Review of the Partial Risk Guarantee of the Asian Development Bank - RECOMMENDATION FOR CHANGES TO ADB’s PRG PROGRAM

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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

D. Introducing a PRG Prudential Limit

59. A separate prudential limit is recommended for PRGs without a counterguarantee (the PRG limit). Treating PRGs in the same way as loans and equity investments does not account for the different risk characteristics of the instruments. PRGs cover only certain well-defined political risks, while a direct loan faces default risk stemming from political as well as commercial events. Thus, by definition, the likelihood of a PRG being called is lower than that of a loan going into default.

60. The PRG limit is proposed to be twice the PSO limit.³³ This approach is similar to that taken by IADB (para. 20). The very limited loss history of MIGA and OPIC’s high recovery rates illustrates that a bilateral or multilateral organization has significant leverage in the area of PRI.

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If this proposal is accepted, total ADB assistance (whether in the form of loans, equity investments, PCGs, or PRGs) should not exceed $100 million or 50 percent of project costs, whichever is less, with loan and equity investments continuing to be guided by the PSO Limit. The PSO W-Paper (Private Sector Operations Strategic Directions and Review, para. 70) has proposed an increase in the PSO single project exposure limit to $75 million. If this increase is approved, total ADB assistance (whether in the form of loans, equity investments, PCGs, or PRGs) should not exceed $150 million or 50 percent of project costs, whichever is less, with loan and equity investments continuing to be guided by the PSO limit.

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C. Covering Interest

E. Introducing a Coguarantee Program and a Collaboration Program

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D. Introducing a PRG Prudential Limit