finance. OGH Advisors offers consultant the Bank's Project Finance and Guarantees unit (the services to multilateral and bilateral institutions and is predecessor of IFG) in 1993, she has led the mobiliza- an adviser to the Global Developing Markets hedge tion of financing for public and private infrastructure fund (an Emerging Markets equity and fixed income projects, structuring public-private risk-sharing schemes hedge fund), and to Michael Kenwood, LLC. Before and implementing World Bank guarantee transactions. forming OGH Advisors in 2003, Odo held senior posi- She has provided advisory services in relation to infra- tions in the emerging capital markets groups with Crédit structure finance issues, forms of private participation, Suisse, Daiwa Securities, and Deutsche Bank. From and mobilization of commercial debt for various coun- 1994 to 1996, he worked for the World Bank on local tries, sectors, and projects worldwide. She is a coauthor capital market development in the Financial Sector of the World Bank discussion papers "Foreign Exchange Development Department. He is a member of the UN Risk Mitigation for Power and Water Projects in and Swiss Development Agency­sponsored Infra- Developing Countries" and "Local Financing for Sub- structure Experts Group, the Initiative for Global Sovereign Infrastructure in Developing Countries." Development, and the Bretton Woods Committee. He Before joining the World Bank, she worked at Morgan received his MBA and BBA in International Finance Stanley, Citicorp, and the Chase Manhattan Bank. She from the University of Anchorage, Alaska. holds a MBA from Stanford Graduate School of Business and a BA from the University of Tokyo. Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments vii ACKNOWLEDGMENTS This work was sponsored by the Public-Private tion business who encouraged and guided the task team Infrastructure Advisory Facility (PPIAF) and the World in the compilation of the book; as well as IEF colleagues Bank's Infrastructure Economics and Finance and core members of the Infrastructure Experts Group. Department (IEF, which has since reorganized as The task team would like to extend its appreciation Finance, Economics and Urban Department [FEU]). The to Laszlo Lovei, IEF Director, Jyoti Shukla, the PPIAF paper was prepared by Tomoko Matsukawa (IEF), the Program Manager, as well as Suman Babbar, Senior task manager, together with Odo Habeck (OGH Advisor, and Ellis Juan, Manager, of the IEF, for their Advisors). Tomoko Matsukawa contributed the main valuable support and guidance. text; Odo Habeck took the lead in compiling profiles of The findings, interpretations, and conclusions multilateral and bilateral risk mitigation instruments. expressed in this report are entirely those of the authors Transaction cases were compiled on a joint basis. and should not be attributed in any manner to the Andres Londono (IEF) provided valuable contributions Public-Private Infrastructure Advisory Facility (PPIAF) to the authors in preparing and editing this book. or to the World Bank, to its affiliated organizations, or The book could not have been completed without the to members of its Board of Executive Directors or the kind cooperation and valuable contributions of infor- countries they represent. Neither PPIAF nor the World mation, reviews, and comments from multilateral and Bank guarantees the accuracy of the data included in bilateral institutions presented in the paper. The task this publication or accepts responsibility for any conse- team thanks Michael Schur and James Leigland of quence of their use. PPIAF, who initiated the idea of researching and com- The material in this report is owned by PPIAF and piling a comprehensive review paper on risk mitigation the World Bank. Dissemination of this work is encour- instruments; Fabrice Morel of the Multilateral aged, and PPIAF and the World Bank will normally Investment Guarantee Agency (MIGA), who provided grant permission promptly. For questions about this valuable comments at various stages of development of report or information about ordering more copies, the paper; officials of the institutions in the risk mitiga- please contact PPIAF by email: ppiaf@ppiaf.org viii Acknowledgments FOREWORD While the importance of the infrastructure sectors in structure, presenting notable transaction cases and user- achieving economic growth and poverty reduction is friendly reference to the products of key multilateral and well established, raising debt and equity capital for bilateral institutions. The work examines different types, infrastructure development and service provision has natures, and objectives of risk mitigation instruments been a challenge for developing countries. Risk mitiga- and summarizes the characteristics of public and private tion instruments facilitate the mobilization of commer- providers of risk mitigation, with a view to serve as a cial debt and equity capital by transferring risks that pri- concise yet comprehensive information package on risk vate financiers would not be able or willing to take to mitigation instruments. We hope the work will provide those third-party official and private institutions that useful insights for policy makers, private financiers, offi- are capable of taking such risks. There has been increas- cial agencies, and other stakeholders in meeting the chal- ing interest and discussion on risk mitigation instru- lenges of mobilizing adequate financial resources for the ments in the context of infrastructure financing among provision of infrastructure in developing countries. developing country governments, multilateral and bilat- eral donors, and the private sector. However, due to the Laszlo Lovei complex and diverse nature of risk mitigation instru- Director ments, what these instruments can and cannot offer and Finance, Economics and Urban Department how these instruments can best be used for infrastruc- World Bank ture financing are not well understood. This book reviews a diverse group of risk mitigation Jyoti Shukla instruments that have been used to help developing Program Manager countries mobilize foreign and local financing for infra- Public-Private Infrastructure Advisory Facility Foreword ix BACKGROUND The Review of Risk Mitigation Instruments for igation instruments,1 publicly available sources such as Infrastructure Financing and Recent Trends and agencies' Web sites and publications, financial and Developments was sponsored by the Public-Private insurance industry publications, and rating agency Infrastructure Advisory Facility (PPIAF) and the World reports. To provide practical guidance, recent transac- Bank's Infrastructure, Economics and Finance tions are presented as short case studies to illustrate Department (IEF) to review existing risk mitigation their application and how these instruments have assist- instruments, primarily focusing on those offered by ed in securing project financing. multilateral and bilateral official agencies, and to con- The work also references products and transactions sider recent trends and developments that make these of private insurers that have been actively offering risk instruments valuable in securing financing for infra- mitigation instruments for infrastructure financing in structure projects in developing countries. The book recent years and presents how public and private sector summarizes the characteristics of the major types of risk instruments may complement each other in financing. mitigation instruments and the institutional require- The findings and interpretations expressed in this ments for their use and compares their key differences paper are entirely those of the authors. For details about as well as compatibility. the risk mitigation instruments discussed in this paper, The sources of information for this work were the please contact the relevant institution directly. (Contact multilateral and bilateral agencies that provide risk mit- addresses can be found in appendix B.) 1There is a distinction between various types of multilateral and bilat- eral agencies. Please refer to chapter 3 for details.. x Background INTRODUCTION Raising debt and equity capital to finance projects in thy institutions, which, in turn, can lower their developing countries remains a challenge. There is an financing costs for infrastructure development. increasing interest in using risk mitigation instruments · Multilateral and bilateral institutions are able to to facilitate the mobilization of private capital to finance leverage their financial resources through the use of public and private projects, particularly in those infra- risk mitigation instruments as opposed to lending or structure sectors in which financing requirements sub- granting funds, thus expanding the impact of their stantially exceed budgetary or internal resources. support. Risk mitigation instruments are financial instruments · Risk mitigation instruments facilitate the flow of that transfer certain defined risks from project finan- local and international private capital, support the ciers (lenders and equity investors) to creditworthy third creation of commercial and sustainable financing parties (guarantors and insurers) that have a better mechanisms for infrastructure development, and pro- capacity to accept such risks. These instruments are mote the provision thereof. especially useful for developing country governments and local infrastructure entities that are not sufficiently The objective of the Review of Risk Mitigation creditworthy or do not have a proven track record in Instruments for Infrastructure Financing and Recent the eyes of private financiers to be able to borrow debt Trends and Developments is to provide a concise yet or attract private investments without support. comprehensive guide as well as reference information The advantages of risk mitigation instruments for for practitioners of infrastructure financing, including developing country infrastructure projects are multi- private sector financiers and developing country offi- faceted: cials. The work is also intended as a reference for insti- · Developing countries are able to mobilize domestic tutions offering (or developing) risk mitigation instru- and international private capital (debt and equity) for ments, allowing them to learn from each other's recent infrastructure implementation, supplementing limit- practices.2 ed public resources. The book is organized into five chapters with the fol- · Private sector lenders and investors will finance com- lowing objectives: mercially viable projects when risk mitigation instru- · Chapter 1 Type of Risk Mitigation Instruments: ments cover those risks that they perceive as exces- increases awareness of the different types and nature sive or beyond their control and are not willing to of risk mitigation instruments currently available for accept. private financiers · Governments can share the risk of infrastructure · Chapter 2 Recent Trends in Risk Mitigation: high- development using limited fiscal resources more effi- lights areas in risk mitigation for developing country ciently by attracting private investors rather than hav- infrastructure financing receiving recent attention ing to finance the projects themselves, assuming the entire development, construction, and operating risk. · Governments can upgrade their credit as borrowers, 2It is intended for the Web site version of the work to be updated reg- or as the guarantor for public and private projects, by ularly to reflect changes and developments in risk mitigation instru- using risk mitigation instruments of more creditwor- ments at the institutions. Introduction xi · Chapter 3 Characteristics of Providers and The book refers to actual transactions throughout Compatibility: summarizes the characteristics of mul- the text, and describes each transaction in detail in tilateral, bilateral, and private providers of risk miti- appendix A Profiles of Transaction Cases. gation instruments and the compatibility of those The focus of this book is on the multilateral develop- instruments ment banks and agencies (that is, The World Bank · Chapter 4 Innovative Application of Risk Mitigation Group and regional development banks and affiliates) Instruments: presents recent developments and inno- and bilateral development agencies and export credit vative applications of risk mitigation instruments and investment agencies of major developed countries through case transactions that have supported the compilation of this information.3 · Chapter 5 Challenges Ahead: summarizes areas that Risk mitigation instruments offered by each of these pose challenges to the use of risk mitigation instru- institutions are summarized in appendix B Profiles of ments as catalysts of infrastructure development Multilateral and Bilateral Risk Mitigation Instruments. 3 Appendix B presents risk mitigation instruments of bilateral agen- cies operated by countries contributing to the Public-Private Infrastructure Advisory Facility. Contribution of product informa- tion from other public entities would be welcomed for the purpose of updating the book in the future. xii Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 1 . TYPES OF RISK MITIGATION INSTRUMENTS Risk mitigation instruments have a wide variety of BOX 1.1 names, often applied to instruments offering similar risk coverage for private financiers. This may be because an Guarantees vs. Insurance instrument's use is unique or different, or because of limited standardization efforts among providers across Guarantees typically refer to financial guarantees of debt that the spectrum of risk mitigation instruments. This abun- cover the timely payment of debt service. Procedures to call on dance of names can cause confusion, not only for the these guarantees in the event of a debt service default are usual- uninitiated but even for practitioners of infrastructure ly relatively straightforward. In contrast, insurance typically financing. requires a specified period during which claims filed by the The risk mitigation instruments this book focuses on insured are to be evaluated, before payment by the insurer. are guarantees and insurance products with a medium While having different characteristics, some insurance products to long contract term and that are typically used in may be termed as "guarantees" by their providers. This book infrastructure projects to catalyze commercial debt and does not differentiate between guarantees and insurance instru- equity financing, from offshore or domestic sources.1 ments unless there is a particular need to highlight the differ- Broadly speaking, key parameters defining the char- ence. acteristics of risk mitigation instruments can be summa- Source: Authors. rized schematically as in figure 1.1. The following are brief descriptions of commonly used terms in infrastructure financing and in risk miti- gation instruments: or investment losses as either political risk or com- · Beneficiary. "Beneficiary" means the signer of a guar- mercial risk, where guarantee or insurance payouts antee or insurance contract with the provider there- would depend on the cause of the losses; and of, or a third party that directly benefits from the risk whether the specific risk has indeed been guaranteed mitigation instrument's support. Depending on the or insured under the specific contract. (Political risk instrument, the beneficiary can be a debt provider is further categorized into subrisks or risk events and (that is, a lender or bond investor) concerned with discussed later in the book.) the credit risk of the borrower, and wanting coverage · Extent of loss coverage. Many instruments cover against debt service default losses; or the beneficiary only a part of debt service default or investment loss- could be an equity investor desiring protection es. Partial coverage promotes risk sharing between against investment risk and wanting coverage for the guarantor or insurer and the lender or equity investment losses (on investments made, and on equi- ty returns in some cases). · Risk types covered. While risk mitigation instru- 1 Casualty insurance products (for example, business interruption ments highlighted in this review cover either credit insurance) and financial market hedging instruments (interest rate and currency derivatives, for instance) are not discussed in this book. risk or investment risk, some instruments differenti- While widely used in infrastructure financing, these instruments do ate between the "cause" of the debt service default not catalyze private financing per se. Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 1 Figure 1.1. Key Parameters of Risk Coverage ernment support offered, as well as other credit enhancements available to the lenders.3 Lenders lend to a private infrastructure project com- Comprehensive risk pany on a limited recourse basis contingent on the qual- Full coverage ity of the project's cash flows, which are supported by Partial coverage its security package,4 or with recourse to a creditworthy equity sponsor company; or lend on a corporate finance basis backed by the borrower's multiple revenue sources Debt (Credit risk) Political Commercial and strong balance sheet. risk risk For the sake of simplicity in this discussion, the risks Equity faced by private infrastructure financiers are very (Investment risk) broadly categorized as follows: · The risk of losses faced by debt providers in lending to the government or its public entity (risks associat- ed with sovereign or public debt) investor. In the case of risk mitigation instruments for · The risk of losses faced by debt providers in lending debt, full coverage (that is, 100 percent of principal to a private entity either on a corporate finance basis and interest payments) may be available.2 or on a limited-recourse project finance basis (risks associated with various types of private corporate In infrastructure financing, private equity investors debt) and lenders are driven by return on investment consid- · The risk of losses faced by equity investors in invest- erations, which must be adequate to compensate them ing in a private entity as above (risks associated with for the risks they assume by making an investment. equity investments) Their return requirements are determined by the spe- cific project risks and the type and structure of the Table 1.1 divides risk mitigation instruments avail- financing. able to such lenders and equity sponsors into broad cat- On one hand, in the case of lending to a government egories. These categories are discussed further in the or a sovereign entity (which finance infrastructure proj- remainder of this chapter. ects), the lenders evaluate the likelihood of the borrow- er making timely debt service payments and, if they are Credit Guarantees willing to lend, then determine the maturity and pricing Credit Guarantees cover losses in the event of a debt (credit spread) to be adequately compensated for the service default regardless of the cause of default (that is, borrower credit risk to be taken. Bond investors typical- both political and commercial risks are covered with no ly rely on the analysis of established rating agencies, differentiation of the source of risks that caused the while bank lenders traditionally conduct such analyses default). in house. On the other hand, additional risk analysis is neces- · Partial Credit Guarantees (PCGs) cover "part" of sary to evaluate a single-asset, greenfield private infra- the debt service of a debt instrument regardless of the structure project. Project sponsors and lenders investi- cause of default. Multilaterals and a few bilateral gate the details of a project's financial feasibility and agencies offer PCG instruments. The objective of a commercial viability, including the risk allocation and mitigation measures. Project risks may include construc- 2 The extent of coverage and timeliness of the guarantee or insurance tion risks (engineering feasibility, cost overruns, costs of payment has an impact on debt ratings. When the debt is to be rated, delay, for example), operating risks (demand or revenue the major rating agencies focus on probability of default and timeli- risks, tariff mechanisms, operating cost overruns, equip- ness of payments. Thus, risk mitigation instruments that require a claims process or arbitration may not enhance the rating of the ment performance), macroeconomic risks, legal and reg- transaction unless such process must be concluded within a defined ulatory risks for investments in the country generally period and some provision is made for the debt service payments to and with respect to the specific infrastructure sector, the continue uninterrupted during this period. 3 Debt service and major maintenance reserve funds, and so forth. contractual framework of the project, the creditworthi- 4 A security package normally includes an assignment of all of the ness of contractual counterparties, the sovereign gov- sponsors' rights under the project contracts. 2 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments Table 1. Broad Category of the Availability of Instruments Export credit Political risk Credit guarantee guarantee or insurance guarantee or insurance Sovereign debt Political risk X X X Commercial risk X Corporate debt Political risk X X X Commercial risk X Equity investment Political risk X Commercial risk Source: Authors. PCG is to improve both the borrower's market access PCGs are flexible and can be structured to meet and the terms of its commercial debt (that is, to the needs of specific debt instruments and market extend the maturity and reduce interest rate costs) conditions, including determining the right balance through the sharing of the borrower's credit risk of risk sharing of the borrower's credit. For example, between the lenders and the guarantor. risk sharing between the guarantor and the lender PCGs traditionally have been used by developing can be pro rata or at certain percentages (50-50 risk country governments or public entities (state-owned sharing where each would take 50 percent of losses, utilities, for instance) to borrow in the international for instance) or up to a certain amount of debt serv- bank market or to support a bond offering in the ice losses. The guaranteed coverage level may be set international capital markets. PCGs typically have to achieve a target bond rating to facilitate bond provided coverage for late maturity payments. For issuance, or at a level required to encourage [enable] example, a PCG may cover the final principal repay- commercial bank lenders to participate.5 PCGs may ment (a bullet principal payment) on the final maturi- be provided for a specific debt or for a loan portfolio ty date or the last few principal and interest payments. (for example, when individual loans are small). As an example, the Asian Development Bank (ADB) provided a PCG for a Japanese yen bond issued · Full Credit Guarantees or Wrap Guarantees cover the by a government entity in the Philippines. ADB's PCG entire amount of the debt service in the event of a covers the principal repayment of the two-tranche default. They are often used by bond issuers to bonds at maturity (18 and 20 years, respectively) as achieve a higher credit rating to meet the investment well as interest payments during the final 10 years of requirements of investors in the capital markets. In the bonds. (Please see transaction case 1 on selected developing countries, private monoline insur- "Philippines: Power Sector Assets and Liabilities ers have been active in issuing wrap guarantees for Management Corporation" in appendix A.) bonds issued by infrastructure project companies (toll PCGs have recently been used by subnational gov- road companies, for instance). Monoline insurers, ernments and other subnational entities, such as however, generally require the underlying borrower municipal utilities, as well as by private companies, or security to have a standalone investment-grade rat- to borrow domestically from commercial banks or issue bonds in the domestic capital market in local currency. (Please see transaction case 3 on "Mexico: 5 Possible structures also include first-loss/second-loss risk sharing, Tlalnepanta Municipal Water Conservation Project" rolling guarantees (where the guarantee, if not called, would be rolled over to the next scheduled debt service payment), and forms and 4 on "South Africa: City of Johannesburg" in of a put option or take-out, depending on the risk perception of tar- appendix A.) get credit providers. Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 3 ing on an international rating scale to consider offer- · PRGs cover commercial lenders in private projects. ing their guarantees.6 They typically cover the full amount of debt.10 Payment is made only if the debt default is caused by Export Credit Guarantees or Insurance risks specified under the guarantee. Such risks are Export Credit Guarantees or Insurance cover losses for political in nature and are defined on a case-by-case exporters or lenders financing projects tied to the export basis. PRGs are offered by multilateral development of goods and services.7 Export credit guarantees or banks and some bilateral agencies. insurance cover some percentages of both political risk · PRI, or investment insurance, can insure equity and commercial risk (together, termed comprehensive investors or lenders. PRI can cover the default by a risk guarantee or insurance). sovereign or corporate entity but only if the reason for Commercial risks, in the context of purely export a loss is due to political risks.11 Coverage is generally transactions at export credit agencies (ECAs), are defined limited to less than 100 percent of the investment or as bankruptcy or insolvency of the borrower or buyer, loan. Providers of investment insurance include failure of the buyer to effect payment, failure or refusal of export credit agencies, investment insurers, private the buyer to accept goods, termination of purchase con- political risk insurers, and multilateral insurers. tract, and so on.8 Political risk is discussed below. Coverage is limited to a specified percentage for each PRI includes relatively standardized risk coverage risk, but it could represent quasi-complete coverage. For offered by the insurance industry for traditional example, an ECA may offer coverage of up to 97.5 per- political risks. This coverage includes cent of political risk and 95 percent of commercial risk. · currency inconvertibility and transfer restriction: Credit guarantees and comprehensive risk guarantees of losses arising from the inability to convert local cur- ECAs effectively provide cover to lenders for basically rency into foreign exchange, or to transfer funds out- the same (commercial and political) risks, guaranteeing side the host country; debt service in the event of a default by sovereign or cor- · expropriation: losses as a result of actions taken by the porate obligors for any reason. host government that may reduce or eliminate owner- Export credit guarantees or insurance are normally ship of, control over, or rights to the insured invest- "tied" to the nationality of exporters or suppliers, and ment; and sometimes to the project sponsors or lenders. "Untied" · war and civil disturbance: losses from damage to, or comprehensive guarantees may be available at a few the destruction or disappearance of, tangible assets bilateral agencies, such as Japan Bank for International Cooperation (JBIC). JBIC generally provides untied 6 That means the borrower would most likely need to be located in an comprehensive guarantees in conjunction with JBIC investment grade (triple-B or better) country. Most monoline insur- direct loans. ers are rated triple-A on an international scale by rating agencies, Some bilateral insurers, such as Nippon Export and and have rigid credit policies to maintain such rating. 7 Loans may be made by the lender to the exporter so that the Investment Insurance (NEXI) of Japan and the U.S. exporter can allow deferred payments by the importer in a develop- Overseas Private Investment Corporation (OPIC), can ing country ("supplier's credit"), or loans are made directly by the provide risk insurance for parastatal entities backed by financial institution to the importer, normally through a bank in the developing country ("buyer's credit"). a sovereign guarantee to issue international bonds or 8 ECAs may have project finance programs where the insurance can access commercial bank markets, which has the same cover all commercial risks associated with the construction and effect as more standard credit guarantees. (Please see operation of a facility. 9 The World Bank introduced a Partial Risk Guarantee concept in transaction case 2 on "Philippines: Philippine Power 1994. Since then other multilaterals followed, but basically the same Trust I" in appendix A.) debt guarantee instrument is called a Political Risk Guarantee at the ADB or the Inter-American Development Bank (IDB). 10 Political Risk Guarantees or Insurance PRGs typically cover the full principal repayment, as well as accrued interest (when the guarantee is callable upon the acceleration of Political Risk Guarantees or Insurance cover losses underlying debt) or full interest payments (when the guarantee is caused by specified political risk events. They are typical- nonaccelerable). ly termed Partial Risk Guarantees (PRGs), which may be 11Some private insurers would widen their PRI policies to cover con- tractual default risk of highly rated local corporations, when such termed as Political Risk Guarantees (PRGs),9 or Political contractual obligations would not be covered under export credit Risk Insurance (PRI) depending on the provider. insurance because there is no export. 4 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments caused by politically motivated acts of war or civil cancellation of license and approval; nonallowance for disturbance in the host country. agreed tariff adjustment formula or regime); · contractual performance of public counterparties Relatively newer political risks covered include (for example, state-owned entities under an off-take · breach of contract: losses arising from the host gov- agreement, an input supply agreement, or the like); ernment's breach or repudiation of a contract;12 and · frustration of arbitration; and · arbitration award default: losses arising from a gov- · certain uninsurable force majeure events. ernment's nonpayment when a binding decision or award by the arbitral or judicial forum cannot be To meet market demand, some PRI providers have enforced. similarly started to stretch their expropriation risk cover- age to include a range of government actions that would Demand for political risk mitigation has been shifting have the effect of creeping expropriation or by offering from traditional political risks to coverage of risks that expanded political risk insurance, which includes a more arise from the actions or inactions of the government explicit cover for breach of contract by the government. that adversely influence the operation of a private com- PRI providers may have different definitions of "the gov- pany engaging in infrastructure business. One may ernment." Some may be restricted to the sovereign gov- argue that some of these risks fall in between tradition- ernment, while others may include public entities such as al commercial risks and traditional political risks. state-owned electric utilities and the like. PRGs offered by multilaterals were developed to The availability of different types of coverage cover a wider range of political risks (and for a longer depends on the specific situation. Traditional political tenor) than those covered by the insurance market. They risks can be analyzed and evaluated by private insurers typically cover government contractual obligations, that and commercially oriented public agencies based on his- is, losses arising from a government's nonpayment of its torical performance of the country. However, breach of payment obligations under its contractual undertaking contract risk or a wider range of political risks cannot. or guarantees provided to a specific project. PRGs have Coverage availability for these risks at PRI providers is typically been used in limited-recourse project finance based largely on the specific contractual undertakings of transactions; however, recently they have also been used the government toward the project (in a manner similar for concession projects. to PRG). If such contractual undertaking is not avail- The coverage offered through a PRG depends on the able, the PRI provider would require clear evidence that specific contractual agreements for an infrastructure public contractual counterparties acting on behalf of the project and on the obligations contractually agreed to by government so that a claim against the counterparties the host government for the project. The coverage may could be upgraded to that against the government, or include traditional political risks as described above, as their claim payout under the insurance policy would be well as losses arising from risks relating to the following: conditional on the existence of an arbitration award in · government contractual payment obligations (for favor of the insured against the government. example, termination payments or agreed subsidy payments); · government action or inaction having a material 12Many insurers require an arbitration award before accepting claim adverse impact on the project (examples include change liability, and thus their coverage is similar to arbitration award of law, regulations, taxes, and incentives; negation or default coverage. Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 5 2 RECENT TRENDS IN RISK MITIGATION While risk mitigation instruments facilitate the mobi- these instruments have mitigated those risks that the pri- lization of private debt and equity capital, the borrower vate sector was unwilling to take. or project must be sufficiently "bankable" to enable the providers of such instruments to properly assess the Regulatory Risk risks, identify recourse measures as needed, and offer Regulatory risk is often cited as a problem experienced defined risk coverage. Risk mitigation instruments are by private infrastructure companies in implementing not a panacea; they do not make poorly structured proj- agreed-upon tariff increases due to regulatory action or ects, or borrowers with unpredictable future prospects, inaction. This has been an issue particularly in countries bankable. suffering from macroeconomic shocks where the con- Major risks cited by private infrastructure financiers tractually agreed increases would have been very large. in developing countries today often relate to govern- Regulations for infrastructure projects are often mental or quasi-governmental actions, outside of the included in concession or other key contracts between a private party's control: government and a private company (so-called regula- · Regulatory risk: the risk of losses as a result of tion by contract). In countries with a nascent regulatory adverse regulatory actions by the host government framework and a regulatory agency without a track and its agencies (for example, a regulatory agency) record, the government may opt to provide contractual · Devaluation risk of local currency: the risk of losses certainty to regulations to attract private investment. arising from unfavorable movement of foreign When these regulations are defined contractually, the exchange rates (for example, devaluation of local regulatory risk may be mitigated using a partial risk currency for infrastructure projects that earn rev- guarantee (PRG), which could cover the government's enues in local currency while expenses, costs, and contractual obligations, or by a breach of contract pol- financing are largely denominated in foreign or hard icy under political risk insurance (PRI). currency) For example, when the government of Romania pri- · Subsovereign risk: the risk of losses as a result of vatized its power distribution companies, it provided a breach or repudiation of contracts or nonperfor- guarantee to the investors against a change or repeal by mance by the subnational host government or sub- the government or the regulatory agency of, or non- national contractual counterparties, or both; action compliance by the regulatory agency with, the key pro- or inaction by the local host government having a visions of the regulatory framework. The World Bank material adverse impact on the project; and similar could then provide a PRG to backstop the govern- situations ment's obligation to compensate for loss of regulated revenues resulting from such defined regulatory risk. These risks do not readily fall under the established This PRG was in response to the investor's requirement political risk categories and are difficult to define. for a predictable revenue stream to support the finan- However, some risk mitigation instruments have cov- cial viability of the distribution companies in the face of ered these risks, if not in full, in part, and indirectly. The considerable uncertainty because the regulatory regime following discussion presents examples showing how was untested. (Please see transaction case 5, "Romania: 6 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments Privatization of Banat and Dobrogea Power Distribu- for a project where the tariff adjustment was not linked tion Companies," in appendix A.)1 to the utility's costs but to local inflation.3 (Please see It is difficult for guarantors or insurers to assess and transaction case 7, "Brazil: AES Tietê," in appendix A.) cover the risk of an untested regulatory regime, includ- While this example concerns a private power utility, ing the risk of unanticipated action by the new regula- a similar liquidity arrangement for public utilities might tory agency, without clear government undertakings, if be explored by governments in countries where timely not explicit recourse to the government, to provide cov- cost pass-through to end users upon substantial curren- erage for regulatory risk. Some financiers may want to cy devaluation may not be warranted politically. Such a explore arbitration award default coverage (defined in liquidity facility could enhance the creditworthiness of chapter 1) offered by PRI providers to obtain a degree the government, and could possibly be backstopped by of comfort against such regulatory uncertainty. a PRG.4 Devaluation Risk Subsovereign Risk Devaluation risk has been a significant issue since the Subsovereign risk chiefly refers to the credit or payment massive currency devaluations took place in late 1990s risk of lower-level (state, provincial, municipal) govern- to early 2000s in a number of developing countries in ment entities.5 The trend is to decentralize government East Asia and Latin America. Public and private utilities functions; therefore subsovereign governments are were unable to adequately pass through increased costs increasingly responsible for provision of infrastructure. to users due to government action and inaction and suf- Private financiers have been asked to evaluate the qual- fered serious financial problems and, in some cases, loan ity of these subsovereign borrowers, the concession defaults. grantor, the contractual counterparty, the guarantor of This issue arises in countries without well-established municipal utilities, and the local regulator. and liquid long-term debt markets and without market- Some products can mitigate certain subsovereign based currency hedge products (cross-currency swaps, risks. In investment-grade developing countries, private for instance). Where local financial markets and mar- monoline insurers provide wrap guarantees (defined in ket-based hedging mechanisms exist, local lenders as chapter 1) for municipal bonds of sufficiently creditwor- well as foreign lenders (including multilateral and bilat- thy municipalities. Multilateral development banks eral agencies) can extend loans in local currency loans, have traditionally lent to subsovereign governments or intermediate cross-currency swaps, to minimize the either through or with the guarantee of the relevant sov- devaluation risk for infrastructure projects.2 ereign government. The European Bank for The multilaterals continue to try to find solutions to Reconstruction and Development (EBRD) and the providing local currency funding. The Asian Development Bank, for example, entered into a long- term currency swap contract with the Philippines to 1 Please also refer to Pankaj Gupta, Ranjit Lamech, Farida Mazhar, offer local currency loans because the country currently and Joseph Wright, "Mitigating Regulatory Risk for Distribution Privatization: The World Bank Partial Risk Guarantee," Discussion lacks market-based liquid long-term currency hedges. Paper 5, Energy and Mining Board Discussion Paper Series, Devaluation risk has been contractually mitigated Washington, DC, World Bank, 2002. chiefly by allowing for tariff indexation of foreign cur- 2 For internal risk control purposes, most official lenders would offer local currency loans only when cross-currency swaps are available to rency cost components (for example, foreign currency hedge their currency exposure fully, or when they can raise funds in debt and equity costs, dollar-denominated fuel costs) to the same currency to match the loan exposure. foreign exchange rates. PRGs or certain breach of con- 3 To the extent that the economic concept of purchasing power parity tract policies of PRI providers have also been used to is reasonably accurate over the medium to long run, a cash flow shortage caused by devaluation could be managed by an appropri- cover a government's or public counterparty's contrac- ately sized liquidity facility, and a loan advance could be repaid tual performance, indirectly covering the devaluation through a tariff increase reflective of inflation. 4 risk for the project. Please see the following work, which discusses such a scheme: Tomoko Matsukawa, Robert Sheppard, and Joseph Wright, The U.S. Overseas Private Investment Corporation "Foreign Exchange Risk Mitigation for Power and Water Projects in (OPIC) at one time offered an innovative standby credit Developing Countries," Discussion paper 9, Energy and Mining facility that could be drawn following a substantial Board Discussion Paper Series, Washington, DC, World Bank, 2003. 5 Quasi-sovereign entities such as parastatals (companies owned by devaluation of the local currency to enable the borrower the sovereign government) may be included in the subsovereign cat- to meet its debt service obligations. This facility was used egory at some insurers. Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 7 International Finance Corporation (IFC) have created ity building, as well as some form of credit enhance- municipal finance units6 and provided loan and partial ment, would be required for marginal and small subsov- credit guarantee support (including local currency) to ereign entities to become bankable.8 selected subsovereign governments and entities based on their own credit. 6 Other multilaterals, such as the Inter-American For example, the Municipal Fund is a joint initiative of the World Bank and the IFC. Transactions are booked at IFC and a full line of Development Bank and the Multilateral Investment IFC risk mitigation instruments are available in conjunction with its Guarantee Agency (MIGA) provide PRGs and PRI for Structured Finance Group. municipal concession projects. It should be noted that 7 This may include legal interpretation that the country is responsible for all the actions of any political subdivision acting within the scope PRI providers, which specialize in covering a country's of authority, or an arbitral award may be elevated to the sovereign political risks, generally require "legal links"7 to the sov- level, and so forth. ereign government to cover subsovereign risk. 8 Please see the following work: Robert Kehew, Tomoko Matsukawa, and John Petersen, "Local Currency for Sub-Sovereign Infrastructure While the most creditworthy subsovereigns have in Developing Countries," Discussion paper 1, Infrastructure, access to the market on their own credit, there is grow- Economics and Finance Department, Washington, DC, World Bank, ing recognition that more technical assistance for capac- 2005. 8 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 3 CHARACTERISTICS OF RISK MITIGATION PROVIDERS AND COMPATIBILITY OF PRODUCTS Risk mitigation providers include multilateral develop- For example, World Bank Group institutions often ment banks and agencies, bilateral or national agencies, provide their respective instruments for the same private and private financial entities. Each has its own structure infrastructure projects that benefit from government and benefits. undertakings or guarantees discussed in chapter 1. While the World Bank (IBRD and IDA) requires an Multilateral Agencies indemnity from the host government and offers uniform Multilateral agencies that offer risk mitigation instru- guarantee fees across all member countries, its private ments are multilateral development banks and guaran- sector-focused member institutions (IFC and MIGA) do tee or insurance agencies affiliated with development not require such indemnities and charge market-based banks. fees. The Asian Development Bank (ADB), however, Many of the multilateral development banks have performs a risk assessment of each project-specific situ- similar guarantee programs (partial credit guarantees ation to determine if a sovereign indemnity is required [PCGs] and partial risk guarantees [PRGs] for debt when it offers a PRG.2 providers, as discussed in chapter 1). The use of these (For the list of major multilateral institutions and their instruments is conditional on meeting development risk mitigation instruments, please see appendix B1.) objectives; that is, underlying projects would need to meet the specific institution's development assistance Bilateral Agencies strategies and priorities for the applicable country to be Bilateral or national agencies offering risk mitigation eligible for guarantees. instruments can be generally categorized into bilateral Multilateral agencies' operations are typically more development agencies and Export Credit Agencies focused on lending than on providing guarantees, with (ECAs). The latter include export-import banks, export the exception of insurance agencies. When multilateral credit agencies, export credit guarantee agencies, invest- banks offer risk mitigation instruments, they aim at ment insurance agencies, and the like. Some bilateral risk sharing with private lenders by offering partial agencies have combined the functions of a development guarantees. agency and an ECA into one institution. Regional development banks operate both public sec- Bilateral development agencies have development tor and private sector divisions under the same institu- objectives similar to those of multilateral development tional umbrella. (The World Bank Group1 is the only banks. They, too, have been more focused on providing exception.) The demarcation between the public and private divisions is decreasing because infrastructure project opportunities in developing countries requiring 1 The World Bank Group comprises the World Bank (offering multilateral support are in increasingly difficult coun- International Bank for Reconstruction and Development [IBRD] and International Development Agency [IDA] guarantees for public and tries or sectors where certain government undertakings private projects) and private sector-focused group member institu- are required to make projects bankable and make mul- tions, the International Finance Corporation (IFC), and the tilaterals' guarantees operative. In addition, support for Multilateral Investment Guarantee Agency (MIGA). 2 The amount of its support without a government counter-guarantee subsovereign governments and entities are often under- is limited by policy. Fee levels (net) would be different depending on taken on a joint basis between public and private sector a PRG with a counter-guarantee and without (more expensive and in divisions. line with market rates). Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 9 loans or grants rather than leveraging their balance Just as the objectives of public and private insurers sheets through the issuance of risk mitigation instru- are different, so are their attributes, skills, and focus. ments (guarantees and insurance). One notable excep- While private insurers are highly sophisticated in risk tion is the United States Agency for International assessment, public insurers have greater leverage with Development (USAID), which operates an innovative host governments. For example, the multilateral institu- and decentralized PCG program for private businesses tions have preferred creditor status or special govern- in various developing countries under its Development ment-to-government relationships. But private insurers' Credit Authority (DCA).3 products may be more widely available because they are ECAs have diverse organizational structures: some not limited by institutional development priorities or the are part of their respective governments (in the United financiers' nationality. At the same time, private insur- Kingdom, for example); others are structured as govern- ers typically have more stringent and smaller country ment agencies; and in some countries, government pro- credit limits or risk coverage. Private insurers generally grams are administered by private entities (for instance, focus on the lower-risk segment of developing countries in France and Germany). because of their own internal risk management or rating ECAs offer fairly similar political risk and commer- requirements. cial risk insurance or guarantee programs for trade and investment transactions, along with export credit pro- Complementary Roles grams. Many ECAs have separate guarantee or insur- In all areas of infrastructure financing, risk mitigation ance programs for project finance debt facilities. The instruments offered by multilateral, bilateral, and pri- difference between export credit insurance and project vate institutions can be complementary and, in fact, finance coverage at the ECAs is the analytical approach, have been used together in many project finance trans- not the instrument. Export credits will have standard actions. There are a number of examples in which pri- security requirements with a government guarantee, vate infrastructure projects were financed on a limited- while project finance cover is based on the creditworthi- recourse project finance basis and guarantees, insur- ness of the project itself. ance, and loan support of various multilateral, bilateral, ECAs' institutional objectives are largely to serve and private institutions were used for different debt their countries' national interests. Their programs are tranches and by equity sponsors. typically tied to the nationality of exporters or suppliers MIGA, ADB, and IDB all have guarantee programs to and sometimes of the project developers or lenders. A share risk with private insurers to encourage them to par- major part of the business of ECAs is related to nonin- ticipate in risks underwritten under the name of the mul- frastructure sectors with short-term guarantee and tilateral. That way, private insurers can benefit from the insurance contracts. ECAs offer comprehensive risk multilaterals' preferred creditor status or relationships coverage to private financiers to promote their respec- with governments. MIGA's risk-sharing program is called tive countries' exports, to encourage foreign investment Cooperative Underwriting Program (CUP), and the ADB by their nationals, or to promote lending and underwrit- and the IDB act as the guarantors of record (GOR) for ing business by their countries' financial institutions. loans. Reinsurance arrangements are common among all (For the list of major bilateral institution and their types of PRI providers, to share and manage risks. risk mitigation instruments, please see appendix B2.) Similarly, many multilateral banks, through their pri- vate sector departments or organizations, offer an Private Financial Entities "A/B" loan structure, where the multilateral lends a Private financial entities are active in lending to, or portion of the total amount required (the "A" loan) and underwriting or buying bonds of, emerging market country governments, corporations, and projects. There are also a number of private sector providers of risk mit- 3 It commonly offers 50-50 pro rata credit guarantees for local or dol- igation instruments, such as the monoline insurers4 that lar loans, backed by the full faith and credit of the United States gov- ernment. offer wrap guarantees to structured debt transactions, 4 Major monoline insurers include MBIA, AMBAC, FSA, FIGIC, including asset-backed securities and project finance XLCA, and others. Please refer to the Web site of the Association of debt; and political risk insurers5 (and reinsurers) provid- Financial Guaranty Insurers (http://www.afgi.org). 5 Major political risk insurers include AIG, Chubb, Sovereign, Zurich, ing political risk insurance (PRI) in a manner similar to Lloyds (the latter is not a company but comprises several syndicates), multilateral and bilateral insurers. and others. 10 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments syndicates the remainder of the loan to commercial ADB); bilateral agencies (loans from the Japan Bank for lenders (the "B" loan). The multilateral acts as the International Cooperation (JBIC) and PROPARCO of lender of record for the full loan and the private sector France); and private political risk insurers that assumed lenders receive the benefit of being under the umbrella risks under the ADB's GOR umbrella. (Please see trans- of the multilateral.6 action case 8, "Vietnam: Phu My 2-2 BOT Power The Phu My 2-2 BOT Power Project in Vietnam is a Project," in appendix A.) typical example of a limited-recourse project with mul- tiple guarantors and insurers. The project was devel- 6 B loan participants benefit from the multilateral's preferred creditor oped with equity from a private sponsor consortium. status and thereby the A/B loan structure implicitly mitigates curren- The debt financing was supported by multilateral devel- cy transfer risk for lenders, though in a weaker form (vs. an explicit currency inconvertibility and transfer restriction guarantee). The opment banks (a PRG issued by the World Bank; a PRG structure is chiefly employed for projects in the lower-risk segment issued by the ADB as the GOR and a loan from the of developing countries. Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 11 4 INNOVATIVE APPLICATION OF RISK MITIGATION INSTRUMENTS Providers of risk mitigation instruments have made sub- undertakes to pay for the work or provides operating stantial efforts to facilitate the accessibility and use of subsidies so the project can obtain financing. their instruments by introducing innovative applications While a government's payment obligation to the con- and expanding the interpretation of their existing poli- cessionaire may be guaranteed through a partial risk cies, as well as by introducing new instruments. guarantee (PRG) and political risk insurance (PRI) The following examples illustrate how risk mitiga- instruments, the IDB has innovatively used its PCG by tion instruments were used or combined in unique and effectively covering the payment obligations of the gov- nontraditional manners. ernment of Peru under a toll road concession, with a caveat that, under an indemnity agreement between the Multilateral Wrap Guarantees by Combining IDB and Peru, if the government fails to make payments Partial Credit Guarantees and the guarantee is triggered, any disbursement made Institutional investors in developing countries are gener- by the IDB to the concessionaire under the guarantee ally risk-averse and thus typically invest primarily in will be converted into a loan by the IDB to Peru. government bonds. In addition, for pension funds in a This structure may diminish the deterrent effect of a number of developing countries, the investment in high- multilateral guarantee (that is, ensuring government ly rated debt is mandated through prudential regulation. action through an indemnity agreement) but it would be To meet the demand for high-quality securities in viewed as attractive by governments for PPP projects domestic bond markets, the Inter-American Develop- requiring substantial public financing. (Please see trans- ment Bank (IDB) deployed its partial credit guarantee action case 10, "Peru: IIRSA Northern Amazon Hub," (PCG) with a private monoline insurer's guarantee to in appendix A.) provide a full credit wrap for local currency bond issues by toll road companies in Chile. The IDB acts as the PCG for Pooled Financing guarantor of record as well as guarantor for its own Pooling arrangements allow small and medium cities account for a predetermined amount with the remaining to aggregate their financing needs, diversify their cred- amount under the bonds guaranteed by a private mono- it risks, and spread the transaction costs of a bond line insurer. This combination of partial guarantees of issuance. In India, Tamil Nadu's Municipal Urban multilateral and private institutions for the provision of Development Fund issued pooled bonds for water and fully wrapped infrastructure bond achieves the objective sanitation projects of participating urban local bodies of risk sharing by the IDB with private "guarantors," (ULBs), with a PCG from USAID's Development while providing the project companies with the ability Credit Authority covering 50 percent of principal and to access the local capital market. (Please see transaction other credit enhancement measures, namely, (a) case 9, "Chile: Rutas del Pacifico," in appendix A.) escrow accounts funded by the ULBs, and (b) a debt service reserve fund set up by the state government PCG Combined with Contingent Loan Support that would be replenished by diverting ULB transfer In some public-private partnership (PPP) projects, the payments. (Please see transaction case 11, "India: concessionaire's role is to construct, operate, and Tamil Nadu Pooled Financing for Water and finance the project on the premise that the government Sanitation," in appendix A.) 12 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments Complementary Guarantees by Combining vatization transactions, which may not involve new a PRG and PRI investment and therefore are not able to draw other A PRG and PRI were used together as complementary forms of export credit or PRI support. (Please see trans- guarantees, with a pro rata allocation of claims among action case 5, "Romania: Privatization of Banat and coguarantors to meet the needs of a specific project. The Dobrogea Power Distribution Companies," and transac- World Bank (through IDA), the Multilateral Investment tion case 6, "Joint Kenya Uganda Railway Concession," Guarantee Agency (MIGA), and a private insurer in appendix A.) (backed by reinsurance from the Overseas Private Investment Corporation), offered PRG and PRI to cover Brownfield Project Support the termination payments guaranteed by the government Bilaterals such as Japan Bank for International of Ghana for a pipeline project company in West Africa. Cooperation (JBIC) provide investment guarantee sup- A termination payment due but not paid by the gov- port for equity acquisitions by Japanese private ernment would be deemed to be a project company loan investors from original private investors, as seen in the to the government under the project contract. This recent activity in the purchase and refinancing of private allowed the World Bank to offer its PRG (which must infrastructure projects in developing countries. benefit a "debt" provider) for a project funded entirely by equity from the project sponsors. The World Bank's Country-Specific Guarantee Facilities participation (with the government's indemnity) brought Multilaterals have experimented in setting up country- comfort to the investors. (Please see transaction case 12, specific guarantee facilities to streamline processing of "West African Gas Pipeline Project," in appendix A.) their guarantees to support small to medium projects. In addition, multilateral and bilateral agencies have Corporate Finance with PRG and PRI assisted countries to set up guarantee facilities by pro- Equity sponsors may be willing to guarantee commer- viding contingent credit or seed capital to the govern- cial risks, such as project development, construction, ment. Such official donor financial support may be and operation risks, by providing their corporate guar- structured on a first loss basis for the private financial antee to lenders, but they are generally unwilling to take institution managing the guarantee program and to host-country political risks, thus requiring third-party leverage donor support (by using its own balance sheet risk mitigation instruments. on a second loss basis). In the Southern Africa Regional Gas project located To support reconstruction efforts in Afghanistan, the in Mozambique, a South African sponsor, Sasol, provid- IDA and the Asian Development Bank provided credits ed a corporate guarantee to lenders (Sasol assumed all to the government of Afghanistan to set up and fund an project-related commercial risks) with the exception of investment guarantee facility to stimulate foreign invest- Mozambique political risk, over which Sasol would ment. MIGA manages the facility. (Please see transac- have no control. This risk was carved out of the guaran- tion case 14, "Afghanistan: Investment Guarantee tee provided by Sasol and covered by a PRG from the Facility," in appendix A.) World Bank, PRI from MIGA (partly reinsured by bilat- In Ghana and other African countries, the World eral insurers)1 and PRI from the Export Credit Insurance Bank (through IDA) and the International Finance Corporation of South Africa (ECIC). Corporation are collaborating to develop a local-cur- These PRGs and the PRI were provided for local cur- rency PCG program to encourage local banks to lend to rency loans in South African rand. In addition, the proj- small and medium enterprises (SMEs). (Please see trans- ect received financing via local currency loans from action case 15, "Ghana: SME Partial Credit Guarantee other multilateral and bilateral agencies. (Please see Program," in appendix A.) transaction case 13, "Mozambique/South Africa: Southern Africa Regional Gas Project," in appendix A.) Global or Regional Guarantee Facilities Various initiatives have been formulated by multilateral Privatization Guarantees and bilateral donors as well as private institutions to set Multilateral and bilateral institutions have traditionally up global or regional guarantee facilities that support limited their support to projects making new investments (including rehabilitation or expansion). The World Bank 1 Italian Export Credit Agency (SACE) and Export Finance and and other multilaterals now offer PRG and PRI for pri- Insurance Corporation (EFIC) of Australia. Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 13 the development of infrastructure projects in developing country to underwrite the capital for the facility. ATI countries. A notable example is GuarantCo, established covers political and commercial risk for trade and invest- by a bilateral donor group, Private Infrastructure ment projects. It has been able to leverage its funds Development Group (PIDG).2 GuarantCo offers partial through the mobilization of private and public coinsur- guarantees for debt of private infrastructure projects ance and reinsurance. (Please see transaction case 18, and companies, parastatals, public utilities, and munic- "African Trade Insurance Agency," in appendix A.) ipalities. To date, GuarantCo has closed one transac- tion: GuarantCo counter-guaranteed the Netherlands Guarantee Initiatives for Local Capital Markets Development Finance Company (FMO), which provid- Some initiatives focus on the mobilization of local cur- ed a PCG for a cellular phone operator in Kenya. (Please rency bonds. The Association of Southeast Asian see transaction case 16 on PIDG in appendix A.) Nations+3 launched the Asian Bond Market Initiative Africa has been a difficult region for private sector to eliminate currency mismatches and to develop local investment in infrastructure without some form of risk capital markets in participating countries. A guarantee mitigation. Donors have set up regional guarantee facil- facility for local currency debt is currently being devel- ities targeted at African countries to streamline the pro- oped under the Asian Bond Market Initiative.3 cessing of guarantees, or as a first step for the establish- Private monoline insurers are establishing a global ment of a new regional insurance agency. One such ini- bond insurance company that plans to provide wrap tiative is a regional infrastructure guarantee facility guarantees for local bonds issued for infrastructure developed by the World Bank (through IDA), MIGA, projects and municipalities as well as asset-backed and and Agence Française de Développement (AfD). It offers mortgage-backed securities. They will likely focus ini- guarantees to promote small and medium infrastructure tially on investment-grade countries, given the require- projects in West Africa. The products--the PRG by IDA ments of the rating agencies. and AfD, PRI by MIGA, and comprehensive guarantees covering political and commercial risks by AfD--will be offered separately but in a complementary manner. 