Rather than providing a direct guarantee of the commercial debt, governments may provide guarantees that are contingent on the outcome of future events. For instance, if a local government party defaults, the national government will support its obligations or guarantee the amount of debt paid if a partnership or concession is terminated.
Table 1: Government measures to stimulate the involvement of private finance
| Benefits | Issues |
Up-front payments: Capital contributions | • Reduces private-sector funding requirement • Provides access to cheaper public funding • Risk transfer is relatively undisturbed if used in moderation | • Increased operating leverage • Difficulties refinancing public-sector support • Need to consider carefully the impact on any debt rating1 |
Direct co-lending | • May be quickly implemented • Retains structure of envisaged transaction • Reversible in better credit markets | • Does not deal with increased debt costs • Requirement for government lending skills/operation • Potential conflict of interest to manage • Investor and private funder issues to consider • UK model provides only liquidity not better terms • Leaves government with the challenge of how to dispose of stakes |
Guarantees: Direct | • Might assist project affordability | • Helps credit capacity and debt costs but not liquidity issues • Benefit may be limited by the widening of government spreads • Leaves government with contingent funding requirement (at default or termination) |
Guarantees: Indirect | • May attract new debt to the market (as investors may regard it as quasi-sovereign debt with no direct project risk) • Should help with pricing | • Leaves government with contingent funding requirement |
1 Moody's Investor Service 2009 | ||
Source: World Economic Forum analysis
"It will be interesting to see if the economic crisis catalyses governments within regions to work more closely together to pool their resources-whether finance or know how." - Rashad Kaldany, Vice President, Asia, Eastern Europe, Middle East and North Africa, International Finance Corporation |