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Credit enhancing output based aid
Stephan von Klaudy and Umang Goswami |
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This paper presents options for using World Bank guarantee instruments to enhance the credit worthiness of government Output Based Aid (OBA) payments to an infrastructure service provider. OBA payments are targeted, performance-based subsidies provided when full cost recovery through direct user fees is not justified due to externalities, not possible due to affordability constraints, or not practical due to the high costs of levying such fees. The main focus of the paper is not on the policy aspects of subsidy provision, but on the use of OBA payments as one element of a cash flow for project financing, the other element being user fee payments. Structured in the right way, OBA payments can be made creditworthy and can make
infrastructure transactions financeable in the market place. In many countries, government payments
are not considered reliable and are assigned a low credit rating by financial markets and
investors. In these cases, the quality of OBA payments needs to be enhanced, i.e. lifted to a higher
level, if they are to become a creditworthy component of a project's cash flow. World Bank
guarantee instruments can be used to achieve this objective. The two principal options analyzed
in this paper are partial risk guarantees to mitigate government payment risks for individual projects,
and partial credit guarantees to enable governments to mobilize funding for a subsidy pool
that would provide OBA payments to multiple projects.
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