World Investment and Political Risk The Global Environment OECD UNCTAD Global Forum DECEMBER 2009 Frank J. Lysy MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP
DEPFA BANK 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 MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 2
Pre-crisis: A Fairy Tale World 1000 800 600 400 200 0 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 3
Mid-2007: Maybe Not So Rosy 1000 800 600 400 200 0 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 4
The World Erupts 1000 800 600 400 200 0 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 5
Fallout. And Recovery? 1000 800 600 400 200 0 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 6
Real Markets Volatility as Well Commodity Indices (% change vs Jan 2007) 200% 150% 100% 50% 0% -50% -100% Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Oil Gold Copper Corn MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 7
Baltic Dry Freight Index: Giant Price Swings 12,000 10,000 8,000 6,000 4,000 2,000 0 MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 8
Recovery in Global Industrial Production Contributions to global IP growth (% q-o-q) 6 4 2 High Income Countries Developing countries excl China China 0-2 -4-6 -8 Q1-07 Q3-07 Q1-08 Q3-08 Q1-09 Q3-09 MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 9
2009 Emerging Market Equity Indices 140% 120% 100% 80% 60% 40% 20% 0% -20% -40% MSCI Barra EM Index Brazil China Indonesia Russia Turkey Ukraine -60% Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Equity indices in terms of US$ returns. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 10
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Billions of $ Net FDI Flows to Developing Countries 1987-2009 forecast (US$ billions) 700 600 500 400 300 200 100 0 MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 11
Gross Equity and Debt Flows by quarter, 2007 2009 (US $ billions) 250 (Note: 2009 Q4 is simply October data times three) 200 Bonds Banks Portfolio Equity 150 100 50 0 2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 12
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 MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 13
World Investment and Political Risk The Role of Political Risk Insurance OECD UNCTAD Global Forum DECEMBER 2009 Frank J. Lysy MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD 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 MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 15
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 16
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 17
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 18
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 19
MIGA Financials As 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 20
DEPFA BANK 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 MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 21
DEPFA BANK Risks covered (cont d) Breach of contract cover protects against government (including subsovereign) 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 MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 22
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% MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 23
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 24
Case Studies MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 25
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 26
Case Study: Ukraine - Can-Pack Ltd. F&P Holding Inc USA 53.2% ownership Can-Pack S.A. 100% ownership 46.8% ownership Equity ($17.6 million) Pol-Am-Pack Poland Equity ($16.1 million) Ukraine Can-Pack Ltd. (Ukraine) MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 27
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 28
Case Study: Doraleh Container Terminal (Djibouti) DP World 100% ownership Commercial Banks Direct Agreement DPW Loans Equity ($5 million) Interest Swaps Premium $440 M Djibouti DCT (the project) Concession Government of Djibouti 100% ownership 67% ownership PAID (State-owned port company) MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 29
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 30
Bulgaria - Maritza East 1 Power Plant AES 100% ownership AES Bulgaria Holding BV Equity ( 328 million) Commercial Banks Official Institutions Loans ( 150 million) Loans, export credit ( 616 million) Bulgaria Martiza East 1 EOOD Government of Bulgaria Off-take (Take-orpay contract) Natsialna Electrichiska Kompania (NEK) MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 31
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 32
Case Study: Dominican Republic Autopistas del Nordeste Toll Road $4.5 M Equity and Sub Debt $103 M International Sponsors Institutional Investors Sub. debt and equity $15 M Grupo Odinsa, Odinsa Holding, Grodco, Grodco Panama Autopistas del Norte Cayman Islands Bond: $206 M Morgan Stanley NY Arranger Astris Finance Financial Advisor Local Sponsor Consorcio Remix Autopistas del Norte Dominican Republic Dominican Republic Rating increase with only 51% MIGA coverage 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 was not available Innovative and speedy use of PRI different for of financing financing to raise a MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 33
Information about MIGA www.miga.org migainquiry@worldbank.org t. +1-202-458-2538 f. +1-202-522-0316 MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 34
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