MIGA in China

Political Risk Insurance Helps Investors Push Projects Ahead

by Angela Gentile and Philippe Valahu

Investing in a developing country can be a daunting experience. In addition to commercial risks faced by all projects, doing business in an emerging economy can bring added risks, real or perceived, of an undesirable political event that many investors are simply not prepared to deal with on their own. These issues have gained even more prominence in recent years, as concerns about borderless wars, financial crises, and terrorism dampen investors' appetite for risk-taking.

Reducing risk

Political risk insurance is an important instrument for equity investors and financiers concerned about mitigating noncommercial risks. A number of entities, both public and private, offer such insurance. Of these, the Multilateral Investment Guarantee Agency (MIGA), a member of the World Bank Group, offers a type of security unavailable anywhere else. MIGA may be of particular interest to US investors in China, as the Overseas Private Investment Corp., a US government agency that offers services similar to those of MIGA, is currently prohibited from operating in China.

Created in 1988 with $1 billion in capital, MIGA now has nearly $2 billion and 163 country members. The agency encourages the flow of private capital to developing countries to reduce poverty by offering insurance (or guarantees) to investors and lenders and by helping developing countries attract private investment. MIGA's insurance protects investments against the risks of currency transfer restriction or inconvertibility, expropriation, breach of contract, war, terrorism, and civil disturbance. By December 2003, MIGA had issued nearly 700 guarantees totaling more than $12 billion in coverage, bringing the amount of foreign direct investment (FDI) facilitated to $50 billion.

MIGA both supports and draws on the resources of the World Bank Group to offer clients in-depth knowledge of emerging economies. MIGA's unique structure, as an international organization whose shareholders include most countries in the world, also benefits clients. Because countries are shareholders in the agency, MIGA can help deter government actions that could disrupt investments and can help resolve potential disputes. For instance, in 1999, provincial government officials in China unilaterally reduced the prices paid to certain foreign electric power producers. MIGA had issued guarantees to one of the affected investors, providing protection against the risks of transfer restriction, expropriation, and war and civil disturbance. When the investor alerted MIGA to its difficulties, the agency stepped in. Negotiations with the investor and government representatives eventually yielded an agreement to resolve the problem and avoid a claim by the investor. This dispute was just one of some two dozen that erupted in China's power sector following the 1999 price change.

Insurance is particularly important for large, capital-intensive projects in the energy, mining, heavy industry, and infrastructure sectors. Financial institutions also often require political risk insurance for projects in developing countries, to provide not only protection against risks but also to enhance a project's credit profile while lowering the institution's country provisioning requirements. The agency's insurance has other benefits, such as allowing investors and lenders to venture into new markets with confidence and achieve investment-grade or higher ratings for emerging market securities, important considerations in today's tight markets.

Activities in China

China was one of the earliest members of MIGA, joining in 1991. Since then, MIGA has actively supported FDI into the country, providing $333 million in investment guarantees. As of December 2003, MIGA's portfolio consisted of 14 contracts, with gross exposure of $150 million, for projects in the manufacturing, power, and water sectors.

When the agency first started insuring projects in China, manufacturing projects were most popular. But there is a perception now that manufacturing no longer presents the kinds of noncommercial risks that concern investors. Rather, it is the larger, particularly infrastructure, projects that are perceived as risky by foreign investors, who are nevertheless tempted by these opportunities.

As China gears up for the 2008 Olympics in Beijing, and as the economy modernizes further, investment in infrastructure, particularly in the water, power, and transport sectors, has become a priority for the government. Because these and other infrastructure projects often involve local governments and long-term concessions, and therefore add what some perceive to be lesser-known elements to the mix, investors in this area typically seek out political risk insurance.

In the past six months alone, MIGA has issued guarantees for two water projects, in the Pudong District of Shanghai and in Deqing, Zhejiang, with a few more in the pipeline. One project for which MIGA provided a $70 million guarantee involves the treatment, distribution, and sale of water; the maintenance and management of facilities; and water supply services in Pudong, home to more than 1.7 million residents. The guarantee covers the investment against the risk of expropriation for up to 15 years.

MIGA is also starting to see more PRC investment in Southeast Asia—particularly Indonesia, Thailand, and Vietnam—and investors have expressed interest in MIGA's coverage. The growing interest stems in part from a partnership launched by MIGA and the China Export and Import Corp. (Sinosure), China's official export credit insurance agency, in December 2001. (Sinosure was formed by a merger of the export credit insurance departments of the People's Insurance Company of China and the Export and Import Bank of China.) The partnership agreement calls for Sinosure and MIGA to increase cooperation and, in particular, to support PRC investment in developing countries. MIGA is working closely with Sinosure, by co-hosting investment insurance seminars in Beijing, for example, and has provided training to its staff. Though primarily an export credit insurer, Sinosure is being drawn increasingly into the field of investment insurance and will likely work more closely with MIGA in the coming year on coinsurance and reinsurance of investments.

