In the current situation, multilateral institutions like the EIB, the EBRD or the IFC, or even export credit agencies are expected to step-up their lending. Such lending can take the form of
■ funding only, supported by third party bank guarantees, Letters of Credit (LCs) or other credit enhancers, or
■ direct project lending, where the public institution takes project risk alongside commercial lenders.
PROS: Both products are in strong demand.
The funding facilities provide considerable added benefit in the current market conditions because (also see 2.3 below):
■ banks' funding costs have sky-rocketed and many are struggling to find any liquidity at all. Banks in this situation may, however, welcome the opportunity to provide guarantees to third parties
■ the price differential between commercial bank lending and funding provided by public or multilateral bodies has considerably widened, even when adding the cost of the commercial guarantees. This is because the increase in banks' funding costs is a lot higher (around 150 to 200 bps even for short maturities), than that of the publicly owned institutions (estimated at 30 to 50 bps for AAA rated institutions).
The direct lending facilities are also filling an acute market need, particularly for large projects. In practice, few eligible PPP projects of significant scale are closing today without direct participation from at least one of the major multilaterals. The funds provided by these institutions allow a considerable reduction in the amounts which need to be found on the commercial markets. The presence of public players in the financing is often a catalyst for commercial banks, as they feel "comforted" by the public commitment and additional diligence multilaterals bring to the project. It is not unusual to see banks' participation being dependent upon the presence of a major multilateral.
CONS: Multilaterals often have specific and onerous due diligence requirements. Care must also be applied in the procurement process in preserving neutrality vis a vis all bidders. This is particularly the case when the institutions' final terms and conditions are disclosed at a late stage of the tendering process