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MIGA and World Bank Group Guarantee Instruments for Multi-Country Projects

June 2007

2MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP

Agenda

The World Bank Group and MIGA

MIGA Guarantees

MIGA in Africa

IDA/IBRD Guarantees

Case Study: Nam Theun 2

The World Bank Groupand MIGA


MIGA… a member of the World Bank Group

1988 MIGA Multilateral Investment Guarantee Agency

Promotes FDI with the use of guarantees and online services

1944 IBRD International Bank forReconstruction and Development

1960 IDA International Development Agency

1956 IFC International Finance Corporation

1966 ICSID International Center for the Settlement of Investment Disputes


World Bank Group Instruments

IFC MIGA IBRD/IDA

IFC A-Loan

IFC B-Loan

IFC C-Loan

IFC Guarantees (partial credit

structures usually for local

financing)

Interest Rate and Currency Swaps

Political Risk Insurance

expropriation

transfer restriction

breach of contract

war & civil disturbances

Guarantees

partial risk

partial credit

IBRD Loan

IDA Credit

Tech. Assistance

MIGA Guarantees


MIGA Mission

To promote foreign direct investment

(FDI) into developing countries to help

support economic growth, reduce poverty,

and improve people's lives.


MIGA helps investors by providing:

Non-commercial risk insurance (guarantees) for investors

and lenders

Dispute mediation services, to remove possible obstacles

to future investment

Online information on investment opportunities and

operating conditions in developing countries


MIGA attracts and retains private

sector investments

Attracts private sector funding into the

country

Ensures best practice environmental and

social safeguards for projects

Guarantee does not create additional

liability to government than it would

otherwise have– Host Country Approval does not contradict

this

– Subrogation to MIGA in the event of a claim

Honest mediator in the event of dispute

MIGA Value Added to Government


MIGA Value Added to Private Sector Investors

Credit enhancements– Improved access to financing

– Extended tenors of capital; and

– Often reduced capital and financing costs

Greater Confidence. The World Bank Group “umbrella” has a

deterrent effect against government actions that could disrupt

investments. MIGA can influence the resolution of potential disputes

between investors and host governments, thereby preventing claims

Extensive Knowledge– Unparalleled knowledge of emerging economies through

extensive resources of the World Bank Group

– Ensure environmental and social safeguard standards are met


MIGA Guarantees: Four Coverages

1. Currency transfer and inconvertibility– Protects against losses arising from:

• Inability to convert local currency into foreign exchange

• Inability to transfer

2. Expropriation: government action(s) which deprives the

guarantee holder of ownership or control of the guaranteed

investment or deprives the guarantee holder of a substantial

benefit of the investment

– Protects against losses arising from:

• Nationalization and confiscation

• Creeping expropriation

• Partial expropriation (expropriation of funds)


MIGA Guarantees: Four Coverages (cont.)

3. War and civil disturbance– Protects against losses arising from:

• Damage/disappearance of tangible assets (including revolution, insurrection, coups d'état, sabotage, and terrorism)

• Prolonged business interruption

4. Breach of contract: failure of the host government to honor an

arbitral award following a breach of contract

– Protects against losses arising from:• Breach or repudiation of a contract between the investor and the Host

Country authorities (Non-enforcement of an arbitration award is a prerequisite)

– Applied to breach of supply/take-off contract, a license agreement, etc., and breach of a sub-sovereign guarantee obligation


MIGA Outstanding Portfolio Distribution

$5.4 billion

by Sector

InfrastructureFinancial

Oil, Gas and MiningAgribusiness & Manufacturing

Tourism and Services

413314

76

%

by Host Region

Europe & Central AsiaLatin American & Caribbean

Sub-Saharan AfricaAsia & the Pacific

Middle East & North Africa

47201614

5

%

Gross Exposure, as of June 30, 2006


MIGA Outstanding Portfolio Distribution

Top Investor and Host Countries, as at June 30, 2006

GrossInvestor Country Exposure

(%)

