Private Partnership in Infrastructure Facilitating – World Bank Guarantees

1. Private Partnership in Infrastructure Facilitating – World Bank Guarantees October 25, 2004

2. Pushing the frontier of private investments IFCMIGA IBRD/IDA IFC A Loan Political Risk Insurance Guarantees IFC B Loan (expropriation, transfer restriction, -Partial Risk IFC Guarantees breach of contract, war & civil -Partial Credit (partial credit structures disturbances) -Policy Based usually for local financing) IBRD Loan IDA Credit • Similar requirements on safeguards, development impact • Joint transactions (e.g., MIGA/IFC/PFG)

3. World Bank Guarantees • Help to catalyze debt with extended maturities and lower financing costs. • Risk mitigation for Government performance- backs sovereign contractual obligations. • Key features: • Partial Guarantee • IBRD/IDA balance sheet • Counterguarantee • Cross defaults • Flexibility • Two types of guarantees commonly used with new products being developed • Partial Risk Guarantees (PRG): Privatization, LC, PRG Facility, FX Liquidity Facility, Local Currency Guarantee • Partial Credit Guarantees (PCG), Debt and Capital Markets, Policy Based Guarantees (PBG)

4. Which risks can be covered by a PRG? • Tariff • Regulatory risk • Collection risk • Arbitration • Change in law • Convertibility • Transferability • Subsidy payments (e.g., OBA)

5. How does the PRG relate to IFC/MIGA instruments? • PRGs can be considered in the following situations: • Sectors in early stages of reform • Larger size/riskier operations • Operations highly dependent on support/undertakings of governments • Joint transactions • Coordination

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

7. Partial Risk Guarantees mitigate concerns related to government performance • A Partial Risk Guarantee (PRG) can cover lenders in case the Government does not meet its commitments Loans Project Company Commercial Lenders Government Undertakings Guarantee Indemnity Agreement Government World Bank

8. Vietnam (P. Risk) 5 5% 16 2% Partial Risk Guarantees help access private finance at sustainable terms Debt Maturity Interest Spread Uganda (P. Risk) 0 8% 16 3.1% Bangladesh (P. Risk) 1 3% without Guarantee 14 2% with Guarantee Cote d’Ivoire (P. Risk) 1 3% 12 2.75%

9. 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% without Guarantee 7 1% with Guarantee Philippines (P. Credit) 7 3% 15 2.5% Partial Credit Guarantees help access private finance at sustainable terms Debt Maturity Interest Spread

10. Policy Based Guarantees to leverage adjustment loans • An extension of partial credit guarantees beyond investment projects to adjustment / sector programs • Facilitates sovereign borrowings in support of structural and social policy reforms • Alternative/Complement to an adjustment loan

11. Bank Guarantees have limited impact on CAS envelope • Country’s total CAS envelope will be increased by 75% of the facevalue of guarantee commitments • This incentive will apply to both partial credit and partial risk guarantees for investment projects

12. PFG Risk Mitigation Instruments • Privatization • Letter of Credit structure • Facilities • Local Currency Guarantees New Applications of PRG

13. Government Indemnity Guarantee Sale Proceeds Government Support Agreement Regulator License Agreement / Regulatory Contract Commercial Loans (US$ 25m) Partly covered by WB-PRG Commercial Lenders Private Investor Privatized Distribution Company (US$100m) Equity (US$50m) Shareholder Loans (US$ 25m) Partly covered by WB-PRG Application of PRGs to support privatization

14. PRG can mitigate Government payment risk using letter of credit Government commits to repay LC bank Commercial Bank Letter of credit can be drawn if Government defaults Commercial Bank World Bank guarantees LC Bank Payment obligations (e.g, OBA) Private Entity

15. PRG facilities to support medium size investments World Bank Indemnity Government Line of PRGs Intermediary for Retail of PRGs Obligations Projects A B C Z

