| Whereas guarantee instruments remain an important tool for supporting WBG strategic priorities, the use of the instruments has fallen short of WBG expectations to varying degrees. Several factors contribute to the perception that there is significant unmet demand for WBG guarantee instruments: (1) Political risk is consistently ranked as a main constraint; (2) regulatory and contractual risks are perceived as the main reason for the growing investment gaps in infrastructure; (3) abundant liquidity in emerging markets calls for enhancements that can help deepen the market, extend maturities, lower spreads, and redirect resources to underserved market segments and new areas unfamiliar to financiers in emerging markets. Some external factors explain limited deployment. To some extent, the WBG has had overly optimistic expectations, particularly in the case of public-private partnerships across a range of infrastructure sectors based on rapid growth in the mid-1990s. Moreover, some studies indicate that 65 percent of investors self-insure rather than take third-party insurance, suggesting a more limited effective demand than expected. Private sector providers of risk mitigation products have expanded their coverage in terms of both products and markets. Liquid markets in the 2000s have reduced the demand for sovereign partial credit guarantees. Internal factors have also constrained the deployment of instruments. MIGA’s Convention and Operational Regulations limit its adaptability to new market trends. MIGA has also not been sufficiently aggressive in innovating within the flexibility allowed by current policies. Internal constraints to the deployment of Bank Group guarantees include the application of standards designed for public sector operations to private sector projects and lack of both internal and external promotion of the instruments. IFC has tended to apply a traditional project financier’s approach to guarantee-type instruments. It has taken an overly conservative stance toward risk-sharing facilities, which has constrained their utilization. Although some progress has been made in innovation, there has been limited replication and scaling up.
Also see:Â
 Â Should the WBG be in the guarantee business?Â
 Is the WBG appropriately organized to deliver the range of guarantee products? |
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