Performance
bonds are an essential element of many export
transactions. They can be used in the traditional manner i.e.
as security for advance payments or for the performance of
obligations undertaken in export contracts, and also as a tool
in barter type arrangements i.e. whereby an enterprise imports
capital equipment or raw materials in exchange for output to
be provided over an extended period e.g. food processing
machinery in exchange for processed food supplied over three
years. Used in this manner, performance bonds can support
trading mechanisms that are an important element in the
transition years of stability pact countries where weak
banking systems are prevalent.
In most stability pact countries, the undertakings of local
banks as bond-giving banks do not represent adequate security
for a buyer or its bank under a sales contract or a principal
under a services or construction works contract,. Usually, a
performance bond must be provided by a bank outside of the
exporting country, which would, in most instances, require
100% cash cover. The Performance Bond Support Facility which
is one component of the Bosnian Export Enterprise Facility, is
designed to overcome this problem, and it is structured as
follows:
Enterprises apply to IGA with the support of their local
bank. IGA does due diligence investigations and, if
satisfactory, works out a security package with the local
bank. The local bank would be required to share the risk of a
bond call, but this may be for a minority stake, as small as
10% in many instances.
Application is made by IGA to private insurers for support
under the facility. Support consists of unfair calling
insurance and an unconditional guarantee to the bond-giving
bank to reimburse the bond-giving bank if a call is made under
the bond. Upon approval by the insurers, the enterprise enters
into a recourse agreement with IGA and the insurers and any
security, such as a local bank guarantee, is put in place. The
insurer then issues its unconditional guarantee to the
bond-giving bank.
If a call is made under the bond-giving bank guarantee, the
insurer is able to access the donor/IFI funds that are placed
in a trust account. In return for access to these funds, the
insurer agrees to issue bond-giving bank guarantees for a
multiple of the value of funds placed in the trust account, up
to a maximum of four times the value of such funds. The
multiple is determined by the spread of risk available to the
insurer i.e. the number of exporters, export transactions,
buyers and buyer countries supported by bond-giving bank
guarantees.
The Bosnian Performance Bond Support Facility is an example
of an "excess of loss" arrangement in that funds are
available from an escrow account to meet the first loss of the
insurers providing guarantees to bond giving banks. This
"excess of loss" type arrangement can be justified
on the grounds of a historically low rate of calls under
performance bond obligations.
Whilst it is possible for each participating country to
have its own scheme with its own separate capital, it is also
possible to have one pool of funds with participating
countries accessing the facility on agreed terms with
safeguards against over utilization by one or more country. If
one scheme were preferred, it could be administered by the
World Bank as trustee on agreed terms.
