Catalog

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p. 19 of 24 BACK | NEXT The Asian Development Bank Mobilizing Private Capital Assistance to Private Enterprises Eligibility for ADB Assistance Advantages of Working with ADB Extent of ADB Assistance Appraisal Criteria Loan Terms Security Procurement Accounting and Auditing Arrangements Corporate Governance Environmental Considerations Role of ADB in Supervising Investments Risk Principles for Investment Funds Sale of ADB Equity Investment Commercial Cofinancing Complementary Financing Scheme Guarantees Export Credit Agency Cofinancing Applying for ADB Assistance Processing Procedures Illustrative Private Sector Projects of ADB Contact Information

ADB’s Private Sector Operations: Catalyzing Private Investments Across Asia and the Pacific

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Guarantees

ADB guarantees for private sector projects are credit enhancements designed to cover those risks that the private sector cannot easily absorb or manage on its own.Mitigating these risks can make a crucial difference in mobilizing debt funding for private sector projects.Guarantees have been used successfully to mobilize commercial cofinancing for infrastruc- ture projects and financial institution development projects.

ADB offers two guarantee products,both of which are designed to miti- gate risk exposure of commercial lenders.The first is the Partial Credit Guarantee,which provides comprehensive cover for both commercial and political risks.The second product,the Political Risk Guarantee,covers sovereign (or political)risks —leaving commercial risks with the private sector sponsors or lenders.The key features of these products are summarized below.

Partial Credit Guarantees (PCGs)are designed to cover that portion of the debt service that falls due beyond the normal tenure of loans available from commercial lenders.They are generally used for projects that need long-term funds to be financially viable.PCGs cover all events of nonpayment of the guaranteed obligation.In that sense,PCGs are comprehensive guarantees of principal and/or interest for those maturities that cannot be obtained from commercial lenders without credit enhancement.PCG cover is particularly useful for projects in DMCs with restricted access to the financial markets,but which are considered fundamentally creditworthy and sound by ADB.

With lessons learned from the Asian financial crisis,host governments,project sponsors,and cofinanciers are placing increased emphasis on matching the currency of project revenue and debt service cash flows.T address this concern,ADB PCGs can be designed to cover local currency debt ,including domestic bond issues or long-term loans from local financial institutions.

Political Risk Guarantees (PRGs)are designed to facilitate commercial cofinancing by covering specifically defined sovereign or political risks, which may include any combination of the following:

• breach of contract refers to losses arising from a host government ’s breach or repudiation of a contract with an insured project (for a power project,such a breach may result from failure by a government-owned entity to make payments in accordance with the power purchase agreement between the independent power producer and the user or distributor);
• expropriation and nationalization ;
• currency inconvertibility and nontransfer;and
• political violence.

Guarantee Fees.Pricing of PCGs and PRGs for private sector transactions is market determined.Depending on administrative considerations and prevailing commercial practice,guarantee fees can be charged either to the borrower or to the lender.

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