See Financial Solutions in Practice
IBRD is a source of innovative and cost-effective financing and risk management. An extensive menu of flexible and complementary options allows countries to pick and choose financial terms and a mix of products to meet the needs of development programs and portfolio risk management objectives.
Financing comes with embedded risk management tools for managing foreign currency exposure and movements in interest rates and commodity prices. Clients can also access these tools on a stand-alone basis to manage a range of financial risks on the sovereign debt portfolio. Contingent financing and catastrophe risk financing options help clients protect resources and prepare for unforeseen events.
IBRD financial products and services come with the added benefits of world-class technical expertise and a dedicated team of specialists to structure a custom financial solution each time. The same menu of products and services is available at the subnational level to local governments and public sector entities.
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The China Tuberculosis Control Project
China was confronting a serious public health problem battling Tuberculosis (TB), as the number one cause of death from infectious disease in adults. According to WHO estimates, China has the world's second largest TB epidemic, behind only India, with more than 1.3 million new cases of TB every year and about 150,000 deaths. The Tuberculosis Control Project was designed to provide access to effective TB control services to nearly 700 million people, especially the poorest, that would otherwise not seek or receive effective treatment. The project’s overall viability was not only dependent on access to financing, but also cost as the project was targeting some of China’s poorest provinces. The interest cost of IBRD financing was considered too high for the project to be financially viable. China’s challenge was to find lower cost financing for the project to proceed.
Instead of employing a traditional co-financing scheme that would have required the Government of China to deal with two separate development partners, the World Bank in collaboration with the UK Department for International Development (DFID) developed a new mechanism to blend an IBRD loan with a DFID grant. This new innovative approach to financing reduced the project’s overall funding cost and expanded the reach of the project by allowing China to lend to poorer provinces at terms they could afford. Blending reduced the project’s implementation and transaction costs because China needed to deal with only one funding agency (IBRD). In addition, this co-financing scheme provided a new mechanism for donors to cooperate effectively in jointly addressing development challenges of the member countries.
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© Curt Carnemark / World Bank
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Financing Summary
Amount: $104 M loan; $37 M grant
Maturity: 8-yr grace period; 20 yrs level repayment
Project Term: 2002-2010
Interest Rate: 64% of LIBOR + 0.30%
Lending Instrument & Terms: Specific Investment Loan; Fixed Spread Loan |
Indonesia’s Experience with IBRD Contingent Financing
Indonesia entered the 2008 financial crisis in a strong position with 2007 real GDP growth near a ten year high of 6.3. However, by the fall the global turmoil began affecting Indonesia’s financial markets. Compared to other countries in East Asia, Indonesia is more exposed to public and private investment flows in and out of the country with a large presence of foreign investors in stock and bond markets. The 1998 crisis also left Indonesian markets sensitive to exchange rate movements and prone to capital flight. Indonesia’s challenge was to ensure that it can provide critical public services and make necessary investments at a time when these are most needed because of the global economic crisis and its impacts.
The government has taken a number of precautionary and proactive measures to maintain the stability of financial markets including setting up a back-up financing facility. An important element of its precautionary stance was budget support in the form of a World Bank USD 2 billion Development Policy Loan with a Deferred Drawdown Option (DPL with a DDO). The main objective of the loan is to assist the Government of Indonesia in addressing the potential adverse impact of the global financial crisis on public expenditure during 2009-2010. The loan is the largest component in a US$ 5.5 billion contingent financing facility, designed by the Indonesian Government for 2009 and 2010. The amount is based on the estimated financing gap that could arise due to tightening market conditions. The government can access the resources from the facility to finance important social and infrastructure programs if and when markets do not provide the needed financing at a reasonable cost.
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© Curt Carnemark / World Bank
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Financing Summary
Amount: USD 2 billion
Project Term: 2009-2010; renewable
Financial Product: Development Policy Loan with Deferred Drawdown Option
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Malawi’s Maize Sector
Recurrent drought has lead to chronic and widespread malnutrition in Malawi. Beyond its direct impact on agricultural production, severe weather has an indirect affect on government resources. When drought strikes the government is forced to divert resources from other programs and make appeals for international assistance to ensure that the population has access to food. In 2005 alone the government of Malawi spent $200 million in drought response.