Austria 19.1

France 17.7

United States 8.4

Czech Republic 5.9

Cayman Islands 5.2

Netherlands 4.2

Spain 4.1

South Africa 3.9

Japan 3.6

Egypt, Arab Rep. of 2.9

Total 75 %

Gross

Host Country Exposure

(%) $M

Russian Federation 10.0 536

Bulgaria 7.4 396

Serbia and Montenegro 7.3 393

Mozambique 4.9 264

Romania 4.9 262

Bosnia and Herzegovina 4.3 231

Brazil 4.2 227

Ghana 3.4 184

Ukraine 3.3 176

Croatia 3.1 164

Total 52.8 % $ 2, 833

MIGA

In Africa


MIGA’s strategy in Africa

Provide access to investors in countries perceived to be

high risk, particularly in infrastructure– Support to frontier markets and conflict-affected countries

through guarantees

– Focus on strategic collaboration with existing facilities and trade agreements such as NEPAD, BOAD, AGOA

– Help attract investments through implementation of outreach programs and technical assistance

– Increase knowledge of investment opportunities through sector/country benchmarking, online information services


FY04Coverage Issued, $1.1 B

Africa12%LAC

5% Asia9%

MENA7%

ECA67%

Africa14%

LAC19%

Asia12%

MENA10%

ECA46%

FY06Coverage Issued, $1.3 B

MIGA’s Africa portfolio

FY06Africa Exposure, %

Infrastructure 40%Financial 2%Oil, Gas & Mining 23%Tourism & Services 12%Agribusiness & Mfg. 23%

Last fiscal year, Africa was MIGA’s top destination for projects in terms of guarantees issued (21 contracts supporting 13 projects)


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Guarantees Issued in Africa by Country, Since Inception

MIGA’s Africa portfolio


MIGA’s Selected Projects in the Africa region

Guarantee

Holder

Project Name Host

County

Investor

Country

Description*

Proparco Barclays Bank of Ghana,

Ltd.

Ghana France Loan to Barclays Ghana to

support manufacturing enterprise

(Polytank Ghana) Ltd.

Barloworld

Equipment (UK)

Barloworld Equipamentos

Angola Limitada

Angola United

Kingdom

Earthmoving equipment

dealership

DAGRIS Société Cotonnière du

Gourma

Burkina Faso France Cotton ginning

Intertek SL Intertek Sierra Leone United

Kingdom

Scanning equipment for port

IDC of South Africa Agriflora Ltd. Zambia South Africa Agriculture company

Mr. Chatthe, IDC Kibos Sugar and Allied

Industries Limited

Kenya UK, S. Africa Sugar factory

Ericsson Vee Networks Ltd. Nigeria Sweden Equipment supply for GSM

mobile telephone network

Note: Full descriptions available on miga.org and MIGA annual reports.

IDA/IBRD

Guarantees


World Bank Guarantees: Key features

IBRD/IDA balance sheet

available to all countries eligible for borrowing from IBRD or IDA

Bank Guarantees back government obligations

Bank Guarantees cover private debt against a government’s (or government entity’s) failure to meet specific obligations to a private or public project

mobilize private sector participation and help catalyze debt with extended maturities and lower financing costs

flexibility – structured to meet borrower and project requirement

an integral part of Country Assistance Strategy

counter guarantee from Member Country– Bank Articles requirement – indicates project priority for Government and Bank

benefits from the ongoing sector and country engagement of the Bank


World Bank Guarantees: Benefits

to governments…

catalyzes private financing for key sectors such as infrastructure

provides access to capital markets as well as commercial banks

reduces cost of private financing to affordable levels

facilitates privatizations and public private partnerships

reduces government risk exposure by passing commercial risk to the private sector

encourages cofinancing

to private sector…

reduces risk of private transactions in emerging countries

mitigates risks that the private sector does not control

opens new markets

improves project sustainability


Types of IDA or IBRD Guarantees

Partial Risk Guarantees (PRGs) –in support of private

projects:

– Cover debt amounts against specific risks

Partial Credit Guarantees (PCGs)- in support of public

projects:

– Cover part of bond/loan repayments against all risks

Policy Based Guarantees (PBGs) – in support of

development policy operations:

– Cover part of bond/loan repayments against all risks


Partial Risk Guarantees (PRGs):

Cover private lenders against the risk of a public entity failing to perform its obligations with respect to a private project.

PRG reinforces obligations of the Government – does not add to them.

Structured to provide minimum coverage necessary to mobilize private financing

The World Bank also offers enclave guarantees which are PRGs structured for export oriented foreign exchange generating commercial projects in IDA-only countries.

