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Operations Manual

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This OM has been superceded by OM E1

OM Section 29: Issued on 12 December 1995
Cofinancing

Bank Policies (BP)

Introduction

1. The Bank derives its mandate for cofinancing¹ from its Articles of Agreement (the Charter). Article 2(i) of the Charter provides that one of the main functions of the Bank is to promote public and private capital investment for development. The Article enjoins the Bank to cooperate with international and national entities, both public and private, that are concerned with the investment of development funds in the Asian and Pacific Region (the Region), and to interest such institutions and entities in new opportunities for investment and assistance.

A. Objectives

2. The objectives of the Bank's cofinancing operations are to play a catalytic role in bringing additional private capital to developing member countries (DMCs) and to promote official cofinancing.

B. Sources of Cofinancing

3. There are two sources of cofinancing, official and commercial. The official cofinancing sources consist of governments or their agencies (mainly through bilateral assistance programs), and multilateral financing institutions, including the International Bank for Reconstruction and Development (IBRD), International Development Association (IDA), and United Nations (UN) agencies. These sources provide either loans (often on concessional terms) or grants.

4. Commercial cofinancing involves financing from private sources such as commercial banks, insurance companies, and pension funds. Such cofinancing can be provided as term loans or long-term bonds, and their terms are market-based.

5. Another source is export credit agencies (ECAs). These ECAs are government-supported financial institutions that support the export of goods or services from their countries. ECAs provide term finance to their exporters or their clients through a guarantee or direct credit, or a combination of both.

C. Strategy

6. The Bank's cofinancing strategy envisages the use of cofinancing modalities as follows:

1. Official Cofinancing

7. Official cofinancing is important in the Bank's cofinancing operations. In addition to strengthening its relations with institutions that have already cofinanced Bank projects, the Bank will (i) explore potential new sources, such as the newly industrialized countries in the Region and DMCs that have graduated from borrowing status; (ii) secure the maximum possible concessional assistance from official sources, and encourage cofinancing on an untied basis to the extent possible; (iii) mobilize grant funds from cofinanciers for its technical assistance (TA) programs and for specific components of Bank-assisted projects (including "soft" components such as training and capacity building); (iv) conclude framework agreements with interested cofinancing sources with a view to streamlining the arrangements for providing assistance; (v) accord priority to directing concessional flows to DMCs that are eligible for assistance exclusively from the Asian Development Fund, subject to donor preferences concerning countries and projects; and (vi) arrange official cofinancing on nonconcessional terms, mainly for traditional growth-oriented projects assisted by the Bank.

2. Commercial Cofinancing

a. Parallel Commercial Loans

8. The Bank will seek to obtain parallel cofinancing for both its public and private sector projects. This modality involves a term loan by commercial sources arranged in parallel with the Bank's loan but without any credit enhancement (such as guarantees or complementary financing scheme [CFS] loans) from the Bank. Parallel loans can be provided for untied as well as tied assistance. The Bank may provide advisory services, when required by a DMC, for structuring the financing package for the cofinanced project. Under parallel cofinancing, the Bank and cofinanciers will each finance specific components of a project.

b. Complementary Financing Scheme Loans

9. The Bank will arrange CFS² loans on market-based terms, in addition to its own loans to public and private entities in DMCs that do not enjoy access to international capital markets on appropriate terms. CFS loans will not be considered for countries and projects that have access to capital markets on reasonable terms. The DMC governments must agree to accord the Bank's preferred creditor status (PCS) to the CFS loans. Accordingly, a government request for a CFS loan for the public sector should reiterate its acceptance of PCS for the CFS loan. In the case of private sector borrowers, the government's assurance in the form of a no-objection certificate will be required for the provision of CFS as part of the Bank's assistance.

10. The institution, private or public, financial or nonfinancial, wishing to participate in a CFS loan should have a proven track record of honoring all of its financial obligations, and it should finance its operations from market funds without any government support.

