The World Bank Group Instruments

1. The World Bank Group Instruments

2. the World Bank Group IBRD provides market-based loans, guarantees, and advice to governments in middle-income countries IDA provides concessional loans and guarantees to governments of the poorest countries IFC finances private businesses in developing countries MIGA provides political risk insurance for foreign direct investment into developing countries a group of institutions with a common goal: poverty reduction through economic development 2

3. World Bank Group financing and risk mitigation instruments 3

4. World Bank Loans and Credits

5. Loans and Credits Basic Structures: • To Gov. with onlending to Project Company • To Project Company with Gov. Guarantee • IBRD Enclave Loans 5

6. IBRD Loan/ Credit COUNTRY Banks Loans Power Company Equity Sponsors 6

7. Guarantee IBRD IBRD Loan COUNTRY Banks Commercial Loans Power Company Equity Sponsors 7

8. IBRD Enclave Loan for IDA-Only Country IBRD Guarantee IDA-Only COUNTRY Loan Loan Repayment Guarantee Offshore EscrowAccount Project Revenues Power Company Purchaser Throughput Equity Sponsors 8

9. World Bank Guarantees

10. World Bank Guarantees:key features • IBRD/IDA balance sheet • available to all countries eligible for borrowing from IBRD or IDA • Bank Guarantees back government obligations • Bank Guarantees cover private debt against a government’s (or government entity’s) failure to meet specific obligations to a private or public project • mobilize private sector participation and help catalyze debt with extended maturities and lower financing costs • flexibility – structured to meet borrower and project requirement • an integral part of Country Assistance Strategy • counter guarantee from Member Country • Bank Articles requirement • indicates project priority for Government and Bank • benefits from the ongoing sector and country engagement of the Bank 10

11. Benefits of World Bank Guarantees for governments… • catalyzes private financing for key sectors such as infrastructure • provides access to capital markets as well as commercial banks • reduces cost of private financing to affordable levels • facilitates privatizations and public private partnerships • reduces government risk exposure by passing commercial risk to the private sector • encourages cofinancing for the private sector… • reduces risk of private transactions in emerging countries • mitigates risks that the private sector does not control • opens new markets • improves project sustainability 11

12. Rationale for the Guarantee Program and Basic Structures “To help extend the reach of private financing by mitigating perceived risk and encourage private sector involvement in developing countries.” • Two Basic Structures • Partial Risk Guarantees • Partial Credit Guarantees • Five instruments: • IBRD Partial Risk Guarantees • IDA Partial Risk Guarantees • IBRD Enclave Guarantees for IDA-only countries • IBRD Partial Credit Guarantees • IBRD Policy Based Guarantees 12

13. Principles of Deployment • Guarantees can be considered in the following situations: • Sectors in early stages of reform • Larger size/riskier operations • Operations highly dependent on support/undertakings of governments • Structure and coverage set at the lowest level to mobilize financing • IDA • conserves IDA resources • Provides a better allocation of risk 13

14. WB Guarantees do not increase the government’s contingent liabilities “The host government’s indemnity of the World Bank does not increase the government’s liabilities when the government is already directly obligated to the private sector on the same liabilities.” “Involving the Private Sector in Forestalling and Resolving Financial Crises – Private Project Finance Flows to Developing Countries,” IMF Board Paper SM/99/211, August 20, 1999, page 21. 14

15. Partial Credit Guarantees (PCGs): Key Features • Cover private lenders against all risks during a specific period of the financing term of debt for a public investment • Specially designed to extend maturity and improve market terms • Lengthen the maturity of the private debt financing beyond that available in private markets by covering a part of the scheduled repayments of private loans or bonds against all risks • PCGs are flexible, allowing different structures for meeting different client needs, such as: • Bullet guarantee • Latter maturities • Rolling non-reinstatable • Amortizing syndicated loan • At present, partial credit guarantees are available only for countries eligible for loans from IBRD. • No overlap with MIGA or IFC instruments 15

