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Processing of Guarantees

Given the highly structured nature of the Bank's guarantee operations, processing of projects using a World Bank guarantee requires specific steps to obtain approval of the World Bank's Board of Directors.  While the process is customized to the needs of each specific transaction the following provides Bank staff, sponsors and private lenders a general summary of the guarantee approval process. 

The following are the key stages required for the preparation and processing of World Bank guarantees:

§          Project Identification and Guarantee Selection

§          Financial and Economic Feasibility

§          Environmental Assessment

§          Procurement

§          Negotiations

§          Review and Management Approval

§          Financial Arrangements

§          Documentation

§          Board Approval and Financial Closure

§          Implementation and Supervision



Project Identification and Guarantee Selection

During identification, both the member country and the World Bank are involved in analyzing development strategies for the country and in identifying projects that supports those strategies. Bank's strategies and the projects they support must be consistent with these strategies and guarantees for indivisual projects should support the desired direction of sector policy. The World Bank's country departments would therefore, be required to assess in the Country Assistance Strategy (CAS) the potential use of guarantees in promoting private sector investing and private resorce mobilization.

Guarantees for public sector projects are generally proposed by the government to the World Bank; those for private sector projects may be proposed by either government or the sponsors that are promoting a particular project.  In all cases, the member country's request for the guarantee is a prerequisite for further processing of the guarantee. 

When a guarantee is proposed, the Bank's Regional departments consult with the Finance, Economics and Urban  Department (FEU) and with the Legal Department (LEG) of the World Bank.  The corresponding Region forms a project team that includes Regional staff, representatives of FEU and LEG, and representatives of other Bank departments as necessary.

The task team informs sponsors, lenders, and the member country government that the project or the program to be supported by the proposed guarantee must comply with all applicable Bank policies, and that the guarantee is subject to management review and Board approval. They explain the structure and level of the Bank's fees for the proposed guarantee.


Financial and Economic Feasibility

The Bank typically conducts its own financial and economic appraisal of projects. A project is processed only if the Bank is satisfied that the project would result in a suitable economic return to the host country. 

In case of private sector projects, studies and financial models used by other financial agencies, private lenders, or sponsors are also utilized.  In these instances, the Bank collaborates with other parties involved in the project to ensure that the project meets Bank standards.  Where the Bank and IFC are both involved in a project, the Bank and IFC conduct a joint appraisal of all aspects of the project.  


Environmental Assessment

The borrower (public or private) is responsible for meeting Bank guidelines with respect to environmental impacts and social soundness.  The Bank's regional environmental staff work with the borrower´s environmental experts to undertake the environmental assessment (EA) and ensure that the project meets the Bank's environment standards.  The Bank makes available to the borrower the Bank's environmental guidelines pertinent for the project to ensure adequate coverage in the EA study.  The Bank coordinates the review of the EA study with the borrower and ensures that the borrower is in compliance with the Bank´s guidelines.  The appraisal of the guarantee is not finalized, and therefore Board approval is not sought, until the EA study has been completed, reviewed, and formally accepted by the Bank.  The EA study must be deposited in the Bank's Infoshop no later than 60 days (for category A projects) prior to the Board date for the review of the proposed guarantee operation.



The Bank's procurement guidelines for guarantees require that goods and services must be procured with due regard to economy and efficiency.  This requirement has three aspects:

  1. the goods must be completed and delivered in a timely manner;
  2. the goods and works to be procured must be of a satisfactory quality and be compatible with the balance of the project; and,
  3. the goods and works must be priced so as not to adversely impact the economic and financial viability of the project.

The Bank ensures that the procurement procedures used in a guarantee operation meet these general criteria.



For private sector operations, the Bank's project task team negotiates the terms of the Guarantee Agreement, the Indemnity Agreement and the Project Agreement in order to facilitate a commercially efficient and economically sound project.