16. Regional Gas Project: Enclave Guarantee Structure (Rand Guarantee) GOM Petroleum Production Agreement Pipeline Agreement SPT (Sasol owned, Moz company) ROMPCO (Sasol owned, RSA company) Indemnity Agreement Project Agreement Project Agreement Loan Agreement (Rand denominated) Loan Agreement (Rand denominated) Guarantee Agreement SPT Guarantee Agreement ROMPCO SCMB (Lead arranger)

17. Upstream Development – Unincorporated Joint Venture Funding Origin Total CMH 18.00 Eq uity Debt Facilities 38.00 Total CMH 56.00 IFC 10.00 SPT Equity 148.00 Debt Facility including political risk coverage from: 182.00 PRG 20.00 MIGA 25.7 ECAs 50.00 Total SPT 330.00 Investments in Upstream Project 396.00 Gas Pipeline currently wholly- owned by Sasol Equity 285.00 Debt Facilities including political risk coverage from: 320.00 PRG 10 .00 MIGA 89.00 ECAs 77.00 Investments in the Gas Pipeline 605.00 TOTAL Financing Required for the Project 1001.00 South African Regional Gas ProjectWorld Bank Group participation… Total Project Cost: US$ 1 billion

18. Guaranteepricing* Types of Fee IBRD IDA Stand-by 75 bp 25 bp ..Bank retains 25 bp 0 bp Guarantee 75-100 bp 75+ bp ..Bank retains 50 bp 75 bp Initiation & Processing 0.15-0.65% 0.15-0.65% Front-end N/A 1%** Payment of Periodic/one time upfront Periodic/one time upfront Guarantee Fee *Excluding PBGs provided under SSALs and for IBRD enclave guarantees in IDA only countries ** For FY 05 with the waiver the effective front end fee is 0.5%

19. Guarantee Allocation by Region AFRICA SA 2% 16% EAP 26% MENA 14% LAC ECA 17% 25% AFRICA EAP ECA LAC MENA SA Guarantees completed so far… Total exposure as of March 2004: US$ 1.41 billion PRGs: 10 PCGs: 8 PBGs: 2 Total IBRD Guarantees: US$ 2,300 million Total IDA Guarantees: US$ 121 m Future operations in the pipeline: Africa: 14 EAP: 1 ECA:8 MENA: 3 SA: 1 LAC:1

20. Cases: PCG Structure Vietnam Phu My 2-2 BOT Power South African Regional Gas Project BOAD Guarantee Facility

21. PCGs: Various structures • Example: • Borrower: Jordan Telecom Corp • Project: Modernization • Terms: 7 year US$ 50 million bond matured in September 2002 US $50m Bond World Bank support for principal repayment at maturity Longest term available to Jordan at the time Additional term provided by WB support 2 0 7 US Treasury + 1.1% Similar structures have been used in the past for project-based partial credit guarantee in Lebanon, Philippines etc.

22. Partial Credit Guarantee • WB will guarantee debt service for specific periods $150 million Example: China Ertan Power Project $50 million 0 3 6 9 12 15 Average financing term for World Bank Additional uncovered Guaranteed China without risk taken by World Bank Guarantee commercial banks Total risk assumed by commercial banks

23. Policy Based Guarantee: Leveraging adjustment loans Interest Payments Guaranteed at Issuance Principal US $159m Bank’s max. exposure 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8 8.5 9 9.5 10 Example: Colombia Policy Based Guarantee Fitch BBB+ Moody’s Baa1 S&P BBB NAIC 2

24. Vietnam: Phu My 2-2 BOT Power Project Key Contracts IDA Indemnity Agreement MPI ADB GOR Private EPRI World Bank Government (MPI) MOI EPRI Government Guarantee Investment Licence BOT Contract IDA PRG EVN IDA Project Agreement Commercial Lenders Power Purchase Agreement Loan Agreement Mekong Energy Company Gas Supply Agreement Loan Agreements PV JBIC ADB OCR Proparco Shareholder Agreement Water Supply Agreement EPC Contract Land Lease Agreement Technical Support Agreement BR-VT People’s Committee (UDEC) EDF-CNET EDF TEPCO BR-VT Water Supply Co. EDFI Sumitomo TEPCI

