RISK MITIGATION: Why can it unlock access to lower cost, longer-term financing?

Developing countries have limited access to private sector capital due to the perception of unacceptable risks, political, regulatory, credit, and currency. INFRADEV enables Risk Mitigation Product providers from the public and private sectors to provide information in one “marketplace” about their products that can be used to reduce these risks, and enable access to longer term, lower cost capital.
  • Political risk. Political risk instruments date from the 1960s, and are well-established and widely used. They cover war and civil disturbance, expropriation and confiscation, and currency convertibility and transferability.
  • Regulatory and contractual risk. Cover in this area typically includes breach of contract, changes in law, license requirements, approval and consents, obstruction in the process of arbitration, arbitral award following a covered default and non-payment of a termination amount. Most MDBs now offer products in this area, including the World Bank Partial Risk Guarantee (PRG) and MIGA’s Breach of Contract Guarantee.
  • Credit risk. Partial Credit Guarantees (PCGs) are the most common form of cover for credit risk. They cover a percentage of the total amount borrowed and can protect against a wide range of events that can cause nonpayment, including commercial risk.
  • Foreign exchange risk. Neither official nor private agencies offer explicit cover for foreign exchange risk. As such, investors seeking protection have to use alternative approaches, which include: (i) use of local currency finance; (ii) currency hedging; (iii) government exchange rate guarantees; (iv) indexing tariffs to foreign currency; and (v) devaluation liquidity backstop schemes.