2 PIDG members are the UK Department for International (Please see transaction case 17, "Banque Ouest Africaine Development (DFID), the Austrian Development Agency (ADA), the de Développement Infrastructure Guarantee Facility," in Swiss State Secretariat for Economic Affairs (SECO), the Swedish appendix A.) International Development Cooperation Agency (SIDA), and the Netherlands Directorate-General for International Cooperation Another initiative is the Africa Trade Insurance (ATI) (DGIS). Facility, established as a pan-African export credit 3 The Asian Bond Market Initiative is not focusing on infrastructure at agency to promote inter- and intraregional trade, initial- this stage. While such a guarantee facility is not yet established, JBIC and Nippon Export and Investment Insurance (NEXI) provided guar- ly for East Africa. The World Bank (through IDA) helped antees and insurance, respectively, to support the issuance of local to establish ATI by providing credit to each participating currency debt (mortgage-backed securities and corporate bonds). 14 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 5 CHALLENGES AHEAD A wide range of risk mitigation instruments are offered and risk-sharing modalities and to better define those by private, multilateral, and bilateral institutions. While risks so that they can be adequately mitigated to attract innovation has been gradual, it is tangible. Change has financing. Based on the case examples presented, a spe- largely been triggered by the needs of specific transac- cific transaction in a specific infrastructure sector or tions and through the changing demand for risk mitiga- country is a logical place for stakeholders to start, either tion instruments by private financiers. when they want to replicate current, or are trying to The main challenges for the providers of risk mitiga- develop new, workable risk mitigation measures. tion instruments in supporting infrastructure financing The World Economic Forum, an infrastructure advo- in developing countries are in the following three areas: cacy group, has recommended, in its report on · Further improvement of risk mitigation instruments Financing for Development Initiative,1 a major expan- and innovation in their uses to make them more sion of risk mitigation activity by the development effective in catalyzing diverse types of transactions banks. Private practitioners often cite mismatches in and to increase available infrastructure financing speed of execution, lack of standardization of instru- · Expansion and facilitation of the use of risk mitiga- ments, nonfinancial conditions, and the like as impedi- tion instruments, in particular at multilateral and ments to the increased use of risk mitigation instruments bilateral official agencies, to promote collaboration of the official agencies. with private financiers and insurers in lieu of direct It was confirmed during the compilation of this lending review that the providers of risk mitigation instruments · Enhanced capacity building and technical assistance are keenly interested in expanding the use of their prod- to developing country governments and entities to ucts and to learn more about how other "competing" prepare infrastructure projects to attract private institutions are using and structuring risk mitigation investment, and to prepare bankable public borrowers instruments in support of infrastructure financing. The intent of the paper is to provide information on As discussed in chapter 2, specific risks (regulatory the current range of ways in which risk mitigation risk, devaluation risk, and subsovereign risk) create a instruments can catalyze local and foreign private large demand by private financiers for financial instru- financing by mitigating specific risks and concerns. It is ments to mitigate those risks. The transaction struc- also intended to show how official agencies' products tures (including regulatory regimes, security packages, have encouraged and promoted the use of private insur- recourse measures) to address these types of risks, ance, and emboldened further use of risk mitigation either as one-off transactions or through standardized instruments at the official agencies. This, in turn, is risk mitigation instruments, need to be further explored expected to further stimulate private equity and debt and developed. investments and also private guarantee and insurance The objective of this paper is to provide stakeholders in infrastructure projects, including developing country 1 governments, private sector financiers, and official and World Economic Forum, "Building on the Monterrey Consensus: The Untapped Potential of Development Finance Institutions to private risk mitigation instrument providers, with the Catalyse Private Investment," Financing for Development Initiative, ability to explore pragmatic, feasible project structures Geneva, 2006. Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 15 products. and advisors to prepare projects for bidding and negoti- It is the hope of the authors that, through broad cir- ation, albeit on an ad hoc basis. As an example, the culation and posting on a Web site dedicated to infra- Public Private Infrastructure Advisory Facility (PPIAF), structure risk mitigation instruments, this paper will a multidonor facility, assists developing countries to remain a living document and allow for the sharing of improve the enabling environment for private sector experiences among providers of risk mitigation instru- participation in infrastructure services, including the ments to further promote collaboration and facilitate provision of funding support for the preparation of spe- the use of their instruments. cific private infrastructure projects. To further these Preparing infrastructure projects for private financ- efforts, some donors have set up facilities dedicated to ing is a costly exercise for developing countries, which project development. may not have adequate financial and technical expert- The combination of increased awareness about how ise. There is a huge need to assist developing country risk mitigation instruments are used, stepped-up initia- governments in the preparation of bankable infrastruc- tives to expand their use, and enhanced project prepa- ture projects that can attract private financiers support- ration initiatives would facilitate and assist the imple- ed by risk mitigation instruments, where needed. mentation of infrastructure transactions in developing Multilateral and bilateral institutions can offer tech- countries on an expanded scale. nical assistance to host governments. This support includes funding for the hiring of external consultants 16 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments A P P E N D I X A PROFILES OF TRANSACTION CASES 1. Philippines: Power Sector Assets and Liabilities Management Corporation--Partial Credit Guarantee (PCG) 2. Philippines: Philippine Power Trust I (Napocor)--Political Risk Insurance (PRI) 3. Mexico: Tlalnepantla Municipal Water Conservation Project--PCG 4. South Africa: City of Johannesburg--PCG 5. Romania: Privatization of Banat and Dobrogea Power Distribution Companies--Partial Risk Guarantee (PRG) 6. Kenya/Uganda: Joint Kenya Uganda Railway Concession--PRG 7. Brazil: AES Tietê--PRI 8 Vietnam: Phu My 2.2 BOT Power Project--PRG 9. Chile: Rutas del Pacifico--PCG 10. Peru: IIRSA Northern Amazon Hub--PCG 11. India: Tamil Nadu Pooled Financing for Water /Sanitation--PCG 12. West African Gas Pipeline Project--PRG, PRI 13. Mozambique/South Africa: Southern Africa Regional Gas Project--PRG, PRI 14. Afghanistan: Investment Guarantee Facility--PRI 15. Ghana: SME Partial Credit Guarantee Program--PCG 16. Private Infrastructure Development Group 17. BOAD Infrastructure Guarantee Facility--PRG, PRI, Comprehensive Risk Insurance (CRI) 18. African Trade Insurance Agency--PRI, CRI Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 17 1. Philippines: Power Sector Assets and Liabilities basis. If other conditions are unchanged, the ratings of Management Corporation1 the two bonds would migrate over the bonds' term from the Baa1 to the Aaa level, with the higher rating Table A1: Summary, Philippines Power Sector Assets and correlating with that of the ADB vs. the rating of the Liabilities Management Corporation government of the Philippines. Country Philippines Sector Power 2. Philippines: Philippine Power Trust I (Napocor)3 RMI type PCG RMI providers ADB Table A2: Summary, Philippine Power Trust I RMI beneficiary Debt (bond investors) Country Philippines RMI coverage Principal on final maturity dates; Sector Power interest during final 10 years RMI type PRI Borrower PSALM RMI providers OPIC Debt amount JPY 61.75 billion (Tranche A: JPY RMI beneficiary Debt (bond investors) 24.75 billion; Tranche B JPY 37 billion) RMI coverage Principal and interest in full Maturity Tranche A: 18 year due 2010 Borrower PP Trust I (underlying borrower Tranche B: 20 year due 2022 is Napocor) Principal repayment Bullet Debt amount US$250 million Interest payment Tranche A: 3.20% semi-annual Maturity 15 year due 2018 Tranche B: 3.55% semi-annual Principal repayment average life of 10 years Rating Baa1 (Moody's) (4.5-year interest-only period) Financial closure 2002 Interest payment 5.4% Source: Authors' compilation. Rating AAA (S&P) Financial closure 2003 A state-owned power sector asset and liability holding Source: Authors' compilation. company of the Philippines, Power Sector Assets and Liabilities Management Corporation (PSALM; not In an effort to diversify lenders, the Philippines' state- rated), issued two-tranche Japanese yen bonds with (a) owned National Power Corporation (Napocor)4 issued a full credit guarantee provided by the Republic of the US$250 million of certificates due 2018 through a Philippines; and (b) a partial credit guarantee (PCG) of grantor trust. The trust holds a guaranteed note issued the Asian Development Bank (ADB). The PSALM by Napocor that benefits from (a) a full credit guaran- bonds have two tranches: JPY 24.75 billion due 2020; tee provided by the government of the Philippines as the and JPY 37 billion due 2022. ADB's PCG covers repay- primary source for payments due to certificate holders; ment of the principal of each tranche of the bonds on its and certificate holders, in turn, benefit from (b) an respective final maturity dates (nonaccelerable guaran- expropriation insurance policy (covering against the tee) and interest on the outstanding principal during the risk of nonpayment by the government as guarantor) final 10 years of the bonds' terms. The proceeds of the provided by U.S. Overseas Private Investment bonds are used by PSALM for general corporate pur- Corporation (OPIC) that insures payment under the poses to sustain reform and restructuring in the guaranteed note.5 Philippines' power sector. While any repayments from PSALM as primary obligor or the government of the Philippines as the full 1 This is based on Moody's International Structured Finance New credit guarantor during the first 8 and 10 years for the Issue Report dated May 7, 2003, on the transaction and other pub- bonds due 2020 and 2022, respectively, are subject to lic information that the author collected. 2 The rating reflects Moody's assessment on an expected loss basis the sovereign risk of the government, the PCG from and addresses the ultimate repayment of principal and interest of the triple-A rated ADB helped increase the ratings of the bonds. 3 bonds above the government's Ba1 foreign currency rat- This is largely based on S&P's pre-sale and rating report. 4 Napocor is part of PSALM's consolidated financials. ing to Baa1.2 Although ADB's guarantee is partial, it 5 The trustee is the insured party. The OPIC policy does not guaran- constitutes a significant portion on a present value tee payments on the certificates directly. 18 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments The transaction used an advance payment mecha- Tlalnepantla de Baz is a municipality of 800,000 people nism, eliminating the need for a reserve account to on the outskirts of Mexico City. The traditional finance cover the payment due during OPIC's claims evaluation structure used to fund state and municipal infrastruc- and processing period (which was estimated to be ture projects in Mexico is one where banks, in the event 87­180 days): Napocor remits payments due under the of default, have recourse to the central government for guaranteed note to the trustee one payment period in all amounts due by deducting the corresponding debt advance.6 The trustee will then make payments due payment from the state or municipality's allocation of under the trust certificate to investors. If both Napocor federal transfers. and its guarantor (the government) were to default on The primary challenges of the transaction were their obligations, OPIC would then make the scheduled allowing the Municipality of Tlalnepantla de Baz and payments due on time, subject to OPIC's notification its Municipal Water Company (OPDM) access to long- and claim filing requirements, before the next semi- term funds at reasonable rates, broadening their fund- annual payment date of the certificate. ing options and reducing currency risk in financing the The certificate was rated AAA based on the strength first wastewater treatment and recycling plant in the and comprehensiveness of the OPIC policy coverage Mexico City metropolitan area. (backed by the full faith and credit of the AAA-rated A private Mexican trust issued unsecured revenue U.S. government). bonds (Certificados Bursatiles, or CB) backed by the Similarly, other bilateral and private political risk Municipality of Tlalnepantla de Baz and OPDM.8 The insurers have offered PRI coverage for sovereign and International Finance Corporation (IFC) (through its corporate borrowing in lieu of credit guarantees,7 often Municipal Fund), working with Dexia Crédit Local as with full or quasi-full coverage of debt service. coguarantor, provided a partial credit guarantee (PCG) in Mexican pesos for the benefit of CB holders. The 3. Mexico: Tlalnepantla Municipal Water PCG enabled the municipality and its water company to Conservation Project access financing at relatively low costs and over a longer term because the bonds were rated AAA national scale Table A3: Summary, Tlalnepantla Municipal Water by both Standard & Poor's and Moody's Mexico, a Conservation Project two-notch increase over the municipality's rating. The Country Mexico bond issue was fully subscribed by eight domestic finan- Sector Water cial institutional investors. RMI type PCG (local currency) RMI providers IFC, Dexia Crédit Local RMI beneficiary Debt (bond investors) 6 The first debt service payment on the guaranteed note was made RMI coverage 90% of principal and interest from the proceeds of the guaranteed note issuance. 7 For example, Japan's Ministry of International Trade and Industry outstanding; up to US$8.2 million (currently, Nippon Export and Investment Insurance) provided its Borrower Trust (backed by revenues of insurance for the trust borrowing of Malaysia in 1998. Tlalnepantla Municipality /Municipal 8 The trust used proceeds to make a loan to the municipality and OPDM; the municipality pledges property taxes and OPDM pledges Water Company) its water fees to secure the loan. Debt amount Mx$95.9 million (approximately US$9.1 million) Maturity 10 years, extendable by 1 year Principal repayment equal semi-annual payments starting year 1 Interest payment UDIS+5.5%; semi-annual Rating AAA (local) S&P, Moody's Financial closure 2003 Source: Authors' compilation. Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 19 4. South Africa: City of Johannesburg scribed 2.3 times, resulting in the final spread of 164 basis points above the benchmark. It was the first struc- Table A4: Summary, City of Johannesburg tured municipal bond in South Africa and was the Country South Africa longest-maturity municipal bond ever issued in the Sector Multi-infrastructure country.9 RMI type PCG (local currency) RMI providers IFC, DBSA 5. Romania: Privatization of Banat and Dobrogea RMI beneficiary Debt (bond investors) Power Distribution Companies RMI coverage principal and interest up to 40% of principal outstanding Table A5: Summary, Privatization of Romanian Power Borrower City of Johannesburg Distribution Companies Debt amount R1 billion (approximately US$153 Country Romania million) Sector Energy (power distribution ) Maturity 12 years Project costs 112 million (US$142.6 million Principal repayment 6 equal semi-annual payments over (privatization) equivalent) the last 3 years RMI type PRG Interest payment 11.9%; semi-annual RMI providers IBRD Rating AA(zaf) Fitch (local) RMI beneficiary L/G banka Financial closure 2004 RMI amount Capped at 60 million Source: Authors' compilation. (US$76.7 million equivalent) Financial closure 2005 Johannesburg, South Africa's largest city, with a popula- Source: Authors' compilation. tion of 3.2 million, is the country's main business center, Note: contributing more than 16 percent of the national GDP. a. While the immediate signatory of the guarantee agreement with IBRD is a The challenge was how best to finance the city's long- commercial bank, this PRG structure backs an Letter of Guarantee (equivalent term capital expenditure plan focused on water, city to a Letter of Credit in Romania), which is for the benefit of privatized distribu- streets, and distribution of electrical power. An inability tion companies and thereby their private investors. to access affordable funding, in combination with a post-apartheid amalgamation of poor and relatively The mixed postprivatization experience of investors in well-off jurisdictions, had resulted in service backlogs, distribution utilities has heightened investors' sensitivi- deferred maintenance, and failure of infrastructure sys- ty to perceived government-related risks, with regulato- tems to keep pace with population growth. With huge ry risk being one of the critical risks. In response to investment needs, the city was keen to diversify its these global lessons, the World Bank adapted its partial financing sources and, in particular, wanted to match risk guarantee (PRG) product to specifically support funding tenors with the life of the assets being funded. privatizations and backstop regulatory risk. The bond issuance allowed the city to tap into the The government of Romania initiated its privatiza- institutional investor market as an alternative source of tion effort in the power sector with the launch of the bid funding. Use of a partial credit guarantee (PCG) provid- for the majority asset (51 percent) sale of the first two ed by the IFC (AAA international, through its of its eight regional electricity distribution companies, Municipal Fund) and the Development Bank of Banat and Dobrogea.10 The distribution companies will Southern Africa (DBSA) (AAA local) raised the bond's operate under a 25-year distribution license and an 8- credit rating three notches to AA(zaf) by Fitch Ratings year supply license for retail supply. Distribution rev- and allowed for an extension of the bond's final matu- enues are regulated by the National Energy Regulatory rity to 12 years (compared with six years on its own). The PCG was sized at 40 percent of the outstanding principal shared equally with DBSA on a several basis. 9 In April 2005, the city launched its first bond under a new Domestic The guarantee covers principal and interest falling due Medium Term Note program, in the amount of R700 million with 8-year maturity. This offering extends the ability of the city to issue and payable to bondholders on any given payment date, bonds without credit enhancement. subject to guarantee limits. The bonds were oversub- 10State-owned Electrica will retain 49 percent. 20 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments Authority (ANRE) on the basis of a price cap­price bas- The PRG facilitated the successful conclusion of the ket methodology introduced in January 2005.11 transaction and caused Enel to reduce its Weighted Enel SpA of Italy purchased the distribution compa- Average Cost of Capital (WACC) requirement. This nies for about 35 million with a commitment to recap- reduction will yield substantial savings for the country italize them with additional capital injections of around throughout the operational life of the distribution com- 77 million. Enel's projected capital expenditure, panies with positive impact on consumer tariffs. This including expenditure for network improvement, is transaction was the first PRG to be provided by the about 171 million for the 2005­09 period. World Bank in support of a privatization transaction, Given the considerable uncertainty relating to the where the innovative L/G structure was designed to be untested performance of the regulator and the investor a source of liquidity for the investor in the event of a requirement of a predictable revenue stream critical to regulatory breach or pending dispute resolution. the viability of distribution companies, the government Traditionally, the Bank's guarantees have been for debt of Romania requested the World Bank to provide a instruments provided by private lenders. PRG to mitigate certain regulatory risks arising from the new regulatory framework being put in place from 6. Joint Kenya-Uganda Railway Concession January 2005, around the same time as the closing of the privatization transaction. Table A6: Summary, Joint Kenya-Uganda Railway Concession The PRG was designed to backstop the government's Countries Kenya, Uganda obligation to compensate the distribution companies for Sector Transport (railways) loss of regulated revenues resulting from noncompliance Project costs US$400 million by the regulator or change or repeal by the government RMI type PRGs of the agreed-upon regulatory framework relating to (a) RMI providers IDA the distribution tariff formula and (b) the full RMI beneficiary Rift Valley Railways Consortium (the passthrough of the electricity costs. The Government concessionaire) Support Agreement (GSA) between the government and RMI amount US$45 million for Kenya the distribution companies details the Guaranteed US$10 million for Uganda Events, the claim process, dispute resolution mecha- Financial closure 2006 nisms, and the agreed-upon tariff framework. Source: Authors' compilation. The PRG was structured to backstop a letter of guarantee (L/G) issued by Citibank Romania12 for the The governments of Kenya and Uganda jointly under- benefit of the two distribution companies. If a took the concessioning of their respective railway sys- Guaranteed Event occurs and the Event of Default is tems to improve the management, operational, and not remedied, the distribution company(ies) would be financial performances of the two networks. The advis- entitled to draw on the L/G on a "first come, first ers to the government of Kenya and the government of served" basis. Following a drawing, the government, Uganda were the IFC and Canarail, respectively. The through the Ministry of Public Finance, would be obli- shareholders of Rift Valley Railways Consortium gated to reimburse the amounts drawn, plus accrued (RVRC) are Sheltam Rail Company of South Africa (60 interest, within 12 months. If the government failed to percent), Trans-Century Limited (20 percent), Babcock make the necessary payments, then Citibank Romania would have recourse to the PRG.13 The L/G and the PRG are for a maximum amount of 60 million for 11The framework provides for a tariff mechanism based on recognized costs by justified and guaranteed return in the form of an agreed both distribution companies. The L/G is valid for five weighted average cost of capital, incentives for performance, and full years.14 IBRD concluded an Indemnity Agreement with passthrough of electricity costs. 12 Romania; a Project Agreement with the distribution This is equivalent to a Letter of Credit in Romania; Citibank Romania was selected competitively. companies and a Guarantee Agreement with Citibank 13In the event of a disputed claim, pending the adjudication of the Romania in support of the transaction. Financial clo- claim, the distribution companies would be entitled to draw provi- sure of the Privatization Agreement between the gov- sional payments under the L/G secured by bank guarantees issued in favor of the Ministry of Public Finance. ernment and Enel, as well as for the PRG, was achieved 14The term of the PRG was selected to cover the three years of the first in April 2005. regulatory period and the first two of the second regulatory period. Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 21 & Brown (10 percent), and ICDCI Investment only be triggered as a result of a termination due to a Company Ltd (10 percent). The RVRC consists of a breach of the Concession Agreements by either govern- holding company that has set up a subsidiary company ment. This would be with respect to their payment obli- in each country to undertake the respective concessions. gations for liquidated damages as well as KRC and All railway assets, consisting of the railway infrastruc- URC's payment obligations relating to the Conceded ture, locomotives and rolling stock, railway and marine Assets Accounts. equipment, and maintenance facilities, were conceded by The terms and structure of the deferred project com- Kenya Railways Corporation (KRC) and Uganda pany loans from the respective concession companies to Railways Corporation (URC) to the concession compa- the respective governments are detailed in separate loan nies at the commencement of the concession. The conces- agreements concluded between the Kenyan concession sion companies will be responsible for the rehabilitation company and the government of Kenya and the and maintenance of all assets to specified standards and Ugandan concession company and the government of for the achievement of minimum investment levels and Uganda. In addition, the IDA has concluded Guarantee traffic growth targets stipulated in the Concession Agreements with the two concession companies that Agreements. The concession companies will also be outline the terms of its PRG support and Indemnity responsible for the payment of concession fees for the Agreements with the governments. This PRG structure is defined conceded assets: a minimum one-off entry fee of particularly suited to the coverage of termination risks. US$3 million to Kenya and US$2 million to Uganda, and RVRC considered the availability of the two PRGs an annual variable fee of 11 percent of each concession critical to its ability to catalyze long-term debt and company's gross revenues, to the respective governments. equity investments. The PRGs played a crucial role RVRC will run the railway as a seamless operation. throughout the concession process in maintaining A large amount of freight traffic is expected to be cross- investors' interest during the bidding process, enhanc- border, and the success of each operation highly ing the bid value, and bringing the concession to depends on the joint coordination of operations on the financial closure. total network. An IDA credit for US$44 million has been made 7. Brazil: AES Tietê16 available for staff retrenchment to bring the Kenya rail- way system to an adequate staffing level to ensure via- Table A7: Summary, AES Tietê bility of the concession. The concession company is free Country Brazil to retain the staff that it requires for the operation of the Sector Energy (power generation) concessions. RMI type PRI and FX Liquidity Facility RVRC is expected to invest around US$28 million in RMI providers OPICa equity in the two concession companies. The debt-to- RMI beneficiary AES Tietê equity ratio of the project will be about 70:30. The RMI coverage Up to US$85 million for PRI; debt financing was provided by the IFC and KfW for a US$30 million for the liquidity facility total amount of US$64 million.15 The capital expendi- Borrower AES Tietê Certificates Grantor Trust tures required for the project are expected to be Debt amount US$300 million approximately US$400 million over the term of the Maturity 15 years; average life of 10.11 years concession, and will be provided through equity, debt Interest payment 11.5% annual financing, and internal cash flows generated by project Rating Baa3 by Moody's; BBB- by Fitch IBCA operations. The concession companies and the lenders Financial closure 2001 will assume the commercial risks associated with the Source: Authors' compilation. concessions, principally the operation, investment, Note: and, most important, the traffic risk. The political and a. OPIC has discontinued offering the liquidity facility. government-related risks are backstopped by the IDA partial risk guarantees (PRGs). 15This figure includes a quasi-equity product in the form of an IFC C- The joint concession is structured legally as two sep- loan of US$10 million. 16For further details, please refer to Tomoko Matsukawa, Robert arate 25-year concessions, which will be supported for Sheppard, and Joseph Wright, "Foreign Exchange Risk Mitigation their entire terms by two separate IDA PRGs in support for Power and Water Projects in Developing Countries," World of the respective concession companies. The PRG could Bank, Washington, DC, 2003. 22 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments Tietê is composed of 10 hydroelectric generation plants The liquidity facility was structured as a revolving (2,651MW) located in the state of São Paulo, Brazil. A credit facility, and repayment of advances from the controlling interest in Tietê was purchased by AES in a facility is made only when the project has a positive privatization held in 1999.17 Tietê derives 90 percent of cash flow after paying its senior debt service. The liq- its revenues from contracted power sales to distribution uidity facility was thus subordinated to the project's companies and 10 percent from the wholesale spot mar- senior debt service (except in liquidation, where the out- ket. It sells most of its contracted capacity and energy to standing balance of the liquidity facility ranks pari AES affiliate Eletropaulo, pursuant to a 15-year supply passu with the project's senior debt). that indexes the price of power to the local inflation rate. Despite the fact that AES Tietê closed following Through the AES Tietê Certificates Grantor Trust, the Brazil's major devaluation in 1999, Brazil's currency has AES subsidiaries that control AES Tietê issued US$300 subsequently undergone a further steep drop in value. million of 11.5 percent certificates (the Certificates) due The transaction was downgraded by Moody's and Fitch 2015 to refinance debt incurred at the time of the pur- to B2/BB- (versus Brazil's then-current foreign currency chase of the company. The Certificates benefited from sovereign ratings of B2/B). These rating actions were a OPIC political risk insurance (PRI) (covering the risk of consequence of the downgrade of Eletropaulo, its major inconvertibility or nontransferability) up to US$85 mil- power purchaser. lion and a FX Liquidity Facility (to mitigate devaluation Although Eletropaulo's local currency rating at the risk) in the amount of US$30 million. OPIC support closing of the AES Tietê transaction was Baa2/BBB-, its enabled the Certificates to achieve investment-grade rat- credit deteriorated as a result of the reduced revenues ings from Moody's (Baa3) and Fitch (BBB-), piercing and regulatory uncertainty created by Brazil's rationing Brazil's then-current sovereign credit ratings (B1/BB-). program in 2001­2, together with its high level of OPIC's liquidity facility was designed to meet a debt- short-term debt (a significant portion of which is in U.S. service shortfall only if the shortfall was caused by a dollars). A further reason for the downgrade of AES devaluation and was designed to separate out the oper- Tietê is the failure of Brazilian authorities to implement ating risk that was not covered. A "floor value" was set a functioning spot market for the sale of electricity. for each year as the dollar value per MW of the con- Although AES Tietê anticipated receiving only a minor tracted assured energy output to represent the project's portion of its revenues from spot market sales, the exis- cash available for debt service. Such value was set at a tence of the spot market would have provided an alter- level that would provide an adequate debt service cov- native to reliance on sales to Eletropaulo. erage ratio (DSCR).18 If available cash as a net margin after tax per unit of output converted to dollars were to drop below the floor value and, as a result, the borrow- er was unable to make debt service payments, then OPIC would permit draws under the facility. The entire 17AES Tietê entered into a concession agreement with the government debt service shortfall would not necessarily be covered of Brazil and the regulatory agency to operate and maintain the Tietê because operating performance less than expected facilities for a 30-year extendable term. 18That is, an average DSCR of 1.4 times over the life. would be taken into account. 