25. BOAD Guarantee Facility WAEMU Country Government(s) Guarantee Facility Agreement (GFA) Indemnity Agreements MIGA (VP Approval) World Bank (RVP Approval) AFD (Board Approval) BOAD Guarantee Agreements Contract of Guarantee Commercial Banks Sub Project Company Commercial Debt, L/C EPC Contract Equity Investor O & M Contract Construction Contractor O&M Contractor • Equity • Shareholders loans

26. Toll Roads Financing

27. The wave of toll road concessions in 1990s Financial Crisis Investment in Road Projects with Private Participation in Developing Countries Source: World Bank PPI Database

28. Issues in toll road financing • Traffic • New facilities (roads/ports/railway) • Extensions/rehabilitation • High local cost component • Barriers to local funding • Short maturities • High cost of financing • Insufficient capacity • Barriers to foreign funding • Country creditworthiness • Devaluation of currency • Political risks/government obligations • Levels & type of government support

29. Risk allocation • Risk allocation based on better understanding of project risks, their impact on project outcomes, who can best control them and the cost of bearing them Third Party Investors& Risk/Obligation Agency Insurance Lenders Guarantee ü Pre-construction Land Acquisition/Right-of-Way ü Environmental Approvals â (1) GOC Financing Contribution ü Project Design (Tunnels) ü Project Design (Roads, Bridges) ü Debt & Equity Financing ü ü (2) Concession Term Political Force Majeure ü ü (3) Changes in Law ü ü Expropriation ü ü (4) Natural Force Majeure ü Currency Devaluation ü Currency Inconvertibility ü Construction Cost Overrun (roads-bridges) â ü (5) (1) Cost Overrun (tunnels) ü Construction delays/project completion ü ü Operations Tort Liability ü Toll Evasion â ü (6) (1) Traffic Level (years 1-9) ü Traffic Level (years 9+) ü ü Toll Adjustment ü Operations & Maintenance 1 / Actual amounts or level of comfort subject to bidding.

30. Sustainable schemes: Seeking more secure debt structures C Toll Revenue B Expected Revenue Toll x Traffic Local financing: short amortization (3-5 years), high interest rates, insufficient market depth Loan 1 (3-5 years) “Roll over” of short term instruments (high refinancing risk) Loan 2: (10 years) 0 10 Years 5 Foreign financing: foreign exchange risk (mismatch with local revenue), political and regulatory risks, sovereign risk.

31. Sustainable schemes: Seeking more secure debt structures Typical Project Cash flows with long-term financing

32. Sustainable schemes: Evolution of risk during project phases Institutional Investors (long-term) financing) Eng. & Const Phase Start Up Phase Operation Phase Refinancing risk Traffic (ramp up) Delay Construction risk Toll adjustments Project risk Land/Ground condition O&M Financial risk Traffic Design Service quality-standards Time

33. Sustainable schemes: Selecting government support options High • Debt Guarantees • Exchange Rate Guarantees • Grants • Subordinated Debt • Minimum Traffic/Revenue Guarantees Impact on ability of project to raise debt • Shadow Tolls • Revenue enhancements • Concession Term Extension Low High Government’s financial exposure

34. Trends in minimum revenue guarantees a) A percentage of traffic forecast (fixed, bid, bid within ceiling) throughout concession period, with share over agreed value; b) Bid within specified limits in duration (e.g., “ramp up”) and amount (e.g., debt service); c) Present value of cumulative revenue, fixed through bidding. Concession ends when:

35. Colombia: Salgar Toll Road Project • Project Cost:US$400-430 million • Borrower:Concessionaire selected by competitive bid • Amount:US$ 80-100m syndicated loan/bond • Maturity:At least 12 years • Bank support: • Partial Risk Guarantee: political events, toll collection & adjustments set in contract • Contingent Bank loan; construction cost increases(tunnel only), • Liquidity Facility: minimum revenue guarantee (capped annually, limited duration, revolving) • Evaluation based on minimum use of Government support