Negotiations are expected to draw upon the Bank's best practices and lessons learned through the Bank's previous lending and guarantee operations.  Accordingly, the final agreements produced through such negotiations are expected to reflect the evolution of transactional experience for the host government while recognizing the commercial market limitation of experience in certain sectors of a given country.


Review and Management Approval

All guarantee proposals are subject to (a) a concept review, and (b) a corporate review. The corporate review is carried out by the Operations Committee, unless it has delegated to the Regional Operations Committee by the Managing Director, Operations. The concept and corporate review meetings include staff from PFG and the Legal Depart­ment (LEG), and from SFR/FRM, IFC and MIGA as appropri­ate. The corporate review normally takes place after the concept review has been carried out. If the terms of the guarantee as finally negotiated deviate significantly from the term authorized by the corporate review, or if substan­tive issues arise that require corporate consideration, the proposed operation is resubmitted for a corporate review.


Upon achieving corporate review approval, guarantee op­erations follow the standard procedures for Board review. The task team continues with the appraisal process and negotiations of the guarantee documentation and risk cov­erage with commercial lenders, project sponsors, and host government representatives.


Financial Arrangements

Private Sector

Private sponsor(s) are responsible for the rest of the financing for the project and choosing the arranging banks in a manner suitable to their objectives and circumstances of the project.  The arranging bank typically syndicates the Bank-guarantee tranche pro rata with other tranches of debt.

Public Sector

For partial credit guarantees where the borrower is a public sector entity or sovereign government, once the structure of the guarantee is endorsed by the Bank management, the borrowing entity, in consultation with the host government and Bank staff, solicits and evaluates proposals from financial institutions to lead manage the guaranteed borrowing.  Based on the evaluation of the proposals received from these institutions, the borrowing entity awards a mandate.



Guarantee proposals are initiated in the Bank by a Project Concept Note (PCN) and/or Project Appraisal Document (PAD), which summarizes the main features of the guarantee in the context of the specific project, provides a brief project overview.  This document is used by the Operations Committee (OC) for evaluation of the guarantee transaction.  Post-appraisal of the project, an updated PAD along with a Memorandum of the President (MOP) are circulated for Board review.  

The key legal documents include the Guarantee Agreement, the Indemnity Agreement and the Project Agreement.  The Guarantee Agreement is usually executed between the Bank and the lenders, and is the agreement under which the terms of the guarantee are specified.  The Indemnity Agreement is executed between the Bank and the member country and it specifies the terms of the member country's counter-guarantee to the Bank.  The Project Agreement is executed between the borrower and the Bank and specifies additional undertakings by the project company to the Bank.  These undertakings include provisions on the use of proceeds of the guaranteed loan and compliance with environmental standards etc.


Board Approval and Financial Closure

Guarantees require approval from the Bank's Board of Executive Directors, which is sought once the guarantee structure and coverage are finalized and the relevant legal documents have been substantially negotiated with the relevant parties.  Financial closure takes place after the Board Approval.


Implementation and Supervision

For both public and public sector projects the borrower is responsible for preparing an implementation plan in accordance with Bank procedures. Bank staff review the borrower's plans for implementing the project, including the scope and content of the project agreements and the arrangements for their execution; the corporate structure, management, and administrative features of the project entity; the construction of project facilities; and operation and maintenance arrangements.

Guarantees are subject to the same supervision criteria and standards as investment loans. Stand-alone guarantees are monitored based on the information contained in progress reports received from lenders and/or borrowers. In addition, specific areas needing Bank attention such as government performance of its contractual obligations and its compliance with stipulated sectoral and financial covenants are supervised as part of the Bank's regular missions. Wherever guarantees are used along with loans, loan supervision also includes two critical parameters that are monitored to ensure the success of these guarantees:

(i) Project performance; to ascertain to what extent projects supported by guarantees meet their expected performance targets (construction completion, efficient operations, and achieving desired financial ratios); and

(ii) Monitoring of government performance; vis-à-vis their contractual obligations outlined in the project documentation and covered by the guarantee.