world investment and political risk the global … · multilateral investment guarantee agency...

World Investment and Political RiskThe Global EnvironmentOECD – UNCTAD Global Forum DECEMBER 2009

Frank J. LysyMULTILATERAL INVESTMENT GUARANTEE AGENCYWORLD BANK GROUP

MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 2

A World of Risk and Uncertainty

World financial markets in recent years are a case lesson in uncertainty

Modesty called for

World is emerging (?) from the worst downturn since the Great Depression

Better appreciation now that risks exist in these markets

Finance recovering, but still cautious

DEPFA BANK


Pre-crisis: A Fairy Tale World

0

200

400

600

800

1000

Jan-02 Oct-02 Jul-03 Apr-04 Jan-05 Oct-05 Jul-06 Apr-07

TED Spread EMBI Spread


Mid-2007: Maybe Not So Rosy

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600

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1000

Jan-02 Oct-02 Jul-03 Apr-04 Jan-05 Oct-05 Jul-06 Apr-07 Jan-08



The World Erupts

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Jan-02 Oct-02 Jul-03 Apr-04 Jan-05 Oct-05 Jul-06 Apr-07 Jan-08 Oct-08



Fallout. And Recovery?

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600

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1000

Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09



-100%

-50%

0%

50%

100%

150%

200%

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09

Oil Gold Copper Corn

Real Markets Volatility as Well—Commodity Indices (% change vs Jan 2007)


Baltic Dry Freight Index: Giant Price Swings

0

2,000

4,000

6,000

8,000

10,000

12,000


Recovery in Global Industrial ProductionContributions to global IP growth (% q-o-q)

-8

-6

-4

-2

0

2

4

6

Q1-07 Q3-07 Q1-08 Q3-08 Q1-09 Q3-09

High Income Countries

Developing countries excl China

China


2009 Emerging Market Equity Indices

Equity indices in terms of US$ returns.

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09

MSCI Barra EM Index

Brazil

China

Indonesia

Russia

Turkey

Ukraine


Net FDI Flows to Developing Countries1987-2009 forecast (US$ billions)

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100

200

300

400

500

600

7001

98

7

19

88

19

89

19

90

19

91

19

92

19

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19

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00

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01

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Bill

ion

s o

f $


Gross Equity and Debt Flows by quarter, 2007 – 2009 (US $ billions)

0

50

100

150

200

250

2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4

(Note: 2009 Q4 is simply October data times three)

Bonds Banks Portfolio Equity


What to Conclude?

Risk and uncertainty in the world

Mid-decade, markets thought emerging market risk had largely gone away: Spreads at historic lows

Not true: risk was there

And not just emerging markets: Who predicted capital controls in Iceland?

Finance recovering, in particular bond issuance (banks still reluctant to lend)

Fundamental unpredictability

World Investment and Political RiskThe Role of Political Risk Insurance OECD – UNCTAD Global Forum DECEMBER 2009

Frank J. LysyMULTILATERAL INVESTMENT GUARANTEE AGENCYWORLD BANK GROUP


Use of Political Risk Insurance (PRI) to Address One Source of Risk

PRI can be used to address one source of uncertainty: arbitrary governmental actions

MIGA offers PRI for cross-border private investments into projects in developing countries

Does not cover commercial risks


Political Risk Insurance Cover

Covers losses due to:

Imposition of capital controls

Expropriation

Breach of contract by a sovereign authority

Damage from war or civil disturbance

Non-honoring of sovereign financial obligations


Why is MIGA Able to Take on Such Risks?

Multilateral development agency

Only guarantees developmentally sound projects, meeting high environmental and social standards

Approval of host country government

Approval of MIGA’s Board

Open and transparent

Ongoing World Bank relationship

Hence able to resolve disputes


MIGA History

Guarantees provided for 600 projects since 1990

Only 5 claims made, all small: 3 for damage due to war/civil disturbance

2 for expropriatory actions

Approximately 70 cases of disputes that could have led to claims

All but two resolved by MIGA mediation


MIGA Complements Private Insurers

As a development agency, MIGA seeks to foster growth of private PRI providers

MIGA business model good at managing risk – But admin cost relatively high

MIGA advantage is in higher risk countries and sectors (e.g. much of Africa; or infrastructure)

Private insurers better placed where risks are more modest, and cost concerns dominate


MIGA FinancialsAs of Sept 30, 2009

Exposure under insurance contracts: Gross insurance liability: $7.7 billion

Net of reinsurance: $4.2 billion

Operating capital: $1.0 billion (mostly in cash and short term investments)

Through reinsurance, MIGA can provide PRI for most size projects


Risks covered

Currency transfer restriction and inconvertibility cover protects against losses arising from: inability to convert local currency into forex for transfer outside the host country

inability to transfer/excessive delays in acquiring forex (currency depreciation not covered)

