Risk Mitigation

As the requirements for infrastructure funding increase and neither public nor private sector resources appear to keep pace, there is a growing need to connect infrastructure development more effectively with private financial markets as a way to leverage and mobilize more capital. New and improved risk mitigation products and applications can help to make this connection where the principal prerequisites for infrastructure finance are not sufficiently developed.  The Bank Group recognizes that the IFIs and bi-laterals are—relative to the magnitude of the challenge and overall financing requirements—small only small providers of public funding, but they can play an important catalytic role in leveraging financing from multiple sources, in particular from private financial markets by providing suitable risk mitigation.

The Bank Group assists countries in improving their infrastructure regulatory framework and investment climate. This includes institution building to allow financial markets to fund infrastructure development through reducing regulatory and investment risk (i.e. economic regulation, judicial reform, conflict resolution, etc.). Moreover, the WBG supports countries in reforming their financial systems and in strengthening and modernizing their financial markets. However, these sector reform measures take time to show the desired results. Meanwhile, to be able to reduce the infrastructure funding gap the WBG can increase the use of its guarantee instruments and develop innovative risk mitigation products and applications that will foster private capital mobilization for infrastructure development. 

The World Bank (IBRD and IDA) offers three kinds of guarantees:

• Partial Risk Guarantees (PRGs)– offered by IBRD and IDA for private borrowers – cover private lenders against the risk of a public entity failing to perform its obligations with respect to a private project.  PRGs ensure payment in the case of default resulting from the nonperformance of contractual obligations undertaken by governments or their agencies in private sector projects.
• Partial Credit Guarantees (PCGs)– offered by IBRD for public borrowers – cover private lenders against the borrower’s credit risk during a specific period of the financing term of debt for a public investment.  PCGs are specially designed to extend maturity and improve market terms. 
• Policy Based Guarantees (PBGs)  – offered by IBRD for public borrowers – help to improve governments’ access to capital markets in support of social, institutional, and structural policies and reforms.  PBGs are offered to countries with a strong track record of performance with a satisfactory social structural and macroeconomic policy framework and a coherent strategy for gaining access to international financial markets. 

To encourage the use of guarantees at the World Bank, only 25% of the face value of the guarantee will be counted against the overall lending envelope of a country, and remaining 75% will be available for additional lending and guarantees.  All of the above World Bank risk mitigation products require counter guarantees from the host governments.

Multilateral Investment Guarantee Agency (MIGA)’s  Investment Guarantees cover equity and debt for qualified investments against currency transfer restrictions, expropriation, war and civil disturbance and breach of contract.  Unlike the World Bank’s guarantees, MIGA coverage does not require counter guarantee arrangements with the host country government of the project.

The International Finance Corporation (IFC) offers credit enhancement structures for debt instruments (bonds and loans) through partial credit guarantees, risk sharing facilities, and participations in securitizations.  Partial credit guarantees allow IFC to use its international triple-A credit rating to help private investors diversify their funding sources, extend maturities, and obtain financing in their currency of choice, including local currency. Risk sharing facilities allow a client to transfer credit risk to IFC from their own portfolio, or from a new portfolio they originate.  In securitization transactions, IFC participates as a structuring investor or guarantor, typically at the mezzanine level of risk.