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p. 8 of 21 BACK | NEXT I. Introduction II. An Overview of the Political Risk Insurance (PRI) Market III. Review of ADB's Partial Risk Guarantee (PRG) Program A. Existing Policy Framework for PRGs B. Review of Experience IV. Recommendation for Changes to ADB's PRG V. Potential Benefits of the Proposed PRJ Program VI. Conclusion

Review of the Partial Risk Guarantee of the Asian Development Bank : III. Review of ADB's Partial Risk Guarantee (PRG) Program

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B. Review of Experience

43. The 1995 review foresaw a large potential demand for PRGs, in particular, in the context of increased private sector participation in the infrastructure sector. However, by the 1999 review (footnote 2), ADB had not yet issued any PRGs. A PRG was considered for an infrastructure project in Pakistan, but did not proceed, as the project did not go ahead. Currently, two BOT projects in Bangladesh and Sri Lanka are being processed with a PRG supporting the commercial debt financing, and another PRG is being considered in Pakistan for import letters of credit confirmation.

44. The limited demand for ADB’s PRG can be attributed to a combination of market factors, product-specific weaknesses, and organizational shortcomings:

1. PRG Coverage is too Narrowly Defined. Under the 1995 policy, the PRG is explicitly but, narrowly focused on breach of contract coverage and currency inconvertibility for BOT and BOO projects.²⁰ This covers only a small segment of the overall PRI market and artificially reduces the number of potential projects to which a PRG can be applied. For example, of the 40 PSO projects approved between 1995 and 1999 by ADB’s Board, only 8 were BOT or BOO infrastructure projects. Since the Asian financial crisis started in 1997, the number of BOT/BOO projects has dwindled dramatically, reducing the number of projects for which a PRG can be considered.

2. Prudential Limit is too Low. The PSO prudential limit (currently $50 million per project or 25 percent of project cost, whichever is less) is applied to PRGs without a government counterguarantee. The market perceives the PSO limit to be too low to be effective for large-scale, capital-intensive projects in the region. If a choice is given to borrowers within this limit, they will always prefer to receive ADB assistance in the form of a direct loan, as opposed to a more time- consuming PRG-supported loan funded by commercial banks.

3. Lack of a Coguarantee Program. In addition to the low PSO limit applied to PRG operations, the potential leverage of ADB’s PRG program is handicapped by the absence of a coguarantee program, similar to that of MIGA, and another cooperative program with public and private insurers. Under the coguarantee program, the ADB would be the guarantor of record. Under a cooperative program, the coinsurer would provide a guarantee parallel to that of ADB, in its own name. Such programs would allow ADB to expand coverage beyond the PSO limit by cooperating with other PRI institutions.

4. Difficulty in Securing Counterguarantees. Demand for PRGs with a counterguarantee has been adversely affected by the limited willingness of DMC governments to provide such counterguarantees. The DMCs frequently view counterguarantees as running against the spirit of introducing private sector participation in infrastructure projects that aim to keep direct government obligations to a minimum. In addition, such counterguarantees are often included as foreign debt under International Monetary Fund programs, rather than as contingent liabilities. This reduces incentives to provide such guarantees. DMC governments are also averse to potential legal disputes if there are ambiguities about whether the PRG may be called.

5. Lack of a Targeted Communication Strategy. There has been no sustained marketing effort of PRGs by ADB. In addition, the market has been somewhat confused about differences between PCGs and PRGs, due to the similar names of the two instruments.

6. Lack of Organizational Focus. Successful implementation of the PRG program requires cross-departmental cooperation within ADB. However, no interdepartmental working group has been established with a clear responsibility to implement and market the program.

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