19If inflation for any six-month period exceeds an annualized rate of OPIC's mitigation of the devaluation risk was based 30 percent, AES Tietê is required to deposit all funds available in a on the fact that Tietê sold assured energy (which was set special inter-period inflation reserve account for the benefit of the Trustee and OPIC up to US$40 million. A debt service shortfall at the level of about 50 percent of its installed capacity) caused by a devaluation will be withdrawn from this account first. under long-term take-or-pay contracts and that price of power was adjusted annually based on the inflation rate. To the extent that the economic concept of pur- chasing power parity was reasonably accurate if taken on an basis over the medium to long run, a cash flow shortage caused by a devaluation could be managed by an appropriately sized liquidity facility and cash could be captured or recovered through a tariff increase reflective of inflation.19 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 23 8. Vietnam: Phu My 2.2 BOT Power Project20 by private developers and Petro Vietnam [PV]) sup- plied by state-owned Vietnam Oil and Gas Table A8: Summary, Phu My 2.2 BOT Power Project Corporation or PV under a 20-year Agreement for the Country Vietnam Sale of Natural Gas (GSA). Under a Government Sector Energy (power generation) Guarantee, the government guarantees the contractual Project costs US$480 million (financing require- performance of each Vietnamese contractual party to ments including contingency) MECO, including payment obligations, under the RMI type PRG BOT Contract, PPA, GSA, and associated Vietnamese RMI providers IDA, ADB, (private insurers) project agreements,21 as well as the availability, con- RMI beneficiary Lenders vertibility, and transferability of foreign exchange. RMI amount US$100 million With total financing requirements of US$480 mil- Financial closure 2002 lion, including the base project cost of US$400 million Source: Authors' compilation. funded at the debt-equity ratio of 75:25 and standby financing of US$80 million, it was the first project in Electricity demand in Vietnam has increased rapidly Vietnam with a limited-recourse financing package of since the mid-1990s. To sustain the projected economic such significant size. Of the US$480 million, the spon- growth of about 6­8 percent per year over the medium sors financed US$140 million in equity. Debt require- term, the country needed to increase its electricity sup- ments of US$340 million were funded by a US$75 mil- ply at the rate of about 10­14 percent per year. The lion commercial bank loan under the IDA PRG, US$25 government of Vietnam in 1996 decided to promote million commercial bank loan under the ADB PRG private sector participation for increasing power gener- (ADB serves as the guarantor of record for private ation capacity required to sustain economic growth and political risk insurers);22 US$50 million ADB direct further reduce poverty. loan; US$150 million JBIC loan; and US$40 million The Phu My 2.2 power project was the first private PROPARCO loan. The project, with actual project cost infrastructure build-operate-transfer (BOT) project at US$407 million, achieved financial closure in where the project sponsors were selected under an inter- December 2002 and started commercial operation in national competitive bidding in Vietnam. The World early 2005. Bank (through IDA) helped the government finance the The IDA PRG guarantees commercial lenders against first phase of the Phu My 2 power project as a public default in scheduled debt service payments of principal project, and assisted the development of the second and interest resulting from the government's failure to phase as a BOT project through financing the govern- meet its payment obligations (both periodic payments ment's preparation of bidding documents and offering and termination amounts) under the BOT Contract or an IDA partial risk guarantee (PRG) as an option to all Government Guarantee. The guarantee is nonaccelera- the bidders. The offering of the PRG enhanced the com- ble: in the event the project is terminated as a result of petition at the bidding and the government received a government default, the IDA would be called on to attractive tariff proposals from international investor make payments only according to the original debt serv- consortia. ice schedule. The IDA guarantee excludes coverage of The project is a 715MW gas-fired power project built, government obligations arising in connection with a owned, and operated by Mekong Energy Company Ltd. MECO event of default. (MECO), a project company established by the winning A PRG helped Vietnam to mobilize private financing sponsor consortium of EDF International (EDFI, 56.25 for infrastructure development to supplement limited percent), Sumitomo Corporation (28.125 percent), and public resources. It also supported the extension of the Tokyo Electric Power Company International (TEPCI, 15.625 percent). The project is implemented under a 20-year BOT 20For further details, please see a Project Finance and Guarantees Contract with the Ministry of Industry (MOI); sells transaction note on the project at World Bank's guarantee Web site power exclusively to state-owned Electricity of (www.worldbank.org/guarantees). 21 Vietnam (EVN) under a 20-year Power Purchase A Water Supply Agreement with a provincial water supply company and a Land Lease Agreement with a provincial entity. Agreement (PPA); is fueled by domestic gas (sourced 22ADB serving as the guarantor of record enabled private insurers to from the Nam Con Son Basin gas fields jointly owned take risks they were otherwise not willing to take. 24 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments long-term debt substantially beyond prevailing market Troncal Sur. The concession officially started in August terms for the country (the IDA-guaranteed loan has a 1998 and has a maximum term of 300 months. 16-year maturity), contributing to the achievement of The project combined the proven revenue generation competitive generation tariffs. The successful financial capacity of Ruta 68 with the future benefits of new toll- closure of Phu My 2.2 through the deployment of the paying customers on the Troncal Sur. Ramp-up risk was PRG was an important milestone for attracting further mitigated through well-established traffic levels and private capital flows to the country. usage patterns, as well as average annual growth of 6.4 percent (over the last 16 years) since the MOP started 9. Chile: Rutas del Pacifico23 collecting tolls at the two mainline toll plazas on Ruta 68 in 1964 and 1972. At the time of the bond issue, the Table A9: Summary, Rutas del Pacifico entire Ruta 68 project was over 70 percent completed. Country Chile The contractor covers all cost overruns except for those Sector Transportation (toll roads) caused by the MOP. RMI type PCG The MOP provides annual toll increases on the road RMI providers IDB as the guarantor of record for its indexed to the consumer price index. A unique feature account and for coguarantor FSA of the concession is that it was awarded based on the RMI beneficiary Debt (bond investors) lowest present value of revenues. The Ingresos Total de RMI coverage principal and interest in full (full la Concession (ITC) is a predetermined amount of rev- wrap financial guarantee); IDB cover enues that can accrue to the Company. The term of the US$75 million with FSA covering concession is either 300 months or the date by which remainder the ITC is reached, whichever is shorter. This provision Borrower Rutas del Pacifico S.A. provides a fixed return for the sponsors and limits the Bond issue amount UF11.42 milliona: 10.42 million public Company's upside revenues. bonds and 1 million private placement The bonds were structured around the ITC, with a (approximately US$288 million) final maturity of 2024 and principal amortization start- Maturity 23 years and 12 years ing in 2004. If revenues are better than expected, accel- Interest yield 6.02% and 5.5% erated principal amortization begins. Interest is capital- Rating National Scale: Humphreys ized until 2003. Debt service coverage (DSC) must (Moody's affiliate) AAA; Feller Rate remain at 1.4 times debt service requirements. Dividend (S&P affiliate) AAA payments can be made to the sponsors if the DSC Financial closure April 2002 equals or exceeds 1.3 times. Reserves include a 12- Source: Authors' compilation. month debt service reserve fund in the form of a stand- Note: by letter of credit that will gradually be replaced by a. UF = Unidades de Fomento (a Chilean peso-denominated unit with daily excess project cash flows. In addition, a Major adjustment to inflation). Maintenance Reserve Account will be funded over mul- tiple years to cover scheduled maintenance require- Rutas del Pacifico S.A. (the Company) is a single-pur- ments. If DSC falls below 1.3 times, or the Loan Life pose company owned 50 percent by ACS, Chile, and 50 Coverage Ratio falls below 1.4 times, excess cash flows percent by Sacyr, Chile, respectively owned by Grupo are trapped in a Cash Collateral Reserve Account until ACS and Grupo SACYR from Spain, which in 1998 one year's debt service is funded. won the concession contract for the Santiago- Local pension funds and insurance companies are Valparaíso-Viña Del Mar (SVVDM) toll road project highly conservative, concentrating on investing in high from Chile's Ministry of Public Works (MOP). investment-grade, primarily local-scale AAA-rated The SVVDM toll road project is located in the cen- paper. To promote local capital market development tral area of Chile. The project consists of the engineer- and aid the project company in raising local-currency, ing, construction, upgrade, operation, and mainte- nance of the existing 109 km Ruta 68 toll road, which 23Information for this summary was taken from: Project Finance connects Santiago with the Port of Valparaíso and the International-Americas Review; IADB Project CH-0167 Abstract Dec. 2000; Moody's Global Credit Research Rating Action March Viña del Mar region; the new 20 km Troncal Sur; and 2002; International Financing Review, "Chile-Desperately Seeking 10 km of Ruta 60, which connects Ruta 68 with Comparables," April 2002. Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 25 long-term financing by issuing debt, the IDB created award for Red Vial 6. The government of Peru is cur- and implemented an innovative "multilateral wrap" rently executing a road rehabilitation and improvement model.24 This is a coguarantee mechanism, with the IDB project on 960 km of the road system (Northern being the guarantor of record in privity of contract with Amazon Hub). The concessionaire is responsible for the bondholders; the first cooperation of a multilateral construction, operation and maintenance, and financ- institution with a private monoline insurer, in this case ing, and will recover its investments through the Annual FSA, which coguaranteed the remaining amount and Payments for Construction (APCs) in an amount up to benefited from the IDB's preferred creditor status. The US$29.5 million over 15 years, to be made by the gov- coguarantee under the guarantor-of-record structure is ernment. The government also commits to pay annual analogous to the IDB's A/B loan structure. works maintenance payments (AWMPs), net of toll rev- enues, up to 25 years to the concessionaire.26 The bidder 10. Peru: IIRSA Northern Amazon Hub25 who bid the lowest sum for the APC and the AWMP was awarded the concession. Table A10: Summary, IIRSA Northern Amazon Hub To encourage the participation of private concession- Country Peru aires and ensure sound financing of the project, the gov- Sector Transportation (toll roads) ernment requested a partial credit guarantee (PCG) RMI type PCG from the IDB to partially guarantee the timely payment RMI providers IDB of APC by the government. The IDB's PCG is to back RMI beneficiary Government of Peru (effectively the financial obligations of the government under the concessionaire's debt holders [bond concession to cover the annual APC payments for con- investors])a struction agreed to in the concession contract, including RMI coverage First-loss, rolling, recognition of partial works if the concession is termi- reinstatable guarantee: covers up nated early. It is a first-loss, rolling, and reinstatable to 100% of the sum of annual guarantee.27 The IDB has received a counter-guarantee payments for construction payments from the government of Peru. If the government fails to outstanding make the APCs and the guarantee is triggered, any dis- Guarantee amount US$60 million bursement the IDB makes will be converted into its loan Maturity 20 years to Peru. These loans will have the same terms as IDB's Financial closure IDB board approval in 2006 Ordinary Capital Loans with the exception of the grace Source: Authors' compilation. period and tenor--up to the remaining term of the Note: guarantee and determined according to the available a. The guarantee contract will be signed between the IDB and the government amount of the guarantee.28 The amount the government of Peru; lenders to the concession would effectively benefit from such PCG. A prepays to the IDB within a period not exceeding 30 trust is to be set up that includes the establishment to administer the flow of days for each disbursement will be reinstated to the funds by the government. guarantee. Peru's infrastructure expenditures dropped by almost 50 percent during the period 1998 to 2002. A large pro- 24In 2003, the IDB replicated this structure for the Costanera Norte S.A. urban toll road concession in Santiago. AMBAC acted as portion of the cutbacks took place in the transportation coguarantor on this transaction. sector, where investment fell by over 51 percent to 25IIRSA is Initiative for the Integration of South American Regional US$216 million in 2002. However, since then the Infrastructure. Information for this summary was taken from the Peruvian economy has experienced strong growth and Inter-American Development Bank Loan Proposal Document PR- 3018, December 22, 2005. greater macroeconomic stability. This has, in turn, led 26Toll revenues are expected to partially cover operation, routine main- to a new focus on revitalizing its investments in the tenance, and periodic maintenance. The difference between the infrastructure sector. AWMP and the toll revenues is assumed by the government. Surplus revenues exceeding AWMP will be shared between the government The establishment of the institutional and regulatory (80 percent) and the concessionaire (20 percent). framework through the 1996 Law to Promote Private 27A rolling and reinstatable guarantee refers to the guarantee rolling Investment in Public Infrastructure Works and Services forward to each subsequent interest payment, and if a payment is not made by an issuer and the guarantee is used, then the next payment led to the 2003 concession award for the Lima-Pativilca is not guaranteed until the issuer makes the guarantor whole, at stretch for the Red Vial 5 toll road and 2005 concession which point the guarantee is reinstated. 26 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments The guarantee amount was determined through a smaller cities located in the Indian state of Tamil Nadu. financial analysis by the local affiliate of one of the USAID not only provided market access to these urban major rating agencies. It indicated that a US$60 million local bodies (ULBs), but helped develop the municipal guarantee (nonamortizing) would raise the debt rating capital market by introducing a new institutional of the project by two levels (and as a result, possibly option to Indian investors. USAID's partial guarantee, achieve a foreign long-term rating higher than the sov- combined with other risk mitigation measures and the ereign), thus allowing access by the concessionaire to credit quality of the ULBs, resulted in a local AA Fitch the local and foreign capital markets. rating, which was sufficient to attract Indian institu- Through a combination of participants, such as tional investors. USAID, which, under its agreement with PROINVER- A constraint to the expansion of the municipal bond SION (Peru Agency for the Promotion of Private market in India had been a lack of investor interest in Investment), financed the financial, legal, environmen- long-term debt. Before this transaction, the term of tal, and economic studies for the project; CAF (Andean municipal bonds had been confined to a maximum of Development Corporation), which provides a three- seven years. Municipal bonds with longer tenors had year US$60 million revolving line of credit during the been perceived as too risky for the market and thus construction phase; and the IDB, which is providing unable to receive favorable pricing. Measures to increase credit enhancement during the postconstruction phase the term of municipal bonds and measures to initiate via a PCG; an innovative approach has been found to their trading on the secondary market were needed to address the needs and requirements of both the private further develop the municipal bond market in India. and public sectors. In addition to investor obstacles, there are high transaction costs for local governments interested in 11. India: Tamil Nadu Pooled Financing for Water accessing capital directly from the market, making it and Sanitation affordable for only the largest municipal issuers. Pooling arrangements at state or regional levels allow Table A11: Summary, Tamil Nadu Pooled Financing for small and medium cities to aggregate their financing Water and Sanitation needs and diversify credit risk, which serve to attract Country India investors as well as spread the transaction costs among Sector Water and sanitation a number of borrowers. Additional risk mitigants RMI type PCG (local currency) included both ULBs and the Tamil Nadu state govern- RMI providers Government of Tamil Nadu, USAID ment prefunding escrow accounts dedicated to bond RMI beneficiary Debt (bond investors) investors, and USAID providing a guarantee to replen- RMI coverage 50% of principal and interest ish 50 percent of the amount drawn from the Debt outstanding; up to US$3.2 million Service Reserve Fund (DSRF), up to an amount equal to Borrower Water and Sanitation Pooled Finance one-half of the bond principal. ­ 13 small and medium municipalities Tamil Nadu's Municipal Urban Development Fund Debt amount US$6.4 million (TNUDF), a legally registered trust, issued the bonds. (304.1 million Indian rupees) TNUDF is the successor organization to the World Maturity 15 years Bank-supported Municipal Urban Development Fund. Principal The TNUDF trust is managed by a private entity, Tamil repayment equal annual principal payments and Nadu Urban Development Infrastructure Financial Ltd. starting year 1 (TNUIFSL), whose ownership is 51 percent private, Interest payment 9.2% per year including the largest private shareholder and manager Rating AA (local) Fitch of TNUIFSL, ICICI Bank. The state government owns Financial closure 2002 49 percent of the company. Source: Authors' compilation. The escrow accounts were funded by the ULBs from general revenues and before bond issuance, in an The U.S. Agency for International Development amount equal to one year's worth of their respective (USAID) used its Development Credit Authority (DCA) to support a pooled municipal bond issue that financed 28The term would be 15 years, 10 years, or 5 years, depending on the water and sanitation infrastructure improvements for available amount of the guarantee. Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 27 loan obligation to TNUDF. These funds were held in The Foundation Customers--Volta River Authority secure, short-term fixed deposits in the name of the ULB (VRA) of Ghana and Communauté Electrique du Bénin and available to cover debt service payment shortfalls. (CEB)--have committed to purchase the initial volumes The ULB's Current Account will be used to replenish of gas (on a take-or-pay basis in U.S. dollars) and draws on the escrow accounts. underwrite the costs of the new pipeline. The state government funded the DSRF at a level West African Gas Pipeline Company Limited equal to 1.6 times annuity payments (or comparable (WAPCo) was formed by ChevronTexaco West African market negotiated level). Like the ULB-funded escrows, Gas Pipeline Company Ltd. (38.2 percent), NNPC the debt service reserve is held in short-term fixed (26.0 percent), Shell Overseas Holdings Ltd. (18.8 per- deposit investments or other liquid instruments in the cent), and Takoradi Power Company Ltd. (as share- name of the fund. If drawn upon to make annuity pay- holder for the government of Ghana, 17.0 percent) to ments to bondholders, the state government will replen- build, own, and operate the pipeline. An international ish it through either a government order or by diverting project agreement (IPA) among the four states and ULB transfer payments. USAID guarantees 50 percent WAPCo provides for the development, financing, con- of DSRF repayments and is triggered when the DSRF is struction, ownership, and operation of the pipeline. exhausted and has not been replenished by the state N-Gas Ltd, a newly formed entity owned by NNPC government within 90 days. (62.35 percent), ChevronTexaco N-Gas Ltd. (20.00 Critical to the success of this transaction (and anoth- percent), and Shell Overseas Holdings Ltd. (17.65 per- er pooled municipal financing in the state of Karnataka, cent), purchases gas under 20-year gas purchase agree- also supported by USAID), was a relatively stable regu- ments; transports gas under gas transportation agree- latory framework and transparent ULB budgets. These ments (GTAs); and sells gas to the Foundation factors were positively influenced by long-term and Customers (92 percent of the demand would be from intensive USAID technical assistance. VRA in the early years) under gas sales agreements (GSAs). 12. West African Gas Pipeline Project29 Ghana, in compliance with its undertaking under the IPA, irrevocably and unconditionally guarantees to N- Table A12: Summary, West African Gas Pipeline Project Gas and WAPCo, under a Government Consent and Countries Benin, Ghana, Nigeria, Togo Support Agreement (GCSA), the performance obliga- Sector Energy (gas pipeline) tions of VRA under the Takoradi GSA (between VRA Project costs US$590 million and N-Gas) and the VRA Direct Agreement (among RMI type PRG, PRI VRA, WAPCo, and N-Gas).31 RMI providers IDA, MIGA, Zurich/OPIC The US$590 million initial project cost will be RMI beneficiary WAPCo (equity investments; financed through direct equity and shareholder loans to shareholder debt) WAPCo from the sponsors. The subsequent compres- RMI amount US$250 million sion-related capital expenditures (estimated to be about Financial closure 2005 US$20 million over 20 years) are expected to be financed Source: Authors' compilation. by cash flow from operations. WAPCo will recover its investments through gas transportation charges under its The West African Gas Pipeline Project (WAGP) includes GTAs with N-Gas and other future shippers. (a) a new pipeline system (678 km) that will transport The partial risk guarantees (PRGs) will involve com- natural gas from Nigeria offshore to Ghana, Togo, and plementary guarantees from the IDA (PRG, US$50 mil- Benin; (b) spurs to provide gas to power-generating lion), MIGA (PRI, US$75 million), and Steadfast units in Ghana, Benin, and Togo; (c) conversion of existing power-generating units to gas; and (d) as-need- 29 ed additional compression investments. For further details, please see a Project Finance and Guarantees transaction note on the project at World Bank's guarantee Web site Natural gas is sourced from two existing oil-produc- (www.worldbank.org/guarantees). ing joint ventures in Nigeria, one of Nigerian National 30The other joint venture partners are Elf Petroleum Nigeria Ltd. and Petroleum Corporation (NNPC) and Chevron Nigeria Nigeria Agip Oil Company Ltd. 31Under the agreement, N-Gas, upon termination, directs VRA to pay Ltd. (CNL), and the other led by NNPC and Shell WAPCo a Termination Payment amount directly to WAPCo instead Petroleum Development Company of Nigeria (SPDC).30 of to N-Gas. 28 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments Insurance Company (a subsidiary of Zurich Financial The Southern Africa Regional Gas Project is a natural Services Group, and substantially reinsured by OPIC; gas development and pipeline project that comprises (a) PRI, US$ 125 million). All will cover payments owed by the development of the Pande and Temane gas fields in the government of Ghana in the event of a termination Mozambique and the construction of a central process- of the Takoradi GSA with VRA, although there are dif- ing facility (upstream project), and (b) the construction ferences in application of individual risk coverage. The of a new 865 km pipeline (531 km in Mozambique; 334 basis will be pro rata allocation of claims among the km in South Africa) to transport the gas to South Africa guarantee and insurance providers; however, because of (pipeline project). differences in structure and coverage, detailed mechan- Under the petroleum production agreement (PPA), ics under various scenarios have been agreed by the the government of Mozambique grants to Sasol sponsors with the IDA, MIGA, and Zurich/OPIC. In Petroleum Temane Limitada (SPT), a subsidiary of Sasol the event of termination of the Takoradi GSA, there are Ltd. of South Africa, and Companhia Mocambicana de different pro rata allocations of claims (and thus of pay- Hidrocarbonetos (CMH), a subsidiary of Empresa outs) that have been identified for different demand and Nacional de Hidrocarbonetos de Moçambique (ENH), tariff scenarios. the exclusive rights for the development, production, As to the IDA guarantee, which covers only debt and disposition of the gas in the Pande and Temane (and not equity investments), in the event a termination fields for a period of at least 30 years. payment is due and the government fails to make the Under the pipeline agreement (PA), the government of termination payment to WAPCo, the IDA would be Mozambique authorizes Republic of Mozambique deemed to have made a loan to the government equiva- Pipeline Investments Company (ROMPCO), a sub- lent to the IDA's share of the termination payment. The sidiary of Sasol Ltd.,33 to construct, own, and operate the IDA guarantees to WAPCo the repayment of this loan gas pipeline and related infrastructure and equipment to at its maturity one year from disbursement. transport natural gas for a period of at least 30 years. The project would not have gone forward without Under the gas sales agreement, SPT/CMH will sell the political risk guarantees and insurance. The World gas to Sasol Gas Ltd., a subsidiary of Sasol Ltd., for a Bank's involvement brought together the world's best period of at least 25 years, where 80 percent of the practices in environmental and social safeguards imple- annual contract volume (ramping up to 120 million mentation, economic and financial assessment, struc- gigajoules per year over four years) is on a take-or-pay turing for sustainability, and transparency. basis. A 25-year gas transportation agreement secures a revenue stream for ROMPCO through a ship-or-pay set 13. Mozambique/South Africa: Southern Africa at 80 percent of the contract volume. Regional Gas Project32 The financing (for upstream and pipeline) is a hybrid of corporate debt and project financing. It comprises Table A13: Summary, Southern Africa Regional Gas Project three debt tranches in the total amount of R3.692 bil- Countries Mozambique, South Africa lion with 12-year maturity. Given Sasol's extensive Sector Energy (gas development and involvement in the project (as the primary sponsor of pipeline) the upstream development and the seller of the gas, the Project costs R3.692 billion (debt) transporter and the operator of the pipeline and the RMI type PRG, PRI facility, and the buyer of the gas), Sasol Ltd. provides RMI providers IBRD (Enclave),a MIGA (SACE/EFIC), debt service support to the two project companies (SPT ECIC and ROMPCO). Under Sasol's debt service support RMI beneficiary Lenders agreement, lenders have full recourse to Sasol (thus a RMI amount R1.46 billionb (local currency) corporate loan with Sasol assuming all project-related Financial closure 2004 risks), except that Mozambican political risk (over Source: Authors' compilation. Note: a. World Bank's IBRD Enclave PRG is for an export-oriented commercial project 32For further details, please see a Project Finance and Guarantees expected to generate foreign exchange outside an IDA-only country (in this transaction note on the project at World Bank's guarantee Web site (www.worldbank.org/guarantees). case, Mozambique). 33The governments of South Africa and Mozambique have options to b. Debt amount benefiting from PRG and PRI. purchase shares in ROMPCO. Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 29 which Sasol has no control) is carved out of the Sasol 14. Afghanistan: Investment Guarantee Facility debt service support. The commercial debt issue of R1.46 billion was Table A14: Summary, Afghanistan Investment Guarantee underwritten by the Standard Bank of Africa and bene- Facility fited from partial risk guarantee (PRG) and political Country Afganistan risk insurance (PRI) covering the Mozambican political Sector Cross-border private investments risk, which enabled the following commercial debt (including foreign loans of local financing: investors; foreign currency-denomi- · R210 million under IBRD Enclave PRG nated local loans) · R820 million under MIGA PRI (of which R310 mil- RMI type PRI lion was reinsured by SACE of Italy and EFIC of RMI provider MIGA (backed by the government Australia) facility financed with credits from IDA · R430 million under Export Credit Insurance and ADB; and on its own account) Corporation of South Africa (ECIC) PRI RMI beneficiary Lenders and equity investors Facility amount US$10 million The PRG covers debt service default from a breach Effective date 2004 by the government of Mozambique of specified obliga- Source: Authors' compilation. tions set in the PPA and PA: (a) change in law in Mozambique including the petroleum law and regula- To assist Afghanistan in its reconstruction efforts by tions that would have the effect of making the PPA and stimulating foreign investments through the offering of PA unenforceable or having material adverse effect; (b) political risk cover, the IDA and the ADB have provid- failure by the government to expeditiously award ed credits (US$5 million equivalent each) to the govern- licenses, permits, approvals, company registration, ment of Afghanistan to set up and fund an Afghanistan expatriate permits, and land use rights necessary to Investment Guarantee Facility (AIGF). finance, develop, and transport gas; or to enforce MIGA will administer and implement the AIGF in license terms (length of period, renewal terms), exclu- accordance with a Facility Agreement with the govern- sivity terms, stabilization clauses, free access to pipeline ment and issue guarantee contracts on behalf of the AIGF. corridor, environmental accords, appointment of man- The facility's capital will be disbursed into a trust fund,34 agement committee members, regulatory authority which will be invested to earn interest income partly to approval, and to abide by land use and access rights; (c) defray some operating costs.35 Having the trust fund on a expropriation; and (d) currency transferability. first-loss basis (US$2 million per project), MIGA and the The second debt tranche of R1.47 billion was lent ADB intend to make available guarantee capacity from from developing financial institutions (Development their own capital, and will seek to further mobilize capac- Bank of Southern Africa, African Development Bank, ity from other public and private insurers.36 Deutsche Investitions- und Entwicklungsgesellschaft Given Afghanistan's conflict-affected environment, mbH, and the Netherlands Finance Development the AIGF intends to flexibly support transactions Company) where the Mozambican political risk was including foreign loans for importation and foreign cur- taken by these lenders. The third debt tranche of R762 rency-denominated loans made by local branches of million was provided by the European Investment Bank foreign banks.37 The availability period for the AIGF is (EIB), where Sasol and EIB shared the Mozambican political risk. 34Twenty-five percent of the IDA-ADB contribution would be dis- bursed upfront; the remainder is to be disbursed as guarantee prospects obtain host-country approval from the government. 35Germany will contribute US$0.6 million for technical assistance and to cover part of implementation costs. 36With US$10 million contribution from the government of Afghanistan (funded by the IDA and the ADB), capacity addition would be expected from MIGA (US$10 million), the ADB (US$10 million), and public and private insurers (US$30 million). 37Such transactions are otherwise not eligible for MIGA policies because MIGA does not support transactions that do not involve cross-border equity investments. 30 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments five years; the maximum duration of each guarantee on existing portfolio histories; provision of technical contract is seven years, resulting in the expected total assistance (matching grants funded by IDA) for partici- facility life of 12 years. pating banks and SMEs (before and after receipt of the loan); pari passu risk sharing with the banks to ensure 15. Ghana: SME Partial Credit Guarantee Program38 that productive loans are booked; and the use of a streamlined portfolio guarantee approach, given the Table A15: Summary, SME Partial Credit Guarantee Program small size of individual loans. Country Ghana Sector Small and medium enterprises 16. Private Infrastructure Development Group40 RMI type PCG (local currency) RMI provider IFC (backed by the government facili- Table A16: Summary, Private Infrastructure ty financed with credit from the IDA; Development Group and on its own account) Countries First three columns of Part I of the RMI beneficiary commercial bank lenders Developing Countries and Territories Facility amounts about US$15­20 milliona DAC List of Aid Recipients Effective date under preparation (see www.oecd.org for details) Source: Authors' compilation. Sector Private sector infrastructure projects Note: Current programs Emerging Africa Infrastructure Fund a. The IDA approved US$4.1 million equivalent credit to the government of and investment GuarantCo Ghana for the PCG program as part of the Micro, Small and Medium Enterprise vehicles funded by InfraCo Project in 2006. PIDG Trust Technical Assistance Fund PIDG affiliates DevCo To assist financial access of small and medium enter- Global Partnership for Output Based prises (SMEs) in Ghana, the IDA and the IFC devised a Aid (GPOBA) local-currency partial credit guarantee (PCG) program Effective date 2002 to encourage local banks to lend to a sector that the For information www.Pidg.org banks perceive as risky in terms of borrower credit. The Source: Authors' compilation. IDA would provide its credit (US$4.1 million equiva- lent) to the government of Ghana to finance the pro- The UK Department for International Development gram. The IFC would administer the PCG program in (DFID), the Swiss State Secretariat for Economic Affairs accordance with a framework agreement with the gov- (SECO), the Swedish International Development ernment and the IDA, and would issue or front PCGs as Cooperation Agency (SIDA), and the Netherlands the agent of the government and for its own account. Directorate-General for International Cooperation The PCG program will leverage both IDA credit and (DGIS) collaborated in setting up the Private IFC resources and capabilities. Infrastructure Development Group (PIDG). Current Guarantees would cover 50 percent of outstanding membership also includes the World Bank and the principal amount of a portfolio of new local-currency Austrian Development Agency (ADA). The aim of the loans originated by a few commercial banks (participat- group is to provide financial, practical, and strategic sup- ing banks) on a pari passu basis. It is proposed that the port to encourage infrastructure investments and projects IDA credit would be used to finance the government's in developing countries. The group's objective is to foster obligation under the PCG to cover 5 to 15 percent of economic growth and reduce poverty by helping the pri- net default losses on a first-loss basis, whereas the IFC would cover the remaining 45 to 35 percent of the loss- es on a second-loss basis after the government.39 Terms 38This section is based on the Project Appraisal Document of IDA (Report No: 31985-GH). and conditions of the guarantees, including eligible 39The IFC, during its appraisal of each participating bank, would final- SME borrowers and eligible loan portfolio, would be ize the details of the risk-sharing arrangement with the government. defined under a guarantee facility agreement to be Assuming the guarantee coverage ratio of 10 percent by the IDA entered between the IFC and each participating bank. credit and 40 percent by the IFC and a constant exchange rate, the proposed IDA credit support would be translated into the total PCG The design of the program reflects lessons learned, facility amount of some US$20 million. including partnerships with private local banks based 40Sources: DFID and PIDG Web sites. Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 31 vate sector overcome risks and hurdles encountered in PIDG members were expected to contribute shortly infrastructure investments in developing countries. thereafter, but there have been a number of delays. PIDG aims to address the overriding obstacles in GuarantCo is now operational but not expected to meet attracting private sector capital to infrastructure, such as its equity investment target of US$73 million until 2007. · an inappropriate enabling environment, GuarantCo was specifically set up to provide partial · high up-front costs of project development, credit guarantees on local-currency debt issues by pri- · shortage of long-term debt, vate sector infrastructure project companies, as well as · lack of local currency investment, and municipalities in lower-income developing countries, to · inadequate capacity in both the public and private act as a catalyst to mobilize domestic institutional funds sectors. and help develop the local capital markets. The compa- ny will offer investment-grade credit enhancements To achieve its objectives, PIDG has established the through financial guarantees for the benefit of local PIDG Trust, through which it develops its programs lenders and investors. The policies of GuarantCo and manages its investment vehicles. Below is addition- explicitly exclude war, civil strife, and expropriation al information on the two initiatives established by the risks from cover, as well as risks related to lawful gov- PIDG Trust that offer risk mitigation instruments in the ernment actions. In addition, GuarantCo should, to the form of long-term loans and guarantees. The other ini- extent possible, avoid assuming risk for breach of con- tiatives are a donor-funded infrastructure development tract by government or regulatory body. company (InfraCo) and the Technical Assistance Fund According to its operating guidelines, the maximum (TAF), which assists PIDG clients to build local capaci- tenor for guarantees to be issued by GuarantCo will be ty in both the public and private sectors.41 15 years, and its fees (front-end fee, periodic guarantee The Emerging Africa Infrastructure Fund42 is a fees, and possibly a standby fee) will be market based, US$305 million public-private financing partnership and will be commensurate with the risk assessment of focusing on infrastructure development in Sub-Saharan the individual transaction and prevailing market condi- Africa. The fund's equity of US$100 million comes from tions. There is no stated maximum amount per individ- the PIDG Trust, US$85 million of subordinated debt is ual transaction. The amount of cover to be provided per contributed by Dutch, South African, and German transaction will be subject to internal exposure guide- development finance institutions, and the remaining lines with respect to individual company, as well as cur- US$120 million of senior debt has been provided by rency, sector, and geographic, exposures. Barclays Bank and Standard Bank Group, each provid- The initial geographical focus for GuarantCo's activ- ing US$60 million. ities will be on low- and lower-middle-income countries The fund was established to provide long-term in Sub-Saharan Africa and South and South East Asia,44 financing structures tailored to meet the needs of bor- although it is also able to invest in the poorest countries rowers and project sponsors to develop viable infra- of Latin America. structure businesses in the private sector in Sub-Saharan Eligible forms of companies are Africa. Apart from providing U.S. dollar-denominated · start-up companies and greenfield developments, senior term debt and subordinated or mezzanine debt, · operating infrastructure companies, the fund also offers risk-mitigating instruments in the · privatized companies, form of guarantees on senior debt to facilitate the pro- · parastatals or public corporations, and vision of local-currency funding. All financing is provid- · municipal infrastructure. ed at market-based rates dependent on the risk assess- ment of the borrower. The fund does not require a host 41Please see www.pidg.org for more information on these initiatives. government counterguarantee. 42For additional information on borrower eligibility, project eligibility, The maximum tenor for funding is 15 years, and the country sector focus, and contact information please see www.emergingafricafund.com. maximum amount is limited to 10 percent of the fund's 43Source: PIDG Web site; as well as information provided by John size, currently US$30 million. Borrowers must be pri- Hodges, PIDG Programme Manager, such as "GuarantCo's vate sector companies, in terms of both ownership and Guarantee Policy and Operational Guidelines"; for additional infor- control. mation please contact John Hodges at pm@pidg.org. 44Projects in countries from the OECD's DAC List of Aid Recipients GuarantCo43 was established in September 2003, in column I, II and subject to approval from column III, are eligible. with US$5.5 million in capital, provided by DFID. Other Please see www.oecd.org for more information. 32 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments Eligible sectors are vate sector and financial institutions and development · energy supply, finance institutions. To date, InfraCo is involved in six · water and waste services, projects at various developmental stages. · transportation, · telecommunications, 17. BOAD (Banque Ouest Africaine de · gas transportation, distribution, and storage, Développement) Infrastructure Guarantee · urban infrastructure, and Facility48 · other activities that promote development of basic infrastructure and meet GuarantCo's objectives. Table A17: Summary, BOAD Infrastructure Guarantee Facility Countries Benin, Burkina Faso, Côte d'Ivoire, To date, GuarantCo has closed on one transaction, Guinea-Bissau, Mali, Niger, Senegal, the refinancing and expansion financing of Celtel Togo Kenya. Celtel Kenya is one of two cellular phone oper- Sector private sector infrastructure projects ators in Kenya. The company is raising up to 4.5 billion RMI providers and IDA (PRG), MIGA (PRI), Kenyan shillings through a note issued in the local cap- RMI type AFD (PRG, comprehensive guarantees) ital market. The FMO (Netherlands) is fronting the RMI beneficiary debt (IDA, MIGA, AFD); equity (MIGA) guarantee covering 75 percent of debt service for the Facility amount about US$227 million equivalenta benefit of local institutional investors in a US$59 mil- Effective date 2005 lion project. GuarantCo and DEG (Germany) provide Source: Authors' compilation. counterguarantees to the FMO.45 Note: InfraCo46 was established in August 2004 with a. Up to 48.7 million SDR (US$70 million equivalent) from the IDA, up to US$70 US$10 million in funds provided by DFID. InfraCo is a million from MIGA, and up to 70 million from AFD. donor-funded infrastructure development company whose capital is provided by share subscriptions by the This is a regional guarantee facility to promote small PIDG donor group. InfraCo operates in low-income and medium infrastructure projects in the West developing countries, primarily located in Africa and African Economic and Monetary Union (WAEMU) parts of South and South East Asia. InfraCo operates as countries. It was developed by the World Bank a private sector infrastructure development company, (through IDA), MIGA, and AFD to offer their respec- managed by professionals recruited from the private tive guarantees with a total guarantee authority of sector.47 InfraCo will about US$227 million through streamlined proce- · act as a principal, shouldering much of the upfront dures. The facility is managed by a regional develop- costs and risks of early stage development, thereby ment bank, Banque Ouest Africaine de reducing the entry costs of private sector infrastruc- Développement (BOAD). Under the guarantee facility ture developers agreement with BOAD and the three guarantors, the · secure in-principle commitments from providers of participating governments have committed to support finance to support investments subject to entry by a the implementation. competent private sector sponsor The facility, through BOAD, offers three types of · prior to financial close, offer structured investment guarantee instruments that are separate but comple- opportunities to private sector consortia through a mentary--PRGs by IDA and AFD, PRI by MIGA, and tender process comprehensive guarantees by AFD--to offer flexibility · be compensated for its time, efforts, and costs by to investors and to better adapt to a variety of small incoming private sector sponsors, often in the form and medium projects' requirements. Risk coverage of a minority "carried" interest in the venture. Over time it may sell its interest to national institutional 45Source: PIDG Annual Report 2004­5. and public investors. 46Source: www.pidg.org; www.infraco.com. 47For more information on the activities to date of InfraCo, please A key objective of InfraCo is to create conditions in contact John Hodges, PIDG Programme Manager, pm@pidg.org or which providers of finance for infrastructure in devel- Keith Palmer, Chairman of InfraCo, palmerk@dial.pipex.com. 48For further details, please see a Project Finance and Guarantees oping countries can increase their commitments. To transaction note on the project at World Bank's guarantee Web site achieve this goal, InfraCo continuously works with pri- (www.worldbank.org/guarantees). Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 33 under individual projects will be decided on a case-by- underwriting capital for the facility (US$124 million) case basis.49 and to finance ATI's initial operating costs (US$10 mil- Eligible infrastructure projects need to comply with lion). ATI was created as a regional implementing applicable guidelines of each guarantor; social, environ- agency51 to manage the facility. mental, and safeguard policies of MIGA; and total proj- Rigid country-by-country allocation of IDA ect costs may not exceed US$50 million. The cumula- resources has not permitted the facility to use those tive amount of guarantees would not exceed US$30 resources efficiently. This being recognized, ATI's million; and each guarantee is limited to US$15 million. General Assembly adopted a resolution in December BOAD as an administrator markets the guarantee 2005 allowing ATI to put forward proposals for the facility; identifies and screens candidate projects; rec- restructuring of its underwriting capital by converting ommends the deployment of each or any combination the individual country allocations into pooled common of guarantee instruments; and assists in the monitoring, equity capital. Once this process has been completed, supervision, and administration of the projects support- new ATI member states and nonstate members will be ed by the facility. recruited on the basis of subscribing to, and paying in, agreed additional amounts of capital. This capital 18. African Trade Insurance Agency restructuring will allow ATI to increase its own insur- ance capacity through leveraging its capital (on a 1:3 Table A18: Summary, African Trade Insurance Agency basis, for example) as a result of the diversification of Countries Burundi, Democratic Republic of ATI's risk portfolio. It will also enable ATI to access Congo, Djibouti,a Eritrea, Kenya, treaty and facultative reinsurance, to provide addition- Liberia,b Madagascar, Malawi, al underwriting capacity. Rwanda, Tanzania, Uganda, Zambia ATI's member state governments have a de jure obli- Sector Political and commercial risk insurance gation under the relevant membership agreements to for trade and investment make ATI whole for any losses that it would incur as RMI type Regional ECA (PRI and CRI) result of any covered risk events (with the exception of Financier IDA, ATI member states, EU, and losses resulting from events of war, civil disturbance, Japan civil commotion, and embargo). A member state's Beneficiary Trade and Investmentc default under this obligation would also constitute a Facility amount US$134 million equivalent default vis-à-vis the World Bank. Consequently, the ATI Effective date 2002 deterrence effect is very strong. For information www.Africa-ECA.com The facility covers political and commercial risks52 for Source: Authors' compilation. a wide variety of trade and investment transactions, Note: including traditional investment insurance and nonpay- a. Signatory to ATI Treaty (pending ratification and payment of underwriting ment risk on commercial, parastatal, and sovereign capital). obligors. ATI issues policies for its own account for b. Membership application has been approved by ATI's General Assembly (pend- small transactions (less than US$2 million), but will ing signature of ATI Treaty). source coinsurance or reinsurance from private and pub- c. A wide variety of trade transactions and financing instruments can be covered lic insurers to support larger transactions. ATI currently under the facility. partners with Altradius, the world's second largest cred- The African Trade Insurance Agency (ATI) was estab- 49Risk coverage may include changes in law, government payment lished as a pan-African Export Credit Agency (ECA) to obligations, currency convertibility or transferability, expropriation, promote inter- and intraregional trade and investment war and civil disturbance, breach of contract, frustration of arbitra- involving ATI member countries.50 Initially, ATI started tion, and the like. 50While this is not for infrastructure per se, it is presented as a possi- with seven founding member countries. Today, ATI has ble modality of donor support for guarantee facilities. nine fully fledged member countries and four nonstate 51It is open to participation by all African countries. 52 members (Altradius, COMESA, PTA Bank, and During the December 2005 General Assembly meeting, ATI's General Assembly adopted a resolution allowing ATI to expand its ZepRe). The World Bank (at the request of COMESA) product offerings to include cover against nonpayment risk on sov- helped establish the facility through the provision of ereign and private obligors, in addition to ATI's traditional political IDA credits to each participating country to provide risk cover and cover against nonpayment risk on parastatal obligors. 34 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments it insurer, in supporting ATI member country exporters' involving five ATI risk countries (Burundi, Democratic whole turnover export business against buyer nonpay- Republic of Congo, Kenya, Tanzania, and Zambia), and ment risk. ATI member country exports to over 30 buyers world- To date, ATI has supported 15 insureds from six dif- wide. ATI has issued 22 policies and policy renewals, ferent countries (Belgium, China, Kenya, Mauritius, covering a total transaction value of US$133.4 million, South Africa, and Uganda) and two African multilateral while utilizing US$25.8 million of ATI's own underwrit- organizations (PTA Bank and Shelter Afrique) for trans- ing capacity, thus mobilizing US$107.3 million in pri- actions in six sectors (agribusiness, manufacturing, min- vate and public coinsurance and reinsurance capacity. ing, real estate, services, and telecommunications) No claims or near claims have occurred. Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 35 A P P E N D I X B PROFILES OF MULTILATERAL AND BILATERAL RISK MITIGATION INSTRUMENTS B1. Major Multilateral Risk Mitigation Instruments B1.1 World Bank: International Bank for Reconstruction and Development (IBRD) and International Development Association (IDA) B1.2 International Finance Corporation (IFC) B1.3 Multilateral Investment Guarantee Agency (MIGA) B1.4 African Development Bank (AfDB) B1.5 Asian Development Bank (ADB) B1.6 European Bank for Reconstruction and Development (EBRD) B1.7 Inter-American Development Bank (IDB) B1.8 European Investment Bank (EIB) B1.9 Andean Development Corporation (CAF) B1.10 Islamic Corporation for Insurance of Investments and Export Credits (ICIEC) B1.11 Inter-Arab Investment Guarantee Corporation (IAIGC) B2. Major Bilateral Risk Mitigation Instruments B2.1 Export Development Canada (EDC)--Canada B2.2 Agence Française de Développement (AFD)--France B2.3 Coface--France B2.4 Deutsche Investitions und Entwicklungsgesellschaft mbH (DEG)--Germany B2.5 Foreign Trade and Investment Promotion Scheme (AGA)--Germany B2.6 Italian Export Credit Agency (SACE)--Italy B2.7 Japan Bank for International Cooperation (JBIC)--Japan B2.8 Nippon Export and Investment Insurance (NEXI)--Japan B2.9 Atradius Dutch State Business NV--The Netherlands B2.10 The Netherlands Development Finance Company (FMO)--The Netherlands B2.11 Norwegian Guarantee Institute for Export Credits (GIEK)--Norway B2.12 Swedish Export Credit Guarantee Board (EKN)--Sweden B2.13 Swiss Investment Risk Guarantee Agency (SERV)--Switzerland B2.14 Swiss Export Risk Guarantee (ERG)--Switzerland B2.15 Department for International Development (DFID)--United Kingdom B2.16 Export Credits Guarantee Department (ECGD)--United Kingdom B2.17 United States Agency for International Development's (USAID's) Development Credit Authority (DCA)--United States B2.18 Export-Import Bank of the United States (EX-IM Bank)--United States B2.19 Overseas Private Investment Corporation (OPIC)--United States 36 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments Appendix B1 Profiles of Major Multilateral Risk Mitigation Instruments Table B1.1 World Bank: International Bank for Reconstruction and Development (IBRD) and International Development Association (IDA) Institution type Multilateral development agency, a member of the World Bank Group Ownership IBRD is owned by 185 member countries; IDA has 165 member countries Head office 1818 H Street NW, Washington, DC, 20433 U.S.A. Rating AAA (IBRD); not rated (IDA) Major instruments development loans and credits; guarantees Political risk coverage Comprehensive risk coverage Instrument name IBRD Partial Risk Guarantee (PRG); IBRD Partial Credit Guarantee (PCG); IDA PRG; IBRD Enclave PRG IBRD Policy-Based Guarantee (PBG) Instrument type debt guarantee debt guarantee Eligible borrowers · new investments (including expansion, · PBG: sovereign government borrowers and projects privatization, and concession transactions) in for fiscal support a developing member country · PCG: normally sovereign or public · IBRD Enclave PRG for foreign exchange­ borrowers for new investmentsa earning projects in IDA-only countries · must meet development objectives of the host country and be in compliance with the World Bank's Country Assistance Strategy (CAS) for each country · technically, financially, and economically viable; and environmentally and socially sound · proceeds of the guaranteed debt for investment projects (PRG and PCG) to be used solely for the purpose of projects approved by the World Bank · no sector restriction Eligible beneficiaries private lendersb Eligible forms of · debt: loans, bonds, or other financial instruments that have characteristics of commercial debt investment (for example, a letter of credit), including local currency-denominated debt Risk types covered political or regulatory risks that are assumed · borrower credit risk, that is, "part" of debt by the host government for a project, which services to encourage risk sharingc may include · standard political risksd · breach of contract (various)e Maximum tenor consistent with project needs Maximum amount · up to 100% of debt (both principal and · no specific percentage limit and subject interest payments) to specific debt instruments and market · subject to CAS conditions Fees (summary only)f IBRD PRG IBRD Enclave PRG IDA PRG IBRD PBG and IBRD PCG Initiation fee higher of 15 bp or US$100,000 none Processing fee up to 50 bp (higher for exceptional cases) none Front-end fee 0 bp 0 bp none 0 bp Standby fee 25 bp/y 75 bp/y 20 bp/y 25 bp/y on a PV basis Guarantee fee 55 bp/y up to 300 bp 75 bp/y 50 bp/y on a PV basis Other conditions An Indemnity Agreement needs to be concluded with the member country For more information http://www.worldbank.org/guarantees continued Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 37 Table B1.1 Continued Guarantee Portfolio Indicator 2001 2002 2003 2004 2005 No. of guarantees 2 1 2 3 4 Guarantees issued (US$ million) 159.0 75.0 30.0 126.7 95.2 Guarantees outstanding (US$ million) 1,908 1,683 1,713 1,840 1,882 Guarantees outstanding (infrastructure only) (US$ million) 1,499 1,524 1,554 1,681 1,723 Source: Authors' compilation. Note: bp = basis points; bp/y = basis points per year; PV = present value. a. Private entities could be considered. b. This includes any publicly owned autonomous financial institutions that are established and operate under commercial law for the purpose of pursuing profit. c. Guarantee coverage can be structured flexibly. For example, principal repayment can be guaranteed in full if there is an adequate noncallable period for the guarantee. d. Currency inconvertibility or transfer restriction, expropriation, war and civil disturbance. e. This may include, but not be limited to, risks relating to government contractual payment obligations (for example, termination payments or subsidy payments), government action or inaction having a material adverse impact on the project (for example, change in law or regulations, nonallowance for agreed tariff regime), contractual performance of public counterparties (for example, under an off-take agreement), frustration of arbitration, and the like. f. Initiation, processing, and front-end fees are up-front, one-time fees. This table presents the summary fee levels at the time of writing only. Please refer to the Web site for details of the definition of fees. Table B1.2 International Finance Corporation (IFC) Institution type Multilateral development agency, a member of the World Bank Group Ownership owned by 179 member countries Head office 2121 Pennsylvania Avenue NW, Washington, DC, 20433 U.S.A. Rating AAA Major instruments loans for own account (A-loans); equity investments; quasi-equity finance (C-loans); syndicated loans (B-loans); guarantees; hedging products; and others Comprehensive risk coverage Instrument name Partial Credit Guarantee (PCG) Instrument type debt guarantee Eligible borrowers · private sector projects located in developing member countriesb (except at World Bank/IFC and projects Municipal Fund, which assists subnational public sector entities)c · new investments (including expansion, and privatization and concession transactions), or a pool of new assets, in a developing member country; existing assets may be eligible for Risk Sharing Facilities (PCG for a pool of assets) or Securitization supportd (PCG for debt issued by a securitiza- tion vehicle) · meet development objectives of the host country; benefit the local economy · technically sound; have good prospect of being profitable; environmentally and socially sound · no sector restriction Eligible beneficiaries private lenders Eligible forms of debt, including loans, bonds, or other financial instruments that have characteristics of commercial investment commercial debt, including local currency-denominated debt Risk types covered borrower credit risk; "partialness" can be structured flexibly to fit to specific debt instruments and market conditions Maximum tenor no limit Maximum amount no specific percentage limit but guarantee coverage has to be "part" of debt services to encourage risk sharing continued 38 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments Table B1.2 Continued Comprehensive risk coverage Fees market based Other conditions acknowledgment by a host country For more information http://www.ifc.org Source: Authors' compilation based on publicly available information. Note: a. IFC offers B-loans where IFC is the sole lender of record and B-loan participants would benefit from IFC's preferred creditor status (thereby A/B loan structure mit- igates currency transfer risk to that extent). b. As a rule, the enterprises IFC finances must be majority private sector-owned and -controlled. Exceptions can be made for state-owned enterprises that are in the process of being privatized. It may provide finance for a company with some government ownership, provided there is private sector participation and the venture is run on a commercial basis. c. The Municipal Fund is a joint initiative of the World Bank and the IFC launched in 2003 to support investments (in infrastructure and other essential public servic- es, typically in the range of US$5­$50 million equivalent) made by subnational entities (local, provincial, or state governments; enterprises; financial intermediaries; subsovereign public-private projects). Transactions are booked at the IFC and a full line of IFC financial products, including loan and bond guarantees, are available. d. Any asset class with relatively predictable cash flows can potentially be securitized. IFC provides a PCG for up to a specified percentage of debt services to improve local or international credit ratings of such debt from the trust structure's stand-alone rating. Table B1.3 