Introduction: How guarantees work in project and infrastructure finance

A guarantee is a contractual commitment by a third party to absorb defined losses if specified risks materialise. In project and infrastructure finance, these instruments serve two distinct economic functions: credit enhancement and risk transfer. Credit enhancement improves a borrower’s general risk profile to lower the cost of capital, lengthen tenors, and attract more lenders. Risk transfer shifts defined political or contractual risks to a party better positioned to bear them. Common instrument types include Partial Credit Guarantees (PCGs), which cover a portion of debt service irrespective of the cause of default, and Partial Risk Guarantees (PRGs), which cover defaults arising from specific government-related risks like regulatory commitments or off-taker performance.

The framing

Analysis reveals that the so-called “guarantee gap” is often misdiagnosed as a generic shortage of risk mitigation. Interviews with over 30 senior practitioners indicate that the central challenge is misalignment; guarantees are frequently not deployed where they can have the most catalytic impact. A guarantee is only effective when it materially changes investment decisions, shifts the terms of capital (price, tenor, or risk allocation), or expands the range of eligible risk-holders. However, they are not substitutes for project preparation, as practitioners emphasise that “a guarantee doesn’t make a bad project a good project.” Underlying project economics remain decisive, and there is a recurring concern that pressure to deploy capital leads to guarantees being extended to projects without adequate preparation.

Where guarantees lose traction

Supply-side constraints often result in guarantees being treated as second-class products relative to loans within many multilateral development banks (MDBs) and development finance institutions (DFIs). Accounting practices frequently treat a USD 100 million guarantee as equivalent to USD 100 million of exposure on the balance sheet, undermining the leverage advantage they are intended to provide. If guarantees are not meaningfully cheaper than direct lending, borrowers tend to prefer loans to avoid the “complexity premium.” This preference is compounded by the fact that loans generate a wider range of ancillary fee income—such as commitment and syndication fees—that guarantees typically cannot replicate.

Furthermore, an “innovation trap” exists where the pursuit of bespoke, boutique products generates legal friction and high transaction costs without achieving scale. Many guarantee types lack a standard definition of coverage or consistent trigger logic, which becomes a severe bottleneck in multi-guarantor transactions. There is also a significant mismatch between available products and transaction needs; while 41 products in the GGG Directory cover credit risk, only five cover currency risk. Additionally, 46 out of 53 products focus on energy access and power generation, leaving other critical sectors like social infrastructure and manufacturing insufficiently covered. This asymmetry reflects a broader market gap where hard-currency guarantees dominate supply despite persistent financing needs for local-currency revenue projects.

Where guarantees work

Successful cases tend to embed guarantees within broader processes of local market development rather than deploying them as standalone enhancements. For example, GuarantCo’s support for the Nigerian Infrastructure Credit Enhancement Facility (InfraCredit) established a local-currency guarantor that enabled the issuance of AAA-rated green infrastructure bonds. This deepened Nigeria’s debt capital market by attracting domestic pension funds that previously had limited exposure to infrastructure. Similarly, transparency and data platforms are vital for pricing; the recently launched GGG Guarantee Directory provides structured, comparable data that can accelerate deal flow and strengthen collaboration across the ecosystem.

Effective risk mitigation is also achieved through pooling and layering. Layered structures, such as combining MDB first-loss positions with MIGA’s Non-Honoring of Financial Obligations (NHFO) second loss, can reduce blended financing costs and enable entry into higher-risk environments. Portfolio-based approaches allow for diversification across currencies and geographies, which can reduce aggregate volatility. For instance, diversifying FX exposure across 15–20 emerging market currencies can reduce historical volatility from approximately 18% to roughly 7%. Specialized platforms like the Private Infrastructure Development Group (PIDG) also succeed by combining concessional capital with a focus on improving credit quality in markets where hedging is unavailable or too expensive.

Pending questions and conclusion

Several critical questions remain, including whether standardisation efforts primarily improve internal public-sector coordination rather than changing investment outcomes. There is a growing argument for shifting the focus toward DFIs and government-backed agencies, such as SIDA, which may offer more effective channels for deployment because they operate under lower rating constraints and can use securitisation to expand their risk budgets.

The evidence shows that guarantees are particularly needed for long-tenor infrastructure exposure, local-currency revenues, and short-term liquidity stress during construction. However, their effectiveness depends on parallel improvements in project preparation, institutional governance, and structural reforms of the international financial architecture. Without attention to these broader conditions, guarantees risk remaining underused within an already fragmented development finance system.