11. The cofinanciers that fund CFS loans will receive the benefit of the Bank's appraisal of cofinanced projects, as well as its supervision of project implementation and loan administration services. Accordingly, the Bank will charge an arrangement fee and an administration fee for CFS loans.

12. Although all DMCs will have access to CFS financing, the applicability of CFS to a project will be assessed on a case-by-case basis in terms of the following factors:

(i) The recipient country should not be undergoing debt restructuring. However, any DMC that is phasing out of debt restructuring in accordance with an economic adjustment program agreed to by the International Monetary Fund will be excepted.

(ii) The recipient country's external debt situation and its capacity to service external debts will be reviewed. An essential condition for a CFS loan is that the recipient country should be able to service external commercial debt.

13. The Bank's procurement guidelines do not apply to CFS loans, as the Bank does not provide its own resources for the funding of CFS loans. However, procurement of all goods and services financed under CFS loans is restricted to the Bank's member countries.

c. Choice of Modalities

14. The Bank will use its cofinancing modalities, along with its guarantee facility, to enable DMCs and private borrowers to obtain long-term finance on the best possible terms. In choosing the commercial cofinancing modality for a particular project, the Bank will follow a flexible and pragmatic approach in line with the creditworthiness of the borrower concerned.

15. The Bank will encourage the provision of parallel commercial cofinancing without any credit enhancements from the Bank, wherever appropriate, especially for borrowers that can mobilize private capital from the market. Where parallel cofinancing is not possible, the Bank will consider the following alternatives:

(i) If the borrower is unable to obtain credit maturities appropriate to the project to be financed, the Bank will consider providing its guarantee support in obtaining commercial loans or in issuing long-term bonds.

(ii) In case the Bank's guarantee support does not suit the borrower's requirements, the Bank will try to arrange, where appropriate, loans under its CFS. In the case of private sector projects, both CFS and the partial risk guarantee can be used as the main credit enhancement instruments, if credit enhancement is considered necessary.

16. In arranging commercial cofinancing, the Bank will give special attention to the needs of borrowers that have not yet attracted a significant amount of international private capital provided that the Bank is satisfied that such DMCs can service commercial debt.

17. Effective financing packages, based on the Bank's cofinancing and guarantee facilities, will be provided to promote the flow of private capital into DMCs, especially for large infrastructure projects. The Bank will identify and formulate key infrastructure projects that would bring in significant additional resources through private sector initiatives.

18. Commercial cofinancing will be concentrated on sectors where large inputs from the private sector will be necessary to meet the investment financing needs in DMCs. Typically, sectors such as energy, transport, telecommunications, water supply, and industry will be given special attention.

3. Guarantees

19. The Bank offers partial credit or partial risk guarantees in accordance with its policy of risk sharing with its borrowers.³

20. The Bank's guarantee can be offered in any currency of its members to support commercial debt-financing for private or public entities in DMCs.

21. Three basic types of guarantee are available to different categories of borrowers:

Borrower Guarantee

(i) Public sector borrower Partial credit guarantee

(ii) Private sector borrower with Partial risk guarantee government counter-guarantee

(iii) Private sector borrower without Either partial credit or partial government counter-guarantee risk guarantee

22. The Bank will normally provide either a partial credit guarantee, which guarantees a portion of the debt service and covers all events of nonpayment, or a partial risk guarantee, which covers only specific risk events responsible for default on all or part of the debt service.

23. The Bank's partial credit guarantee will cover a portion of the financing provided by private financiers and typically extends the maturities of loans. The guarantee is callable in case of default, irrespective of the circumstances causing it. The Bank will guarantee either part of the principal or part of the principal plus base interest, for those maturities that cannot be obtained from commercial lenders without credit enhancement. In the case of a debt instrument with a "bullet" (or one-shot) payment or amortization during the last several years of the loan, the Bank can guarantee the total amount of principal repayment.

24. Partial credit guarantees can be provided for public and private sector projects that need long-term funds to be financially viable. This facility is provided to DMCs that have partly restricted access to the international capital market, but that are considered fundamentally creditworthy and sound by the Bank for obtaining credit of longer maturities.

