|ADB's Political Risk Guarantee (PRG) covers payment of all or part of the project's debt service against specific political or sovereign risks. PRG coverage can include any combination of:
1. Currency inconvertibility and/or nontransfer (CI);
2. Confiscation, expropriation, nationalization, or deprivation of project assets (CEND);
3. Political violence, such as strikes or civil disturbances, including terrorism, sabotage, that negatively affects the project; and
4. Breach of contract, such as nondelivery by state-owned entities of inputs (e.g. fuel supplies) or nonpayment for outputs (e.g. power or water).
PRGs are primarily designed to facilitate private sector development, either through public or private sector projects. PRGs are well suited to cases in which commercial lenders are prepared to take on the commercial risks of a project, but require assistance from a multilateral institution or private insurer in mitigating political risks.
Since the political risks covered by a PRG relate to events under the direct or indirect control of the host government, the government may provide a counter-guarantee or indemnity to ADB. This provides further assurance to co-financiers and ADB of the host government's commitment to the project.
The host government can also take comfort in having ADB involved in the project, to help ensure, among other things, the technical and financial viability of the project. Project lenders benefit from the increased political risk insurance (PRI) cover in more difficult and challenging markets, while enjoying the comfort of an ADB guarantee, coupled with ADB's direct participation in the project.
If the PRG is counter-guaranteed by the host government, there is no limit on the amount of the PRG. For projects with PRG support for which there is no host government counter-guarantee, ADB's total assistance may be up to $400 million or 40 percent of project costs, whichever is less. Such assistance is calculated on a face value basis.
The PRG can be applied to all debt instruments including but not limited to loans, bonds or floating rate notes. The usual denomination is in US dollars, Japanese Yen, or Euros, but ABD will issue the guarantee in any currency it can efficiently intermediate including the currencies of some of its Developing Member Countries.
Cooperation with Political Risk Insurers:
ADB's PRG can be structured to make it compatible with the Political Risk Insurance (PRI) products offered by other agencies, including the World Bank's Multilateral Investment Guarantee Agency, private sector PRI providers, and export credit agencies. Because of the size of some projects requiring PRI cover (particularly large infrastructure projects), and in recognition of the importance of risk sharing and collaboration, ADB can offer its PRG in parallel with other PRI providers.
Public and private PRI providers offer PRI to the same project alongside or in parallel with ADB, under their respective names, terms, and conditions. This arrangement benefits PRI providers that:
- do not need the benefits of ADB's preferential status or umbrella, and
- offer insurance, rather than guarantees, on terms that cannot be easily reconciled with those of ADB's PRG.
ADB as Guarantor-of-Record
ADB issues a guarantee for the entire amount of coverage requested by the borrower, but retains only a portion of the exposure under the guarantee for its own account.
Private sector PRI providers underwrite the remaining exposure. Recoveries, if any, are shared between ADB and the other PRI syndicate participants on a pro rata basis. To cover the administrative expenses incurred in structuring each transaction and to compensate ADB for fronting the other PRI syndicate participants, ADB will charge the participants an administration fee. This fee will be determined by ADB on a case-by-case basis.
ADB can guarantee in sectors designated in the ADB Strategy 2020: Infrastructure, Environment, Regional Cooperation and Integration, Finance Sector Development, and Education.
There is no export content requirement.