The World Bank in collaboration with other stakeholders helped Malawi develop an integrated risk management framework to manage its vulnerability to extreme weather and an overall strategy to ensure the population’s ongoing access to affordable food during drought. The weather derivative contract which links agricultural production and rainfall levels, was designed for Malawi to access contingent financing from the market in the event of a severe and catastrophic drought. IBRD acted as the market intermediary for this transaction and the UK Department for International Development (DfID) provided budget support to help the government finance the premium for this contract. Malawi became the first country to hedge its weather exposure with the World Bank and the contract represented the first time an IDA country used IBRD market-based risk management tools.
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© Curt Carnemark / World Bank
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Financing Summary
Amount: USD eq. 5 million
Strike: Rainfall 10% below historical average
Contract Term: October 2008 - April 2009
Risk Taker: Swiss Re
Financial Product: IBRD Weather Hedge
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Colombia’s Experience with the IBRD Flexible Loan
Expanding national access to tertiary or university level education has been a focal point of the Government of Colombia’s overall strategy to spur economic growth. The high cost of tertiary education had been identified as the cause for low enrollment levels and high drop-out rates among lower-income students and those from rural areas. At the same time the Instituto Colombiano de Crédito Educativo y Estudios Técnicos en el Exterior (ICETEX), the education financing agency, in the practice of lending out grant money rather than raising its own financing, had limited capacity to improve student loan financing services due to increased credit and cash flow risk from loan defaults. Colombia’s challenge was to secure a financing package that had flexible repayment terms to match the specific needs of students and risk management options that would allow ICETEX to become a self-sustaining financial entity able to attract its own financing.
Partnering closely with ICETEX, IBRD was able to enhance its standard loan terms to offer longer maturities, more in line with the needs of recently graduated students, plus the ability to customize repayment schedules according to agency disbursement and student repayment schedules. ICETEX received the loan proceeds from IBRD in Colombian pesos to avoid the currency risk of taking student receipts in pesos and repaying IBRD in dollars. The highly customizable features of the IBRD Flexible Loan provided the means for ICETEX to reduce the credit and cash flow risks on its balance sheet which would ultimately improve the agency’s capacity to raise its own financing and expand education loan services to lower income students.
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© Curt Carnemark / World Bank
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Financing Summary
Amount: USD 300 million
Maturity: 22.5 years; 6 year grace period
Project Term: 2008-2013
Financial Product: IBRD Flexible Loan; fixed spread
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Uruguay’s Experience with IBRD Back-to-Back Financing
In line with the Government of Uruguay’s reforms to strengthen domestic capital markets, the Ministry of Economy and Finance is working to reduce the country’s vulnerability to foreign currency debt by increasing the percentage of local currency debt in its portfolio through the issuance of index-linked bonds in the domestic market. To support these reforms Uruguay sought financing in local currency. However, when IBRD lends in a local currency it usually does so by accessing the local derivative market to swap the original USD obligation into the local currency. With an undeveloped derivative market this conventional method was not an option in Uruguay . Working closely with the local institutions, IBRD proposed to issue an IBRD bond in Uruguayan pesos targeting institutional investors and lend the bond proceeds in pesos to government. The challenge was to structure a financial instrument that was an acceptable investment choice for institutional investors, namely local pension funds.
To facilitate this transaction, the government broadened the regulatory framework that governs pension funds to include bonds issued by international financial institutions as eligible investments. In two simultaneous and symmetrical transactions, IBRD became the first foreign issuer to launch a public bond in Uruguayan pesos, of which the proceeds were passed to the Uruguayan government through an IBRD Flexible Loan with terms replicating that of the bond. Beyond meeting the government’s objective for local currency financing, this bond issuance contributed to the development of the Uruguayan capital market by adding depth, breadth and liquidity to the market. For pension funds, previously restricted to investing only in government bonds, this operation provided the investment diversification they demanded for better portfolio risk management.
