Partial Risk Guarantees in Practice

A partial risk guarantee covers debt service default arising from specified government-related failures: a state utility failing to pay under an agreed contract, a government failing to honour an undertaking, or a defined political action. It is issued by a development institution and typically requires a counter-indemnity from the host government.

The cover is real and has enabled projects that could not otherwise be financed. It is also narrower than the phrase "risk guarantee" suggests.

Commercial and operational risk remains entirely with the project. If the plant underperforms, if costs overrun, or if demand disappoints for reasons unconnected to government action, the guarantee does not respond.

This sounds obvious and is frequently blurred in financial models, where the guarantee is treated as general downside protection rather than cover for a defined event.

Most partial risk guarantees require the host government to indemnify the issuing institution if the guarantee is called. That has two consequences sponsors should understand.

First, it means the government has a direct interest in the guarantee never being called — which is part of the instrument's disciplining effect and a genuine benefit.

Second, it means the government must agree to the counter-indemnity, and that agreement runs through the ministry of finance, not the sector ministry sponsoring the project. Where the two are not aligned, the timetable extends considerably.

The provisions that matter most are the ones nobody negotiates hard because everyone expects never to use them:

• What constitutes a covered event, defined precisely rather than by category
• The waiting or standstill period before a claim can be made
• Evidence required to support a claim
• Whether the guarantee pays debt service as it falls due or accelerates
• Subrogation: what the issuing institution can then pursue, and against whom

A guarantee that pays after a long standstill is protection against default, not against liquidity stress. Projects frequently need both, and the second usually requires a separate liquidity instrument.

Obtaining a partial risk guarantee is a parallel workstream with its own approvals, diligence, and board processes. Sponsors who begin it when the commercial structure is settled find the financing timetable driven by the guarantee, not the other way round. Beginning it early, with the finance ministry engaged from the outset, is the single largest saving available.