PRGs 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. PRGs typically cover outstanding principal and accrued interest of a debt tranche in full. Payment is made only if the debt service default is caused by risks specified under the guarantee.
- Eligible projects: Projects with private participation dependent on certain government contractual undertaking, such as: Build-Operate-Transfer (BOT) and concession projects; Public-Private Partnership (PPP) projects; privatizations. The projects can be both greenfield or existing projects.
- Eligible debt: PRGs can be used for any commercial debt instruments (loans, bonds) provided by any private institution, including debt provided by sponsors in the form of shareholder loans. PRGs can cover both foreign currency and local currency debt.
- Risk coverage: PRGs can cover a range of risks relating to government performance including, changes in law, failure to meet contractual payment obligations, obstruction of an arbitration process, expropriation and nationalization, foreign currency availability and convertibility, nonpayment of a termination amount or an arbitration award following a covered default, and failure to issue licenses, approvals, and consents in a timely manner.
Traditional PRG Contractual Structure
The World Bank also offers enclave guarantees which are partial risk guarantees structured for export oriented foreign exchange generating commercial projects in IDA-only countries. In this regard, IBRD would consider providing non-accelerable guarantees to such projects provided adequate arrangements are in place to ensure that the host government will be able to meet its obligations to IBRD with respect to the IBRD's guarantee.
An Illustration of a Partial Risk Guarantee
BANGLADESH: THE HARIPUR POWER PROJECT
Haripur Project in Bangladesh was the second Partial Risk Guarantee (PRG) provided by IDA. The project, located about 22 km south-east of Dhaka, is the first land-based Independent Power Producer (IPP) plant in Bangladesh and comprises of a 360 MW gas-fired combined cycle power plant.
GUARANTEE TERMS & STRUCTURE:
The IDA PRG provides coverage to commercial lenders for loan default by the Project Company on scheduled debt servcie payments, resulting from the Government's failure to meet its payment obligations under the Indemnity Agreement (IA) and the Government Guarantee (GA) in support of the Power Purchase Agreement (PPA), Gas Supply Agreement (GSA), and the Land Lease Agreement (LLA). The guarantee structure is non-accelerable. Total project cost: US$ 181 million
Beneficiary: Haripur Power Co.
Guarantee Amount: US$ 60.9 million
Maturity: 15 years
Financing Mobilized Under the Guarantee: US$ 181 million