Foreign direct investment and private capital flows are highly concentrated geographically, with almost half of them reaching five top destinations. These flows tend to evade many high-risk countries. Regulatory and contractual risks, particularly in infrastructure, have inhibited investments in many parts of the developing world. A core objective of the World Bank Group (WBG) has been to support the flow of private investment for development; guarantees and insurance have been among the instruments that the WBG has used to pursue this objective.
The study asks three main questions:
Should the WBG be in the guarantee business? MORE >Â
Have guarantee instruments in the three WBG institutions been used to their potential as reflected in WBG expectations and perceived demand? MORE >Â
Is the WBG appropriately organized to deliver its range of guarantee products in an effective and efficient manner? MORE >Â
Distribution of Guarantees Issued by Sector (gross exposure), Fiscal 1990-2007
Distribution of IBRD PCGs by Sector (net commitment) Fiscal 1990-2007
Distribution of IFC Guarantees by Sector (net commitment) Fiscal 1990-2007
Source: MIGA data.
Source: World Bank data. Note: IBRD= International Bank for Reconstruction and Development; PCG= partial credit guarantee.
Source: IFC Data. Note: This excludes Global Trade Facility Program.
Guarantees have been effective in promoting key WBG strategic objectives, particularly in facilitating the flow of investment to high-risk sectors and countries. They remain important instruments for achieving WBG’s priorities.
The use of guarantee products in each of the three institutions has fallen short of expectations, because of both external and internal factors. Internal constraints include (i) competition among the three WBG institutions that imposes additional transaction costs on clients and reputational risks to the WBG; (ii) weaknesses in marketing; (iii) supply-driven policy and mandate restrictions; (iv) limited internal awareness, skills, or incentives in the World Bank and IFC; and (v) inconsistent pricing of the WBG political risk-mitigation products.
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To overcome the current limitations of the delivery system of WBG guarantees and political risk mitigation (PRM) instruments and to enhance their use and development potential, the Independent Evaluation Group recommends the following to WBG senior management:
Take a strategic approach and make a decision whether to maintain the existing organizational structure while addressing some of the important problems, or to develop and propose an alternative organizational structure to the Board.
Under any scenario, take action to introduce greater flexibility in the use of guarantee instruments in response to dynamic country and client needs and market developments.
If a new organizational structure is developed and proposed, consider at least three alternative perspectives for organizational realignment: the client perspective, the country perspective, and the product perspective.
If the current organizational structure is maintained, direct the management of each individual WBG institution to enhance the delivery of its own guarantee/ insurance products by taking actions to improve policies and procedures, eliminate disincentives, increase flexibility, and strengthen skills for the deployment of the products.
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