Sovereign risk mitigation is often needed to catalyze PPPs in developing countries with high credit risk ratings. In developing Asia, a large percentage of countries borrowing from MDBs are considered risky. Sovereign risk and country risk are associated with the financial closure of infrastructure PPP projects. Reducing these risks through guarantees provided by MDBs is a solution, but this is only one of many options that include private insurance and letters of credit. The case studies from Kenya and Turkey show that, in projects with a dedicated source of revenue and high demand for services, credit enhancement from MDBs helped to enable financial close.
Key risks for private investors include dealing with a government counterparty's payment timeliness and its willingness to pay. Risk mitigation instruments such as MDB-issued letters of credit and partial risk guarantees that are not affected by a country's macro environment are beneficial, and, in some cases, they can raise the credit rating of the project above the sovereign ceiling. The Elazig Hospital PPP showed that proper risk mitigation can be used outside traditional sectors, such as power, and are also effective in social sectors. Further, the upstream support to Turkey's health sector by the EBRD was considered a material factor determining the project's credit rating. This implies that MDBs should continue their engagement in upstream capacity building since this can have a material impact on PPP investments downstream.
Another policy implication is that there are ways to reduce risk that should be taken before turning to credit enhancement. These include improving domestic investment conditions through increased transparency, practicing risk allocation, and using government support where needed. When credit enhancement is used by MDBs, the empirical analysis shows it can be a significant factor in attracting investment. But, for the financial benefits of these interventions to accrue to the government, they must be in place before bidding. This implies that there should be early dialogue between government and MDBs during the transaction advisory stage.