India Lobbying To Remove Host Government Guarantee

Indian finance secretary Montek Singh Ahluwalia, making a pitch for removing the host country guarantee requirement, said the World Banks involvement in a project would be sufficient indication of its quality, making the government guarantee unnecessary.

The World Bank adds credibility if it comes in and finances a part of a projects, he said at a seminar on accelerating private sector participation in infrastructure projects in East Asia here Saturday.

The World Bank is required to seek a host government counter-guarantee for its guarantee instruments under its articles of amendments. The guarantees, which the Bank has been pushing with fresh vigour in the past two years, are part of the multilateral institutions efforts to leverage its resources and encourage private sector financing for infrastructural projects.

The Bank believes that the host government counter-guarantee is particularly crucial for its partial risk guarantee instrument which ensures payment in the case of debt default because of government noncompliance with its obligations, such as maintaining the regulatory framework.

World Bank officials argue that a counter-guarantee makes sense for the host government because it reduces its contingent liability risk to a minimum to make a project feasible, and encourages the private sector to take on most of the commercial risks.

India, although it is unhappy with the need for a counter-guarantee, is urging the World bank to tailor financial instruments that will enable developing countries to tap the international debt markets.

I think we have a major problem in accessing debt. Our main concern is that it is not easy to go for debt financing at the very early stages of a project, Ahluwalia said, asking the World Bank to fill the gap.

We would like to go in for bond financing with maturity commensurate with the projects, he said, speaking of the difficulties in tapping long-term financing at a viable cost.

The Indian finance secretary said it would be difficult to finance projects with long gestation periods if the risks were not mitigated by unbundling.

At present, most developing country governments assume most of the risks for pioneering projects. However, counter-guarantees are an unpopular option.

Unbundling risks would help in more even distribution of the cost of setting up projects. A World Bank paper recommends that developing countries create models for each major sector, clarifying who will mitigate what risks are involved and how.

Ahluwalia hinted that such models were being created in India. Over the next 2-3 years, we would have a much better appreciation of the kind of unbundling needed to make risks financiable, he said.