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IDB approves first partial risk guarantee

The Inter-American Development Bank has added another instrument to its growing list of financial facilities to support the private sector in Latin America and the Caribbean: partial risk guarantees.

A $31.25 million partial risk guarantee was approved in April by the IDB Board of Executive Directors for senior debt noteholders investing in Bogotana de Aguas y Saneamiento S.C.A., E.S.P., a company that will build a wastewater treatment plant serving the metropolitan area of Bogotá, Colombia.

The operation is both a first for the IDB, and also the first partial risk guarantee made by a multilateral development bank without a sovereign government counterguarantee, according to Blair Thomas, the IDB project team leader.

Private financiers have long maintained that they would invest more in the region if the IDB could reduce risks for an investment project in circumstances in which no other organization has this capability.

The IDB can "mitigate discreet risks that no other party can because of its preferred creditor status," Thomas said. "When we cover these risks, we unlock the entire financial package and make it work."

The IDB partial risk guarantee, which ensures compensation to some of the senior debt noteholders in the event of an early termination of the concession or in case of restrictions on foreign exchange convertibility or transferability, was a key to putting together the first phase of an investment in Bogotana de Aguas sponsored by the French firm Lyonnaise des Eaux. The firm may eventually complete an $800 million investment program in the Bogotá area with the help of additional IDB financial support.

For the time being, IDB guarantees are expected to be used only when specific circumstances call for this type of operation, according to Thomas. The amount of the IDB guarantee is charged against the Bank's ordinary capital, the same as if it were a loan, and cannot exceed 25 percent of total financing for a private sector project.

"Based on the experience gained in this project, we are looking at ways to enhance the guarantee program," Thomas says. "It has the potential of becoming a much more widely used financial instrument."
 

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