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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
MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 3
Pre-crisis: A Fairy Tale World
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Jan-02 Oct-02 Jul-03 Apr-04 Jan-05 Oct-05 Jul-06 Apr-07
TED Spread EMBI Spread
MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 4
Mid-2007: Maybe Not So Rosy
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Jan-02 Oct-02 Jul-03 Apr-04 Jan-05 Oct-05 Jul-06 Apr-07 Jan-08
TED Spread EMBI Spread
MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 5
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
TED Spread EMBI Spread
MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 6
Fallout. And Recovery?
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Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
TED Spread EMBI Spread
MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 7
-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)
MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 8
Baltic Dry Freight Index: Giant Price Swings
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2,000
4,000
6,000
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12,000
MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 9
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
MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 10
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
MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 11
Net FDI Flows to Developing Countries1987-2009 forecast (US$ billions)
0
100
200
300
400
500
600
7001
98
7
19
88
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89
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Bill
ion
s o
f $
MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 12
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
MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 13
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
MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 15
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
MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 16
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
MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 17
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
MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 18
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
MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 19
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
MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 20
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
MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 21
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
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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
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MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 23
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%
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MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 24
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
MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 26
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
MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 27
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
MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 28
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
MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 29
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
MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 30
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
Risks Covered Transfer Restriction
Expropriation
War & Civil Disturbance
MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 31
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)
MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 32
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
Risks Covered Transfer Restriction
Expropriation
War & Civil Disturbance
Breach of Contract
MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 33
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
MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 34
Information about MIGA
www.miga.org
t. +1-202-458-2538
f. +1-202-522-0316