Case Study Details - Playbook of Solutions

Description

Sovereign guarantees (otherwise known as government guarantees) are formal assurances provided by a national government to underwrite financial liabilities or obligations of a specific entity. They give lenders assurance that the government would assume responsibility for repaying a financial commitment or ensuring contractual obligations are met in case of default of the primary obligator. They enhance investor confidence by mitigating risks related to counterparty, political instability, regulatory changes, and sometimes also currency fluctuation, thus making investments more attractive.

Benefits

Sovereign guarantees are crucial in sectors like infrastructure and clean energy, where private capital is essential but risks can be perceived as high, especially in an emerging and developing context. These guarantees typically enable the financing of projects that would not otherwise be able to receive financing by elevating the credit worthiness of the contracting entity. By demonstrating government commitment, they help build confidence and improve the terms of the financing (e.g., reduced financing costs, lengthened tenors). Their effect on lowering the risk profile of a project, also tend to expand the investors’ base and promote competition in bidding, which further decreases financing costs.

To minimize risk and maximize benefit, government guarantees should be considered part of the project structuring and assessed for risk allocation, government exposure, affordability and sustainability.

Case Study

South Africa National Treasury’s Energy Bounce Back (EBB) Loan Guarantee Scheme

Leading into 2023, the government of South Africa had identified small-scale, embedded power generation such as solar rooftop PV as one of multiple solutions to overcome load shedding challenges that its energy system was facing. However, SMEs and households both struggled to meet the high upfront costs required to install such solutions.

In order to help de-risk these investments for small Energy Service Companies (ESCOs), the South African National Treasury launched in August 2023 the Energy Bounce Back (EBB) Loan Guarantee Scheme. By guaranteeing solar-related loans, the scheme sought to facilitate the RE transition and support 1000 MW of rooftop solar generation in its first 12 months of existence. To achieve this goal, the government partnered with commercial banks, DFIs and non-SME finance providers to identify projects and provide loans to SMEs and households. The use of a sovereign guarantee mechanism in the form of the National Treasury guaranteeing 20% of initial losses on rooftop solar loans, administered by the South African Reserve Bank, was absolutely key in de-risk investment projects administered in the scheme. This sovereign guarantee helped increase investors’ confidence around the availability of 1st loss capital, should borrowers not be able to honor loan reimbursements. It helped reduce the cost of loans by lowering the perceived risk of solar investments while also encouraging major financial institutions from the private sector (e.g., ABSA Bank, First National Bank, Standard Bank) to participate in the scheme.

Additional Sources

Sovereign Guarantees