(a) Guarantees issued by the host governments to cover the breach of obligations assumed by the Contracting Authority under the project agreement.
(b) Performance guarantees are useful instruments to protect the project company and the lenders from the consequences of default by the Contracting Authority or other public authority assuming specific obligations under the project agreement.
(c) Performance guarantees are used where the Contracting Authority is a separate legal entity that does not engage the responsibility of the government itself. However if a Contracting Authority is a truly corporatized entity, the performance risk cannot easily be considered as a political risk, but rather as a commercial risk.
(d) Central government cannot provide guarantees against risks related to the behaviour of other entities (e.g. decentralized political authorities). To add credibility to the government's own commitment, other instruments may be needed, such as government's performance guarantees or guarantees by multilateral institutions counter guaranteed by the government. Performance guarantees can also be issued in the name of a public financial institution of the host country.
(e) The legislation should enable the government to efficiently manage and assess the project risks and determine the level of direct and contingent liabilities it can assume, e.g. Off-take Guarantee: Government guarantees payment of goods and services supplied by the Project company to public entities.
In the scope of "power purchase agreements", resources (or cash flow) are provided to meet (i) debt service, (ii) operation and maintenance costs, and (iii) return on investment.
Supply guarantees protect the parent company from the consequences of default by the public sector entities providing goods and services required for the operation of the facility (e.g. fuel, electricity, water), or to secure payment of which the Contracting Authority may become liable under the supply agreement
General guarantees: provided to protect the Project Company against any form of default by the Contracting Authority rather than default on specifically designated obligations. General guarantees are not very frequent, but can be used when the obligations undertaken by the Contracting Authority are not commensurate with its credit worthiness (e.g. municipal concession).