Transcript What is the ADF Partial Risk Guarantee?

What is the ADF Partial Risk
Guarantee?
Partial Risk Guarantees (PRGs), also known as
political risk guarantees, cover private lenders
and investors against the risk of the
government (or a government owned agency)
failing to perform its obligations vis-à-vis a
private undertaking.
What are the costs and benefits for
the country….?
PRG instruments are designed to:
 Crowd in private financing
 Accelerate foreign direct investment
 Promote infrastructure development, and
 Encourage private sector participation in public-private partnerships.
As only 25% of the face value of the guarantee is deducted from the country’s ADF
allocation, ADF PRGs are effectively additional to the country’s lending program,
without loan repayment obligations and no associated costs.
The guarantee fees would be payable by the beneficiary.
ADF PRGs will be extended on condition that the member country in whose territory
the investment project is located provides counter indemnity under which it agrees to
reimburse the Fund for any payments triggered by a default under its guarantee.
However, they do not generate additional contingent liabilities when the government
is already obligated to the private sector on the same liabilities.
… and for the investors and lenders?
• PRG are designed to provide comfort to investors and debt
providers for risks that are beyond their control and that they might
otherwise be unwilling to assume. They mitigate risks to produce
more competitive loan pricing and enable the financial institutions
to reduce their allocation of risk capital in accordance with the rules
set out in Basel II and Basel III. This will allow projects to mobilize
both foreign currency and local currency debt on better, longer or
more affordable terms. If the guarantee is called, the ADF disburses
with the same repayment schedule terms as the underlying project
loan or public off-taker payment.
• Because the government is subjected to cross-default clauses and
suspension of disbursement on all projects funded through the ADF,
it has a powerful incentive to abide by its contractual commitments
and to undertake the policy and regulatory reforms necessary to
mitigate performance risk.
Fees Structure:
ADF PRG fees are payable by the beneficiary and are expected
to include:
• A front end fee to recover development costs set within a
range of 0.5-1% of the maximum possible exposure of the
Fund under the guarantee payable before or at guarantee
signature;
• A standby fee equal to the contractual commitment fee
charged on the unused portion of the guarantee and set at
0.5%;
• A guarantee fee similar to the service charge applicable to
ADF loans, currently 75bps, is payable either according to a
schedule approved by the Fund or as a one-time up-front
payment.
What does a PRG cover?
• The PRG covers up to 100% of all due repayments in the event of a debtservice shortfall arising from government or state owned entity nonperformance under the terms of the guarantee.
• PRGs can be used for any commercial debt instruments (loans, bonds)
provided by any private institution, including debt provided by sponsors in
the form of shareholder loans.
• Beyond debt, PRGs can be structured to cover deemed-loan structures, to
provide cash flow support for investors and lenders. They cover welldefined risks typically including:
 Political force majeure,
 Currency convertibility and transfer (but not exchange rate risk),
 Regulatory risk, and
 Various forms of breach of contract.
In all cases, risks covered would be those that the host country government
would be willing to bear under a counter indemnity agreement.
Important Features:
• The ADF PRG is non accelerable by the
beneficiary of the guarantee. However, when
the Guarantee is called, the government
becomes immediately liable to reimburse the
defaulted amounts. Failure to reimburse
within applicable curing period would trigger
cross-default provisions on all ongoing
operations. The Fund would have the option,
at its own discretion, to convert that
disbursement into a loan.
What is the maximum amount that
can be covered with the ADF PRG?
• Up to 100% of each country’s ADF allocation can be
guaranteed (1:4 allocation: exposure leverage ratio) in
any given ADF cycle. Each country can leverage its
allocation with more than one PRG, but the maximum
additional headroom generated by PRGs utilization
would be capped at 75% of its original allocation.
• To make the most of scarce ADF allocations and
competing needs for concessional financing at country
level, ADF PRGs are intended to be used alongside
other risk mitigation and debt financing instruments to
utilize only the minimum required to make a project
bankable.
What projects are eligible?
• PRGs will only support undertakings to further economic
and social development which align with the priorities of
the country.
• While ADF PRGs are most likely to be utilized to enhance
the bankability of project finance operations to support
PPPs, private greenfield and privatization projects, they can
be mobilized to support any other private undertaking
where sovereign risk exposure hinders bankability.
• Public sector projects may be eligible only to the extent
that they involve private financing. Any official
development finance institution that has preferred creditor
status will not benefit from ADF PRG cover, nor will any
company either partially- or fully- owned by a government
in whose territory the project is to be located.