Multilateral Investment Guarantee Agency (MIGA) Institution type Multilateral development agency, a member of the World Bank Group Ownership owned by 170 member countries Head office 1818 H Street, NW, Washington, DC 20433 U.S.A. Rating not rated Major instruments investment insurance Political risk coverage Instrument name Investment Guarantee Instrument type political risk insurance Eligible investments · new cross-border investments (including expansion and privatization) originating in a MIGA mem- and projects ber country, destined for any developing member countrya · meet development objectives of the host country · meet MIGA's criteria of technical, financial, and economic viability, as well as environmental and social soundness Eligible beneficiaries entities operating on a commercial basis Eligible forms of · equity investment · shareholder loans · nonshareholder loans, provided that an equity or quasi-equity investment in the same project is or has been insured by MIGA · loan guarantees by shareholders · other forms of investments, such as performance bonds, leases, franchising and licensing agree- ments; management contracts may be eligible for coverage · all investments have to have a minimum tenor of 3 years Types of risk covered Investors may choose any combination of the four types of coverage: · currency inconvertibility and transfer restriction · expropriation · war and civil disturbance (including terrorism) · breach of contract (arbitration award default) Maximum tenor · up to 15 years (20 years on a case-by-case basis) · insured may reduce coverage any time and cancel coverage after 3 years continued Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 39 Table B1.3 Continued Political risk coverage Maximum percentage · up to 90% of equity of cover or amount · up to 95% of debt of cover · up to US$200 million (if necessary, more can be arranged through various forms of reinsurance and coinsurance) Acceleration Loan may be accelerated. Compensation for any claim will normally follow original scheduled payments. Fees · application fee, US$5,000 to US$10,000 (credited toward the first year's insurance premium); pro- cessing fee US$25,000 · insurance premium based on country and project risk, charged per risk; nonbinding indications can be given in 48 hours. Other conditions host country approval required For more information http://www.miga.org Guarantee Portfolio, All Sectors Indicator 2000 2001 2002 2003 2004 2005b No. of guarantees 53 66 58 59 55 62 Guarantees issuedc (US$ million) 1,863 2,154 1,358 1,372 1,076 1,226 Guarantees outstanding (US$ million) 4,365 5,179 5,257 5,083 5,186 5,094 Source: Authors' compilation. Note: a. Investments made by nationals of the host country may be eligible, provided the assets invested are transferred from outside the host country. b. In 2005, the infrastructure sector accounted for 39 percent of MIGA's portfolio. c. Including amounts leveraged under the Cooperative Underwriting Program (CUP). Table B1.4 African Development Bank (AfDB) Institution type Regional multilateral development bank Ownership supported by 77 member countries, 53 from Africa, and 24 from North and South America, Europe, and Asia Head office Rue Joseph Anoma, 01 BP 1387 Abidjan 01, Côte D'Ivoire Rating Moody's Aaa, S&P Aaa Major instruments PCGs and PRGs, as well as Private Sector Enterprise Loans, Public Sector Non-Sovereign Guaranteed Loans, Public Sector Sovereign Guaranteed Loans, Risk Management Products Political risk coverage Comprehensive risk coverage Instrument name Partial Risk Guarantee (PRG) Partial Credit Guarantee (PCG) Policy-Based Guarantee (PBG) Instrument type debt guarantee Eligible borrowers · any public or private sector project eligible for AfDB financing and projects · PBG eligibility is same as for policy-based loans · all projects must meet AfDB's environmental assessment requirements Eligible beneficiaries private lenders Eligible forms of debt financing: loans, bonds, and other financial instruments (commercial paper), including for investment local currency Risk types covered · currency inconvertibility and transferability PCG covers portions of scheduled repayments · expropriation and nationalization of private loans against all risks · breach of contract continued 40 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments Table B1.4 Continued Political risk coverage Comprehensive risk coverage Maximum tenor up to 20 years for sovereign-guaranteed public sector borrowers and 15 years for nonsovereign guaranteed borrowers (NSG), subject to principal repayment period of the financing matching requirements of project financed; in case of bullet repayment, max. tenor is 15 years; with avg. life of 10 years Maximum amount · for private sector, should not exceed 33% of total project cost and facilities to financial institutions, should not exceed 50% of shareholders' net worth at the time Fees · front-end fees: no front-end fees for public sector borrowers and 1% of possible max exposure under guarantee for NSG · standby fee: 0.75% for public sector borrowers and 1.0% for NSG. · guarantee fee: lending spread (for AfDB loans) + risk premium associated with particular guarantee structure · appraisal fee: fees for private sector projects to cover legal and other expenses incurred by the bank during initiation, appraisal, and underwriting process Other conditions · the bank may require a counterguarantee from the member country in whose territory the project will carried out, or of a public agency or institution of that member country · AfDB reserves right to terminate the guarantee facility if agreement is not signed within 180 days of the Board's approval For more information http://www.afdb.org email: afdb@afdb.org tel: (+225) 20.20.44.44 Source: Authors' compilation. Table B1.5 Asian Development Bank (ADB) Institution type Regional multilateral development bank Ownership owned by 65 members (47 from Asia Pacific Region) Head office 6 ADB Avenue, Mandaluyong City 1550, Philippines Rating Moody's Aaa, S&P AAA Major instruments ADB's financial instruments are available for both public and private sector borrowers and include Ordinary Capital Resources (OCR), Asian Development Funds (ADF), guarantees, grants, technical assistance, equity, guarantee-of-record, "A/B" loans, and Trade Finance Facilitation Program Political risk coverage Comprehensive risk coverage Instrument name Political Risk Guarantee (PRG) Partial Credit Guarantee (PCG) Instrument type debt guarantee Eligible borrowers · wide variety of eligible debt instruments and projects · greenfield and expansion projects, including refinancings and multi-tranche facilities · projects can be public or private sector operations, including state-owned enterprises Eligible beneficiaries lenders that operate on a commercial basis, including public and private insurers and reinsurers Eligible forms of loans, including commercial bank loans, loans by shareholders, loans guaranteed by shareholders, investment bond holders, and other traded debt instruments Risk types covered · currency inconvertibility or nontransfer commercial and political risks (at left) · expropriation · political violence (including terrorism) · breach of contract (frustration of arbitration process and denial of justice) · any other form of coverage approved by the Board Maximum tenor typically 15 years, but up to 32 years with Board approval continued Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 41 Table B1.5 Continued Political risk coverage Comprehensive risk coverage Maximum amount · no project limit for guarantees with government counterindemnity · PCG: without counterindemnity, up to US$75 million or 25% of project costs · PRG: without counterindemnity, up to US$150 million or 50% of project cost; larger amounts can be guaranteed through reinsurance or guarantor-of-record structures · guaranteed percentage ­ PCG: a portion of borrower's debt service ­ PRG: up to 100% of principal and interest Fees · guarantee fees ­ PCG: with counterindemnity, 40 bp/y; without counterindemnity, market rates apply ­ PRG: with counterindemnity, 40 bp/y; without counterindemnity, market rates apply. Fee is calculated on outstanding principal and accrued interest. · front-end fees ­ PCG: up to 1% for public sector projects, market rates for private sector projects ­ PRG: up to 1% for public sector projects, market rates for private sector projects Other conditions · Government counterindemnity is not required for private sector projects or projects involving state-owned entities. It is required for public sector projects on public sector terms (that is, pricing, amounts). · ADB may issue a guarantee if it participates, for example, in a project (with equity or debt), a program loan, or if it provides a grant or technical assistance. For more information http://adb.org or contact Mr. Werner Liepach, Principal Director, tel: +632-632-6314 email:wliepach@adb.org Source: Authors' compilation. ADB is revising its guarantee programs. Please consult with the ADB for program details. Note: bp/y = basis points per year. Table B1.6 European Bank for Reconstruction and Development (EBRD) Institution type Regional multilateral development bank Ownership owned by 60 member countries and two intergovernmental institutions (European Community and European Investment Bank) Head office One Exchange Square, London EC2A 2JN, United Kingdom Rating Moody's Aaa, S&P AAA Major instruments loans (senior and junior), mezzanine debt, equity and guaranteesa Political risk coverage Comprehensive risk coverage Instrument name Political Risk Guarantee (PRG) Trade Finance Facilitation Program (TFP) SME Guarantee Facility Municipal Finance Facility (MFF) Instrument type debt guarantee Eligible borrowers financial sector strengthening, local capital · TFP: trade finance transactions (import and and projects market development, infrastructure (power, export, including cross-border engineering, transport, waste water) construction, commodities, and the like); state-owned entities are precluded · SME: loans and loan portfolios of local banks and leasing companies · MFF: municipal projects Eligible beneficiaries · subsovereigns, approved financial institutions, private sector Eligible forms of · short-term loans, medium-term loans, local and foreign currency bonds, letters of credit, local- investment currency loans continued 42 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments Table B1.6 Continued Political risk coverage Comprehensive risk coverage Risk types covered · political violence · commercial credit risk · expropriation · political risks · license revocation · currency convertibility and nontransfer · breach of contract Maximum tenor · 15 years · TFP: 3 years max (5 year max is being considered) Maximum amount · 150 million (can be higher subject to individual approval) or 35% of total project cost · TFP: 5 million Fees · market based, case-by-case evaluation · TFP: market based, individually determined, no commitment fee Other conditions · no sovereign counterguarantee (except on a case-by-case basis) · asset pledge · debt service accounts For more information http://ebrd.com tel: +44 20 7338 6000 Source: Authors' compilation. Note: a. Of EBRD's total board-approved projects, 80 percent are debt, 18 percent are equity, and 2 percent are guarantees. Nonsovereign projects make up 78 percent, and 22 percent are sovereign. Total guarantee exposure under the TFP program is around 300 million; for non-TFP-related guarantees, exposure is around 170 million. Table B1.7 Inter-American Development Bank (IDB) Institution type Regional multilateral development banka Ownership owned by 47 member countries (26 are borrowing members from Latin America; the remainder are from North America and Europe; in addition, Israel, the Republic of Korea, and Japan are members) Head office 1300 New York Avenue, NW, Washington, DC 20577, U.S.A. Rating Moody's Aaa, S&P AAA Major instruments loans, grants, guarantees, A/B loans,b equity investments Political risk coverage Comprehensive risk coverage Instrument name Political Risk Guarantee (PRG) Partial Credit Guarantee (PCG) Trade Finance Facilitation Program (TFFP, initiated in 2005 is a PCG facility)c Instrument type debt guarantee Eligible borrowers nonsovereign guaranteed entities located in · nonsovereign guaranteed entities located in and projects borrowing member countries: transactions borrowing member countries: transactions include greenfield and expansion projects; loans include greenfield and expansion projects; and refinancing for corporate borrowers and loans and refinancings for corporate bor- subsovereigns entities; capital markets; no sector rowers and subsovereign entities; capital limitations markets; no sector limitations · sovereign and public borrowing · TFFP: international trade activities Eligible beneficiaries private lenders Eligible forms of loans, bonds (both international and local · loans, bonds (both international and local investment currency, as well as project and corporate bonds) currency, project and corporate bonds, asset backed securities, future flow or loan securitizations) · TFFP guarantees: cover letters of credit, documentary collections, promissory notes, and so forth continued Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 43 Table B1.7 Continued Political risk coverage Comprehensive risk coverage Risk types covered · expropriation of funds Covers portions of scheduled payments · currency convertibility and nontransfer (principal and interest) of bond issues against · breach of contract (regulatory risks) for all risks in various risk-sharing modalities: certain sovereign obligations · Mezzanine Guarantee: for a specified layer of risk to raise rating on the local currency scale · Rolling Guarantee: for specified number of interest and principal amortization payments on a rolling basis · Maturity Guarantee: allows investors to put debt instrument to IDB after certain time frame to get investors to accept longer maturities · Co-Wrap Guarantee with Coinsurance: IDB is guarantor of record, a guarantee for portion of principal and interest on its account with uncovered portion being insured by private sector insurers on a pari passu basis Maximum tenor · PRG or PCG: no limit, depends on underlying assets · TFFP: 3 years Maximum amount · PRG: up to 50% of project costs or US$200 million, whichever is less (exceptions up to US$400 million per project) · PCG: up to 25% of project costs or up to US$200 million (exceptions up to US$400 million); in certain countries, the limit is up to 40% of project costs (projects in smaller economies with limited access to capital markets), and up to 50% for expansion projects (subject to limits related to total capitalization of the issuer) · TFFP: up to 100% per transaction, per-country exposure not to exceed 30% of program amount (US$400 million); limit per issuing bank of US$40 million Fees PRG and PCG: annual guarantee fees, commitment fees on the undisbursed balance, and certain upfront fees will be charged on a case-by-case basis depending on the risk covered and structure Source: Authors' compilation. Note: a. IDB also has the Multilateral Investment Fund (MIF), an independent fund managed by the IDB to promote microfinance and small business development via loans, grants, and equity investments. In addition, there is also the Inter-American Investment Corporation (IIC), an independent affiliate of the IDB group that provides loans, grants, and equity investments for private projects for small and medium enterprises. b. The IDB offers an A/B loan structure, in which IDB lends as sole lender of record: the A-loan on its own account and the B-loan syndicated out to market partici- pants. It can also do the B-loan as a 144a private placement instead of a syndicated loan. c. The program amount is US$400 million. 44 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments Table B1.8 European Investment Bank (EIB) Institution type Multilateral development bank Ownership owned by the 25 member states of the European Union (EU) Head office 100, Boulevard Konrad Adenauer, L-2950 Luxembourg Rating Moody's Aaa, S&P AAA Major instruments EIB operates both inside the EU and (on mandate from its member states) outside the EU. Inside the EU, EIB offers a full range of long-term financial instruments, principally in the form of loans; guarantees and equity participations in favor of EU small and medium enterprises (SMEs) are provided through the majority-owned European Investment Fund (EIF). Outside the EU, EIB operates in the ACP countries under the Cotonou Partnership Agreement, and can offer a full range of instruments including loans (in foreign exchange or local currency), equity, and guarantees. In ALA, EIB offers a range of instruments including loans with carve-out of political risk from the obligations of the guarantor (also available in the ACP and Mediterranean countries). In the Mediterranean region, EIB offers a full range of equity and loan instruments. Political risk coverage Comprehensive risk coverage Instrument name · inside EU: not offered · inside EU: EIF credit insurance, enhancement, · outside EU: political risk carve-out on SME Guarantee Facility guarantees for EIB loans · outside EU: range of guarantee instruments under the Cotonou Investment Facility (and also in the Mediterranean region from 2007 onward) Instrument type · inside EU: EIF loan guarantees, microcredit guarantees, equity guarantees, and loan guarantee · outside EU: political risk carve-out on guarantees to EIB (in ALA and ACP countries); credit enhancement guarantees by EIB to assist local borrowers to raise funds; portfolio credit risk sharing with local banks Eligible borrowers · inside EU: borrowers in the member states of the EU, the accession countries (including Bulgaria, and projects Romania, Turkey) , and the EFTA countries of Norway, Iceland, and Liechtenstein · outside EU: borrowers in ACP states, certain countries in ALA, and the Mediterranean countries Eligible beneficiaries private companies and institutions (financial institutions, leasing companies, guarantee institutions, mutual guarantee funds, special purpose vehicles, private equity vehicles, and so on), or commer- cially run public institutions Eligible forms of · long- and medium-term debt (in foreign currency and in selected countries also in local currency); investment equity and guarantee instruments available in ACP and Mediterranean countries · via the EIF, equity and guarantees principally in the EU Risk types covered · under political risk carve-out mechanisms: nontransfer of currency, war and civil disturbance, expropriation, and denial of justice · under comprehensive guarantees: proportionate or residual loss guarantee Maximum tenor · inside EU: EIF credit enhancement up to 15 years average life · outside EU: tenor appropriate to the project being financed (up to 25 years for infrastructure projects) Maximum amount · Inside EU: EIF ­ up to 50% of the total project cost ­ no geographic limits ­ EIF : Credit Insurance, takes up to 50% of the risk of every individual loan or lease in the portfolio, up to a maximum capped amount ­ EIF: Credit Enhancement · Outside EU: amounts by reference to geographical mandates (typical range of financing package is 10­100 million generally limited to 50% of project cost Fees determined by each transaction, using market-based rates continued Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 45 Table B1.8 Continued Political risk coverage Comprehensive risk coverage Other conditions · inside EU: EIF ­ no counterguarantee required ­ does not provide direct guarantees for individual SMEs, but always operates on the basis of a portfolio of guarantees or loans ­ equity and first loss are not normally guaranteed ­ portfolio or securities should normally have an investment-grade rating before the EIF guarantee · outside EU: No sovereign counterguarantee required for private-sector operations. Usual security required (as appropriate, third-party guarantees, pledge on assets, accounts, and the like) · Guarantees can be one component of a multiple-component EIB financing package. For more information http://www.eib.org or www.eif.org tel: +352) 43 79 31 22 email:info@eib.org Source: Authors' compilation. Note: ACP = Africa, Caribbean, and Pacific; ALA = Asia and Latin America; EFTA = European Free Trade Association. Table B1.9 Andean Development Corporation (CAF) Institution type Regional multilateral development bank Ownership owned by 17 member countries from Latin America, the Caribbean, and Europe (86.21% is owned by the Andean countriesa; 13.75% by nonregion countries), and 16 private banks from the Andean Region (0.04%) Head office Ave. Luis Roche, Torre CAF, Altamira, Caracas, República Bolivariana de Venezuela Rating Moody's A1, S&P A Major instruments loans (A/B loans), guarantees, equity and quasi-equity participationb Comprehensive risk coverage Instrument name Partial Credit Guarantee Instrument type debt guarantee Eligible borrowers · all public and private financial institutions, private sector companies, and governments from and projects member countries · public and private infrastructure projects, such as roads, transportation, telecommunications, power generation and transmission, water and environmental clean-up and development of border areas, and the physical integration of shareholder countries · industrial projects Eligible beneficiaries financial institutions, private companies, governments Eligible forms of debt investment Risk types covered borrower credit risk; partial credit enhancement can be structured flexibly to fit to specific debt instruments and market conditions, that is, guaranteeing installment of principal and an interest payment or a portion (usually no more than 33%) of a debt issue on a revolving basis Maximum tenor · 15 years Maximum amount · private sector companies up to US$80 million (unless otherwise authorized) Fees · market-based, subject to transaction type, structure, tenor, and credit profile of beneficiary, as well as whether it is a sovereign (subject to a lower fee structure) or private sector entity Other conditions · CAF does not explicitly require a host government counterguarantee · real estate and military-related transactions are not supported For more information http://www.caf.com tel: (58212) 209-2111 email: infocaf@caf.com continued 46 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments Table B1.9 Continued Partial Credit Guarantee Portfolio, All Sectors Indicator 2001 2002 2003 2004 2005 Guarantees outstanding (US$ million) 250 400 325 299 199 Note: Political risk coverage is offered by LAIGC. a. Andean countries are Bolivia, Colombia, Ecuador, Peru, and República Bolivariana de Venezuela. b. Includes fixed- or variable-income instruments in companies and infrastructure projects; subordinated loans, preference shares, mezzanine financing, and convert- ible loans. The Latin American Investment Guarantee Company (LAIGC) Institution type Insurance company for the promotion of foreign investment Ownership CAF (50%) and AIG Global Trade & Political Risk Company Head office 29 Richmond Road, Pembroke HM 08 Bermuda. Telephome +441-298-5269 Coverage LAIGC offers political risk and investment insurance for foreign credit, foreign trade, and capital investment operations in the countries of the region. Primary business To maximize the leveraging effect of ots capital through co-insurance and reinsurance packages. strategy For every transaction that LAIGC insures, AIG will partner in the same risk on an at least a dollar for dollar basis. Source: Authors' compilation and 2005 CAF annual report. Table B1.10 Islamic Corporation for Insurance of Investments and Export Credits (ICIEC)a Political risk coverage Comprehensive risk coverage Instrument name · Equity Investment Insurance Policy (EIIP) · Comprehensive Short Term Policy (CSTP) · Financing Facility Investment Insurance Policy · Supplemental Medium Term Policy (SMTP) (FFIIP) · Specific Transaction Policy (STP) · Loan Guarantees Investment Insurance Policy · Bank Master Policy (BMP) (LGIIP) · Documentary Credit Insurance Policy (DCIP) Instrument type investment and export credit insurance, reinsurance Eligible investments, · export credits pertaining to goods exported from member states worldwide borrowers, projects · investments in member states irrespective of country origin, including direct investments in the share capital of enterprises including principal amount of loans made or guaranteed by holders of equity in the enterprise concerned · private, public, and mixed investments operating on a commercial basis Eligible beneficiaries private sector, lenders (Islamic and commercial banks), national ECAs (export credit agencies) Eligible forms of loans (including letters of credit), equity investment Risk types covered · currency convertibility and transfer · commercial risks: insolvency or bankruptcy · expropriation of buyer; repudiation or termination by the · war and civil disturbance buyer of the purchase contract; refusal of · breach of contract the buyer to pay the purchase price · political risks (as at left) Maximum tenor · export credit insurance: maximum tenor 7 years (subject to Board of Directors, tenor could be increased) · PRI: from 1 year to 15 years (20 years in special circumstances) Maximum amount · PRI: up to 90% of the investor's loss, the principal plus the mark-up to be accumulated over the lifetime of the loan, less the 10% uninsured amount · commercial risk: 90% as standard, but may be increased or decreased at the discretion of the underwriter on an individual basis subject to prudent underwriting principles continued Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 47 Table B1.10 Continued Political risk coverage Fees · for investment insurance premium and fees ­ administrative fee for reviewing preliminary applications US$500, nonrefundable ­ processing fee for assessing main application of US$5,000 nonrefundable (subject to a refund or increase depending on actual costs incurred by ICIEC); the full processing fee will be applied to first year's premium in the event a policy is issued ­ premium rates depend on the risks selected by the policyholder and the host country; premium rates are per year and vary from 0.2% to 4.35% for package of four risks · export credit insurance premium and fees ­ policy administration fee 0.025% to 0.1% of policy limit with minimum US$1,000 premium rates depend on factors such as country risks, commercial risks, terms of payments, whole turnover cover or single transaction cover; premium rates for short term business (less than 180 days) vary from 0.4% to 3.15% Other conditions · export goods must be Shariah compliant · fully documented claims must be made within 60 to 365 days from date of loss, waiting period of 4 to 9 months applies · policies covered only in Islamic Dina, U.S. dollar, euro (unless otherwise approved by Board) · ICIEC is entitled to cancel policies in the event of failure by the policyholder to supply declarations or to pay premium within the periods specified by the corporation. · Specific exclusions from coverage are devaluation or depreciation of currency. For more information http://isdb.org tel: (+9662) 6361400 email: idbarchives@isdb.org Guarantee and Insurance Portfolio, All Sectors Indicator 2001 2002 2003 2004 2005 No. of approvals 183 248 455 457 874 Business insured (US$ million) 50.3 102.8 159.2 317.9 590.8 Exposure (US$ million) 65.0 109.0 123.5 227.4 447.0 Note: a. A member of the Islamic Development Bank Group founded in 1994, 50% owned by IsDB and remainder by 35 member countries of the Organization of Islamic Conference (OIC), for more information please go to www.iciec.com or write to P. O . Box. 15722 - Jeddah 21454 - Kingdom of Saudi Arabia, tel: (+9662) 6445666 fax : (+9662) 6379504 E-mail : iciec@isdb.org Islamic Development Bank (IsDB) Islamic Development Bank (IsDB) Institution type Multilateral development bank Ownership Owned by 56 countries, member countries should also be members of the Organization of the Islamic Conference Head office P. Box 5925, King Khaleed Street, Jeddah, 21432 Kingdom of Saudi Arabia Rating S&P AAA, Fitch AA Major instruments Shariah compliant funding: Loan financing, Technical Assistance, Leasing, Istisn'a, Lines of Financing, Equity Participations, Profit Sharing, ICIEC Investment and Export Credit Insurance, ICD Islamic Corporation for the Development of Private Sector, ITFC Islamic Trade Finance Corporation. Source: Authors' compilation. 48 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments Table B1.11 Inter-Arab Investment Guarantee Corporation (IAIGC) Institution type Pan-Arab regional multilateral agency Ownership owned by all Arab countries (except Comoros Islands) Head office P.O. Box 23568 Safat 13096 State of Kuwait Rating Not rated Major instruments investment guarantees, trade finance guarantees Investment coverage Export credit coveragea Instrument name · Direct Investment Guarantee · Comprehensive Guarantee · Equity Participation Guarantee · Specific Guarantee · Loan Guarantee · Specific Noncommercial Risks Guarantee · Contractors Equipment Guarantee · Buyer Credit Guarantee · Others Instrument type insurance Eligible investments, · Arab new investments in Arab countries · goods of Arab origin exported from one borrowers, projects · equity investment (total project ownership or Arab country to another Arab country equity participation) · exporter must be an Arab nation · loans for new investment projects exceeding 3-year maturities Eligible beneficiaries · Arab nationals, be it natural or juridical persons, private or public, provided that their nationality is different from that of the host country in the case of natural persons. For juridical persons, the share capital should be substantially owned by Arab nationals and the head office seated in any Arab country. · Arab-foreign banks operating outside the Arab world if at least 50% Arab owned Eligible forms of loans, equity, equipment contract investment Risk types covered noncommercial risks commercial risks · currency convertibility and transfer · insolvency or bankruptcy of buyer · expropriation and nationalization · failure of the buyer to effect payment · war and civil disturbance · failure or refusal of the buyer to accept goods · noncommercial risksb Maximum tenor · direct investment and equity participation: · comprehensive guarantee: not to exceed 10 years 1 year · loan guarantee: no maximum · specific guarantee: for length of credit period · contractors equipment: corresponds with the project execution period Maximum amount · max 90% loss in case of inconvertibility · commercial risks: up to 85% or cover · 85% for all other risks · noncommercial risks: up to 90% for inconvertibility, delay in approving transfer, dis- criminatory exchange rate; 85 percent for others Fees · US$350 registration fee · US$175 registration fee; US$150 importers · commitment fee:c 0.1% for amounts not information collection fees exceeding US$10 million and 0.15% for · commitment fee: 0.05% of the total value amounts exceeding US$10 million of the contract · guarantee premiums: determined subject to · guarantee premiums: dependent on risk evaluation of risks covered; around 0.4% per evaluation; around 1% of the value of the risk payable annually on the current amountd shipment executed Other conditions · host country's prior approval is required (an implicit acknowledgment) For more information http://www.iaigc.org tel: (+00965)4844500 email: info@iai.org.kw Source: Authors' compilation. Note: a. Specific Guarantee covers comprehensive risks for private sector importer; Specific Noncommercial Risks Guarantee covers noncommercial risk for export with an importer of the public sector. b. Noncommercial risks include cancellation or nonrenewal of an import license or refusing entry of the shipped goods; refusal of the public authorities of an Arab transit country to allow transit; confiscation, sequestration, or detention of the exported goods; measures taken that prevent exporter from receiving his dues; nation- alization; confiscation; compulsory seizure; expropriation; public civil disturbances; and others. c. Paid annually on the amount that represents the difference between the maximum guarantee amount and the current amount. d. If two risks are covered, premiums will be reduced by 5%; if three risks are covered, 10%. Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 49 Appendix B2 Profiles of Major Bilateral Risk Mitigation Instruments Table B2.1 Export Development Canada (EDC) Institution type Export credit agency Ownership Government of Canada (a Crown Corporation) Head office Export Development Canada, 151 O'Connor, Ottawa, Canada, K1A 1K3 Rating Moody's Aaa, S&P AAA Major instruments export credit insurance (accounts receivable insurance), political risk insurance, guarantees Investment coverage Export credit coverage Instrument name · Political Risk Insurance (PRI) · Contract Frustration Insurance (CFI, formerly Specific Transaction Insurance) · Accounts Receivable Insurance (ARI) · Bank Guarantee Program (BGP) · Capital Markets Coverage (CMC) Instrument type insurance BGP: guarantee; Others: insurance Eligible investments, overseas investments beneficial to Canada · CFI: specific export contract for services and borrowers, and projects capital goods or projects · BGP: loans by Canadian and international banks supporting the export of goods and services · CMC: bond issues by emerging market issuers into international capital markets Eligible beneficiaries lenders, private sector companies lenders Eligible forms of loans, equity (paid-in-capital), shareholder loans, loans, accounts receivable, bonds investment guarantees such as financial guarantees or completion guarantees, physical assets, service agreements, production sharing contracts Risk types covered PRI commercial and political risks · currency convertibility and transferability · expropriation and repossession · political violence · breach of contract by a government or state- owned entity, subject to an arbitration award in favor of the investor not being honored Maximum tenor up to 15 yrs (unless otherwise approved) no set maximums Maximum amount · equity coverage: normally 90% of eligible · CFI and ARI: up to 90% of losses (costs or cover losses, no stated project limit incurred or receivables), no stated maximum · bank loans: up to 100% of principal and · BGP: for less than US$10 million, 95% cover interest, no stated project limit on 85% of Canadian export contract; for greater than US$10 million, 90% coverage; increases to 100% when the lending bank provides financing for the 15% uncovered portion for a minimum two-year tenor Fees premiums based on country, industry, and · exposure fees: determined by EDC's own transaction characteristics and number of risks risk-based analysis, which can be higher covered; discounts apply if more than one risk than rates set by the OECD arrangement is insured against · pricing based on a number of factors including policy liability, policy duration, payment terms, buyer risks, and other contract-specific risk factors · BGP: guarantee fee equal to the OECD minimum premium rate plus a component for commercial credit risk continued 50 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments Table B2.1 Continued Political risk coverage Comprehensive risk coverage Other conditions · insurance can be tailored to cover only To qualify, EDC will take into account value specific risks from above selection of the exports from Canada and any other · must be compliant with EDC's code of significant benefits to Canada, creditworthiness business ethics, such as a commitment to of foreign buyer, contractual terms and condi- environment tions, conditions and economic outlook in buyer's country, and exporter capabilities. For more information http://www.edc.ca tel: (613) 598-2500 email: export@edc.ca Total Volume of Medium-Term Insurance Policies (PRI and CFI), All Sectors Indicator 2001 2002 2003 2004 2005 Guarantees outstanding (CAD billion) 8.5 8.6 7.4 6.9 8.4 Source: Authors' compilation. Table B2.2 Agence Française de Développement (AFD) Institution type Bilateral development agencya Ownership French government Head office 5, Rue Roland Barthes, 75598 Paris Cédex 12 Rating S&P AAA, Fitch Ratings AAA Major instruments loans (concessional, nonconcessional), subsidies, guarantees Political risk coverage Comprehensive risk coverage Instrument type guarantee Eligible projects infrastructure, urban development, rural devel- · private companies and microfinance insti- opment and environment, health, education, tutions operating in countries in AFD's local financial market development, in AfD- geographical areas of operationb qualified countries · medium- and long-term loans granted to private businesses and microfinance institu- tions, as well as credit lines for microfinance institutions · all activities qualify except private housing, small retail business, weapons, gambling, tobacco, and alcohol Eligible beneficiaries lenders, private sector companies Eligible forms of debt, equity, bond issues debt (not working capital) investment Risk types covered political risks · commercial risks (insolvency, bankruptcy) · currency convertibility and transfer · political risks (see left) · expropriation and repossession · political violence (including terrorism and sabotage) · breach of contract · nonpayment by a sovereign obligor Maximum tenor none, project determined loan: 2­12 years Maximum amount · private sector: max 90% of eligible losses, no maximum 750,000 (for example, 50% of or cover stated maximum amount a loan amount of 1.5 million) and maximum · bank loans: up to 100% of principal and 50%, except for IMMs (up to 75%) interest; no stated maximum amount continued Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 51 Table B2.2 Continued Political risk coverage Comprehensive risk coverage Fees premiums based on country, industry, and 2% on the current guaranteed amount for transaction characteristics and number of risks loans covered; rates start as low as 0.5% per year to insure one political risk; discounts apply if more than one risk is insured against Other conditions · insurance can be tailored to cover only · the guarantee may not be invoked within specific risks from above selection the first 12 months following the total · sovereign counterguarantee required disbursement of the loan · sovereign counterguarantee not needed For more information http://www.afd.fr (to identify the local offices) tel: +33 1 53 44 31 31 email: site@afd.fr Guarantee and Insurance Portfolio, All Sectors Indicator 2001 2002 2003 2004 2005 No. of guarantees 8 4 4 4 2 Guarantees issued (million euro) 3.8 32.7 11.6 5.7 14.1 Guarantees outstanding (million euro) 49.9 79.6 76.4 66.8 49.8 Source: Authors' compilation. Note: a. Includes PROPARCO (the private sector arm, owned 67% by AFD) with the remainder by French financial institutions (15.09%), French companies (7.74%), and international finance institutions (9.07%). PROPARCO Web site address is www.proparco.fr; tel: +33 1 53 44 37 37). AFD operates in 69 countries, including those that do not belong to the French Priority Zone of Solidarity, as per the Inter-ministerial Committee for International Cooperation and Development. b. Please see Web site www.afd.fr for qualified countries Table B2.3 Coface Institution type Export credit agency (French government) Ownership Coface Corporationa Head office 12 cours Michelet, La Défense 10, 92065 Paris La Défense Cédex Rating Moody's Aa3, Fitch Ratings AA+ Major instruments Export credit insurance (accounts receivable insurance), political risk insurance Investment insurance Export credit guarantees Instrument type insurance guarantee Eligible projects and all investments above 15 million and for a · companies exporting majority French transactions duration between 5 and 15 years produced goods, and contracting for private and public works · companies providing services for a duration longer than one year · bank credits of at least two years Eligible beneficiaries French companies, French banks and lenders Eligible forms of equity participation (greenfield or expansion), loans, performance and bid security, accounts investment allowances, shareholder loans, security guaran- receivable tees for equipment lease, concession or license fees, bank loans Risk types covered PRI: applicant can select from Commercial risks · currency convertibility and nontransfer · insolvency or bankruptcy of buyer · expropriation, change in law · failure of the buyer to effect payment · political violence, war and civil disturbance · termination or cancellation of contract · breach of contract, nongranting of rights by buyer and permits, denial of justice continued 52 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments Table B2.3 Continued Investment insurance Export credit guarantees Noncommercial risks · political risk (country of operation) · political risk (France and EU decisions) · natural disasters, force majeure Maximum tenor 15 years · up to 14 years for project financing · up to 15 years for hydroelectrical projects Maximum amount equity investments and bank loans: max 95% of · no maximum amount except for some or cover eligible losses, no stated maximum amount specific countries as defined in terms of cover · for credit risk: 95% for buyer credit, 90% for political risks for supplier credit, 85% for commercial risk for supplier credit (90% if a bank guarantee is available) · bank loans: 95% or less, depending on commercial risk; from 85% to 90% for bid and performance securities; 95% for project finance loans political risk Fees Premiums based on country, industry, and premiums based on type of risk covered (credit transaction characteristics and number of risks risk, construction risk, securities), coverage covered. Discounts apply if more than one risk (political risk, commercial risk), country risk, fin- is insured against ancing structure, duration, buyer, and the like Other conditions · operate in compliance with OECD principles and standards for responsible business conduct in a variety of areas, including employment and industrial relations, human rights, environment, information disclosure, combating bribery, consumer interests, science and technology, compe- tition, and taxation (http://www.oecd.org) · French government needs to approve transactions. For more information http://www.coface.fr or www.coface.com tel: +33 (0)1 49 02 19 73 Guarantee and Insurance Portfolio Indicator 2001 2002 2003 2004 2005 No. of guarantees all sectors 459 374 328 403 395 infrastructure transactions 17 6 5 10 12 Guarantees issued (US$ million) all sectors 10,822 13,167 10,499 11,662 20,401 infrastructure transactions 278 500 867 64 1202 Guarantees outstanding (US$ million) all sectors 66,593 71,304 71,533 68,400 60,976 infrastructure transactions n.a. n.a. 3,153 3,138 2,708 Source: Authors' compilation. Note: n.a. = Not applicable. a. Founded in 1946 as a specialized export credit insurance company, managing its own products and state guarantees for French exports. Coface privatized in 1994. In 2002, Natexis Banques Populaires became Coface's majority shareholder. Coface acquired Ort from Reuters in 2004 and became France's leading credit informa- tion provider. Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 53 Table B2.4 Deutsche Investitions und Entwicklungsgesellschaft mbH (DEG) Institution type Bilateral development agency Ownership 100% KfW,a Frankfurt Head office Belvederestr. 40, 50933 Cologne, Germany Rating DEG: not rated; KfW: Moody's Aaa, S&P AAA, Fitch Ratings AAA Major instruments loans, mezzanine finance, equity capital, and guarantees Comprehensive coverage Instrument name Partial and Full Credit Guarantees Instrument type guarantee Eligible borrowers · agribusiness, financial sector, infrastructure, manufacturing industries and services and projects guarantees provided on an untied basis · Eligible borrowers are private sector financial institutions and private sector companies only; public financial institutions do not qualify. Eligible beneficiaries private financial institutions Eligible forms of debt investment Risk types covered borrower credit risk (insolvency, bankruptcy, and the like) Maximum tenor usually up to 10 years, longer tenors are possible Maximum amount up to US$30 million for DEG´s own account (additional amounts can be mobilized from third parties) Fees market based, in accordance with normal banking practices For more information http://www.deginvest.de tel: +49 221 ­ 4986 -0 e-mail: info@deginvest.de Kredit Anstalt fuer Wideraufbau (KfW) Institution type Bilateral development agency Ownership 80% held by the German Federal Government, with the remaining 20% held by the individual German federal states Head office Palmengartenstrasse 5-9, 60325 Frankfurt am Main, Germany Rating Moody's Aaa, S&P AAA, Fitch Ratings AAA Major instruments DEG: loans, mezzanine finance, equity capital, and guarantees IPEX Bank: loans, equity participation, export and project financing For more information http://kfw.de tel: +49 69 7431-0 Source: Authors' compilation. Note: a. KfW Group consists of DEG; KfW Development Bank, which focuses more on the public sector; and IPEX bank, which is responsible for the project and export finance activities of the KfW Group and is to be launched as an independent bank on January 1, 2008. 54 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments Table B2.5 Foreign Trade and Investment Promotion Scheme (AGA) Institution type Export credit agency Investment Insurer Ownershipa Euler Hermes (EH), a private company PricewaterhouseCoopers (PwC), a private com- pany Head office Euler Hermes- Export Credit Guarantees, PricewaterhouseCoopers-New-York-Ring 13, Friedensallee 254, 22763 Hamburg, Germany 22297 Hamburg, Germany Rating German government: Moody's Aaa, S&P AAA Major instruments Export credit guarantees Investment guarantees and untied loan guarantees Investment coverage (PwC) Export credit coverage (EH) Instrument name Investment Guarantee Export Credit Guarantee Instrument type guarantee Eligible investments, New direct investments abroad, long-term capital investments in cash or in other in-kind contri- borrowers, projects butions with the aim of entrepreneurial activity. Developmental and environmental aspects as well as positive reverse effects of the investment on Germany play a crucial role for eligibility. Only entrepreneurs and companies domiciled in Germany and having their center of activity in Germany are entitled to apply for investment guarantees. Regarding export guarantees, financial institutions and banks financing German export transactions are entitled to apply as well. Exports and manu- facture of German goods, structured finance, and project finance transactions are eligible. Eligible beneficiaries lenders, private companies, foreign sovereign lenders, private companies, foreign sovereign and subsovereign borrowers and subsovereign borrowers Eligible forms of debt (shareholder and bank loans); bonds; · debt, prime costs (in case of preshipment investment equity (equity participations in a project cover) company, endowment capital), including earnings (dividends, interest, capital gains) Risk types covered political risk · commercial risks (insolvency, bankruptcy, and · currency convertibility and nontransfer the like) · expropriation · political risks · political violence (including terrorist acts) · moratorium risk · breach of contract Maximum tenor · investment guarantee up to 15 years (justified cases up to 20 years), and may be extended upon maturity for 5 more years · export credit guarantee up to 12 years (maximum as set out in the OECD Consensus-- "The Arrangement") Maximum amount no limit on amount of coverage Fees · investment guarantee: under 5 million, no handling fee; above 5 million, a flat handling fee of 0.5%; however, total fee for each application may not exceed 10,000; policy premium after issuance is 0.5% annually · export credit guarantee: handling fee (comprises an application fee, issuance fee, and possibly prolongation fee) plus premium rate (depends on OECD system for risk analysis) Other conditions · International code of practice on environmental guidelines has to be met. · Pure financial investments without entrepreneurial activity (that is, portfolio investments) are ineligible. · Legal protection for the direct investment must be ensured, such as through an investment protection treaty between host country and Germany or, alternatively, the existing legal system of the host country guarantees adequate protection of foreign investments. · Project finance transactions may require offshore escrow accounts for hard currency revenues. · For export guarantees (including preshipment cover for manufacturing risks), a percentage of loss must be carried by insured ranging from 5% to 15%, depending on type of cover. For more information http://www.agaportal.de Euler Hermes: http://www.eulerhermes.com tel: +49 (0) 40 / 88 34 ­ 91 92 email: info@exportkreditgarantien.de PricewaterhouseCoopers: http://www.pwc.com/de tel: +49 (0) 40 / 8834-94 51 email: investitionsgarantien@de.pwc.com continued Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 55 Table B2.5 Continued Source: Authors' compilation. Note: a. A consortium of two private companies, Euler Hermes Kreditversicherungs-AG and PricewaterhouseCoopers AG, are mandated to manage the guarantee schemes on behalf of the German government. Euler Hermes is the lead partner for export credit guarantees, and PricewaterhouseCoopers is the lead partner for investment guarantees and untied loan guarantees. Table B2.6 Italian Export Credit Agency (SACE) Institution Type Export credit agency Ownership fully owned by the Italian Ministry of Economy and Finance Head office Piazza, Poli 37/42, 00187, Rome, Italy Rating Moody's Aa2 Major instruments export credit insurance, investment insurance, reinsurance Investment coverage Export credit coverage Instrument name · Political Risk Insurance: · Buyer Credit Insurance · Overseas Investments Insurance Policy · Bond Insurance · Confirmation of Documentary Credits · Supplier Credit Insurance · Civil Works Insurance · Exportplus · Working Capital Facility · Credit Enhancements Instrument type insurance Eligible investments, · exports of goods and services by Italian companies borrowers, projects · investments by Italian enterprises abroad, including indirect ones (that is, carried out by Italian companies' foreign subsidiaries); without restriction to sector, structure, or size Eligible beneficiaries banks, private sector companies Eligible forms of equity, loans, corporate bonds, project finance debt investment Risk types covered political risks commercial risks · currency convertibility and nontransfer · Insolvency or bankruptcy of buyer · expropriation and repossession · failure of the buyer to effect payment · political violence, war, unrest, and natural · termination or cancellation of contract disasters by buyer · exchange rate fluctuation due to law noncommercial risksa provisions adopted by the debtor country · embargo Maximum tenor 12 years, unless otherwise approved by SACE Maximum amount up to 95% of the eligible amount, no maximum stated Other conditions all SACE commitments are guaranteed by the Republic of Italy For more information http://www.sace.it tel: +39 06-67361 email: info@sace.it Source: Authors' compilation. Note: a. Noncommercial risks include cancellation or nonrenewal of an import license or refusing entry of the shipped goods; nonconversion of currency or inability to trans- fer funds; war, revolution, insurrection, or other political disturbances; and host government moratorium on debt. 56 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments Table B2.7 Japan Bank for International Cooperation (JBIC) Institution type Bilateral agency for the support of Japanese exports and imports, Japanese economic activities overseas, and stability of international financial order Ownership Government of Japan Head office 4-1, Ohtemachi 1-chome, Chiyoda-ku, Tokyo 100-8144, Japan Rating Moody's A2, S&P AA- , Japan Credit Rating Agency AAA Major instruments export/import loans, overseas investment loans, untied loans, guarantees, equity participation Political risk coverage Comprehensive risk coverage Instrument name Political Risk Guarantee (PRG) Comprehensive Guarantee (CG) Instrument type debt guarantee Eligible borrowers and private entities · sovereign and public entities projects · private entities · projects supporting economic activities of Japanese companies both for importing and exporting goods and services, investment activities, and promoting economic activities · projects with JBIC loan participation under cofinancinga; and projects without JBIC loan participation Eligible beneficiaries · private financial institutions (nationals of Japan or Japanese branches of foreign financial institutions) · sovereign, public, and private entities (for bond guarantees) Eligible forms of · loans and bonds · loans and bonds (including local currency- investment denominated bonds) Risk types covered Political risks all types of commercial and noncommercial · currency convertibility and transfer risks · expropriation and repossession · political violence · breach of contract by a sovereign obligor Maximum tenor depending on projects, generally up to 15 years Maximum amount · up to 100% of debt (both principal and interest payments) · depending on project Fees depends on individual structure, tenor, borrower credit risk, country risk Other conditions · for covering political risk or credit risk of nonsovereign public borrowers, may require government guarantee on case-by-case basis · nonfinancial conditions of guarantee operation (for example, environmental policies) are, in principle, same as those under the loan operation For more information http://www.jbic.go.jp tel: +81-3-5218-3374 Guarantee Portfolio, All Sectors Indicator 2001 2002 2003 2004 2005 No. of guarantees 5 36 27 23 38 Total guarantees issued (JPY billion) 87.3 333.5 240.9 216.0 273.6 Guarantees outstanding (JPY billion) 555.6 630.5 745.7 903.5 1,055.1 Source: Authors' compilation. Note: a. Private lenders under cofinancing arrangement can also share JBIC loan agreement (with special provisions). Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 57 Table B2.8 Nippon Export and Investment Insurance (NEXI) Institution type Export credit agencya Ownership 100% by the government of Japan through Ministry of Economy, Trade and Industry Head office Chiyoda First Building, East Wing 3rd Floor, 3-8-1 Nishikanda, Chiyoda-Ku. Tokyo, 101-8359 Japan Rating No independent rating, Government of Japan rating (Moody's A2, S&P AA-) Major instruments export credit and trade insurance, investment insurance, reinsurance Investment coverage Trade coverage Instrument name · Overseas Investment Insurance (OII) · Export Credit Insurance · Overseas Untied Loan Insuranceb (OULI) · Buyer's Credit Insurance · Trade Insurance for Manufacturersc · Export Credit Insurance for SMEs · Other Instrument type insurance Eligible projects · OII: foreign investments by Japanese compa- · export of Japanese goods and services; nies; equity investments in a subsidiary or a intermediary trade function by Japanese joint venture in a foreign country, long-term companies; Japanese commercial bank loans loans or surety obligations; real estate and to foreign importers of Japanese trade goods mining rights investment · OULI: financings, guarantees, or purchase of foreign corporate or sovereign debt by a Japanese business for purpose of long-term financing not tied to Japanese exports; covers losses from both political and commercial risk Eligible beneficiaries private sector companies, lenders Eligible forms of debt , bonds (domestic or foreign currency), equity investment Risk types covered · political risk: currency convertibility and nontransfer, expropriation and repossession, political violence, war, unrest, and natural disasters · commercial risk: insolvency of debtor; debtor or guarantor protracted default; purchaser's arbitrary repudiation, suspension, or unilateral termination of a commercial contract or purchaser's refusal to accept the exported goods or services Maximum tenor · OII: 2 years to 15 years · OULI: 2 years or more · Export Credit Insurance, Buyer's Credit Insurance:12 years in principle · Trade Insurance for Manufacturers: less than 1 year · Export Credit Insurance for SMEs: 180 days Maximum amount · OII: political risk 95% · OULI: political risk 97.5%, commercial risk up to 95% · Export Credit Insurance, Buyer's Credit Insurance: political risk 100%, commercial risk 95% · Trade Insurance for Manufacturers, Export Credit Insurance for SMEs: political risk 95%, commercial risk 95% Fees · OII: Political risk--subject to country risk (OECD rating) · OULI: Political risk--subject to country risk ­ Commercial risk: depending on buyer's financial standing, premium is collected according to grades (five grades) · Export Credit Insurance, Buyer's Credit Insurance, Trade Insurance for Manufacturers, and Export Credit Insurance for SMEs: differ depending on the country risk (OECD rating) or repayment term Other conditions guidelines on environmental and social considerations For more information http://www.nexi.go.jp tel: 81-(0)3-3512-7650 continued 58 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments Table B2.8 Continued Medium- to Long-Term Guarantee and Insurance Portfolio, All Sectorsd Indicator 2001 2002 2003 2004 2005 No. of insurance policies 821 672 1,172 1,009 883 Insurance issued (million Yen) 1,552,603 825,641 1,839,182 1,666,652 1,546,428 Insurance outstanding (million Yen) 4,381,351 4,017,360 4,606,028 4,944,521 5,058,753 Source: Authors' compilation. Note: a. Originally started by the Japanese government to facilitate trade and export; subsequently it has been spun off into an Independent Administrative Institution, to better meet the changing requirements of the global marketplace. The Japanese government reinsures insurance agreements underwritten by NEXI, thus enhancing the creditworthiness of NEXI. b. Two categories of insurance are available under this product: (a) insurance for loan and bond subscription; financings not related to Japanese export transactions, that is, commercial bank loans to foreign companies and sovereigns; or purchase of bonds issued by foreign company or sovereign; and (b) insurance for guarantee of obligation, which covers losses by a Japanese company or bank that extended a guarantee to the borrowing (could be in form of a local bond) of its overseas sub- sidiary, or a foreign government or company. c. This insurance, unlike Export Credit insurance, is exclusively for Japanese manufacturers that engage in export or intermediary trade activities. It covers losses when they are unable to make shipments or collect receivables. A manufacturer's overseas subsidiary is exempt from commercial risk cover. d. In FY2005, the result of the total number of large-scale transactions (mostly Non-LG transactions and for OULI or BC) which were posted on the NEXI's Web site when commitment was provided shows that infrastructure transactions (transportation and power) account for 22 percent in number of transactions and 13 percent in terms of amount of money. These percentages may not be the same every year. Table B2.9 Atradius Dutch State Business NV Institution type Private company, administers Dutch government export credit and investment insurance Ownership fully owned by the Atradius Group Head office Postbus 473, 1000 AL Amsterdam, Keizersgracht 281, 1016 ED Amsterdam, The Netherlands Rating Moody's A2. S&P A Major instruments export credit and investment insurance Investment coverage Export credit coverage Instrument name · Investment Insurance · Export Credit Insurance (Direct Investment Insurance) · Capital Goods Insurance Instrument type insurance and guarantee Eligible investments, · export of capital goods and performance of works abroad by Dutch-based companies borrowers, projects · project finance · overseas property, plant, and equipment · investment insurance: equity investments abroad for establishment of a subsidiary, participation in a joint venture, investment in the share capital of a company Eligible beneficiaries private companies, lenders Eligible forms of loans, shareholder loans, equity investment Risk types covered · currency inconvertibility and transfer Insured can choose risk coverage types · expropriation · commercial risk (insolvency, bankruptcy, · war and civil disturbance (including terrorism and the like) and sabotage) · political risks · moratorium · force majeure · breach of contract (upon request), including · catastrophe risk (natural disasters) failure by host governments (sovereign and · nuclear disaster subsovereign) to meet their obligations under · currency exchange risk guarantees issued for a project · bond cover continued Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 59 Table B2.9 Continued Investment coverage Export credit coverage Maximum tenor up to 15 years Maximum amount For investment insurance For export credit insurance · maximum compensation: for loans, 75 · maximum percentage for political risk and million; for invested assets, 100 million some subsovereign risk cover goes up to 98% · direct investment insurance: application fee is · maximum percentage for commercial risk is 0.1% of invested amount min. 450 and 95% max 45,000, premium varies between 0.65% and 1.1% per year depending on the risk (of war, expropriation, and transfer) Fees · processing costs (information gathering, max 120; commission for the issue of a promise of cover of 0.05% of the maximum indemnification payable, subject to a minimum of 150 to 1,500; cost of issuing a policy, 0.5% of the maximum liability with a minimum of 150 and a maximum of 3,000) · plant and equipment insurance: premium varies from 0.151% to 1.314% per year Other conditions · transactions must meet OECD guidelines for corporate social responsibility, including environ- mental standards and the combating of bribery · the insured lender may lay off his own risk to the exporter · delay interest is covered · standard waiting period for indemnification is 3 months For more information http://www.atradius.com tel: +31 (0)20 553 9111 email:carlindalengkeek@atradius.com Guarantee and Insurance Portfolio, All Sectorsa Indicator 2003 2004 2005 No. of policies issued during year 109 112 121 Policies issued (million euro) 2.5 2.1 2.5 Policies outstanding (excluding claims paid) (million euro) 5.4 5.7 6.6 Source: Authors' compilation. Note: a. Policies for infrastructure sectors account for 17 percent of policies outstanding at the end of 2005. Please note that this figure refers to the liability under the poli- cies. The percentage of contract amounts for infrastructure projects in the portfolio is estimated to be considerably higher. The reason for this is mainly because of the following: 1. Infrastructure contracts are often on cash basis. This means that, as opposed to many other transactions, no financing costs (interest) are involved. 2. Liability of infrastructure projects are usually capped at an amount well below the contract amount. This is because of the revolving character of the works (for example, monthly certificates). 