Virtually no developing country, from a transition economy in Eastern Europe to the poorest countries in Sub-Saharan Africa, has escaped the impact of the widening global economic crisis. With a decline in foreign direct investment (FDI), steady economic growth seen in the developing world is slowly being eroded. In response to this, the Multilateral Investment Guarantee Agency (Miga) has launched a number of initiatives.

As the leading international institution promoting FDI in emerging and transition economies, Miga can help investors mitigate risks in these uncertain times and play an important role in helping countries attract FDI. “Miga can act as a stabilising influence in the market, provided it has the tools necessary to respond to the needs of investors and lenders,” says Miga’s executive vice-president Izumi Kobayashi.

Miga has already responded to the global financial crisis in a number of ways. It launched a multi-billion dollar initiative to support financial flows from banks to their subsidiaries in crisis-hit countries. The initiative will provide extended support to financial institutions seeking political risk insurance on cross-border investments for recapitalisation or liquidity support to their subsidiaries in such markets. Under the initiative, Miga will be able to provide such guarantee support globally, of which up to US$3bn will be available for investments into the heavily impacted economies of Europe and Central Asia.

Miga has also developed an innovative product that provides an umbrella contract to facilitate investments to small-and-medium enterprises. The launch of the product was with the African Development Corporation (ADC) to facilitate up to US$150mn of investments in Sub-Saharan Africa. The contract provides a blanket commitment of guarantee that allows Miga to provide political risk coverage for up to 20 of ADC’s planned small-scale investments in the banking, real estate, information technology, telecommunications, agriculture, and service sectors in countries throughout Sub-Saharan Africa. Notes Kobayashi: “The risk mitigation provided by Miga’s commitment is helping ADC raise new funds in an environment where investor confidence is lacking.”

Miga also entered a joint initiative for Africa under which the World Bank Group, the African Development Bank, the European Investment Bank, and the Agence Française de Développement Group pledged to support the private sector in the region and to fund lending to the real economy. And it participated in another initiative to spur economic growth in Latin American and Caribbean countries under which the World Bank, International Finance Corporation (IFC), and Miga are coordinating a crisis response in partnership with the Inter-American Development Bank and the Inter-American Investment Corporation, Corporacion Andina de Fomento, the Caribbean Development Bank, and the Central American Bank for Economic Integration. In both cases, the international and regional financial institutions are working together to identify partnerships to increase their collective impact and explore new opportunities to protect the economic and social gains achieved during the last five years.

However, the global economic crisis has prompted the agency to do more to meet the rapidly evolving needs in the investor community. “Although we’ve been able to be innovative in responding to the financial crisis, we felt the time was right to expand our offerings and enhance our overall flexibility and effectiveness. The urgency for institutional renewal is heightened given the turmoil in the financial markets and it is incumbent on the World Bank Group to be especially adaptive and responsive at this time,” says Kobayashi.

In April 2009, Miga’s board of directors approved substantial changes that will affect the agency’s day-to-day business operations in order to meet changing circumstances and market conditions. “The changes encompass a number of measures that will enable Miga to bring greater value to clients and to meet its objectives of promoting developmentally beneficial foreign direct investment,” says Kobayashi.

The modifications are aimed at increasing Miga’s operational flexibility and improving efficiency. They include introducing one new area of coverage, enhancing several existing areas of coverage, and clarifying and streamlining various existing procedures.

Sovereign guarantee cover
The new area of coverage available to Miga clients is the non-honouring of sovereign guarantees. This product will be offered in addition to Miga’s traditional breach of contract coverage for investments into projects that benefit from unconditional financial payment obligations or guarantees from the host government. (Under breach of contract, the guarantee holder is required to obtain an arbitration award against the host government and is compensated in case of non-payment of an award within a waiting period specified in the insurance contract.) Under the new non-honouring of sovereign guarantee product, the guarantee holder will be compensated if the government fails to pay within specified waiting periods, eliminating the need for an arbitration award. The new product is suitable for certain types of transactions, particularly public-private partnerships and will allow Miga to respond to the needs of its clients and priorities in the marketplace. It is expected that Miga’s existing breach of contract will remain an important risk mitigation instrument for transactions that do not benefit from government financial guarantees.

The existing breach of contract has also been enhanced by extending coverage to state-owned enterprises and to accommodate situations in which the investor does not have recourse to a dispute resolution forum, or legal proceedings are taking an unreasonably long time.

Impact of war
The other cover that has been expanded is Miga’s war and civil disturbance coverage. This extends temporary business interruption cover to the temporary cessation of operations, abandonment, or loss of access to a project, including allowing Miga to cover business income loss. The applicable waiting period has been shortened from 180 days to a period of not less than 30 days.

Definitions surrounding eligibility for Miga coverage have also been expanded and clarified. This will help Miga extend the instances in which it can provide coverage and lead to reduced transaction costs for Miga and its clients. Miga has also clarified a number of procedural issues with respect to engaging prospective clients.

“These changes represent the largest and most significant expansion of the agency’s business toolkit since Miga was established in 1988,” says Edith Quintrell, Miga’s director of operations. “As such, they have great significance in demonstrating Miga’s commitment to adapting to changing market needs.”

At the same time, the proposed changes will bring positive development results, especially in the agency’s strategic focus areas – the world’s poorest countries and Sub-Saharan Africa in particular, post-conflict countries, South-South investments, and complex projects.

“These strengthened capacities and more user-friendly procedures will help would-be project sponsors better manage political risks, which will lead to greater interest in more projects, more deals getting done, and better terms for the host country,” says Kobayashi.

The bottom line for Miga remains providing support to emerging and transition economies battered by the global financial crisis. “The recent initiatives are consistent with our mandate and strategic priorities, focusing on areas where Miga adds most value and complements the work of other institutions.”