Download Harmonization and Alignment

Reforming the World
Bank’s Operational
Policy on Guarantees
January 2012 – April 30, 2012
1
BACKGROUND
 Bank guarantees are one of Bank’s three development finance
instruments, complementary to investment lending (IL) and
development policy lending (DPL).
 The Bank’s Articles of Agreement emphasizes the use of both
guarantees and loans to assist in the development of member
countries .
 Bank guarantees help member countries meet their development
financing needs by guaranteeing private borrowing.
 By mobilizing additional private financing, guarantees also
leverage the Bank’s own limited resources.
 Since guarantees were introduced in 1994, the Bank has provided 37
guarantee operations for a total of $4.5 billion.
 Bank guarantees have been used in 31 countries across all Regions
and in many sectors, but the largest shares have been in Africa and in
the energy and infrastructure sectors.
 All Bank guarantees require a counter-guarantee from the government.
2
BACKGROUND
 The World Bank guarantees have been effective in helping high risk
countries access private financing for development purposes.
 However, on average there have been only two guarantee operations
per year.
 Hence, Management believes that the full potential of Bank guarantees
to support development financing has yet to be realized.
 Private sector financing is needed to address huge investment gaps in
many developing countries, which cannot be funded through official
resources alone.
 For infrastructure in the Africa Region, the financing gap is
estimated to be 1/3 of the annual spending needs of $93 billion.
 Private financial flows are often unavailable or unaffordable for
developing countries.
3
BACKGROUND
 The Bank can be a strong guarantor based on its strong relationship
with governments, sector knowledge, and a large and diversified
portfolio.
 Reforms of the operational policy are part of a broader Bank agenda
for promoting private sector and infrastructure development:
 Reforms of guarantee operational policy
 Providing enhanced support for the preparation of PPP projects
 Improving the deployment of specialized staff skills
 Strengthening the outreach to clients and marketing of
guarantees
 Enhancing WBG collaboration and coordination, among Bank
guarantees, MIGA political risk insurance. and IFC guarantees
and lending
4
Purpose
 The overall aim of the proposed policy reforms is to further improve
badly needed access to private development financing for member
countries by:

Streamlining, consolidating and enhancing the applicability of
the instrument; and
 Removing any unnecessary and outdated policy provisions.
 The proposed reforms would allow the Bank to better serve its
clients and further respond to client needs for development financing
 The reforms also reflect the discussions among the G20 on the
possible greater use of WBG guarantees.
 The Approach Paper, “Modernizing the World Bank’s Operational
Policy on Guarantees,” outlines the proposed reforms.
5
Consultations
 The Bank is conducting global consultations on the proposed reforms
of its guarantee operational policies, in order to elicit inputs and
feedback from a wide range of stakeholders in as broad and
inclusive manner as possible.
 The Approach Paper and a range of consultation materials are
publicly available on www.worldbank.org/guaranteesconsultation.
 The consultations will include representatives of governments,
private sector investors and financiers, multilateral and bilateral
development organizations, and CSOs.
 The consultations will be carried out from January 2012 to end April
2012, utilizing the following channels:
 Website
 Face-to-face forums
 Videoconferences
 Based on the consultations, Management plans to develop the
Approach Paper into a policy paper and present it to its Board for
approval.
6
Guarantees: Overview
 The Bank offers three guarantee options:
 Partial risk guarantees (PRGs) support private lending to private
sector projects. They cover debt service defaults caused by a
government’s failure to meet its obligations to the project.
 Partial credit guarantees (PCGs) support borrowing for public
sector projects. They protect private creditors against default on
a specified portion of debt.
Policy-based guarantees (PBGs) are partial credit guarantees
that support borrowing for general budget financing. PBGs
support a program of policy and institutional reforms.
 PRGs are available to all member countries, but PCGs and PBGs
are available only to IBRD countries.

7
Main Reform Proposals
 There are essentially two overarching themes to the proposed policy
reforms:
 Extending PCGs and PBGs to IDA countries
 Aligning policy requirements for guarantees with their
corresponding lending instruments
8
Extending Partial Credit Guarantees to
IDA-Only Countries
 The Approach Paper discusses three possible options regarding the
extension of PCGs to IDA countries:
 These options differ on the eligibility requirement regarding debt
sustainability and debt management capacity.
 Management believes that the most appropriate option (option three in
the Approach Paper) combines both country and project
considerations in the eligibility criteria
 The recommended option requires that IDA countries have low risks of
debt distress and adequate debt management capacity, but allows for
exemptions for projects with significant financial returns.
 This option appropriately balances the need to address significant
development financing gaps with the need to ensure prudent and
sustainable borrowing.
9
Extending Policy Based Guarantees to
IDA-Only Countries
 Three options are also proposed for the extension of PBGs to IDA
countries, which again differ on the eligibility criteria based on debt
sustainability considerations.
 Management prefers the option (option one) which requires IDA
countries to have low risks of debt distress and adequate debt
management capacity.

No exemptions are considered, as PBGs support borrowing for
general budget financing and hence are not associated with a
specific investment project.
10
Aligning Project-Based Guarantees
with Investment Lending
 The overall objective is to align, where appropriate, the policy
requirements for PRGs and PCGs with those for ILs.
 Safeguard policies. As in investment lending, the proposal is to
supervise Bank Safeguards only up to the completion of the project
which is benefiting from the guarantee.
 However, supervision would continue after project completion for
any applicable legal covenants, if required by a specific safeguard
policy, or to address Management concerns about compliance.
 Sector policy framework. It is proposed to apply to all project-based
guarantee operations the same requirement as for IL operations
regarding the adequacy of the sector policy framework.
 Additional financing. It is proposed to introduce additional financing
operations for guarantees, which is currently available only for ILs.
11
Aligning Policy-Based Guarantees
with Development Policy Lending
 The overall objective is to align, where appropriate, the policy
requirements for PBGs with those for DPLs.
 It is proposed to allow the use of PBGs to support local in addition to
international financing.
 As required for DPLs, the country’s reform program supported by the
PBG would be assessed against the country’s track record.
 For countries which already have some market access, PBGs can
also be used to improve financial terms and achieve financial
leverage.
 PBGs will continue to be subject to the operational policies for DPLs.
12
Further Innovations
 Innovation has been a key feature of Bank guarantee operations.
 The operational policy on guarantees provides flexibility in structuring
guarantee operations to fit specific client needs and project
circumstances.
 Specific structures have been developed to backstop government
payment obligations.
 As part of the policy paper, Management intends to explore the
possibility of extending guarantees to:
 Carbon contracts to support low-carbon projects for reducing
greenhouse gas emissions
 Hedging products
13
Consultations: Guiding Questions
 How can the guarantee instrument be designed to best help developing
countries meet their development financing needs?
 Do you think that the proposed policy reforms will enable better, more
effective, and broader use of the Bank guarantee instrument? If not, how
can we improve it?
 Do you agree with the proposal to introduce partial credit guarantees
(PCGs and PBGs) to IDA countries, based on new eligibility criteria?
Do you think these criteria can help ensure that the resulting debt is
prudently managed and sustainable?
 Do you think that the policy requirements for project-based guarantees
should be aligned with those for investment lending, including the
supervision responsibilities for Bank safeguard policies?
 Do you think that the policy requirements of policy-based guarantees
should be aligned with those for DPLs?
 Do you think that the Bank should explore the possibility of extending
guarantees to support low-carbon projects to combat climate change and
also to hedging products?
14
 Do you have other suggestions or comments?