Expropriation cover protects against losses arising from: nationalization and confiscation

creeping expropriation, partial expropriation (limited coverage)

non-discriminatory measures are not covered

War and civil disturbance cover protects against losses arising from: damage/disappearance of tangible assets due to war or civil disturbance (including

revolution, insurrection, coups d'état, sabotage, and terrorism)

prolonged and temporary business interruption

DEPFA BANK


Risks covered (cont’d)

Breach of contract cover protects against government (including sub-sovereign) actions resulting in: breach or repudiation of an agreement with the investor and non-enforcement of an

arbitration award

Non-honoring of sovereign financial obligations protects against losses resulting from: government’s failure to make a payment when due under an unconditional financial

payment obligation or guarantee given in favor of a project

does not require the investor to obtain an arbitral award

DEPFA BANK


Eligibility requirements

Eligible Investments Minimum 3 years, up to 15 years (on occasion 20 years)

Cross-border from one member country (developed or developing) into another developing member country

New, or, if an existing investment, must be associated with an expansion, modernization, or a financial restructuring

Investment types Equity

Shareholder loans

Loan guaranties

Non-shareholder loans (i.e. loans from financial institutions)

Non-equity direct investment

Amounts and Coverage MIGA typically can arrange cover for all amounts, either on its own books or through

co/reinsurance

No minimum amount for guarantee or size of investment

Equity covered up to 90% & debt up to 95%

DEPFA BANK


MIGA’s Small Investment Program (SIP)

Standard package of three covers (transfer, expropriation, war and civil disturbance)

Streamlined due diligence process

Simplified pricing, and at a reduced level (no charge for MIGA overhead expenses)

Up to $10 million of MIGA cover

For SME’s, defined as meeting 2 of the 3 criteria: Less than 300 employees

Less than $15 million in total assets

Less than $15 million in total annual sales


Case Studies


Case Study: Ukraine – Can-Pack Ltd.

Project Aluminum beverage can production

Investment of a Polish firm into its Ukraine subsidiary

At contract signing, was the largest private Polish investment into the Ukraine

Covered an equity investment, a shareholder loan, and a management and technical assistance contract

Risks Covered Transfer Restriction

Expropriation

War & Civil Disturbance


Case Study: Ukraine - Can-Pack Ltd.

Can-Pack Ltd.

(Ukraine)

Can-Pack S.A.

Pol-Am-Pack

Ukraine

Equity ($16.1million)

Equity ($17.6million)

46.8% ownership

100% ownership

Poland

USA

F&P Holding Inc

53.2% ownership


Case Study: Doraleh Container Terminal (Djibouti)

Project Construction, management,

operation and maintenance of a new container port terminal in Djibouti

$427 million in MIGA PRI

30-year concession

PRI on a Sharia compliant financing structure

Key Risks for Lenders Destruction of assets

Business interruption

Breach of Contract


DCT (the project)

PAID(State-owned port

company)

DP World

Government of Djibouti

Commercial Banks

DPW

Djibouti

Case Study: Doraleh Container Terminal (Djibouti)

Concession

67% ownership

100% ownership

100% ownership

Equity ($5 million)

• Loans

• Interest

• Swaps

• Premium

Direct Agreement

$440 M


Bulgaria - Maritza East 1 Power Plant

Project Independent power plant

Build, own, operate a twox300 MW net lignite-fired power plant to replace outdated power generation facilities

Over €1 billion total project cost

$118m (equiv) MIGA guarantee cover


Expropriation



Bulgaria - Maritza East 1 Power Plant

Martiza East 1 EOOD

Natsialna Electrichiska Kompania (NEK)

AES

Government of Bulgaria

Official Institutions

AES Bulgaria Holding BV

Bulgaria

Off-take (Take-or-pay contract)

100% ownership

Equity (€328 million)

Loans (€150 million)Commercial Banks

Loans, export credit(€616 million)


Dominican Republic – Autopistas del Nordeste Toll Road

Project Design, construction, operation,

and maintenance of a 106km toll road from Santo Domingo to the Samana Peninsula

33 year concession; 20 year MIGA cover

$108m MIGA guarantee cover

$211m total project cost

MIGA support to privately placed bond issue allowed higher rating


Expropriation


Breach of Contract


Case Study: Dominican Republic Autopistas del Nordeste Toll Road

Autopistas del NorteDominican Republic

Autopistas del NorteCayman Islands

International Sponsors

Grupo Odinsa,Odinsa Holding,

Grodco,Grodco Panama

Morgan Stanley NYArranger

Institutional Investors

Sub. debt and equity $15 M

Bond: $206 M

Local Sponsor

Consorcio Remix

Astris FinanceFinancial Advisor

$4.5 M

Equity and Sub Debt

Dominican Republic

$103 M

MIGA supports a 33-year infrastructure concession financed

through a capital markets transaction (“144a” private placement)

40% oversubscribed (institutional investors as well as retail)

Absent MIGA coverage, long-term financing was not available

Innovative and speedy use of PRI to raise a different for of financing

Rating increase with only 51% MIGA coverage


Information about MIGA

www.miga.org

[email protected]

t. +1-202-458-2538

f. +1-202-522-0316

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