36. What was covered Toll adjustment & collection Expropriation Currency Inconvertibility Political Force Majeure: Sabotage, war civil disorder, national & regional strikes finds (archaeological-mineral) delay in award of permits Changes in Law No competing road Access roads Not covered Non-political F.M.: employee strikes earthquakes, hurricanes, fires, floods, slides accidents on roadway Toll evasion Design shortfalls Inefficient O&M Construction delays & cost overruns Partial Risk Guarantees - Toll Road Min. Traffic/Revenue Guarantees

37. Bank Guarantee ProgramProcedures

38. Selecting Guarantee Operations 1.Government & Bank dialogue 2. Government undertakes competitive bid for sponsor 3. Sponsor proposes project to Bank

39. Operational Procedures: Appraisal and Negotiations • Discrete Steps Vs. Ongoing Process • Same appraisal standards as Bank loans/credits • Can accept 3rd party assessments/appraisals • Disclosure requirements: • IBRD Guarantees: different that IBRD loans • IDA Guarantees: same as IDA credits • Standard Bank environmental guidelines • Private sponsor prepares EA, flexible timing • Negotiations • Contractual arrangements: Govt.-sponsors • Financial arrangements: Bank-lenders

40. Operational Procedures: Appraisal and Negotiations • Discrete Steps Vs. Ongoing Process • Same appraisal standards as Bank loans/credits • Can accept 3rd party assessments/appraisals • Disclosure requirements: • IBRD Guarantees: different that IBRD loans • IDA Guarantees: same as IDA credits • Standard Bank environmental guidelines • Private sponsor prepares EA, flexible timing • Negotiations • Contractual arrangements: Govt.-sponsors • Financial arrangements: Bank-lenders

41. Procurement Guidelines • Paragraph 3.15: If the Bank Guarantees the repayment of a loan made by another lender, the goods and works financed by the said loan shall be procured with due attention to economy and efficiency and in accordance with procedures which meet the requirements of paragraph 1.5. • Paragraph 1.5: ….Goods and Works to be procured: a) are of satisfactory quality and are compatible with the balance of the project b) will be delivered or completed in timely fashion; and c) are priced so as not to affect adversely the economic and financial viability of the project.

42. Environment Assessment • In accordance with OP/BP 4.01 • Guarantees – Disclosure Policy. • Category A EA report - no later than 60 days at the Infoshop • Category B EA report - no later than 30 days at the Infoshop

43. Operational Procedures: Documentation • Project Information Document • After government request • Send to PIC 30 days prior to Board date • PCN/PAD for Guarantees • Legal Documents: • Indemnity Agreement between Govt. and IBRD/IDA • Guarantee Agreement between Lenders and IBRD/IDA • Project Agreement between Sponsor/s and IBRD/IDA

44. Sponsor’s Role • Early consultation with government & Bank ensures project priority • Sponsor takes lead • Project structuring • Financial arrangements • Provides data for Bank appraisal • Sponsor selects arranging banks • Bank reviews selection/structure for guaranteed amount

45. Sponsor’s Role • Early consultation with government & Bank ensures project priority • Sponsor takes lead • Project structuring • Financial arrangements • Provides data for Bank appraisal • Sponsor selects arranging banks • Bank reviews selection/structure for guaranteed amount

46. IBRD or IDA PRG Government Request PID and IM (or PCN) Management approval to make the PRG available in the bidding documents Processing of Guarantees Concept Review Corporate Review (Operations Committee) Appraisal Start Negotiations with Government, Sponsors, and Guaranteed Lenders PAD and MOP Approval by RVP, ENV, LEG World Bank Board Approval Signing of Agreement and Effectiveness PFG: 3-Nov-99

47. For further information contact: Suman Babbar, Sr.Adviser The World Bank 1818 H Street, NW Washington, DC 20433 (USA) Ph: +1 (202) 473-2029 Fax: +1 (202) 522-0761 Email: sbabbar@worldbank.org or visit our web site: www.worldbank.org/guarantees