Managing Guarantee Programs in Support of Infrastructure Investment

27 Pages Posted: 20 Apr 2016

See all articles by Michael U. Klein

Michael U. Klein

Frankfurt School of Finance and Management; Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS)

Date Written: July 1, 1997

Abstract

Guidelines for managing government guarantee programs in support of private investment in infrastructure.

Klein discusses the risks of infrastructure projects and the costs of capital, rationales for government support of private infrastructure ventures, and approaches to managing government guarantees of private infrastructure investments. Among his recommendations:

The decision to grant a guarantee for debts associated with infrastructure projects should be based on an explicit cost-benefit analysis for the project to be guaranteed, including an assessment of the likely cost to taxpayers and the impact of alternative forms of government support.

In principle, when the rationale for government support arises from the difference between effective willingness to pay and social benefits, the support should take the form of subsidies supplementing the price customers are willing to pay for a service. Such subsidies are contingent on the effective provision of the subsidized service. They allow the private provider to be guided by the full benefits of the project without reducing the incentives to perform (as would occur with risk sharing through cofinancing or guarantee).

Guarantees of policy risks should support a credible reform program but not substitute for it. In the medium term, policy reform should obviate the need for a guarantee. Beneficiaries of guarantees should bear a part of the risk, as with a deductible. In structuring guarantees, governments need to take care that performance incentives for private investors are not undermined. Essentially, this means not covering normal business risk, including exchange rate and interest rate movements.

Governments should consider sharing normal business risks only as a last resort, if at all. To prevent excessive government exposure, decisions should be transparent and based on explicit cost-benefit analysis. Monetary limits should be placed on total government exposure, and there should be an exit strategy for the government wherever possible.

Governments should consider creating a central office charged with managing guarantee exposure, to limit taxpayer exposure and to strengthen private performance incentives.

Governments should establish a system to update the valuation of its guarantee exposure periodically as well as mechanisms to adjust guarantees or to seize collateral when fees are not paid. The use to which guarantees can be put should be clearly limited, and policies for appropriate guarantee fees and coinsurance requirements should be established.

This paper - a product of the Private Sector Development Department - is part of a larger effort in the department to analyze issues arising from private participation in infrastructure.

Suggested Citation

Klein, Michael U., Managing Guarantee Programs in Support of Infrastructure Investment (July 1, 1997). World Bank Policy Research Working Paper No. 1812, Available at SSRN: https://ssrn.com/abstract=620502

Michael U. Klein (Contact Author)

Frankfurt School of Finance and Management ( email )

Adickesallee 32-34
Frankfurt, 60322
Germany

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS) ( email )

1740 Massachusetts Avenue NW
Washington, DC 20036-1984
United States

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