Rather than providing lending directly, governments may instead guarantee repayment of debt provided by commercial sources, in case of default by the private party. Farquharson et al [#95, page 63] notes that guaranteeing project debt undermines the risk transfer to the private sector. For this reason, governments often provide only partial credit guarantees-that is, a guarantee on repayment of only a part of the total debt.
Partial credit guarantees have been used by both developed and developing country governments to help support their PPP programs. For example:
• Korea's Infrastructure Credit Guarantee Fund guarantees project debt through a counter-guarantee structure. That is, the Fund guarantees an on-demand term loan provided by a financial institution, that can be called by the project to meet its senior debt service payments [#99, pages 6-7]
• Kazakhstan has provided guarantees on infrastructure bonds issued for its transport PPPs. The guarantees on the bonds by the government gave security for the pension funds to invest in the projects. [#263]
The use of guarantees should be carefully considered, and targeted at risks which the government is best placed to manage. Guarantees that are inappropriately used by the government can increase its fiscal exposure, while reducing value for money by reducing real risk transfer to the private sector, as described in Section 1.4.2 on the danger of over-leverage, and Section 1.3.1 on the lack of fiscal clarity from PPPs. For more information on government guarantees and public financial management for PPPs, see Section 2.4: Public Financial Management Frameworks for PPPs.