Guarantees – a type of “insurance policy” protecting banks and investors from the risks of non-payment – have been a mainstay of financial markets globally for many years. They play an important role in helping the private sector make investments that promote growth and create jobs.
Developmental guarantees are a special category of official guarantees backing projects that promote the development. These guarantees can provide the measure of security needed to bring on board more private risk capital and are a valuable instrument for mobilizing private resources from private companies, banks, individuals, NGOs, self-help groups, or investment funds.
Credit guarantees can be used in a myriad of ways, such as i) backstopping financing for large-scale, multi-year infrastructure projects, ii) lengthening the maturities of loans to small enterprises, iii) refinancing municipal utilities, iv) enabling local banks to enter new markets such as mortgage or microenterprise lending, or v) deepening capital markets by facilitating local-currency bond issues.
Guarantees for development supported a total of $15 billion from private sector actors for investments in the developing world from 2009 to 2011 with volumes doubling from $3 billion to $6 billion. The OECD’s Development Assistance Committee is exploring the scope for a new database that could help the development cooperation community understand where resources are being mobilized by guarantees, what types of guarantee instruments are being used, and whether additional resources are being catalyzed by these flows.
Points to consider
- Lack of data: Data on development credit guarantees is limited. There is no international statistical standard or data collection to provide information about the magnitude and scope of their use in developing countries. One factor contributing to this is that guarantees are “unmaterialized” financial flows. As “contingent liabilities,” they are registered in the financial statements of the institutions issuing them, but they do not actually give rise to official financial flows until a default occurs.
- Un-mobilized capital: Most of the guarantees (85 percent by value) backed capital that was not mobilized in the countries where it was deployed.
- Higher-risk areas: Developmental guarantees are uniquely suited to facilitate investment flows to developing countries and high-risk sectors, mobilizing resources beyond what financial markets would normally provide.
Global: Mobilizing private sector investment in infrastructure
GuarantCo is a special guarantee facility established in 2006 under the aegis of the Partnership for Infrastructure Development, a multi-donor organization working to mobilize private sector investment in infrastructure in the developing world. GuarantCo provides local currency guarantees to infrastructure projects in low-income countries to mitigate credit risks for local banks, thereby promoting domestic infrastructure financing and capital market development. The cumulative value of GuarantCo’s financial commitments as of the end of 2012 was $230 million, which represented 18 projects.
GuarantCo has supported investment in the industrial, telecommunications and transport sectors, each of which accounts for approximately 25 percent of its outstanding portfolio. Half of its guarantee operations have been targeted at crucial infrastructure investments in fragile states. Recent activities include a credit enhancement for a municipal bond issue in Kenya, a guarantee for a public-private partnership hospital in Egypt, and partial guarantees for a river hydropower project in Nepal, a slum redevelopment project in India and a green field agro-energy project in Tanzania.
- Africa: African Development Fund Partial Credit Guarantee (ADF-PCG)
- Global: USAID Development Credit Authority