Eligibility

Projects eligible for MIGA-guarantee coverage include new, cross-border investments originating in any member country and destined for any developing member country. New investments associated with the expansion, modernization, or financial restructuring of existing projects, and acquisitions involving privatization of state enterprises, are also eligible. To qualify for coverage, projects must contribute to host country development needs, via job creation, technology transfer, or export generation, and be financially, economically, and environmentally sound.

Eligible forms of investment include equity, shareholder loans, and loan guarantees issued by equity holders, as well as technical assistance, management contracts, leases, and franchising and licensing agreements. The agency may also insure loans from unaffiliated financial institutions to the projects it guarantees, as well as shareholder loans from banks to their developing country subsidiaries.

Coverage

MIGA covers up to 90 percent of the value of equity investments, and up to 95 percent of debt, with coverage typically available for 15 years. The agency normally insures $110 million per project, but can go up to $200 million depending on country exposure and type of project. More can be arranged as needed. Pricing is determined according to project risk in the host country. The investor has the option to cancel a policy after three years; MIGA may not cancel the coverage other than for nonpayment of premium and breach of warranty.

In addition to its investment guarantee services, which complement those provided by other public and private entities, MIGA helps developing member countries attract investment by strengthening the capacity of investment intermediaries and equipping them with the tools, techniques, and know-how to target and win FDI. For example, MIGA is currently helping China's Sichuan Investment Promotion Bureau conduct a benchmarking exercise to determine the region's relative strengths, improvements in the investment climate, and changes in sector dynamics.

MIGA Contact Information

MIGA also provides free investment information on emerging economies through its online services: www.fdixchange.com, www.ipanet.net, and www.privatizationlink.com.

For more information on MIGA, see www.miga.org, or contact MIGA's corporate relations officer, Federica Dal Bono, by telephone at 202-473-9292 or by e-mail at fdalbono@worldbank.org.

Angela Gentile is senior communications officer, Corporate Relations at the Multilateral Investment Guarantee Agency, a member of the World Bank Group.

Philippe Valahu is manager for infrastructure, oil and gas, and mining, Africa, Asia, and the Middle East at MIGA.