25. In addition to partial credit guarantees, the Bank may provide partial risk guarantees to cover specific risks (e.g., sovereign risk) that private financiers generally find difficult to absorb or manage. In build-own-transfer (BOT) or build-own-operate (BOO) projects, where the Government is contractually involved, the Bank's partial risk guarantee would in general need a government counter-guarantee to reaffirm the government's acceptance of the obligations backed by the Bank. In special cases where the government concerned is legally not allowed to provide such counter-guarantee, the Bank's risk guarantee may be provided without such counter-guarantee. The specific risks may arise from nonperformance of a government's contractual obligations that are critical to the viability of the project or from foreign exchange transfer risk in projects that do not generate foreign exchange.

26. Cofinancing or a guarantee can be considered only in the context of a Bank-assisted project. In the case of a public sector borrower with a government counter-guarantee, there is no limit on the Bank guarantee. The Bank's involvement in a private sector project by way of loan or equity or guarantee is limited to 25 percent of the total project cost. This limit will not apply to guarantees where a government counter-guarantee has been provided.

4. Export Credit

27. The Bank will assist DMCs in obtaining export credit from ECAs. The Bank may take the initiative in arranging for export credit along with its loan, in consultation with the DMC concerned. This is meant to safeguard the advantages generally gained by DMC borrowers in securing a competitive price for the equipment covered by export credit. Often such advantages are offset by delays in getting the export credit and by less favorable credit terms.

28. The Bank may provide cofinancing with the support of a guarantee or a CFS loan to help a borrower meet its obligation to make the down payment needed to obtain the export credit contract. This may be necessary because ECAs do not meet the full cost of the equipment; usually about 15-20 percent of its cost must be provided as a down payment by the borrower in foreign currency to get the export credit contract.

29. The Bank will establish regular consultations with major ECAs. The Bank may seek more cooperation with ECAs that provide cofinancing on a "project finance" basis for large infrastructure projects.

5. Policy Dialogue

30. The Bank will encourage DMC governments through its policy dialogue to address the concerns of cofinanciers with a view to improving the policy environment for the flow of private capital. Particular emphasis will be given in the policy dialogue to aspects of the regulatory and policy frameworks that are considered inadequate to attract significant international private investments on favorable terms.

31. The environmental requirements for Bank-assisted projects apply to all projects cofinanced by it.⁴

Operational Procedures (OP)

A. Proposals from Governments and Private Sponsors

1. Proposals for official cofinancing from DMC governments are to be coordinated, where feasible, by the Bank's Cofinancing Division (CF). Project proposals from private sponsors will be examined first by the Bank's Private Sector Group (PSG). PSG will select projects that have prima facie potential for cofinancing. Once PSG decides to assist the project and if the project requires cofinancing from market sources, CF will examine the possibilities for cofinancing, and discuss the best possible structuring and processing of cofinancing. Private sponsors will be involved in the discussion and processing of the cofinancing.

2. As part of its general supervision and monitoring of project implementation, the Bank will furnish periodic progress reports to cofinanciers in all cofinanced projects; in cases of joint financing or parallel financing with untied funds from cofinanciers, the Bank could provide administrative services (consultant selection, supervision of procurement and disbursement).¹ In other cases,² cofinanciers normally assume responsibility for procurement and disbursement related to their financing and the Bank may, as a lead agency, provide services to coordinate project implementation. In addition, the Bank may provide appraisal and loan administration services, subject to availability of staff time, for specific financing arrangements with certain cofinanciers, with appropriate cost recovery, if resources offered are untied and the borrowing DMC so requests.

B. Mainstreaming of Cofinancing Operations

3. Cofinancing, including the provision of guarantees, will be brought into the mainstream of Bank operations. The Bank will endeavor to integrate cofinancing systematically into its lending operations in consultation with the DMCs. In exploring the scope for cofinancing, special attention will be given to DMCs that express interest in arranging commercial cofinancing for both public and private sector projects, particularly BOT/BOO projects with private sector participation.

