Credit Guarantees for Local Currency Finance Credit guarantees are available for local currency
debt to finance infrastructure projects in emerging countries around the
world. 20% of the portfolio adopted by this source is targeted for
housing and other forms of urban infrastructure such as water and
sanitation.
The main aim is to help projects in poorer
countries avoid reliance on hard currency financing by building capacity
in their domestic markets to deliver viable and sustainable
infrastructure financing solutions and assist with the alleviation of
poverty.
Their equity comes from government aid budgets but
is entrusted to a private sector manager to encourage a commercial and
sustainable approach.
Advantages of local currency finance:
-
Financing in local currency allows a project
developer to match their currency of revenue with currency of debt
service.
-
Projects financed in foreign currencies carry
devaluation and currency convertibility risks.
-
Involvement of domestic banks and institutions
helps build capacity to finance further projects.
-
Local currency financing involves productive
recycling of savings within country rather than increasing the
country’s external debt burden.
-
Projects financed in US Dollars or Euro carry
devaluation and currency convertibility risks.
The guarantee cover is available for any single
transaction from a minimum amount of equivalent of US Dollars 5 million
(although lesser amounts might be considered for highly developmental
projects) and a maximum equivalent of US Dollars 20 million. Up to 100%
cover can be provided but this will only be available in limited
circumstances and when dictated by the market. Usually, the financing
covered by a guarantee will be up to three times the size of the
guarantee (30% to 70% cover), although this can be significantly for
securitization transactions.
The guarantee cover scheme can cover debt and
subordinated or mezzanine financing but not equity with a maximum of 15
years.
Several types of guarantees can be provided as
follows:
Projects in all low income and lower middle income
countries in Asia, Africa, Latin and Central America and the Caribbean
are eligible for these types of guarantees. Below is a list of all these
countries:
The guarantee cover scheme can support
infrastructure projects developed by the following entities:
-
Special purpose vehicle or project companies
-
Private operating infrastructure companies
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Privatized companies
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Parastatals or public corporations
-
Municipalities
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Projects from the following sectors can be
considered:
-
Energy supply, including generation,
transmission and distribution
-
Water/Waste services
-
Transportation
-
Telecommunications
-
Gas transportation, distribution and storage
-
Urban infrastructure
-
Mining, provided the financing is for related
infrastructure services with access by third parties.
Other activities that impact positively on the
development of the relevant country’s basic infrastructure, including
the manufacturing of components used in infrastructure, such as cement
and steel, and infrastructure associated with agribusiness.
Generally speaking, the guarantee scheme will
support the construction of new facilities or the expansion or
refurbishment of existing facilities. In addition, support can be
provided for the refinancing of existing facilities where cross border
debt is replaced by local financing.
The guarantee scheme funds comes from government
aid budgets but is entrusted to a private sector manager to encourage a
commercial and sustainable approach.