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	MIGA in China Political Risk Insurance Helps Investors Push Projects Ahead by Angela Gentile and Philippe Valahu Investing in a developing country can be a daunting experience. In addition to commercial risks faced by all projects, doing business in an emerging economy can bring added risks, real or perceived, of an undesirable political event that many investors are simply not prepared to deal with on their own. These issues have gained even more prominence in recent years, as concerns about borderless wars, financial crises, and terrorism dampen investors' appetite for risk-taking. Reducing risk Political risk insurance is an important instrument for equity investors and financiers concerned about mitigating noncommercial risks. A number of entities, both public and private, offer such insurance. Of these, the Multilateral Investment Guarantee Agency (MIGA), a member of the World Bank Group, offers a type of security unavailable anywhere else. MIGA may be of particular interest to US investors in China, as the Overseas Private Investment Corp., a US government agency that offers services similar to those of MIGA, is currently prohibited from operating in China. Created in 1988 with $1 billion in capital, MIGA now has nearly $2 billion and 163 country members. The agency encourages the flow of private capital to developing countries to reduce poverty by offering insurance (or guarantees) to investors and lenders and by helping developing countries attract private investment. MIGA's insurance protects investments against the risks of currency transfer restriction or inconvertibility, expropriation, breach of contract, war, terrorism, and civil disturbance. By December 2003, MIGA had issued nearly 700 guarantees totaling more than $12 billion in coverage, bringing the amount of foreign direct investment (FDI) facilitated to $50 billion. MIGA both supports and draws on the resources of the World Bank Group to offer clients in-depth knowledge of emerging economies. MIGA's unique structure, as an international organization whose shareholders include most countries in the world, also benefits clients. Because countries are shareholders in the agency, MIGA can help deter government actions that could disrupt investments and can help resolve potential disputes. For instance, in 1999, provincial government officials in China unilaterally reduced the prices paid to certain foreign electric power producers. MIGA had issued guarantees to one of the affected investors, providing protection against the risks of transfer restriction, expropriation, and war and civil disturbance. When the investor alerted MIGA to its difficulties, the agency stepped in. Negotiations with the investor and government representatives eventually yielded an agreement to resolve the problem and avoid a claim by the investor. This dispute was just one of some two dozen that erupted in China's power sector following the 1999 price change. Insurance is particularly important for large, capital-intensive projects in the energy, mining, heavy industry, and infrastructure sectors. Financial institutions also often require political risk insurance for projects in developing countries, to provide not only protection against risks but also to enhance a project's credit profile while lowering the institution's country provisioning requirements. The agency's insurance has other benefits, such as allowing investors and lenders to venture into new markets with confidence and achieve investment-grade or higher ratings for emerging market securities, important considerations in today's tight markets. Activities in China China was one of the earliest members of MIGA, joining in 1991. Since then, MIGA has actively supported FDI into the country, providing $333 million in investment guarantees. As of December 2003, MIGA's portfolio consisted of 14 contracts, with gross exposure of $150 million, for projects in the manufacturing, power, and water sectors. When the agency first started insuring projects in China, manufacturing projects were most popular. But there is a perception now that manufacturing no longer presents the kinds of noncommercial risks that concern investors. Rather, it is the larger, particularly infrastructure, projects that are perceived as risky by foreign investors, who are nevertheless tempted by these opportunities. As China gears up for the 2008 Olympics in Beijing, and as the economy modernizes further, investment in infrastructure, particularly in the water, power, and transport sectors, has become a priority for the government. Because these and other infrastructure projects often involve local governments and long-term concessions, and therefore add what some perceive to be lesser-known elements to the mix, investors in this area typically seek out political risk insurance. In the past six months alone, MIGA has issued guarantees for two water projects, in the Pudong District of Shanghai and in Deqing, Zhejiang, with a few more in the pipeline. One project for which MIGA provided a $70 million guarantee involves the treatment, distribution, and sale of water; the maintenance and management of facilities; and water supply services in Pudong, home to more than 1.7 million residents. The guarantee covers the investment against the risk of expropriation for up to 15 years. MIGA is also starting to see more PRC investment in Southeast Asia—particularly Indonesia, Thailand, and Vietnam—and investors have expressed interest in MIGA's coverage. The growing interest stems in part from a partnership launched by MIGA and the China Export and Import Corp. (Sinosure), China's official export credit insurance agency, in December 2001. (Sinosure was formed by a merger of the export credit insurance departments of the People's Insurance Company of China and the Export and Import Bank of China.) The partnership agreement calls for Sinosure and MIGA to increase cooperation and, in particular, to support PRC investment in developing countries. MIGA is working closely with Sinosure, by co-hosting investment insurance seminars in Beijing, for example, and has provided training to its staff. Though primarily an export credit insurer, Sinosure is being drawn increasingly into the field of investment insurance and will likely work more closely with MIGA in the coming year on coinsurance and reinsurance of investments. Eligibility Projects eligible for MIGA-guarantee coverage include new, cross-border investments originating in any member country and destined for any developing member country. New investments associated with the expansion, modernization, or financial restructuring of existing projects, and acquisitions involving privatization of state enterprises, are also eligible. To qualify for coverage, projects must contribute to host country development needs, via job creation, technology transfer, or export generation, and be financially, economically, and environmentally sound. Eligible forms of investment include equity, shareholder loans, and loan guarantees issued by equity holders, as well as technical assistance, management contracts, leases, and franchising and licensing agreements. The agency may also insure loans from unaffiliated financial institutions to the projects it guarantees, as well as shareholder loans from banks to their developing country subsidiaries. Coverage MIGA covers up to 90 percent of the value of equity investments, and up to 95 percent of debt, with coverage typically available for 15 years. The agency normally insures $110 million per project, but can go up to $200 million depending on country exposure and type of project. More can be arranged as needed. Pricing is determined according to project risk in the host country. The investor has the option to cancel a policy after three years; MIGA may not cancel the coverage other than for nonpayment of premium and breach of warranty. In addition to its investment guarantee services, which complement those provided by other public and private entities, MIGA helps developing member countries attract investment by strengthening the capacity of investment intermediaries and equipping them with the tools, techniques, and know-how to target and win FDI. For example, MIGA is currently helping China's Sichuan Investment Promotion Bureau conduct a benchmarking exercise to determine the region's relative strengths, improvements in the investment climate, and changes in sector dynamics. MIGA Contact Information MIGA also provides free investment information on emerging economies through its online services: www.fdixchange.com, www.ipanet.net, and www.privatizationlink.com. For more information on MIGA, see www.miga.org, or contact MIGA's corporate relations officer, Federica Dal Bono, by telephone at 202-473-9292 or by e-mail at fdalbono@worldbank.org. Angela Gentile is senior communications officer, Corporate Relations at the Multilateral Investment Guarantee Agency, a member of the World Bank Group. Philippe Valahu is manager for infrastructure, oil and gas, and mining, Africa, Asia, and the Middle East at MIGA. Top of Page Table of Contents
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