16. PCGs help access finance at sustainable terms Debt Maturity Interest Spread Colombia (P. Credit) 5 6.5% 5% 10 Thailand (P. Credit) 0 8.5% 10 2.9% Lebanon (P. Credit) 5 3% 10 1% Jordan (P. Credit) 2 3% 7 1% Philippines (P. Credit) 7 3% 15 2.5% 1Spreads at the time of the guarantee issuance without Guarantee with Guarantee 16

17. Partial Risk Guarantees (PRGs): Key Features • Covers private lenders against the risk of a public entity failing to perform its obligations with respect to a private project. • Reinforces obligations of the Government – does not add to them. • Structured to provide minimum coverage necessary to mobilize private financing • The World Bank also offers enclave guarantees which are PRGs structured for export oriented foreign exchange generating commercial projects in IDA-only countries. • A flexible instrument – various structures available • New developments: • Letter of Credit Structure for Greenfield projects • Privatization Guarantees • Guarantee Facilities • Local Currency Guarantees • IBRD guarantees can be accelerable, and IDA guarantees are non-accelerable 17

18. Which risks can be covered by a PRG? • tariff • regulatory risk • collection risk • arbitration • change in law • convertibility • transferability • subsidy payments (e.g. Output-Based Aid) 18

19. PRGs help access finance at sustainable terms Debt Maturity Interest Spread1 Vietnam (P. Risk) 5 5% 2% 16 1 3% Bangladesh (P. Risk) 14 2% 3% 1 Cote d’Ivoire (P. Risk) 12 2.75% 0 N/A Lao PDR (P. Risk) 16.5 2.25 % without Guarantee with Guarantee 1Spreads at the time of the guarantee issuance 19

20. Partial Risk Guarantees Structuresfor IDA only countries 20

21. Loans Project Company Commercial Lenders Guarantee Agreement Project Agreement (Government Undertakings) Indemnity Agreement Government World Bank Partial Risk Guarantee structure • Guarantees cover lenders in the event that the Government does not meet its commitments • Counter-guarantee of the member country is normally in the form of an Indemnity Agreement. 21

22. IBRD Enclave Guarantees in IDA-only Countries • Framework • Export-oriented commercial private projects in IDA-only countries expected to generate foreign exchange outside of the country • Country should have adequate foreign exchange to meet the payments due to IBRD resulting from a call on the guarantee • Guarantee amount limited to 25% of the financing required for the project • Generally non accelerable 22

23. IBRD Enclave Guarantees in IDA Countries IDA Country “Off-Shore” Guarantee Lenders Counter Guarantee Loan Agreement Guarantee Fee Reserve Account Government Export Concession Contract Limited Government Obligations: FX • Permits/consents • Change in law • Political events • Expropriation Creditworthy Purchaser Enclave Project (up to 25%) 23

24. Examples of different Guarantee Structures • Usually most suited for new infrastructure projects following project finance structure • Active PF commercial banks are usually aware of PRG structures Debt • Beneficiary of L/C is project, not lenders • Catalyze equity and lending • Provide liquidity to project if needed L/C • Can cover investors if there is no Commercial Bank debt • Catalyze equity and lending • Covers Termination Payments Deferred Loan 24

25. Pricing of World Bank Guaranteesfor FY07 25 For detailed fees please consult with the PFG team.

26. IDA Partial Risk Guarantee Fee Charges (in basis points) for FY07 • For all private sector borrowers, i.e. only applicable to Partial Risk Guarantees. • Determined on a case by case basis. Exceptional projects can be charged over 50 bps of the guaranteed amount. • For guarantees approved in FY07. The World Bank reserves the right to change fees at anytime. For detailed fees please consult with the Guarantees Group at the Bank. 26

27. IBRD Enclave Partial Risk Guarantee Fee Charges (in basis points) for FY07 • Footnotes • For all private sector borrowers, i.e. only applicable to Partial Risk Guarantees • Determined on a case by case basis. Exceptional projects can be charged over 50 bps of the guaranteed amount. • Fee charges net of applicable waivers. 27 For detailed fees please consult with the Guarantees Group at the Bank.