Project-Based Payment Guarantee for the Private Sector

Our Project-based payment guarantees cover defaults on non-loan-related government payment obligations (e.g., long-term offtake contracts) to private or foreign public entities arising from contracts, laws, or regulations. 

For instance, it can backstop public entity payment obligations in PPPs, such as for large infrastructure projects, or government-sponsored loan/ guarantee programs through a financial intermediary (FI), such as risk-sharing facilities for local currency financing in nascent markets. 

Our payment guarantees include the following structures: 

Project-Based Payment Guarantee (with LC) for Private Sector Projects

This guarantee backstops a commercial bank letter of credit (LC) that provides liquidity to private sector projects if government payments are delayed, while the World Bank’s payment guarantee to a commercial L/C bank would only be accessible after a certain pre-determined period. The LC serves as a buffer against short-term payment disruptions, allowing time to address the payment delay, while the liquidity situation of the Project is maintained prior to the L/C being fully exhausted. 

This structure enhances the project's resilience to cash flow disruptions, making it attractive for projects in the early stage of reforms and highly dependent on government support and/or undertakings. The guarantee can cover various types of government payment obligations.  

Project-Based Payment Guarantee (Direct) for Private Sector Projects

Our direct payment guarantee covers a portion of government payment obligations to private projects. We can cover a wide range of sovereign contractual obligations, including termination payments, or indemnities for changes in law. By mitigating these payment risks, we facilitate the project's access to limited-recourse financing on more affordable terms. This guarantee is particularly effective in public-private partnerships (PPPs) for large infrastructure projects. 

This risk transfer enables project financing even in challenging markets that lenders might deem too risky. Direct payment guarantees require an adequate period of time between the occurrence of the default and the Bank’s payment obligation under its guarantee to address the government payment default. If a Project requires immediate liquidity, a Payment Guarantee with LC is more suitable than a direct payment guarantee.   

World Bank guarantees are financial tools to leverage commercial financing for development purposes while optimizing the use of scarce public resources. The World Bank deploys its guarantees at the request of a member country. In exchange for the World Bank offering a guarantee, the member country requesting the guarantee provides a sovereign counter-guarantee to indemnify the World Bank if the guarantee is ever drawn (Indemnity Agreement). The World Bank only provides guarantees that backstop the risk of non-performance by governments or public entities for commercial financiers and, to the extent necessary, mobilize private capital to support public and private sector programs and projects.  As with any other guarantee, World Bank guarantees do not inherently reduce the risk of government non-performance. Instead, they shift the financial responsibility for the risk cover to the World Bank as a guarantor. The World Bank then transfers this financial responsibility to the Government through the Indemnity Agreement if that risk ever materializes.