World Bank overhauls guarantee business to woo private investors

The World Bank has unveiled a plan to overhaul how it provides guarantees on its loan and investment contracts to offer simpler, faster, and easier access to guarantees in a bid to attract more private sector investment into emerging markets for climate and development. Announced by bank President Ajay Banga on the sidelines of the Group of 20 major economies’ finance leaders meeting in Brazil on Wednesday, the new guarantee platform is part of the bank’s pledge to triple its annual guarantee issuance — currently around $7 billion a year — to $20 billion by 2030. The institution offers a range of guarantees, mainly to would-be foreign investors, to de-risk projects that would otherwise be too risky to attract private financing. The bank also offers guarantees to sovereign governments to make it easier for them to borrow from financial markets. The move comes as shareholders call on the World Bank and other multilateral development banks to take on more risk and stretch their balance sheets to unlock more capital, including from the private sector, to address multiple overlapping global crises. Part of this includes increasing the use of guarantees, which was a recommendation of a closely watched 2022 report from the G20 Independent Expert Group on strengthening MDBs. “We need the private sector’s resources and ingenuity to tackle major global challenges. By consolidating our offerings, simplifying processes, and boosting accessibility we are delivering faster, easier access to guarantees for businesses,” Banga said in a press release. “Our new guarantee marketplace is a crucial step forward toward tripling our guarantees business at the World Bank Group, but more importantly helping investors do more in developing economies and accelerate positive change,” Banga added. The one-stop-shop guarantee platform will be available to clients as of July 1. Finance and development experts have welcomed the move but raised questions about its implementation. “Guarantees are one of the most established and effective ways to mobilise private finance for climate and development,” Shriti Vadera, chair of Prudential Plc and co-chair of the lab said in a press release. “The platform will simplify access to the World Bank Group’s suite of guarantees and help to ensure that lenders and borrowers better understand what is available in order to plan investments with greater certainty.” The push to simplify and streamline the bank’s multiple existing guarantee offerings — currently spread across different parts of the institution — comes from the bank’s Private Sector Investment Lab, launched by Banga last June to identify barriers and potential ways to attract private investment for climate and development challenges. The lab, which brings together 15 chief executives, including financiers and asset managers, identified guarantees, particularly those covering political risk, as key to “crowding in” more private sector finance. This is something Banga has made central to his presidency, which is no surprise given his corporate background as the former CEO of MasterCard. “The Lab has convened private sector and World Bank leaders to develop and rapidly scale solutions to address the barriers to private investment in emerging markets and developing Economies. Working together, we have prioritised the need for a simplified and consistent suite of guarantees that responds to the constraints and challenges faced by the private sector,” Mark Carney, U.N. special envoy on climate action and finance and co-chair of the lab, said in a press release. The guarantee platform will be housed under the Multilateral Investment Guarantee Agency, or MIGA, the arm of the World Bank that offers political risk insurance, guarantees, and trade finance to foreign private investors looking to enter emerging markets but worried about the risks involved. MIGA’s products protect investors’ equity, loans, and loan guarantees against a host of government-related risks including expropriation and breach of contract, as well as war and civil disturbance. But while MIGA is the bank’s main source of guarantees, other parts of the institution also offer similar products; the bank currently offers 20 guarantee products, all with different rules and processes. For example, the International Bank for Reconstruction and Development, or IBRD, the arm of the bank that lends to middle-income countries, along with the International Development Association, or IDA, the bank’s lending arm for the lowest-income countries, both offer guarantees to borrower governments designed to help them access market borrowing at attractive rates. Meanwhile, the International Finance Corporation, or IFC, the bank’s private-sector lender, has its own guarantee products designed to de-risk working in emerging markets for investors. Now, under the guarantee platform, the bank’s existing guarantee experts will be moved “under one roof” within MIGA, swelling the small agency’s approximately 200 staff members, MIGA’s head, Hiroshi Matano, told Devex. The bank also plans to hire more people to work on guarantees, and offer more training to existing staff, he said. The platform will also offer clients a menu-style set of guarantee instruments and introduce a common approach to reviewing guarantees to make the process faster, easier, and more transparent. The guarantee platform will also make it easier to offer clients a package of combined guarantees, according to Matano. “Combining them makes sense and means we can offer a total solution rather than a piecemeal thing,” he said. However, while the guarantee platform will mean more business for MIGA, Hiroshi said there were no immediate plans to ask shareholders for a capital boost. The de-risking agency currently has $2 billion in capital with which it supports $30 billion in outstanding guarantees — a threefold increase since 2014. MIGA has delivered this growth by going to the reinsurance markets rather than receiving more core funding. In 2023, MIGA issued $6.4 billion in new guarantees. Development finance experts have welcomed the new platform but also raised questions. “This is good news for World Bank clients,” Karen Mathiasen, project director at the Center for Global Development, told Devex. “A key question is whether the World Bank will also develop incentives to encourage … IFC, MIGA, IDA and IBRD to work together because it is by off-taking different risks — like political and policy risks — that the Bank can catalyze the most transformational projects,” she added. Mathiasen also called for the bank to gather and disclose data about the uptake and mobilization of its new combined guarantee instruments. For Chris Humphrey from ODI, the guarantee platform makes sense but could be more ambitious. “$20 billion of guarantee issues is a bit modest. Why not more? This is a good move and makes a lot of sense, but it’s not a massive game changer,” he told Devex. Furthermore, to really ramp up the bank’s guarantee work, the bank will need to address how guarantees are reflected on its balance sheet. For IBRD and IDA, guarantees are booked as loans and so they use up the same amount of lending headroom. For this reason, borrowers may opt to take a loan rather than a guarantee since the associated costs are the same and a direct loan is much less complicated, Humphrey explained. However, MIGA’s balance sheet is structured differently, more like an insurance agency, Humphrey said. This means it can recycle a large share of its portfolio on the reinsurance market, enabling it to issue more guarantees based on its existing capital. This is unlikely to change any time soon, a MIGA spokesperson told Devex via email. “As the World Bank Group guarantee platform takes shape, all institutions will be assessing how capital is deployed against guarantees. IBRD and IFC guarantees will still be booked on their own balance sheets, not MIGA’s,” a MIGA spokesperson said in an email to Devex.