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© Curt Carnemark / World Bank
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Financing Summary
Amount: UYU 1,982 M
Start Date: June 4, 2008
Maturity: April 15, 2017
Coupon: 3.40%
Financing Interest Rate: Coupon + 0.30%
Financial Product: IBRD Flexible Loan
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Mexico’s Experience with the IBRD Flexible Loan
Mexico’s Federal Mortgage Corporation, Sociedad Hipotecaria Nacional or SHF is the primary government agency responsible for developing financial markets for private housing and expanding access to housing finance to lower income borrowers. SHF plays a crucial role as a market maker, providing liquidity and efficiency in the market by standing ready to buy and sell mortgage securities. The scarcity of credit brought on by the 2008 financial crisis forced SHF to rely increasingly on short term borrowing to fund longer term liabilities. This mismatch in financial terms began jeopardizing SHF’s ability to support the domestic mortgage market. SHF needed access to flexible, long-term financing in local currency to extend the maturity structure of its portfolio and manage the risk of cash inflows from borrowers in pesos and outflows/repayment due in foreign currency. It also needed tools to manage interest rates over time.
SHF’s challenge was to find ways to reduce its balance sheet vulnerabilities so that it would be in a stronger position to lead market development. Using an IBRD Flexible Loan for USD 1 billion (roughly 13% of the total balance sheet) with a 30-year maturity plus five year grace period, SHF was able to restructure its balance sheet and attain a more stable risk profile. Through the same loan, SHF accessed local currency financing and interest rate management tools at more favorable rates and in larger volumes than it would have been able to achieve on its own. IBRD partnered with SHF to tailor a mix of fixed interest rates at varying maturities and to include a cancellable interest rate swap feature. This would allow SHF to unfix interest rates on a portion of the loan at no charge on specified dates in the future to reduce the risk of an unfavorable movement in interest rates should financial intermediaries prepay loans.
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© Curt Carnemark / World Bank
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Financing Summary
Amount: USD 1 billion
Maturity: 30 years; 5 year grace period
Coupon: 3.40%
Project Term: 2008-2011
Financial Product: IBRD Flexible Loan
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IBRD’s Role as Treasury Manager for IFFIm
International Finance Facility for Immunisation (IFFIm), launched in 2006 to raise funds for GAVI immunization programs, brings together the capital markets and donor development aid grants to provide a new modality for development finance. Until now these distinct financing mechanisms had operated in separate spheres. The financial challenge was to provide a predictable and long-term source of funding that would allow developing countries to plan and implement children’s health programs by making donor contributions committed over the next 20 years available for disbursement over the next 10 years.
As the treasury manager for IFFIm, the World Bank Treasury offers a range of financial services including bond issuance, and investment and risk management services. Leveraging IBRD’s financial strength, market presence, and financial expertise to secure funds for investment now and in the future, IFFIm is expected to deliver $4 billion over ten years to the GAVI Alliance for vaccines and immunization that help protect an additional 500 million children in the world’s 70 poorest countries against preventable diseases.
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© Curt Carnemark / World Bank
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Program Details
Donors: France, Italy, Norway, South Africa, Spain, Sweden, and the United Kingdom
Currency of Issuance: Australian dollars, British pounds, New Zealand dollars, South African rand, and US dollars
Investor Universe: geographically diverse; institutional and retail investors
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IBRD Provides Financial Platform to Support Advanced Market Commitments for Vaccine Development
Advance Market Commitments (AMCs) are a new approach to public health funding designed to stimulate the development and manufacture of vaccines for developing countries. The goal of this pilot initiative is to alleviate persistent private sector failures to develop and produce products needed in developing countries, due to perceptions of insufficient demand or market uncertainty. With AMCs, donors commit funds to provide vaccine makers with the incentive they need to invest the considerable sums required for development and manufacturing.
The challenge was to strengthen the viability of this initiative by guaranteeing donor commitments over the long-term, while managing the currency risk of receiving donor commitments in multiple currencies and paying out US dollars for vaccines.
IBRD partnered with GAVI and AMC donors to provide the financial platform for the initiative. This cooperation entailed placing USD 1.5 billion of donor subsidy directly on IBRD's balance sheet to provide the needed financial presence and funding guarantee to support ongoing investment from the private sector and using market-based risk management transactions to transfer the currency risk to market.
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© Scott Wallace / World Bank
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Pilot Details
Commitments: USD 8.5billion
Commitment Period: 2009-2030
Future Dosage Commitment: 200 million annually for 10 years
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