Infrastructure and energy projects in emerging and frontier markets often fail to secure financing for one reason: investors are unwilling to absorb risks they cannot control. Political uncertainty, weak utilities, foreign exchange restrictions, and concerns over contract enforcement can make otherwise viable projects too risky for commercial lenders.
Partial Risk Guarantees (PRGs) were developed to address this challenge. Rather than eliminating all project risk, they target specific sovereign and political risks that private lenders are least equipped to manage. By reallocating these risks to highly rated multilateral institutions, PRGs improve project bankability while preserving commercial discipline among developers and lenders.
A Partial Risk Guarantee is a credit enhancement instrument provided by multilateral development banks or development finance institutions such as the World Bank Group, African Development Bank (AfDB), or International Finance Corporation (IFC).
Unlike a full guarantee, a PRG covers only defined risks or a specified portion of the financing. Typical coverage includes:
- Government breach of contractual obligations, such as failure to honour payments under a Power Purchase Agreement (PPA)
- Foreign exchange convertibility and transfer restrictions
- Expropriation or government actions that prevent contractual performance
- Political violence or sovereign interference affecting the project
Commercial risks remain with the project sponsors and lenders. These include construction delays, operational underperformance, equipment failures, technology risks, and fluctuations in electricity prices or demand.
This selective approach ensures that guarantees address genuine market failures without insulating developers from the normal risks of doing business.
The primary purpose of a PRG is to make projects financeable by reducing risks that commercial lenders cannot reasonably price. A PRG enhances the credit profile of the guaranteed portion of a loan by substituting part of the project’s sovereign or political risk with the stronger credit standing of the guarantor.
This often enables projects to attract investors that require investment-grade or lower-risk exposures, particularly institutional investors such as pension funds and insurance companies. Improved credit quality also broadens access to international capital markets that might otherwise be unavailable.
When sovereign-related risks are reduced, lenders require lower risk premiums.
The result is:
- Lower interest rates
- Reduced financing fees
- Improved debt service coverage ratios
- More competitive electricity tariffs
For many renewable energy projects, financing costs represent a significant share of total project costs. Even modest reductions in borrowing costs can substantially improve project viability.
Infrastructure assets generate returns over decades rather than years. PRGs increase lender confidence, making it easier to secure financing with:
- Longer repayment periods
- Extended grace periods during construction
- Debt structures that better match project cash flows
Longer tenors reduce annual debt service obligations and improve overall project economics.
Many institutional investors operate under mandates that restrict investments below specific credit thresholds or limit exposure to sovereign risk. A Partial Risk Guarantee can make a transaction eligible for investors that would otherwise be unable to participate. Instead of relying solely on local banks or development finance institutions, projects can access a wider pool of international lenders and capital market investors.
A Partial Risk Guarantee does not remove risk from a project. It redistributes risk to the parties best positioned to manage it.
Typically:
The guarantor assumes:
- Sovereign payment default
- Government breach of contract
- Foreign exchange convertibility restrictions
- Political force majeure
Sponsors retain:
- Construction performance
- Cost overruns
- Operational efficiency
- Technology performance
Commercial lenders retain:
- Credit assessment responsibility
- Ongoing project monitoring
- Residual commercial exposure
This allocation preserves incentives for all participants. Developers remain responsible for delivering successful projects. Lenders continue conducting rigorous due diligence. The guarantor intervenes only if predefined sovereign-related events occur. PRGs have been applied across both sovereign borrowing and project finance transactions. In sovereign debt markets, guarantees have helped countries issue international bonds at more favourable terms by enhancing investor confidence.
In the power sector, they are commonly used to support independent power producer (IPP) projects where electricity is sold under long-term PPAs to state-owned utilities.
Typical applications include:
- Backstopping utility payment obligations under PPAs
- Covering foreign exchange transfer risks for international lenders
- Protecting investors against government actions that undermine contractual commitments
In these cases, lenders gain confidence that political or sovereign events will not jeopardise debt repayment, even though commercial project risks remain unchanged.
Read Also: How AfDB Is Using Policy-Based Finance to Support Kenya’s Reform Agenda
A guarantee alone cannot rescue a weak project. Commercial lenders still expect:
- Strong project economics
- Experienced sponsors
- Bankable Power Purchase Agreements
- Reliable engineering, procurement and construction (EPC) contractors
- Clear legal documentation
- Transparent dispute resolution mechanisms
The guarantee itself must also specify:
- Exactly which risks are covered
- The circumstances that trigger payment
- Claims procedures
- Coverage limits
- Responsibilities of each party
The credibility of the guarantor is equally important. Institutions with strong international credit ratings provide assurance that guarantee obligations will be honoured if triggered. Over-guaranteeing is generally avoided because it can weaken commercial discipline and expose governments or guarantors to unnecessary fiscal risk.
By covering carefully defined non-commercial risks, they improve credit quality, lower financing costs, extend loan maturities, and attract a broader range of investors without removing accountability from project sponsors or lenders.
