In addition to the three lending categories, the IDB offers guarantee loans made by private financial sources to public sector projects. Guarantees seek to improve financing conditions for projects in Latin America and the Caribbean and help attract investment in borrowing countries. They tend to target risks that the private sector is normally not well suited to assess or manage. These guarantees are mostly partial so that the risks are shared between the Bank and private lenders. The Bank is in a unique position to do so, given its experience in the region and its relationship with governments. The IDB offers two types of guarantees in investment lending:
- Partial credit guarantees cover part (or exceptionally all) the funds provided by financiers, effectively covering risks that might affect their repayment. These are designed to assist governments and their entities in accessing new sources of debt financing with longer maturities than would otherwise be available.
- Political risk guarantees cover the risk that a sovereign or public entity will not comply with contractual conditions agreed with a private entity such as a bank or investment partner, thus affecting the repayment of the debt to creditors. It may be used, for example, where a government has moved from owner or operator to regulator or purchaser of a service. By protecting lenders against debt service defaults that result from nonperformance of government obligations agreed to under a concession or similar arrangement, these guarantees promote greater competition and private sector participation.
Reference: GN-2729-2, 2013