C. Dissemination of Cofinancing Possibilities

4. Projects (except those in the private sector) that may need cofinancing from market sources (or export credit) will be listed as early as possible in the Bank's quarterly publication, Project Profiles for Commercial Cofinancing. A list of commercial cofinancing possibilities will also be included in the Bank's monthly publication, ADB Business Opportunities, and will be made available to the general public through the Internet.

D. Arranging Official Cofinancing

5. At the time of country programming, Bank staff should initiate contacts with representatives of aid agencies, discuss with them the Bank's operational program, and identify areas for possible collaboration. CF staff can be requested to participate where needed. The main steps in arranging official cofinancing are outlined below:

(i) The borrower requests cofinancing for a Bank-assisted project.

(ii) The Bank determines the scope, the possible sources, and the mode of cofinancing. Depending on the procurement policies and the project requirements, cofinancing can be arranged on either a parallel financing or a joint financing basis.³

(iii) The Bank coordinates official assistance with a view to avoiding duplication and achieving consistent policies.

(iv) The Bank invites potential cofinanciers to participate in project fact-finding and/or appraisal in order to incorporate their inputs at an early stage of project processing.

(v) The Bank will ordinarily require the cofinancier's commitment during or immediately after fact-finding for a TA project; and during or just after project appraisal when the Bank is considering the provision of a project loan.

(vi) Depending on the extent of the Bank's role in administering the funds provided by official sources on a joint or parallel basis, the Bank may enter into a separate agreement with the cofinancier specifying the responsibilities of the Bank and the cofinancier.

6. The Bank has agreements with some major multilateral institutions⁴ regarding cofinancing operations. Standard arrangements also exist for cofinancing with some bilateral agencies.

7. A critical issue in cofinancing with official sources is related to various conditions that are attached to assistance and pertain to the eligibility of recipient countries or sectors, procurement restrictions,⁵ etc. Official cofinanciers may also seek conditions additional to or at variance with the Bank's usual loan covenants. These issues are normally settled prior to the presentation of the Bank's loan proposal for Board approval. To minimize complications in project administration and operation, the Bank usually tries to limit the number of cofinancing arrangements for a project.

E. Commercial Cofinancing

8. The Bank will consider a borrower's request to arrange commercial cofinancing for a Bank-assisted project in light of (i) the borrower's credit standing; (ii) the scope of credit enhancements, if needed; and (iii) the market sources likely to be available for the project.

9. Since commercial funds are normally untied, cofinancing can be arranged on a parallel or joint basis depending on the project requirements.

10. Commercial sources may not be in a position to conduct a comprehensive appraisal of the project that they wish to cofinance. Therefore, subject to the borrower's consent, and to encourage commercial cofinancing in DMCs, the Bank provides all relevant information on the borrowing DMC and the project concerned at the earliest possible stage of project processing (generally after fact-finding).

11. CF will explore commercial cofinancing possibilities in the market regularly and as required for specific projects, and will discuss the structure and major terms of cofinancing with interested institutions. In consultation with the borrower, the Bank will then short-list the commercial financing institutions (CFIs) to be invited to make financial offers.⁶ The Bank will appraise the project. If required, interested CFIs can join the Bank's appraisal mission. The Bank, the borrower, and potential cofinanciers should agree on the enhancement and major terms of cofinancing except pricing.

12. The Bank and the borrower will draft and send a letter of invitation together with project information to the short-listed CFIs for financial offers. The Bank and the borrower may make presentation(s) on the project, the sector, and the country, and provide further clarifications.

13. The financial offers can be made singly or jointly, and the whole or partial amount can be underwritten. The Bank and the borrower will evaluate the offers and agree on the mandate to be given. The Bank will send the draft loan documents to the mandated CFI. Loan negotiations among the concerned parties are then carried out. The mandated CFI may go for a general syndication, if needed.

