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Managing guarantee programs in support of infrastructure investment

Author

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  • Klein, Michael
Abstract
The author 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: 1) 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. 2) 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). 3) 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 nor undermined. Essentially, this means not covering normal business risk, including exchange rate and interest rate movements. 4) 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. 5) Governments should consider creating acentral office charged with managing guarantee exposure, to limit taxpayer exposure and to strengthen private performance incentives. 6) 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.

Suggested Citation

  • Klein, Michael, 1997. "Managing guarantee programs in support of infrastructure investment," Policy Research Working Paper Series 1812, The World Bank.
    • Handle: RePEc:wbk:wbrwps:1812
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    References listed on IDEAS

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    1. Christopher M. Towe, 1991. "The Budgetary Control and Fiscal Impact of Government Contingent Liabilities," IMF Staff Papers, Palgrave Macmillan, vol. 38(1), pages 109-134, March.
    2. Alexander, Ian & Mayer, Colin & Weeds, Helen, 1996. "Regulatory structure and risk and infrastructure firms : an international comparison," Policy Research Working Paper Series 1698, The World Bank.
    3. Kenneth J. Arrow & Robert C. Lind, 1974. "Uncertainty and the Evaluation of Public Investment Decisions," Palgrave Macmillan Books, in: Chennat Gopalakrishnan (ed.), Classic Papers in Natural Resource Economics, chapter 3, pages 54-75, Palgrave Macmillan.
    4. Kahn, Edward P., 1991. "Risks in independent power contracts: An empirical survey," The Electricity Journal, Elsevier, vol. 4(9), pages 30-45, November.
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    Cited by:

    1. Jicai Liu & Charles Cheah, 2009. "Real option application in PPP/PFI project negotiation," Construction Management and Economics, Taylor & Francis Journals, vol. 27(4), pages 331-342.
    2. Nur, Suardi & Burton, Bruce & Bergmann, Ariel, 2023. "Evidence on optimal risk allocation models for Indonesian geothermal projects under PPP contracts," Utilities Policy, Elsevier, vol. 81(C).
    3. Carlos Contreras & Julio Angulo, 2017. "Valuing Governmental Support in Road PPPs," Hacienda Pública Española / Review of Public Economics, IEF, vol. 223(4), pages 37-66, December.
    4. Justin Yifu Lin & Doerte Doemeland, 2012. "Beyond Keynesianism: Global Infrastructure Investments In Times Of Crisis," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 3(03), pages 1-29.
    5. Ratha, Dilip & De, Prabal K. & Mohapatra, Sanket, 2011. "Shadow Sovereign Ratings for Unrated Developing Countries," World Development, Elsevier, vol. 39(3), pages 295-307, March.
    6. Klingebiel, Daniela & Ruster, Jeff, 2000. "Why infrastructure financing facilities often fall short of their objectives," Policy Research Working Paper Series 2358, The World Bank.
    7. Charles Cheah & Jicai Liu, 2006. "Valuing governmental support in infrastructure projects as real options using Monte Carlo simulation," Construction Management and Economics, Taylor & Francis Journals, vol. 24(5), pages 545-554.
    8. Michel Noel & W. Jan Brzeski, 2005. "Mobilizing Private Finance for Local Infrastructure in Europe and Central Asia : An Alternative Public Private Partnership Framework," World Bank Publications - Books, The World Bank Group, number 7333.
    9. Gilberto M. Llanto, 2007. "Dealing with Contingent Liabilities: The Philippines," NBER Chapters, in: Fiscal Policy and Management in East Asia, pages 257-284, National Bureau of Economic Research, Inc.
    10. Irwin, Timothy & Klein, Michael & Perry, Guillermo E. & Thobani, Mateen, 1999. "Managing Government Exposure to Private Infrastructure Risks," The World Bank Research Observer, World Bank, vol. 14(2), pages 229-245, August.

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