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The purpose of sovereign guarantees: States issue financial guarantees in order to financially promote projects that are deemed to be in the public interest. The guarantees are used as economic incentives for the capital market to finance the projects. In Sweden, for example, financial guarantees have in the past been used to promote agriculture, fishing, housing construction, shipbuilding and energy supply. From the beginning of the 90’s, they have primarily been used to alleviate the Swedish bank crisis and for promoting investment in the infrastructure.

Sovereign guarantees as a political instrument: There are two basic criteria that should be met before the use of sovereign guarantees. The first criterion is that a long-term assessment of the Beneficiary’s performance shows reasonable probability that it will generate sufficient income to recoup its costs. If it fails to generate the necessary income, the State merely defers final financing, since it will have to honour the guarantee at a future date. If, on the other hand, the project is likely to be capable of bearing its own costs, a financial guarantee is a good incentive for the capital market to finance the project. In such cases the State can use its own funds for other purposes and avoids adding to the State debt. The other criterion that should be met is that the capital markets are not willing to finance the project at a reasonable price without State support. Typically, this applies to large-scale projects that require long-term financing, i.e. loans with a term of more than 10 years, projects involving appreciable political risks and projects which are difficult for the market to assess due to its unique character. Where these criteria are met the State may choose between two methods, i.e. it may itself borrow the necessary amount in the credit markets and on-lend it to the project, or it may issue financial guarantees. In comparison with on-lending, financial guarantees have the following advantages: (a) Guarantees are very flexible. The borrowing may be tailored to meet the Beneficiary’s current needs as regards the amount, the maturity, the interest structure and the terms of repayment. Whereas, on the other hand, the funds are on-lent by the State, the borrowing must normally be adapted to total public sector borrowing in terms of foreign exchange, maturities and interest rate risks etc. (b) Guarantees bring the Beneficiary into direct contact with the credit markets, which offers an important spin-off, particularly with large-scale projects. Only through direct contact with the market will the Beneficiary have quick access to developments in financing arrangements and risk management. Moreover, it is probably easier to recruit a competent finance manager for a borrower who can obtain the required financing directly in the market than if he is referred solely to the State for his financial needs. (c) Guarantees lead to diversification. This is a great advantage when the State borrowing requirement is already large. In that case, small, cheap loans with a specific structure may not suit the State’s borrowing plans, at least not for that moment. Such loans may therefore suitably be channelled to the Beneficiaries. Depending on the borrowing requirement and administrative constraints, the State may also have decided internally on a minimum amount for loan transactions. Here too, the smaller loans may be used to finance guaranteed projects. Some investors may also prefer "sound" guaranteed projects to loans raised to cover the ”anonymous” budget deficit. Finally, it is probably a good thing even for the State to be open to some competition in its sovereign risk borrowing. (d) Loans raised under sovereign guarantees do not increase State borrowing. The larger the borrowing requirement at any given time, the more important this factor is.

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It's a good proposal and I would love to see this taking place and hope that the government will not make it an one sided affair for Shahara India. Government will have enough power to monitor the quality of the work, if they provide a sovereign financial guarantee. They must not give that up.