Maintaining FDI flows in a risk-averse world


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Presented at the Annual Meeting of the MENA-OECD Working Group on Investment Policies and Promotion, March 2013

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Maintaining FDI flows in a risk-averse world

  1. 1. Investment Policies and Promotion Annual Meeting of the MENA-OECD Working Group OECD, March 20, 2013 maintaining FDI flows in a risk-averse world Olivier J. L. Lambert, MIGA Europe Office (Paris)
  2. 2. The International Finance Corporation (IFC)  Investment services for the private sector  Advisory Services for companies and private investors for questions related to the private sector  IFC Asset Management Company The World Bank Group The Multilateral Investment Guarantee Agency (MIGA)  Guarantees against non- commercial risks  Dispute resolution services for guaranteed investments  The International Bank for Reconstruction and Development (IBRD)  The International Development Association (IDA) IBRD:  Loans to middle-income countries  Advisory services  Guarantees and risk management IDA:  Donations and zero-interest loans to least developed countries The International Center for Settlement of Investment Disputes (ICSID)  Specialized dispute resolution institution  Facilities for independent conciliation and arbitration of investor- State disputes  Enables individuals or companies to bring up claims against foreign governments
  3. 3. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 3 1. Currency Transfer Restriction & Inconvertibility Cover  Protects against losses arising from inability to convert local currency into forex for transfer outside the host country or transfer/excessive delays in acquiring forex 2. Expropriation Cover  Protects against losses arising from nationalization and confiscation; Creeping expropriation (e.g. gradual changes in tax regime); Expropriation of funds (e.g. "account freeze” ) 3. War and Civil Disturbance Cover  Protects against: Loss of Assets; Temporary or Permanent Loss of Use  Loss has to be a direct and immediate result of acts of war, revolution, rebellion, insurrection, coup d’état, civil war, civil commotion, riots ; acts of sabotage or terrorism can also be covered 4. Breach of Contract Cover  Protects against losses arising from the government’s breach or repudiation of a contract with the investor (e.g., a concession or a power purchase agreement)  Coverage extends to sub-sovereign risks, interest rate hedging instruments and capital market transactions 5. Non-Honoring of Sovereign Financial Obligations (NHSFO) Cover  Protects against losses resulting from a government’s failure to make a payment when due under an unconditional financial payment obligation or guarantee related to an eligible investment. MIGA Political Risk Insurance cover non commercial risks
  4. 4. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 4 Financial Instruments Covered / Clients  Financial Instruments covered  Equity  Shareholder loans  Loan guaranties  Non-shareholder loans (i.e., stand-alone debt)  Non-equity direct investment (contracts including management, leasing, production-sharing, licensing, turnkey, and others)  Capital market transactions  Clients or Guarantee holders  Investors  Banks
  5. 5. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 5 The need to adapt PRI solutions and MIGA of today The current MIGA: Improved/ new instruments used in innovative ways  Adapted Convention and Operational regulations - No more equity requirement => stand-alone debt - Existing investment, with higher threshold of justification  Improved/ New products - Short-term business interruption: Within WCD limit; Requires 30 days of cessation of activity - Enhanced Breach of Contract: With SOE (Government control, public service, credit worthiness); Denial of justice - Non Honoring of Sovereign Financial Obligations: Basel II compliant  Innovation and responsiveness - New application of products: from expropriation of funds to capital optimization - Swap and portfolio coverage - Coverage adapted to Islamic finance - Master contracts for private equity funds.
  6. 6. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 6 How MIGA relates to governments  Before issuing a guarantee: Host Country Approval (HCA)  In the case an issue arises between MIGA guaranteed investors and the local government:  Guaranteed investors notify MIGA of difficulties with the government  MIGA analyzes the situation and areas of responsibility  If MIGA determines that the guaranteed investor has the case, MIGA will reach out the government to understand its position and help parties come to an agreement If parties are unable to reach an agreement:  MIGA reviews the facts and makes a formal determination or goes through arbitration (breach of contract)  If MIGA finds for the insured investor, compensation will be paid investor entitled under the guarantee  If warranted, MIGA pays according to the contract After claim is paid:  MIGA steps in the shoes of the insured party with no more, no less rights (subrogation)  Under the terms of MIGA’s Convention, we are permitted to seek reimbursement from the government.
  7. 7. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 7 The MENA region: current uncertainties Consensus on optimism in the long run, but concerns prevail in the short and medium term:  A few new foreign investments in the region: wait and see attitude  Investors also step back regarding existing investments  Investors leave. Concerns are related to:  Political violence—especially civil disturbance  Governments' ability to honor commitments and obligations  Untested new frameworks Political and economic stability are intertwined: => PRI tools are decisive to establish a bridge of confidence between today and tomorrow to support investments which will generate the growth.