A flexible instrument – various structures available


PRG Covered Risks:

tariff

regulatory risk

collection risk

arbitration

change in law

convertibility

transferability

subsidy payments (e.g. Output-Based Aid)


Cover private lenders against all risks during a specific period of the financing term of debt for a public investment

Specially designed to extend maturity and improve market terms

Lengthen the maturity of the private debt financing beyond that available in private markets by covering a part of the scheduled repayments of private loans or bonds against all risks

PCGs are flexible, allowing different structures for meeting different client needs, such as:– Bullet guarantee– Latter maturities– Rolling non-reinstatable– Amortizing syndicated loan

At present, partial credit guarantees are available only for countries eligible for loans from IBRD.

No overlap with MIGA or IFC instruments

Partial Credit Guarantees (PCGs):


Guarantees cover lenders in the event that the Government does not meet its commitments

Counter-guarantee of the member country is normally in the form of an Indemnity

Agreement.

Commercial Lenders

Project Company

Government

GuaranteeAgreement

Indemnity Agreement

Project Agreement(Government Undertakings)

Loans

World Bank

Guarantee Structure Requires Counter-Guarantee


If a guarantee is called under the Guarantee Agreement, IBRD/ IDA has the possibility to demand immediate reimbursement of amounts paid under the Guarantee Agreement including interest; and

In the event of a default to reimburse, IBRD/IDA may trigger a cross default affecting the country’s entire portfolio (risking a suspension on current loans and credits).

Call on a Guarantee


The host government’s indemnity of the World Bank

does not increase the government’s liabilities when the

government is already directly obligated to the private

sector on the same liabilities.

WB Guarantees Do Not Increase the Government’s Contingent Liabilities

IFC MIGA IBRD/IDA

Products Partial Credit Guarantees

Hedges for clients

(interest rate, currency

and commodity swaps)

Non-commercial risk

insurance

PRG – IBRD & IDA

PCG & PBG – IBRD Only

Loans Yes Yes Yes

Equity

(Quasi-Equity)

Yes Yes No

Coverage (Risk) Full and timely payment

of principal and/or interest

up to a specified amount -

IFC covers all risks that

may result in non-

payment of a client’s

obligations.

Currency

convertibility and

transferability

Expropriation

War and Civil

Disturbance (incl.

terrorism and

sabotage)

Breach of Contract

Government contractual

Obligations including:

Currency convertibility and

transferability

Expropriation

Political Violence

Breach of Contract

Regulatory

Subsidy payment (e.g. OBA)

Comparison of World Bank Group Risk Mitigation Instruments

IFC MIGA IBRD/IDA

Guaranteed

Percentage

Determined on a case by case

basis.

Debt: up to 95%

Equity: up to 90%

Up to 100% of a tranche

Eligibility Must be a member country Must be a member country Must be a member

country

Tenors Market based but IFC’s

involvement can lengthen tenors

Up to 15 years (20 years in

some cases)

Market based

Limits Based on client’s needs Project: up to $190mm (net)

Country: up to $600mm (net)

Based on project and

country needs and CAS

allocation.

Priority Areas

of Focus

All IFC recipient member countries.

Providing long-term local currency

financing and development of

domestic capital markets.

Africa

IDA eligible countries

South-South investments

SMEs

Infrastructure

IDA eligible countries

Government

Counter

Guarantee

No No Yes

Public Sector

Projects

No No Yes

Collaboration Joint project preparation, environmental analysis, Board processing, etc.


PRGs can be considered in the following situations:

– Sectors in early stages of reform

– Larger size/riskier operations

– Operations highly dependent on support/undertakings of governments

– Clout of the Bank needed

Joint transactions

Coordination

Guiding Principles on Deployment of WBG Risk Mitigation Instruments

Case Study

Nam Theun 2 Hydroelectric Dam

(Laos and Thailand)


Nam Theun 2: Overview

US$ 1.45 billion,1070 MW project in Lao PDR, the largest ever foreign investment in the country.

The project is being implemented by Nam Theun 2 Power Company limited (NTPC), which was established as a limited liability company.

As part of the Concession Agreement (CA), NTPC will develop, finance, construct and operate the plant system.

After a period of 25 years, the plant will revert back to the Government of Laos (GOL).

