Certain procurers, (e.g. France, Portugal) are offering comprehensive public guarantees to lenders, in order to facilitate banks participation in large projects by reducing their exposure to project risks. Unlike "underpinning" (see 2.5.2), such guarantees tend to be autonomous acts, rather than through provisions of the PPP agreement.
They are generally for a limited percentage of senior debt, leaving a residual risk to lenders. They may also contain other limitations and conditions on their call and repayment conditions, allowing them to be tailored for project specific circumstances.
PROS: One of the benefits of a guarantee facility, compared to a funding or lending facility, is its versatility:
■ It can be used to provide direct guarantees to capital market funding or indirect guarantees on certain project features to adjust the risk sharing and facilitate the raising of bank debt.
■ It can also be temporary and released upon the occurrence of certain pre-agreed events.
■ It can be applied as primary or second guarantor.
■ From a public sector budget and accounting perspectives, guarantees are contingent liabilities. They do not require immediate cash, nor are the guarantees themselves accounted for on the government balance sheet. (N.B. they may however affect the balance sheet treatment of the project as a whole).
■ They are probably easier to implement than either state funding or co-lending.
CONS: They are generally more complex to document. They are of a more permanent nature than direct lending, to the extent that they cannot be easily withdrawn, except at pre-agreed conditions, or refinanced.
Pricing the guarantee is not a straightforward exercise, and the public sector is likely to have to demonstrate that pricing is done on an "arms-length" commercial basis.
A further argument against public guarantees when applied to capital markets is that they may cannibalise the corresponding public bonds markets. However, it can be argued that infrastructure bonds will attract a different set of investors.