Loan guarantee: A loan guarantee is an assurance to a lender providing credit to a
project company. Such a guarantee provides an assurance that, if a borrower
defaults, the government will repay the amount guaranteed, subject to the terms and
conditions of the agreement. As the guarantee reduces the lender's risk, the
borrower should be able to obtain funds at a lower interest rate or negotiate a loan
that might not otherwise be available. However, it is important to mention here that
full guarantee by government reduces the incentives for the private operator to
manage the project risks.
As loan guarantees do not involve immediate cash spending by the
government, they can be a more attractive tool to the government than direct loans
or grants, particularly in periods of fiscal restraint. However, they can generate
sizable financial obligations for the government and may significantly affect its fiscal
framework. Further discussion on this issue is provided in the next section.
Force majeure: The government may consider buyout of a project in cases of
prolonged force majeure. Government buyouts may also apply in certain
extraordinary circumstances as may be provided for in the concession or contract
agreement.
Equity participation: The government may also consider direct or indirect equity
participation in a project to assure government support for its implementation and
operation. Equity participation helps in many ways. It may be a vital source to
supplement equity provided by project sponsors, particularly when equity capital
from investment funds or other sources is not available. Equity participation helps to
achieve a more favourable debt-equity ratio necessary to keep the debt service
obligations manageable, particularly in the initial years of project operation. It may
give comfort to debt financiers and consequently the cost of lending could be lower.
Equity participation by the government is also helpful in securing public support for
politically sensitive projects and projects that are of strategic importance.