60 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments Table B2.10 The Netherlands Development Finance Company (FMO) Institution type Bilateral development agency Ownership 51% owned by Dutch government; 42% by Dutch banks; and 7% by employers' associations, trade unions, and some 100 Dutch companies and individual investors Head office Anna van Saksenlaan 71, 2593 HW The Hague, The Netherlands Rating S&P AAA Major instruments loans, guarantees, syndicated loans, equity, and quasi-equity Comprehensive risk coverage Instrument name Credit Guarantees (enhancements) Partial Credit Guarantees Instrument type guarantee Eligible investments, · natural persons and legal entities engaged in a business or profession in a developing countrya borrowers, projects · commercial enterprises in agriculture and fisheries, mining, agribusiness, manufacturing industry, the service sector (including utilities), and banking and insurance in the widest sense · emphasis is placed on the development of the financial sector Eligible beneficiaries private sector companies and financial institutions in developing countries Eligible forms of · trade facilities and letters of credit, commercial paper, capital market transactions (bond investment issues, securitizations) · in addition to US$ and euro, local-currency transactions can be guaranteed under special conditions Risk types covered commercial and political risks Maximum tenor up to 12 years Maximum amount Up to 25% of a company's balance sheet or investment plan, or 10% in the case of financial institutions. The guaranteed amount may vary over the life of the financial instrument, based on the borrower's expected cash flows and investors' concerns. Fees market-based fees For more information http://www.fmo.nl tel: +31 (0)70314 9696 email: info@fmo.nl Source: Authors' compilation. Note: a. "Developing countries" are countries that were classified by the World Bank in its recent World Development Report as low-income economies, lower-middle- income economies, or upper-middle-income economies, or countries that were classified as such when the finance was approved and countries or regions expressly designated as such by the Netherlands government. Table B2.11 Norwegian Guarantee Institute for Export Credits (GIEK) Institution type Export credit agencya Ownership owned by the Norwegian government Head office Dronning Maudsgate 15, Postboks 1763 Vika. N-0122 Oslo Rating None - Norwegian government rating would apply (Moody's Aaa, S&P AAA) Major instruments export guarantee,b investment guarantee Investment Coverage Export credit Coverage Instrument name · Political Risk Insurance · Export Guarantees · Buyers Credit · Suppliers Credit · Preshipment Guarantee · Bond Guarantee · Building Loan Guarantee · Tender Guarantee · Whole turn-over scheme (provided by GIEK Kredittforsikring AS, a wholly owned daughter company of GIEK) continued Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 61 Table B2.11 Continued Investment coverage Export credit coverage Instrument type guarantee or insurance Eligible investments, · export of Norwegian goods and services, including ships borrowers, projects · Norwegian investments abroad in form of equity capital, borrowing, production equipment, or other deliveries in-kind in connection with the establishment of a company or participation in financial ventures outside Norway Eligible beneficiaries domestic and international lenders, and companies located in Norway Eligible forms of loans, shareholder loans, equity investment Risk types covered political risk commercial risk · currency inconvertibility and transfer · insolvency · expropriation · bankruptcy · war and civil disturbance · regulatory risks · breach of contract (sovereign and subsovereign, public institutions) · nonpayment from public or sovereign entity Maximum tenor according to OECD rules Maximum amount · risk cover is subject to type of guarantee (from 50% cover on bond guarantee to 90% on political risk cover) · no maximum, subject to overall government limit Fees subject to country risk (OECD risk rating), credit tenor, and type of buyer, as well as type of coverage selected Other conditions · must meet OECD rules for export credits and credit guarantees, including minimum premiums and combating bribery and corruption · exporter must not have received guarantees, insurance, or security for that part of the loss risk not covered by the guarantee; breach of this nullifies the guarantee agreement · payments under the guarantee shall be made in any convertible currency For more information http://www.giek.no tel: +47 22 87 62 00 email: giek@giek.no Guarantee and Insurance Portfolio (all schemes), All Sectors Indicator 2001 2002 2003 2004 2005 No. of guarantees 65 83 75 55 77 Guarantees issued (NOK million) 2,680 3,562 3,238 3,521 2,667 Guarantees outstanding (NOK million) 10,540 10,959 10,902 12,179 12,484 Source: Authors' compilation. Note: a. Government limit on outstanding guarantees is 40 billion NOK; as of March 2005 21.2 billion was utilized. b. For shorter-term transactions, insurance is offered. 62 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments Table B2.12 Swedish Export Credit Guarantee Board (EKN) Institution type Export credit agency Ownership Authority, part of the State of Sweden Head office Kungsgatan 36, Box 3064, SE- 103-61 Stockholm, Sweden Rating Moody's Aaa, S&P AAA (same as the State of Sweden) Major instruments export guarantee, investment guarantee Investment Coverage Export credit Coverage Instrument name · Investment Guarantees · Contract Guarantee · Production Guarantee · Credit Guarantee · Bank Products Guarantee Instrument type guarantee Eligible investments, · export of Swedish goods and services borrowers, projects · foreign companies eligible to apply if at least 50% of goods are of Swedish origin · investments by Swedish companies in property, plant and equipment, securities, copyright, industrial property rights, technical processes, business name and goodwill, business concessions according to public law Eligible beneficiaries lenders, private companies Eligible forms of investment debt and equity Risk types covered political riska applicant can choose comprehensive cover or · currency inconvertibility and transfer political risk cover only · expropriation · war and civil disturbance (including terrorism) · regulatory risks · breach of contract (sovereign and subsovereign, public institutions) Maximum tenor no maximum stated Maximum amount · uncovered portion is typically 10% for commercial risks and 0% for political risks, or 5% regardless of the event · no maximum stated Fees subject to country risk (OECD risk rating), credit tenor, and type of buyer, as well as type of coverage selected Other conditions · Guarantees subject to certification by business that no bribery is involved. · Transactions with heavily indebted poor countries are subject to special rules designed to prevent these countries from increasing their indebtedness. · Businesses must operate as responsible business as per OECD Common Approaches. Other conditions, · Exporter must not have received guarantees, insurance, or security for that part of the loss risk cont, not covered by the guarantee (without having received written authorization from EKN); breach of this nullifies the guarantee agreement. · Contract currency can be Swedish Kroner, Euro, US dollar, Swiss francs, Japanese yen; in some cases guarantees are issued for local-currency financing. For more information http://www.ekn.se tel: +46 8 788 00 00 email: info@ekn.se Source: Authors' compilation. Note: a. Actions under nationalization, expropriation, and breach of contract do not include actions in the host country that are essentially of a generally regulative or fiscal nature and that are generally applicable, or actions that, without being discriminatory, are required in the interest of public order and safety or of public health. Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 63 Table B2.13 Swiss Investment Risk Guarantee Agency (IRG) Institution type Investment guarantee agency Ownership Swiss government Head office Kirchenweg 8, P.O. Box CH-8032 Zurich Rating No independent rating; Swiss government rated: Moody's Aaa, S&P AAA Major instruments investment guarantees Investment Coverage Instrument name Political Risk Guarantee Instrument type guarantee Eligible investments, · Private persons of Swiss citizenship and domiciled in Switzerland, legal entities controlled by borrowers, projects Swiss and domiciled in Switzerland, and, in exceptional cases, private or legal entities fulfilling only one criteria, but with a close relationship to the Swiss economy · Eligible investments can be equity investments in the form of a direct participation or injection of capital or goods; investment loans can be in the form of credits or loans, such as granted deposits, guarantees, or other securities that allow the investor to raise debt in the investment country. Eligible beneficiaries lenders, Swiss private companies Eligible forms of debt and equity investment Risk types covered political risk · currency inconvertibility and transfer · expropriation · war and civil disturbance (including terrorism) Maximum tenor 15 years Maximum amount · maximum cover not to exceed 70% of investment capital or loan amount · no maximum amount Fees · 1.25% on the guaranteed amount for equity investments · 1.75% on guaranteed amount for capital loans (subject to a reduction to 1.25% if a sovereign payment guarantee is provided) · 4% on guaranteed amount in case of guaranteed annual income Other conditions · may request sovereign counterguarantee on a case-by-case basis · guarantee for equity income is limited to 24% of the underlying investment capital during the whole lifetime of the IRG guarantee · projects must undergo developmental and environmental examinations For more information http://www.swiss-irg.com tel: +41 (0)44 384 4777 email: office@swiss-irg.com Source: Authors' compilation. 64 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments Table B2.14 Swiss Export Risk Guarantee (SERV) Institution type Export credit agency Ownership Swiss government (State Secretariat of Economic Affairs) Head office Kirchenweg 8, P.O. Box CH-8032 Zurich Rating No independent rating; Swiss government rated: Moody's Aaa, S&P AAA Major instruments export guarantees Export credit coverage Instrument name · Predelivery (Manufacturing) Guarantee · Performance and Bid Bond Guarantee Instrument type guarantee Eligible investments, Export of Swiss consumer and capital goods, construction and engineering work and other services, borrowers, projects licensing and know-how agreements, goods on consignment abroad or on exhibition at trade fairs, bid bonds, downpayment guarantees, and performance bonds. The deliveries need to be of Swiss origin or include an appropriate element of Swiss added value. Eligible beneficiaries lenders, Swiss private companies Eligible forms of debt investment Risk types covered · commercial risk (insolvency, bankruptcy, and the like) · political risk ­ currency inconvertibility and transfer ­ expropriation ­ war and civil disturbance Maximum tenor no maximum Maximum amount · maximum cover not to exceed 95% of contract value · no maximum amount Fees subject to country risk (OECD risk rating), credit tenor, and type of buyer, as well as type of coverage selected Other conditions · confirmation that export has not come into existence through bribery · guarantees are always denominated in Swiss francs; however, transactions in other currencies can be covered For more information http://www.serv-ch.com tel: +41 (0)44 384 4777 email: office@swiss-erg.com Export Credit Guarantee and Insurance Portfolio, All Sectors Indicator 2001 2002 2003 2004 2005 No. of guarantees 1,374 1,418 1,237 1,055 998 Guarantees issued (Swiss francs) 382 479.5 681.2 890.3 n.a. Guarantees outstanding (Swiss francs) 6,376.5 6,425.2 6,376.5 6562.6 n.a. Source: Authors' compilation. Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 65 Table B2.15 Department for International Development (DFID) DFID, part of the UK government, manages Britain's aid to poor countries and works to alleviate extreme poverty globally. It does this by supporting long-term programs to help tackle the underlying causes of poverty, and also responds to emer- gencies, both natural and man-made. DFID works in partnership with governments, civil society, and the private sector, as well as with multilateral institutions, including the World Bank, United Nations agencies, and the European Commission. In addition to its work as a bilateral donor to individual countries, 43 percent of total DFID development assistance funding goes through multilateral agencies. DFID works directly in over 150 countries worldwide, with a budget of nearly £4 billion in 2004. Its headquarters are in London and East Kilbride, near Glasgow. In its efforts to meet the Millennium Development Goals, DFID has identified the mobilization of private sector investments in infrastructure service provision in developing countries as essential. To this end, DFID, in partnership with other institutions, supports a number international programs, the aims of which are to address some of the main constraints for infrastructure development in the less developed countries: · an inappropriate enabling environment · high up-front costs for project development · lack of adequate long-term funding instruments in local and international currencies · high or uninsurable country risks · need for financial subsidies in the start-up phase · lack of public capacity to negotiate and implement infrastructure projects The following is a brief overview of some of the programs supported by DFID: Public Private Infrastructure Advisory Facility (PPIAF): A multidonor facility working with developing country governments to improve the enabling environment for private sector participation in infrastructure services. PPIAF is currently funded by 14 donors and has a broad mandate, which includes the development of appropriate legal and regulatory systems, training of local regulators, and assisting in facilitating transactions. (For more information, please see www.ppiaf.org.) Public-Private Partnership for the Urban Environment (PPPUE): In 1994, the United Nations Development Programme initiated this partnership to provide technical assistance and advisory support for the establishment of public-private partnerships between governments, businesses, and civil society organizations at the municipal level for the delivery of basic infrastructure services to urban poor. (For more information, please go to www.undp.org/pppue.) Global Partnership of Output Based Aid (GPOBA): A program being implemented by the World Bank, with DFID support, to develop, demonstrate, and disseminate output-based approaches to supporting sustainable delivery of basic infrastructure serv- ices with respect to subsidies at the point of delivery. The GPOBA has recently been expanded to include a "Challenge Fund," which is open for applications, on a competitive basis, for funding of specific programs to enable the provision by the private sector of infrastructure services to the poor. (For more information, please go to www.gpoba.org.) Community-Led Infrastructure Finance Facility (CLIFF): Launched in 2000, CLIFF, a joint program between DFID (provided fund- ing), the Swedish International Development Cooperation Agency (SIDA, providing in-country support), and USAID (providing the guarantee program), is being implemented under the Cities Alliance program of Homeless International, initially as a devel- opment and demonstration program in India. CLIFF provides loans, guarantees, and bridge finance and technical assistance to encourage and support private sector investment in community-led urban regeneration projects. (For more information, please go to www.citiesalliance.org and www.theinclusivecity.org.) Slum Upgrading Facility (SUF): DFID and SIDA (providing financial support via the Cities Alliance) have partnered with UN- Habitat, which manages SUF, to develop this facility as a pilot approach to meet the growing infrastructure service needs of municipalities and small and medium towns in developing countries. (For more information, please see www.un-habitat.org or contact the task manager via email at z-hensby@dfid.gov.uk.) Private Infrastructure Development Group (PIDG): Please see separate description in transaction case 16 in appendix A for DFID support of PIDG programs and initiatives. Source: DFID Web site: www.dfid.gov.uk. 66 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments Table B2.16 Export Credits Guarantee Department (ECGD) Institution type Export credit agency Ownership Part of UK government Head office ECGD PO Box 2200, 2 Exchange Tower, Harbour Exchange Square, London E14 9GS, United Kingdom Rating UK rating applies: Moody's Aaa, S&P AAA Major instruments export credit and investment guarantees and insurance Investment coverage Export Credit Coverage Instrument name · Overseas Investment Insurance (OII) · Export Credit Insurance: (Political Risk Insurance) · Buyer Credit Guarantees · Supplier Credit Finance Facility · Bond Insurance · Local Currency Financing Scheme · Project Finance Guarantee Instrument type guarantee and insurance Eligible investments, · OII: foreign direct investments (shareholder equity, shareholder loan, shareholder guarantee) borrowers, projects by UK investors in new investments and purchase of existing shares · support loans (complementary investment loans to an overseas enterprise in support of a project that has a UK sponsor) · portfolio loans (investment loans where the investor does not have a proprietary interest in the overseas enterprise) · guarantees to banks providing export credit loans (loans to an overseas enterprise to help it pay for UK exports) · project finance for UK exporters (tied to national sponsor or national bank) Eligible beneficiaries lenders and private companies Eligible forms of Debt and equity investment Risk types covered political risk applicant can choose risk coverage types · currency inconvertibility and transfer · commercial risk (insolvency, bankruptcy) · expropriation · political risk · war and civil disturbance · regulatory risks · breach of contract Maximum tenor · OII: up to 15 years (with possible extensions) · project finance guarantee: up to 14 years with a max avg. life of project of 7.25 years Maximum amount · OII: maximum of 90% of the current insured amount · Export Insurance: up to 95% of total value of any loss · Buyer Credit: usually 100% guarantee to UK-based bank · Local Currency Financing Scheme: guarantee 100% of export credit loan from local bank in host country · Project Finance:a all risk cover provides up to 100% guarantee against losses from political and commercial risks, up to 100% of the loan value and interest payable (guaranteed loan can fund up to 85% of UK content and eligible foreign costs) · no maximum amount Fees · Premiums are determined case by case, based on ECGD's assessment of purchaser's and host country's ability to pay, and upon term of cover. · Project Finance guarantee: premium is individually calculated depending on project, structure, country risks, and the like; in addition, a nonrefundable administrative fee is charged, set case by case. No application or processing fees. For more information http://www.ecgd.gov.uk tel: +44 (0) 20 7512 7000 email: help@ecgd.gsi.gov.uk continued Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 67 Table B2.16 Continued Guarantee and Insurance Portfolio, All Sectorsb Indicator 2001 2002 2003 2004 2005 No. of guarantees 110 77 80 64 32 No. of OII policies 50 45 38 21 13 Civil as % of all business 66.67 61.31 58.71 53.46 29.80 Value of guarantees (million pounds sterling) 489 361 440 298 422 Value of OII policies (million pounds sterling) 1,090 950 706 351 239 Civil as % of all business 49.53 36.51 38.37 31.29 30.06 Source: Authors' compilation. Note: a. ECGD participation will usually be restricted to loans representing no more than 40 percent of total project capital requirements of both loan and equity; in addi- tion, all lending covered by ECAs should normally not exceed 60 percent of total project capital costs, at least 25 percent of the project capital requirements will nor- mally be financed in the form of equity or subordinated debt. b. ECGD data is to the financial year end. Aircraft and defense business are excluded to arrive at civil business. Table B2.17 United States Agency for International Development's (USAID's) Development Credit Authority (DCA) Institution type Bilateral development agency Ownership United States government Head office Ronald Reagan Building, 1300 Pennsylvania Avenue, NW, Washington, DC 20523 U.S.A. Rating Moody's Aaa, S&P AAA Major instruments credit guarantees (via DCA) Comprehensive risk coverage Instrument name Partial credit guarantees backed by the full faith and credit of the U.S. Treasury in the form of · Loan Guarantee · Loan Portfolio Guarantee · Portable Guarantee · Bond Guarantee Instrument type debt guarantee Eligible borrowers · borrowers could be private sector enterprises, municipalities, or other subsovereign entities and projects · projects must meet local USAID development objectives, and not be tied to U.S. export trans- actions or to U.S. companies · DCA guarantees support projects in the following sectors: micro, small, and medium enterprises; democracy and governance; natural resources management; agriculture; infrastructure; energy; education; and health. Eligible beneficiaries lenders: nonsovereign financial institutions (foreign or local); local capital market participants and investors Eligible forms of debt, loans, leases, bonds, letters of credit, or other debt instruments issued by local financial investment institutions, private sector lenders (denominated in U.S. dollar or in local currency) Risk types covered Borrower credit risk shall not cover more than 50% of lender's loss on the defaulted debt instrument unless otherwise approved (guarantee ceiling is expressed in U.S. dollars even in the case of local currency guarantees). Structured finance guarantees and guarantees of payment for capital market investments are possible. Maximum tenor up to 20 years Maximum amount US$100 million per country per year continued 68 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments Table B2.17 Continued Comprehensive risk coverage Fees based on risk and development needs, one-time origination fee on the guaranteed portion of the total debt facility; annual utilization fees on the guaranteed portion of principal outstanding amount; minimum of 0.25% for both types of fees Other conditions · no sovereign loan or bond guarantees · currency mismatches discouraged; currency earned by the project should match the borrowers' debt to be guaranteed · guarantees can be structured to cover both debt principal and interest For more information http://www.usaid.gov, keyword "development credit" tel: +1 (202) 712-5323 email: aeskesen@usaid.gov DCA Guarantee Portfolio Indicator 2002 2003 2004 2005 2006 No. of guarantees 22 43 34 30 21 No. of guarantees in infrastructure 8 4 5 3 5 New guarantees (US$ million) 70 239 241 193 159 New guarantees for infrastructure projects (US$ million) 27 75 37 45 32 Source: Authors' compilation. Table B2.18 Export-Import Bank of the United States (Ex-Im Bank) Institution type Export credit agency Ownership United States government Head office 811 Vermont Avenue, N.W. Washington, DC 20571 U.S.A. Rating Moody's Aaa, S&P AAA Major instruments export finance (medium- and long-term loans and guarantees) and short- and medium-term insurance Political risk coverage Comprehensive risk coverage Instrument name Political Risk Only (PRO) coverage · Export Credit Insurance (for Project Finance/Structured Finance · Loan Guarantee transactions) · Finance Lease Guarantees Instrument type loans, guarantees, and insurance Eligible investments, Export of U.S. goods and services (Ex-Im Bank can support the lesser of 85% of the total contract borrowers, projects value or 100% of the U.S. content of the contract). Goods must be shipped from the U.S. to a foreign buyer, services must be performed by U.S.-based personnel. Eligible beneficiaries lenders, public and private sector borrowers Eligible forms of guarantee support for dollar and eligible local-currency loans; export credit insurance for U.S. goods investment and services Risk types covered · currency inconvertibility and transfer · commercial risks (insolvency, bankruptcy) · expropriation · political risks (as at left) · war and civil disturbance (including terrorism) · regulatory risks Maximum tenor · up to 14 years for project finance transactions · up to 12 years for nonnuclear power plants, financed on a corporate basis · up to 10 years for loan guarantees continued Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 69 Table B2.18 Continued Political risk coverage Comprehensive risk coverage Maximum amount · Export Credit Insurance: cover is 95% of the shipment value; U.S. content must be at least 51%. · For medium- and long-term transactions, cover is 100% of the net U.S. contract value (a 15% cash payment is required; an additional 15% local content can be supported). · No maximum amounts. Fees · letter of interest application processing fee: US$100 · Loan Guarantee: no application processing fee · Commitment fee: 0.125% per year on the undisbursed balance for Corporate Finance transactions; 0.50% per year on the undisbursed balance for Project Finance transactions · Ex-Im Bank exposure fee (premium): varies depending upon disbursement period, repayment tenor, country risk, and buyer credit risk (applicable to all) Other conditions · Military and defense items are generally not eligible, nor are sales to military buyers (with certain exceptions). · Ex-Im Bank may be limited or unable to offer financing in certain countries and under certain circumstances (please see the Country Limitation Schedule on Ex-Im Bank's Web site). · Projects must comply with OECD guidelines and requirements of Ex-Im Bank's Engineering and Environment Division, and policies and procedures regarding utilization; and certain transactions are subject to Congressional review. For more information http://www.exim.gov tel:+1 (202) 565 3946 email: info@exim.gov Medium- to Long-Term Guarantee and Insurance Portfolio, All Sectorsa Indicator 2001 2002 2003 2004 2005 No. of guarantees 8 10 12 16 15 Guarantees issued (US$ million) 1,741 1,124 1,269 2,428 2,933 Guarantees outstanding (US$ million) Source: Authors' compilation. Note: a. These figures are all approvals for the Project and Structured Finance Division only. They relate to infrastructure projects. Table B2.19 Overseas Private Investment Corporation (OPIC) Institution type Investment agency Ownership United States government Head office 1100 New York Ave., NW Washington, DC 20527 U.S.A. Rating Moody's Aaa, S&P AAA (based on U.S. government rating) Major instruments insurance, reinsurance, loans, loan guarantees, investment fundsa OPIC insurance products OPIC finance guarantees Instrument name Political Risk Insurance (PRI) Loan guaranteesb Instrument type insurance loan guarantee Eligible projects new investments, privatizations, and expansions projects or transactions that are commercially and modernizations of existing plants and financially sound, and are within demon- strated competence of proposed management, which has a proven success record and a significant financial risk in projectc continued 70 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments Table B2.19 Continued OPIC insurance products OPIC finance guarantees Eligible beneficiaries U.S. citizens, corporations, partnerships, or Guarantees are issued to legal entities that other associations created under the laws of meet the criteria specified in the left-hand the United States, its states, or territories, and column. OPIC expects the U.S. investor to own more than 50% owned by U.S. citizens; at least 25% of the equity of the project. foreign corporations that are more than 95% owned by eligible investors; other foreign entities that are 100% U.S. owned Eligible forms of debt, equity, capital and operating leases, loans, guarantees (parent company and investment contractors and exporter exposures third-party loans) Risk types covered · currency inconvertibility and transfer · commercial risks (insolvency, bankruptcy) · expropriation · political risks · war and civil disturbance (including terrorism) · standalone terrorism · disputes coverage (arbitral award default and denial of justice) · wrongful calling of bid, performance, advance payment, and other guarantees Maximum tenor 20 years loan guarantees for up to 15 yearsd Maximum amount up to US$250 million per projecte Loan guarantees: up to a maximum of 75% of the total investment Feesf · retainer fee, which ranges from US$500 for Loan Guarantees: guarantee fee ranges from small businesses that qualify for the Small 2% to 4%, depending on commercial and Business Center, to US$30,000­$50,000 political risk coverage for investments between US$50 million and US$200 milliong · PRI: standby fee of 20 basis points per year and 20­80 basis points per year per individual political risk Other conditions Maximum cover for equity investments is up A host country guarantee is normally not to 90% of an eligible investment. Loans and required for a loan guarantee. Investors must leases from financial institutions to unrelated comply with U.S. economic, environmental, third parties may be insured for 100% of worker rights, and anticorruption practices. principal and interest. Investors must comply with U.S. economic, environmental, worker rights, and anticorruption practices. For more information http://www.opic.gov tel:+1 (202) 336-8400 email:info@opic.gov Insurance Portfolio Indicator 2001 2002 2003 2004 2005 No. of Insurance Contracts and Commitment Letters 27 35 44 86 76 No. of Insurance Contracts and Commitment Letters for Infrastructure Projects 4 13 12 17 17 Amount of New Issuance (US$ million) 597 605 960 1,396 931 Amount of New Issuance for Infrastructure Projects (US$ million) 245 147 496 591 694 continued Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments 71 Table B2.19 Continued Source: Authors' compilation. Note: a. Private equity funds to which OPIC provides debt capital. b. OPIC financing can take form of loans or loan guarantees; for more details, please see the OPIC Program Handbook at http://www.opic.gov/pubs/handbooks/ index.asp. c. Acquisitions of existing operations are eligible for financing if the investor contributes additional capital for modernization or expansion. d. Plus a suitable grace period during which only interest is payable. e. This limit goes up to US$300 million for projects in the oil and gas sector with offshore, hard currency revenues. If an oil and gas project receives a shadow rating of investment grade, then limit is US$400 million. f. For a breakdown of OPIC's base rate ranges, please go to http://www.opic.gov/insurance/details/rates/index.asp. g. Any unused portion of the retainer fee is refundable if (a) OPIC makes an offer of coverage and the client accepts it or (b) upon the completion of its review process, OPIC is not able to issue a formal commitment with regard to the project. 72 Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments Although the importance of infrastructure sectors in achieving economic growth and poverty reduction is well estab- lished, raising debt and equity capital for infrastructure development and service provision has been a challenge for devel- oping countries. Risk mitigation instruments facilitate the mobilization of commercial debt and equity capital by trans- ferring risks that private financiers would not be able or willing to take to third-party official and private institutions that are capable of taking such risks. There has been increasing interest and discussion on risk mitigation instruments in the context of infrastructure financing among developing country governments, multi- and bilateral donors, and the private sector. However, due to the complex and diverse nature of risk mitigation instruments, what they can and cannot offer and how they can best be utilized for infrastructure financing are not well understood. The Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Development summarizes existing risk mitigation instruments--primarily focusing on those offered by multilateral and bilateral official agencies-- and presents recent trends and developments that make these guarantee and insurance products valuable in securing financing for infrastructure projects in developing countries. Topics covered include · descriptions of different types of risk mitigation instruments · characteristics of multilateral, bilateral, and private providers of risk mitigation instruments and compatibility of instruments · recent developments and innovative applications of risk mitigation instruments through case transactions · areas that pose challenges to the use of risk mitigation instruments as catalysts of infrastructure development. Appendixes describe in detail each transaction case and the risk mitigation instruments offered by major multilateral and bilateral institutions. This report will be of particular interest to readers working in business and finance, law and regulation, and infrastruc- ture projects and finance. ISBN 0-8213-7100-2