August 20, 2025
A. Government Guarantees
Government guarantees are formal commitments—often through contracts or comfort letters—where the government agrees to fulfill certain obligations or cover defined losses under specific conditions. Government guarantees are a sovereign obligation under a binding or potentially binding2 written document (such as a contract or comfort letter) to satisfy certain obligations of an underlying contract, or to protect the beneficiary from defined losses if specified conditions occur.
These guarantees:
- Enhance project viability by making them more attractive and financeable for private investors.
- Mitigate risks that investors cannot control or are unwilling to bear.
- Improve creditworthiness of projects, even in developed countries, helping to mobilize private capital.
- Reduce financing costs, which can lead to lower service costs for consumers.
B. Types of Government Guarantees
1. Performance Guarantee
Government guarantees are nearly always structured as performance guarantees, to reinforce certain government undertakings or cover the risk of a guaranteed government counterparty’s failure to perform targeted or specific risks or obligations linked to underlying PPP contracts or concessions. With this type of guarantee, the government commits to making the contractual obligor (for example, subnational government or SOE) fulfill its obligations under specific project agreements, such as concession agreements, supply agreements, or output purchase agreements. The primary focus is on performance, although it may include financial implications to eventually make the beneficiary whole. Generally, payment guarantees are financial commitments that require the guarantor to make a payment on behalf of the guaranteed entity, based on the terms outlined in the original concession agreement, in the event of payment default by the primary obligor.
2. Financial Guarantee
Financial or credit guarantees are usually unconditional agreements to service debt obligations of the borrower in case of default. the government is “stepping into” the underlying loan agreements to make debt-service payments on behalf of the borrower, such as the subnational government or SOE, often regardless of the cause of default. Financial guarantees are rarely used in infrastructure PPPs because they may facilitate unbalanced risk allocations that place all risk with the government, and they are not linked to any performance indicators for the private sector. As a result, the government can be liable for a whole host of risks ranging from natural disasters and other force majeure events, to defaults by the private sector such as construction contractors. This type of guarantee may provide the wrong incentives for the private sector because it relieves the debt-repayment pressure from the
sponsors or contractors, especially if the project is not carefully planned and designed. Moreover, governments are often left with no time to remediate the situation through internal coordination or renegotiations, and are instead obligated to make immediate payment.
C. Other forms of Government Support Mechanisms
Comfort letters, letters of intent, keep-well agreements, letters of support are not intended to be legally enforceable. Governments can support projects through various mechanisms beyond guarantees, including:
- Subsidies: Capital grants, financial viability support (upfront or ongoing), and in-kind grants.
- Capital Injections: Direct funding or equity investments to reduce project costs.
- Strategic Selection: The choice of support depends on the government's goals or the market failure being addressed.
Revenue and Demand Risk Guarantees
The most common supports are land acquisition and resettlement costs, minimum demand and revenue guarantees, payment obligation guarantees, currency inconvertibility and transferability risk guarantees, and credit guarantees. Other forms of support include viability gap funding and grant funding at financial close to be used during construction. A government guarantee of a certain minimum level of usage, or of a minimum level of revenues, may be necessary for the project to obtain financing, because lenders tend to shy away from greenfield demand risk. While an availability payment is not technically a guarantee, it often functions in a similar manner to reduce a specific risk—in this case, demand risk. However, because the risks that are addressed by the guarantee are largely beyond the government’s control, governments should provide such guarantees with extra caution. For example, if demand projections are not sufficient to attract investment without a guarantee, governments should first determine whether there is a strong enough economic case to move forward with the project before resorting to providing a revenue guarantee, indemnity agreements, government undertakings, and guarantee agreements.
D. Is Government Guarantees required for a project backed by UKEF’s Buyer Credit Guarantee?
Yes and no.
For a project backed by UKEF’s Buyer Credit Guarantee:
· Government Financial Guarantee: Usually not required. UKEF already provides the financial guarantee to the lenders on behalf of the exporter, so an additional sovereign financial guarantee would duplicate coverage. Financial guarantee depends on the borrower's risk profile and the country's creditworthiness. UKEF may require financial guarantee from high-risk markets (where UKEF perceives elevated political or credit risk). However, it should be noted that none of the official sources explicitly stated that sovereign financial guarantee is adopted in the projects sited at Annex 1.
· Government Performance Guarantee: Commonly required. UKEF wants assurance that the government (or relevant public entity) will perform its obligations under the project agreements (e.g., concession contract, availability payments, demand support, land acquisition, permits). This ensures that the borrower/exporter is not exposed to non-performance by the public counterparty.
Reference:
Annex 1. UKEF’s Buyer Credit Guaranteed Projects
| Project Name / Type | Country | Sector | Buyer Type | Project Description | UKEF Support | UK Involvement |
1 | Ankara–Izmir High-Speed Railway | Turkey | Transport | Turkish Government | 503 km high-speed electric railway | £1.7 billion Buyer Credit Facility | UK suppliers for rail infrastructure |
2 | Yerköy–Kayseri Electric Railway | Turkey | Transport | Turkish Ministry of Transport | 140 km low-carbon electric railway | €1.027 billion loan guaranteed by UKEF and ECAs | UK firms supplying steel, pipes, equipment |
3 | Morava Corridor Motorway | Serbia | Transport | Serbian Ministry of Finance | 5G-ready motorway with flood defense system | €430 million Buyer Credit Facility | UK goods/services via Bechtel-ENKA JV |
4 | Zanzibar Infrastructure Projects | Tanzania | Airports & Roads | Ministry of Finance (non-sovereign structure) | Pemba Airport expansion and 103 km of road upgrades | €422 million via Citi & Deutsche Bank with UKEF guarantees | UK firms awarded £100+ million in contracts |
5 | Egyptian Railway Modernization | Egypt | Transport | Egyptian National Railway Authority (ENR) - State-owned | Modernization of national railway infrastructure | £1.7 Billion Buyer Credit Guarantee | State entity purchasing critical infrastructure UK content - Rolling stock, engineering works, operation and maintenance |
6 | Kotoka Airport Expansion | Ghana | Transport / Aviation | Ghana Airports Company Ltd (GACL) - State-owned | Expansion of Kotoka International Airport | £120 Million Buyer Credit Guarantee | State-owned company undertaking national infrastructure |
7 | Six Flags Qiddiya Theme Park | Saudi Arabia | Leisure / Tourism | PIF & Bouygues Batiment | Theme park in the outskirts of Riyadh | Islamic Finance £531.3 million | UK suppliers involved in construction |
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