Sovereign Guarantees, Financing & P3 Approaches
Sovereign Guarantees are broken into two types of guarantees. The first type of sovereign guarantee is a Project Based Guarantee. The second type of sovereign guarantee is a Policy Based Guarantee.
Project-based Guarantees are applied in the context of specific investment projects. These guarantees are created when governments wish to attract private investment (equity and/or debt). The function of a guarantee is to provide risk mitigation. Often these are deployed in areas where private investors are uncertain of stability, enforcement of laws, or theft. Key risks are specifically address in the covenants and its wording is essential for the viability of the investment.
These Guarantees typically fall under one of the following sub-categories:
Loan Guarantees – is intended to provide risk mitigation to commercial lenders. Specifically with respect to debt service payment. Defaults caused directly or indirectly by government failure to meet specific payment and/or performance obligations arising from contract, law or regulation are incorporated within the covenants.
- Payment of debt service on commercial loans taken by private projects relying on contracts with government for their cash flows e.g. tariff level agreed under an implementation agreement between government and a project.
- Payment of debt service on commercial loans taken directly by government
Payment Guarantees – is intended to provide risk mitigation to private projects or to foreign public entities with respect to payment default on non-loan related obligations by government. Such as:
- Scheduled or unscheduled pre-determined payment obligations arising from contracts, law or regulation e.g. monthly payments under a Bulk Purchase Agreements (such as power or water purchase agreements), termination payment due under a Government Support Agreement or an airport concession contract as a result of a change in law, etc.
Policy-based Guarantees relate to development policy operations where a member bank supports a member country with their program of policy. Typically institutional actions promote growth and sustainable poverty reduction. Other humanitarian aspects are sometimes incorporated. Need of food, medicine or basic human welfare (fleeing conflict zones) are sometimes incorporated. The World Bank is a huge contributor to this space.
This type of Guarantee provides risk mitigation to commercial lenders. Policy based guarantees address debt service payment defaults by government as well. Financing proceeds are suppose to apply to budgetary support in the context of development policy operations. Policy Based Guarantees are largely used for projects subject to misappropriation risk and fraud.
Credit Ratings & Application
In a previous article entitled "Public Private Partnership (P3) Financial Hurdles, Budget Constraints & Overcoming Junk Ratings" we addressed the constraints of developing countries. Often countries that give Public Private Partnership (P3) concession carry ratings that make development challenging. Countries that are developed (such as the United States, Canada & Europe) often require little strategy on monetizing their guarantees.
Structure is paramount and application of proper format is the monetizing agent for these types of governments. The institutions likely to support below investment grade ratings consist of: top tier investment banks (AAA Rated or Above), Impact Investment Funds (Publicly Traded), World Bank, International Monetary Fund (IMF), European Development Bank, and Asia Development Bank. The institutions that design programs are tied politically to obligations of lesser countries.
Private parties lack the political support, financial resources, and human resource infrastructure to effectively enforce contractual rights. Failure to involve established authorities in questionable countries will result in: capital loss, theft, fraud and project failure.
At Knight Advisory & Planning (KAP) we specialize in infrastructure development and work directly with top tier financial entities with regional authority. These established entities, that are publicly traded, allow for facilitation of serious investment to finance P3 projects. Let us analyze your project today to service its infrastructure needs.
Knight Advisory & Planning (KAP) is the only company to primarily focus on Public Private Partnerships (P3) since 2006. KAP operations are spread across countries of the world to serve this need. KAP Network consists of core partners surrounded by interlocking networks of consultants and affiliates in key trading countries and disciplines. We maintain Master Project Manager (MPM) who are American Academy of Project Management (AAPM) certified and are experienced in the following industries: construction, development, finance, technology, FinTech, biotechnology, production, R&D, and manufacturing. With over twenty (20) years of experience let us guide you through the P3 process.