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USAID Partial Credit Guarantees

Supporting Private Investmentin

Infrastructure FinanceJohn Wasielewski

Director, Office of Development Credit, USAID

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Need for Private Financing

Financing needs are too large to be met solely by donor and host government funds

• need for sustainable solutions

Conducive legal and regulatory environment critical to attract private capital

• banks will still be reluctant to undertake new projects in new sectors

Partial guarantees can serve as a catalyst for:• private financing in new sectors and new projects• development of capital markets.

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Partial Credit Guarantees

A catalyst for private financing in new sectors and new projects

USAID offers loan, portable, portfolio and bond guarantees

Cover up to 50% of the loss to private lenders from local currency loans for development activities

Projects are primarily identified and designed by USAID Missions in the field with support from

USAID/Washington

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Impact of Partial Guarantees

Promote lending of local private capital Shared risk Enhance capacity of Financial Partner Demonstrate economic viability of new investments Sustainable – lending without further donor support Development of Capital Markets USAID guaranteed lending:

• 14 projects totaling $208 million in infrastructure loans,• guaranteed portion $100 million, • cost to US Gov’t (taxpayers) just over $7 million.

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Example – Municipal Infrastructure

Partnering with Local Guarantor

Philippines

Type: Loan Guarantee

Amount: $28,500,000

Purpose: provides a 30% guarantee on municipal infrastructure guarantees made by a private guarantor of local government infrastructure projects.

USAID

Municipalities

30% Guarantee

Loans

100% Guarantee

Banks

LGUGC

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Revolving Funds and LDCs

Revolving Funds can be applied in several forms to developing countries.

Distinguishing features of such pooled-financing can include: Targeted technical assistance for individual project

identification, design and implementation as well as municipal capacity building

USAID or other donor partial loan or bond guarantees

Donor or State Reserve Fund support for revolving funds and initial capitalization of such funds

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U.S. Clean Water State Revolving Funds

Clean Water State Revolving Fund (CWRF) program in U.S. has significantly reduced the cost of financing to U.S. cities and towns.

CWRF relies on state bond bank as a financial intermediary that borrows from capital markets and on-lends to participating local governments.

CWRFs receive credit enhancements from national gov’t – e.g., reserve funds, initial capital.

Models can be replicated in developing countries

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Example – Clean Water and Sanitation

India

Type: Bond GuaranteeAmount: $6,400,000Purpose: Provides a partial guarantee to cover repayments to bond investors. Proceeds from the bonds’ sales are pooled in a fund, to finance water and sewerage infrastructure projects in seven selected municipalities in Tamil Nadu, a south-eastern state in India.

Water & SanitationPooled Fund (WSPF)

Funds from bond issue

USAID Guarantee

Private Placement

Bondholders

Escrow Account

Debt Service Reserve

Fund

Sub-loan Disbursement

Debt Service Payments

Water and Sewerage Projects

Municipalities

MUNI Cash Flows

Bonds issued

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(e.g. cont.) Features of the Bond Offering

Indian Rupee equivalent of $6.4 million U.S Dollars issued – Fitch rating of India AA, Bonds have 15-year term - very long for India.

Water & Sanitation Pooled Fund is special purpose-vehicle, independent from State of Tamil Nadu and privately managed.

Repayment of bonds supported by portfolio of loans on-lent to small municipalities and several credit enhancements: USAID’s partial guarantee and a State-financed Debt-Service Reserve Fund.

Pooled-financing reduces aggregate transaction costs and interest rates due to larger issuer size, higher credit rating and wider (larger) group of investors willing to purchase bonds.

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Benefits of a WSPF Bond Offering

Adds depth to capital markets – long tenor and new type of issuance

Encourages good governance and fiscal reform of municipalities

Easily replicated – WSPF is a Revolving Fund

Other Indian states are seeking similar revolving funds for their water and sanitation projects

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USAID Experience – Key Lessons Learned

Comprehensive approach works best - guarantees implemented with other interventions (legal and regulatory reform, improved transparency) can…

• promote legal and regulatory reforms to attract private sector involvement;• focus on improved municipal governance: more transparency, better financial

analysis and loan monitoring through TA;• support feasibility studies to help design good projects.

Sustainability crucial - Structure projects to encourage technical investments • risk assessment or asset management capacity, to increase likelihood of

sustained activity;• 100% guarantees often fail to generate sustained private-sector investment (i.e. after

first loans have matured, private sector fails to invest on their own).

Flexibility is key to helping private sector manage risk • Donor credit enhancements should be tailored to address “gaps” not filled by

private sector;• anything more may crowd out private sector; anything less may eliminate private-

sector financing and project won’t happen.

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Donor Coordination

USAID and JBIC are working jointly to address local water and sanitation needs in developing countries to implement applicable systems and sustainable financing:

- Identified 4 pilot countries (Indonesia, India, Philippines and Jamaica) - Signed 2 Memorandums of Understanding to initiate projects in the

Philippines- recent monitoring meeting in Washington DC

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Other New USAID Guarantee Activities

Enhancing USAID guarantee products (introducing tenor extension guarantees and subordinated (first loss) credit guarantees)

Spearheading introduction of financing technologies used in developed financial markets (e.g., revolving fund in Philippines with JBIC)

Developing a local currency Tier II capital investment initiative to address part of the asset/liability mismatch that inhibits local currency lending