Multilateral Institutions Can Help Attract Significant Private Capital for Infrastructure
Financings Through Higher Leverage for their Guarantees -- Mahesh Kotecha
What Can "Official" Institutions do to Enhance Infrastructure Financings?
The private sector and emerging market countries both value the expertise and neutrality
of multilateral institutions to which both look to play a role as an "honest broker". This
role could become critical in all phases of infrastructure development - from needs
assessment to setting policy objectives, to establishing sector policies, regulation, bidding
and concessioning, financing, dispute resolution, etc. It needs to be considered and
structured so as to be well understood and easy to use.
The private markets value the role of multilateral institutions in infrastructure financings
not simply as yet another source of financing but for their important impact on limiting
host government misbehavior, whether directly as guarantors or indirectly as participants
in the financings. A multilateral institution's participation, even after Argentina, is
considered to increase the likelihood that contractual obligations of the host government
will be honored. Such a "halo" can take a more direct form when the multilateral is
participating through a PCG or a PRG, providing certain explicit credit or political risk
cover.
Risk mitigation is a role where multilaterals have perhaps a greater competitive edge than
in lending. However, with the exception of MIGA, there are no major multilateral
institutions for which risk mitigation is their core product. The World Bank, ADB and
IFC think of themselves as lenders first and guarantors or risk mitigators second. A key
market need is for multilateral institutions to offer risk mitigation in greater abundance
and with greater ease of use.
Though there is wide agreement that risk mitigation is multilateral institutions' core value
added, the risk mitigation instruments that the multilaterals offer - PRGs and PCGs -have been used only to a limited extent. There is no easy explanation of this paradox.
First, as MIGA statutes permit guarantees of debt only when there is some equity
investment guarantee, this can become a limiting factor though generally MIGA tends to
be flexible on what it is prepared to regards as equity. Second, it may be helpful if
multilaterals market themselves more effectively, responding swiftly to market inquiries,
meeting often and face-to-face with market participants and being more swift in product
modifications to meet market needs, and hire professionals from the private sector. Third,
it may help multilateral financial institutions to partner with monoline guarantee industry,
the most prolific guarantors by far, to offer emerging market cost-effective guarantee
products that use multilateral institutions' risk mitigation capabilities to bring transactions
from non-investment grade countries up to investment grade so the monolines can
guarantee them to the triple-A level. Finally, it is entirely possible that guarantees are just
difficult for multilaterals to get excited about since they are subject to the same leverage
as for loans, even if contingent risks may be lower than lending risks.
The mindset of multilateral institutions such as the World Bank and African
Development Bank as that of a lender first and a guarantor second, is an impediment to
expanded use of the guarantee capacity for African projects. Two points illustrate this.
First, multilateral lenders sometimes believe (though this is not a statutory requirement
but a matter of interpretation) that they are required under their articles of agreement to
set aside the same amount of capital for each loan as for a guarantee. As the leverage of
the World Bank and the regional development banks is one to one (one dollar of loan
must be typically be backed by one dollar of capital), their guarantees can be expensive
relative to private sector providers, who can apply much greater leverage. Secondly, the
Treasury groups of such multilateral lending institutions are often concerned about the
potentially inferior trading values for issues they guarantee relative to their straight
corporate debt. They fear that poor trading value of guaranteed issues might contaminate
the trading levels of their corporate or stand-alone debt issues. However, such fears may
or may not be justified, as the markets are generally quite capable of distinguishing
between structured or guaranteed and stand-alone or triple-A rated corporate obligations.
SCIC believes that the development banks with one to one leverage could increase such
leverage to a multiple as high as four times for purposes of guarantees, probably without
jeopardizing their triple-A ratings. If they were to do so, and offer better guarantee
products in collaboration with the private sector, they could help expand substantially the
investments flowing into infrastructure development in the emerging markets.
Mahesh Kotecha
President
August 26, 2004