  8. 8. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 8 MIGA’s commitment to the MENA region The “MENA initiative” (end of FY 2011):  Mobilization of $1bn in insurance capacity to encourage and retain FDI in the MENA region  Organization of events to bring investors together to share knowledge and experience in managing political risk: Dubai, Paris Washington in 2011 and 2012. Planned in Dubai in May 2013 The collaboration with the Deauville Partnership (FY 2012):  An initiative among international financial institutions to help create macro-economic stability, social cohesion and more equitable growth in the MENA region => Achievements:  In 18 months approx. , MIGA has issued $592.7m worth of guarantees  Guarantees for investors in Egypt, Jordan, Morocco and Tunisia.
  9. 9. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 9 But more could be done together by joining forces  We must recognize the high risk environment: => Risks may not be acceptable: EDFI or MIGA must remain sustainable => Guarantees may be too expensive  Capital, including public capital, is limited: => We must all minimize total capital consumption, while making the transactions happen.  So each transaction require  1) detailed risk analysis and  2) enhanced structuring by combining all available instruments, such as:  EDI: loan equity  MIGA: guarantees  European infrastructure funds providing risk layers => Our assessment: there are all necessary instruments or institutions to mitigate risk in the MENA region.
  10. 10. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 10 Why Investors Choose MIGA KNOWLEDGE AND EXPERTISE  Largest multilateral PRI provider  25 years in emerging markets  Expert staff  Access to World Bank Group resources  Best practice environmental and social standards UNIQUE PRI SOLUTIONS  Support investments in difficult markets  Longer tenors (up to 20 years)  May result in lower borrowing costs  Reduce risk weighting and capital provisioning CLAIM DETERRENCE  World Bank Group’s umbrella  177 member countries  Claims track record  Assistance in dispute resolution FINANCIAL STRENGTH  Recognized industry leader  Strong balance sheet  Diversified portfolio  Implied AAA rating  Reinsurance capacity
  11. 11. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 11 MIGA’s Claims Track Record  MIGA has supported more than 700 projects  MIGA has assisted clients in resolving more than 90 disputes  MIGA has successfully facilitated the settlement of disputes in all currency transfer/inconvertibility issues  MIGA has paid claims in six cases  Afghanistan, Nepal, Kenya and Madagascar (war and civil disturbance)  Indonesia and Argentina (expropriation)  All other cases have been resolved or the claim withdrawn. Deterrence effect & early involvement to resolve difficult / complex situations will ensure the largest number of projects are successful.
  12. 12. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 12 OPIC Project Example: Supporting existing investments - Apache Egypt US Egypt Apache subsidiaries Guarantee Apache Guarantee Multiple investments  MIGA issued a guarantee of $150m providing reinsurance for the OPIC coverage to Apache Corporation of the United States, for Apache’s investments into its subsidiaries in Egypt.  Reinsurance coverage is for a period of up to 13 years against the risks of expropriation and breach of contract.  The project involves existing and future exploration and development and production of crude oil, natural gas, and condensate. Egyptian General Petroleum Corporation (SOE) JV Oil and gas exploration activities
  13. 13. Project Example: Attracting new investments - Bitaka S.A. in Tunisia  MIGA issued guarantees of €3.8m ($5.1m equivalent) to Fons Mediterrània Capital, F.C.R. de Régimen Simplificado of Spain (FMC) covering its equity investment and shareholder loan in Bitaka S.A. (Bitaka) in Tunisia.  The coverage is for a period of up to 5 years against the risks of transfer restriction, expropriation, and war and civil disturbance.  Bitaka provides low-cost, innovative solutions to mobile operators in Tunisia. The mobile sector is mainly pre-paid and relies on payment solutions to connect the majority of the population.  The project contributes to the continued growth of the mobile sector in Tunisia (impact on GDP growth). FMC Bitaka S.A. Equity(€1.9m) Shareholder Loan(€2.1m) Spain Tunisia Guarantee Guarantee
  14. 14. BNP Paribas Société Générale Daewoo (Korea)Loan Compagnie Tunisienne de Navigation MoF Tunisia Payment Obligation Guarantee Construction Contract  MIGA issued guarantees of $217.7m covering an investment through financing by BNP Paribas and Société Générale of France in a passenger-car ferry to be acquired by the Compagnie Tunisienne de Navigation SA (CTN) in Tunisia.  The coverage is for a period of up to 13 years against the risk of non-honoring of sovereign financial obligations.  The project will help secure Tunisia’s main transportation link with Europe (key to economic development).  MIGA stepped in due to last-minute withdrawal of ECA. No other political risk insurance cover was available for the project. Project Example: Enabling key investments - CTN Ferry, Tunisia Guarantee (NHSFO) France Tunisia
  15. 15. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 15 MIGA Highlights GROSS EXPOSURE ($ BILLION) 5.1 5.4 5.3 7.3 7.7 FY05 FY06 FY07 FY08 FY09 FY10 6.5 9.1 FY11 FY12 10.3 Key Figures  Supported more than 700 projects for a total of $27.2 billion during FY90-12  Portfolio: $10.3 billion  Issued record $2.7 billion guarantees in FY12 MIGA’s Strengths  Total subscribed capital: $1.9 billion  Strong capital base and ability to pay compensation in the event of large-scale losses  Implied AAA by major credit rating agencies
  16. 16. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 16 Gross Exposure By region and sector – as of June 30, 2012 By region By sector
  17. 17. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 17 Guarantees Issued in Fiscal Year 2012 By region By sector
  18. 18. Thank You!
  19. 19. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 19 Contact Information Europe Regional Office Multilateral Investment Guarantee Agency 66 Avenue d'Iéna 75116 Paris France Olivier Lambert, Manager t. 33-1-4069-3158