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p. 11 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 IV. Recommendation for Changes to ADB's PRG A. Redefining the Coverage of the PRG Instrument B. Defining the Fee Structure C. Covering Interest D. Introducing a PRG Prudential Limit E. Introducing a Coguarantee Program and a Collaboration Program F. Improving the Product Name G. Improving Communications with the Market and Potential Users H. Creating a PRG Focus Group I. The Use of ADB’s Financing Instruments and Staff Implications J. Summary of Proposed Changes to the PRG V. Potential Benefits of the Proposed PRJ Program VI. Conclusion

Review of the Partial Risk Guarantee of the Asian Development Bank : IV. Recommendation for Changes to ADB's PRG

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B. Defining the Fee Structure

48. Charges for PRGs without government counterguarantee will be determined by the Guarantee Committee in each case, on the basis of the principle of market-based pricing and the pricing guidelines stated below. Market-based pricing is substantially the same as the pricing principle applied to private sector loans, thus achieving private sector loan equivalency. The principle is derived from the concept that political risks are one of the two fundamental risk components of private sector loans without counterguarantee (the other component being commercial risks). Accordingly, the pricing of PRGs without counterguarantee will follow the same market-based procedures that apply to the pricing of the political risk component of private sector loans. This principle will also ensure that fees applied to PRGs will suffice to cover the risks taken by ADB under the guarantee, as well as ADB’s administrative and processing costs.

49. A market-based fee structure for PRGs is proposed to make PRG pricing more transparent and consistent with market practice. This structure will have three parts: (i) a front-end fee, (ii) a standby fee, and (iii) a guarantee fee. These fees will be determined for each PRG by the Guarantee Committee.

50. Front-End Fee. Following the principle of loan equivalency, front-end fees are currently being applied to PCGs, with or without counterguarantee. The processing of PRGs—like that of loans and PCGs—will involve significant due diligence and other up-front costs, and thus a front-end fee will also be levied on PRGs with and without host government counterguarantees.

51. In line with pricing principles used for PCGs, ADB will charge a front-end fee calculated on the face value of the underlying debt instrument. For private sector PRGs,²¹ the fee will be set at a market rate, which is currently at 100 basis points. For public sector PRGs,²² the front-end fee will be set based on the ratio of the guarantee to the associated loan within a range of 10–90 basis points of the nominal guaranteed principal amount.²³ The front-end fee will be paid up front as a condition to the effectiveness of the PRG.

52. Standby Fee. In respect of the amounts for which ADB is committed under a PRG, but for which the underlying loan has not yet been disbursed, a standby fee will be charged on all PRGs.²⁴ This fee is in line with market practice and is intended to compensate ADB for the cost of capital that ADB may set aside to match the contingent risk pending disbursement of the underlying debt instrument. The Guarantee Committee will use a benchmark standby fee, to be set at 50 percent of the guarantee fee charged for the PRG, and will take into consideration any other standby or commitment fees payable by the borrower for the underlying debt instrument. The minimum standby fee is set at 20 basis points.²⁵ The standby-fee will be paid, in advance, on the interest payment dates specified in the underlying debt instrument and levied on undisbursed amounts of the underlying debt instrument.

53. Guarantee Fee. The Guarantee Fee for PRGs without counterguarantee will be set by the Guarantee Committee on the basis of a minimum guarantee fee—presently set at 40 basis points—,²⁶ and following procedures similar to those used for the pricing of private sector loans. In the actual setting of the guarantee fee, the Guarantee Committee will take into consideration:

1. the types and extent of political risk coverage offered under the PRG;

2. risk of potential loss and recovery expectation;

3. availability and pricing of the same or similar types of political risk cover in the same or comparable sectors, markets, and countries; and

4. the likely market spread on the underlying loan if there were no PRG.

54. For PRGs with host government counterguarantee the guarantee fee is set currently at 40 basis points (footnote 25) and the borrower will compensate the host government for the counterguarantee directly.²⁷

55. Guarantee fees will be levied on the face value of the guaranteed loan outstanding, plus the interest that will accrue on that amount during the succeeding interest period. However, should a payment default under the guaranteed loan lead to a dispute or arbitration and the interest payments during the arbitration period are covered under the PRG, the guarantee fee will also be levied on the cumulative interest accrued during the arbitration period. For private sector PRGs, the guarantee fee will be paid, in advance, on the interest payment dates of the underlying debt instrument. To conform with the fee payment terms for PCGs, guarantee fees for public sector PRGs may be paid, periodically, in arrears or in advance, as the case may require.²⁸ A table summarizing the principles used in setting guarantee charges for PRGs is provided in Appendix 3.

56. Fees for private sector PRGs will need to be comparable to market premium rates charged by public and private sector PRI providers. Regular dialogue will be held with private and public PRI providers to assess current premium levels, fee structures, and payment terms.²⁹ A review of the fee structures and indicative PRI charges of MIGA, bilateral insurance agencies, and private insurers is provided in Appendix 2.

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