NT2 will primarily export electricity to EGAT of Thailand. About 5% would be for domestic use.


Project identified in the 1980s.

Concession awarded in 1993.

Project subject to a long anti-dam campaign.

Project preparation discontinued following Asian financial crisis (1997).

Preparation resumed successfully in 2001 when the parties agreed on a mutually binding set of actions to reach financial close.

Since 2001, extensive due diligence has been undertaken by project participants.

Took about 4 years of preparation (2001-2005)

Financial Close - June 15, 2005.

Nam Theun 2: Background


Largest private financing in the region at the time.

Non-availability of US$ debt (about 500m) w/out cover.– Export Credits– Political Risk Guarantees– Direct US$ loans– EGAT credit risk– Tenors and pricing

Availability of THB debt (about US$ 500m equivalent).– Non availability of long-term fixed-rate debt– Project location outside Thailand

Cross Border Risk

Funding for GOL Equity (about US$ 90m); HIPC

Nam Theun 2: Financing Challenges


The project generates revenues (US$ 80 million on average), through socially and environmentally sustainable development of NT2’s hydropower potential.

NT2 revenues finance Lao PDR's poverty reduction and development strategy, key elements of Lao PDR's NGPES and the GOL’s MDG targets in 2015 (about 3% to 5% of gross revenues).

The use of NT2 revenues for these purposes was envisioned in the Decision Framework agreed between the GOL and the Bank in 2001 and reiterated in the Government's Letter of Implementation Policy (GLIP) in 2005.

Nam Theun 2: Rationale for Bank involvement


IDA Grant– To finance E&S expenditures (as GOL Equity in

NTPC)

IDA Guarantee– To mobilize private capital by mitigating Lao PDR

political risks– Covered GOL obligations under project documents

IDA Credit to GOL for associated impacts – LeNs

MIGA guarantee– Covered key Thai & Lao political risks

Nam Theun 2: Bank Group Support


Nam Theun 2 project has a standard emerging market power

project finance structure … A SPC (NTPC) to implement the project on a BOOT

basis under a limited recourse finance scheme A turnkey construction contract A Concession Agreement with the Government of Laos A main PPA with EGAT as offtaker and a PPA with EdL

Nam Theun 2: Classic Project Finance Structure


Nam Theun 2 Power Company Limited (“NTPC”) is a Lao company established in Aug. 2002 by :

35% EDF International (EDFI)

25% Electricity Generating Public Company Limited (EGCO)

25% Government of the Lao PDR (GOL)

15% Italian-Thai Development Public Company Limited (ITD)

EDF is acting as Head Contractor, managing three Civil Work subcontracts and two Electromechanical Works subcontracts.

EDF & EGCO are also providing personnel & technical assistance

Experienced sponsors brought development expertise


Meeting Lenders’ requirements under an acceptable project framework, risk allocation and timeframe

2004-05 prevailing financial market conditions were attractive

high liquidity in bank market, relatively low interest rate environment & few good power projects in the region to attract investments

but Lao risk assessment led to full political risk cover requirement from Lenders & standard emerging market contractual risk allocation

Sponsors require effective financing phase management and timely completion of financing plan

the project financing plan was clear and adequately structured from the outset, project agreements were detailed and based on international standards

these conditions, under proper management, contributed to a smooth and relatively brief financing phase (15 months)

Timely project development is possible with appropriate expertise


The finance plan is built on a limited recourse project finance scheme

Substantial financing amount required: raising USD 1,581 million eq. in a country without access to commercial funding

The Project finance plan revolves primarily around MLAs, BLAs and ECAs to allow the Project bankability given

the quantum of financing required

the perceived sovereign risks

Laos unproven track record re. private investments

Strong involvement of Thai commercial banks to allow local currency funding and mitigate forex risk

A suitable response to allow a smooth financing phase


Early market sounding has shown expectations from

ECAs and commercial banks for a strong IFI / World Bank

involvement in the Project to ensure compliance with highest E&S standards to share or cover political risk

Involvement of the World Group from 1995 substitution of MIGA for IFC due to lack of attractiveness of

“B” loans post Asian crisis

Involvement of the ADB from 2002

ADB and MIGA provide pioneering dual-country PRI to accommodate the cross-border nature of the deal

A requirement for MLA support


Diverse ECA, MLA and BLA & Thai commercial banks participation

World Bank Group and ADB were joined by ECAs upon selection of the electro-mechanical equipment suppliers

Coface (France) EKN (Sweden) GIEK (Norway)

Nordic Investment Bank (a MLA)

and by other institutions to complete the finance plan AFD (French Agency for Development) Proparco (subsidiary of AFD) Thai Exim

All acted as either PRI providers (PRI and commercial risk cover from ECAs) or direct lenders.