14. After the loan documents are signed, a loan supervision memorandum is prepared and circulated to the borrower and the CFI if the Bank will be supervising the administration of the loan.

F. Complementary Financing Scheme Loans

15. These procedures will generally apply to the arrangement of all CFS loans and parallel loans with the support of the Bank's guarantee. For guarantee operations, an inter-departmental committee will give guidance on the coverage and pricing of the guarantee at an early stage of processing.

1. Loan Documentation

16. Although the Bank will be the lender of record for CFS loans, the commercial funds are channeled through the Bank on a nonrecourse basis, and hence they will not appear on the Bank's balance sheet. The documentation for CFS loans to private sector borrowers may consist of a single loan agreement to cover both the Bank's main loan and the CFS loan, if such documentation is requested. For CFS loans to private sector borrowers, the participating commercial banks may require the Bank to accelerate the CFS loan in an event of default involving nonpayment of principal or interest. The Bank will, however, retain its option of not accelerating its own loan in such an event.

2. Procurement Guidelines

17. The Bank's procurement guidelines do not apply to CFS loans and guaranteed loans. However, the Bank will require that (i) procurement financed out of such a loan be restricted to the Bank's member countries, (ii) the proceeds of such a loan be exclusively used for the project concerned, and (iii) procurement be carried out with due attention to economy and efficiency.

3. The Bank's Fees

18. The Bank will charge private sector borrowers an arrangement fee of 50-75 basis points on the amount of the CFS loan, with a minimum of $20,000. For public sector borrowers, the fee will be $10,000-30,000 flat per CFS loan. The actual level will be based on an estimate of the costs to be incurred. The arrangement fee is a one-time front-end fee. An administration fee of $5,000-10,000 per annum will be charged to both public and private sector borrowers. The arrangement fee will be collected up front (i.e., at first drawdown or within a period specified after loan signing), while the administration fee will be levied annually over the life of the CFS loan. The actual level of fees to be paid by the borrower will be decided on project-specific considerations and is subject to negotiation among the parties concerned.

G. Export Credit

19. The Bank will, in consultation with and at the request of the DMC concerned, initiate discussions with ECAs for projects in need of export credit early in the project cycle. Where appropriate, the Bank will provide cofinancing with the support of a guarantee or a CFS loan to help the borrower finance the down payments under the export credit contracts. Such a cofinanced loan will be provided in parallel with the Bank's main loan and the ECA-supported loan. If possible, the Bank will provide assistance to the borrower in arranging ECA cofinancing at the time the Bank's main loan is processed. International commercial banks will be given the right of first refusal for participation in the cofinanced loans supported by a guarantee or CFS if they provide term loans on a parallel basis.

20. The Bank might identify suitable project components for parallel financing at the time of appraisal and leave the borrowing DMC to arrange for cofinancing before or after the Bank loan is approved. If the borrower does not require international competitive bidding (ICB), it can easily approach suppliers under export credit. If the borrower prefers ICB, the Bank will encourage the borrower to require that arrangement of ECA financing be included in bid submissions for the project to be cofinanced (the tender documents would include financing terms and conditions).

21. Large projects in such sectors as energy, public utilities, transport, and industry may particularly benefit from cofinancing with ECAs. In the most common form of such cofinancing, agreed upon packages of the project are allotted for financing through buyer's or supplier's credit in which the borrower requests financing offers from suppliers. Suppliers work with their ECAs to provide the financing offer. The borrower assumes responsibility for evaluating the bids and reserves the right to award the contract, taking into account the credit terms. The Bank's role is limited largely to the appraisal and general supervision of the project. Export credit agencies, however, tend to rely heavily on the Bank's evaluation and judgement in supporting a project. The Bank can provide ECAs with appraisal information on the project. Where the borrower is inexperienced, the Bank can give technical advice regarding procurement and evaluation of financial offers, as the Bank's objective is to ensure that the borrower obtains financing on the best possible terms, and goods and services of acceptable quality at the best prices; however, the borrower retains the responsibility of conducting the competitive bidding process and making the contract awards.

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