_34 Why Infrastructure Financing Facilities Often Fall Short of Their Objectives_ the executive body to issue political risk insurance. The GAU was backstopped by a World Bank loan facility to enhance the credibility of the risk coverage. The withdrawal authority for the World Bank loan was delegated to an international bank (ING Bank of the Netherlands). ING was to issue a letter of credit to each individual guarantee holder.<sup>65</sup> The World Bank loan facility that backstopped the GAU amounted to about US$30 million. It was expected that this credit line would backstop guarantees of up to a total of US$150 million.<sup>66</sup> 90. _Activities._ There was little demand for political risk insurance after the PEGF was established in October 1995. To assess future demand, a demand survey was conducted in March 1997. The survey indicated that demand would remain very sluggish in the future and consequently the facility was canceled in May 1997.

91. With hindsight, there are mainly four reasons why the facility generated little demand. First, the PGF faced demand from the Moldovan Government unconditional (broader) and heavily subsidized guarantees in the areas expected to be its principle market, namely foreign supply of agricultural inputs in return for part of the following season's supply; and machinery and equipment sales to the agro processing industry. The situation was compounded by the fact that structural reforms slowed down, especially in the agrosector the sector that the instrument primarily targeted.<sup>6 7</sup> 92. Secondly, there was very little borrowing activity from commercial sources by private Moldovan enterprises as most of the financing was provided by multilateral agencies ineligible for accessing political risk coverage. Thirdly, the pricing of the instruments appears to have been too high to generate demand because the reference price that was used to determine the price of the guarantee was based on risk premia for longterm projects and thus provided an inadequate point of comparison.<sup>6</sup> Fourthly, the Moldovan economy may have been too small to generate adequate demand for the facility.

93. _Lessons Learned._ Three main lessons can be drawn from the Moldovan experience: For a fund/facility to be successful it is crucial for the government (i) to adequately and accurately assess reasons for market failure, design instruments that 65 Moreover, during the start up phase of the facility, ING worked with the staff of the GAU to devise procedures for issuing letters of guarantees, paying claims, and sharing information about pending claims and pending guarantee applications.

> 66 The live of the World Bank facility was limited to five years which to a certain extent ensured that the facility be of a transitional nature.

> 67 The marketing of the facility's instrument appears to have been hampered by confusion created among different government agencies. The GAU was designed not to be attached to any specific Government agency and thus a wide representation of agencies was to be represented on the board of the facility. This was meant to ensure that all agencies represented on the board would be actively involved in the marketing of the facility from all Government officials who are in regular contact with business people. Despite these intentions, the GAU was effectively operated as part of the Department of Foreign Economic Relations with only marginal involvement of representatives of other govemment agencies. Consequently, valuable business contacts were lost. Moreover, it appears that business contacts heard contradictory stories from different Govermment officials on the availability of guarantees.

> 6S The price for political risk coverage may have also appeared high to market participants as they perceived political risk of less of a problem than commercial risk.