Commercial facilities were allocated to 7 Thai banks and 9 international banks on a club-deal basis.

7 Thai commercial banks provide in THB half of the long term loan facilities, and together with Thai Exim, all of the US$131 m. long term L/Cs


The finance plan comprises 27 financial institutions: 5 MLAs; 4 ECAs; 2 BLAs; 16 Thai & international commercial banks.

d. to d. tenor: USD 16.5 yrs

THB 15 yrs i.e. up to 12 year repayment

Resulting Financing Structure

… complex but detailed preparation enabled timely financial close


Contractual Structure

LHSE EGCO EDFI

Nam Theun 2 Power Company

Shareholders Agreement & Equity

Head Construction Contract

EM1 & EM2 CW1, CW2, &

CW3

Construction Sub-Contracts

GOL EGAT EDL

EGAT PPA

EDL PPA

Concession Agreement

Technical Services and Management Services

Agreements

GOL Undertaking

ITD

ECAs

MIGA

Loans

PRG / PRI

ESCO Multilateral & Bilateral Agencies

US$ Banks

World Bank

THB Banks

EIB

ADB

GOL Equity Funding

AFD

EDF

Shareholders’ Agreement

Coverage


Global Financial Stake in NT2

WB (US$ 62 million); MIGA (US$ 42 million); ADB (US$ 110 million)

EIB and NIB (about US$ 85 million)

European ECA’s (US$ 200 million)

French Development Agencies (US$ 60 million)

Nine International Dollar Banks (US$ 500 million)

Seven Thai Commercial Banks (US$ 500 million equivalent)

Thai Exim (US$ 30 million)


Summary: Issues and Solutions

Lao Government budget limitations

Limited Environmental and technical capabilities of Laos

USD1.5 B cost

Commercial Lenders would not assume Political risks in Laos or Thailand

Public Private Partnership

WB advisory and technical assistance + experienced international power developer: EDF

Project Finance scheme

Political Risk Guarantees

ISSUES SOLUTIONS


Summary: Risk Allocation

Risks associated with relationship between Laos and Thailand leveraged through contractual obligations of both governments

Additional leverage created through equity ownership by state-owned power companies of both countries

Social and environmental problems resolved through the involvement of the World Bank

Laos state-owned company enabled to make its equity contribution by using IDA funds

Project developed with 80% debt-to-equity ratio. Debt arranged by 9 leading commercial banks along with guarantees from MIGA, PRG, ADB and ECAs

Some funds provided by Thai banks


Summary: MIGA Value Added

Assisted in: syndication of larger amount of funds by Fortis bank and extension of finance period

Provided customized solution to multi-country risks: MIGA covered not only political risks in Laos but risks in Thailand (breach of the purchase agreement between the project and Thai state-owned company, EGAT)

Collaborated with sister agencies MIGA worked side by side with ADB and PRG to provide equal playing field for other arrangers


Key Lessons Learnt...for Large Hydros

MIGA and PRG Lenders were made accountable for Prohibited Activities undertaken by Company and/or Head Contractor

MIGA and PRG provide appropriate risk mitigation for large private hydropower schemes.– Political risks– Cross border risks

Optimization of the Financing Package is essential.– Over-commitment by lenders/guarantors– Over 25 project participants– Number of overlapping institutional requirements– Inter-guarantor and lender coordination


Key Lessons Learnt...for Large Hydros

Long arduous negotiations on the Concession

Concession deemed “fair” by all parties.– Inclusion of detailed E&S obligations in concessions

could be replicated in future large infrastructure projects

Due Diligence should be of high quality– Fine balance between requirements and cost

implications

Common E&S regime acceptance by all lenders and

guarantors facilitates project implementation

– Harmonization of IFI safeguards requirements is a replicable innovation


For more information

Jason Lu

Senior Underwriter

[email protected]

www.miga.org

jlu lusaka final

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