1. Foreign Direct Investment in Developing Countries/Emerging Markets The Role of Political Risk Insurance Frank Linden, Senior Risk Management Officer Center for Integrative Leadership/Carlson School of Management, University of Minnesota April 20, 2010 MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP

2. 1.An overview of MIGA 2.FDI and political risk pre- and post financial crisis 3.Outlook and MIGA’s positioning MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP

3. 1.An overview of MIGA 2.FDI and political risk pre- and post financial crisis 3.Outlook and MIGA’s positioning MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP

4. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 4 1988MIGA Multilateral Investment Guarantee Agency MIGA …. A member of the World Bank Group 1944IBRDInternational Bank for Reconstruction and Development 1960IDA International Development Agency 1956IFC International Finance Corporation 1966ICSID International Center for the Settlement of Investment Disputes

5. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 5 MIGA’s Mandate  MIGA's mission is to promote foreign direct investment (FDI) into developing countries to help support economic growth, reduce poverty, and improve people's lives  We do this by providing political risk insurance for cross-border investments into our developing member countries  Every dollar MIGA guarantees is estimated to facilitate $4 of foreign investment  Promote research and knowledge on FDI and political risk insurance  World Investment and Political Risk report  Online investor information services: www.fdi.net and www.pri-center.comwww.fdi.netwww.pri-center.com

6. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 6 Risks covered by MIGA  Currency inconvertibility and transfer restriction  Expropriation  War, terrorism, and civil disturbance  Breach of contract (BOC)  Non-honoring of sovereign financial obligations

7. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 7 Risks covered by MIGA (1) 1. Currency Transfer Restriction and Inconvertibility  Protects against losses arising from:  Inability to convert local currency into foreign exchange within the host country  Inability to transfer funds out of the host country NB: Currency depreciation not covered 2. Expropriation  Protects against losses arising from:  Nationalization and confiscation  Creeping expropriation  Partial expropriation (expropriation of funds) NB: Non-discriminatory measures not covered, unless such measures have a confiscatory effect 3. War and Civil Disturbance  Protects against losses arising from:  Damage/disappearance of tangible assets (including revolution, insurrection, coups d'état, sabotage, and terrorism)  Short-term business interruption - new NB: Acts must have a primary intent of achieving a political objective

8. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 8 4. Breach of Contract  Protects against losses arising from:  Breach or repudiation of a contract between the investor/project company and the host country authorities  Denial of Justice  Non-enforcement of an arbitration/judicial award, or no recourse to judicial/arbitral forum, or decision by forum not rendered in reasonable time  May cover sub-sovereign obligations and obligations from SOEs 5. Non-Honoring of Sovereign Financial Obligations - new  For unconditional financial payment obligations of sovereign  No arbitration required Risks covered by MIGA (2)

9. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 9 Areeba Afghanistan LLC (the project) Government of Afghanistan MTN South Africa License Equity USD 80 million Fee MIGA Guarantee MTN – Afghanistan – Project Structure

10. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 10 Types of investments covered  Equity  Shareholder loans  Loan guarantees  Loans from financial institutions  Non-shareholder loans  Non-equity direct investment  and other forms of investment such as technical assistance and management contracts, asset securitizations, capital market bond issues, leasing, services, franchising and licensing agreements

11. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 11 MIGA’s Financial Highlights Gross exposure, $ billion 6.5 FY08 5.30 FY07FY06FY05FY04FY03 5.36 5.09 5.19 5.08 7.3 FY09 Key Figures  Issued 952 guarantees for 600 projects for a total of $20.9 billion during 1990- 2009  Portfolio: $7.3 billion in FY09  Issued $1.4 billion during July 2008-June 2009 MIGA’s Strengths  Total subscribed capital: $1.9 billion as of June 2009  Strong capital base and ability to pay compensation in the event of large- scale losses  Implied AAA by major credit rating agencies

12. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 12 Top Investors and Host Countries as of June 30, 2009 Investor Country Exposure %Host Country Exposure %$M Austria30.0Russian Federation 14.31,044.0 France12.8Ukraine 13.91,012.9 Belgium10.2Turkey 8.4611.8 Spain6.4Djibouti 5.6407.4 United Arab Emirates5.4Uruguay 4.1301.2 Finland4.1China 3.4248.2 South Africa3.7Brazil 3.4244.2 United Kingdom2.8Kazakhstan 3.1224.7 Netherlands2.6Mozambique 2.7196.4 Switzerland2.6Costa Rica 2.2158.5 Total80.6Total61.14,449.3

13. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 13 Claims history  Of the 600+ projects MIGA has supported in its history, more than 60 instances when a project has gone into pre-claim status but then the dispute was resolved and it was not necessary to pay a claim  MIGA has successfully facilitated the settlement of disputes in all currency transfer/inconvertibility issues  Since inception MIGA has never denied a claim and has needed to make claim payments in just 5 cases:  Indonesia ($15 million for expropriation in FY00)  Nepal ($144,600 for war and civil disturbance in FY05)  Argentina ($558,311 for expropriation in FY05)  Kenya ($491,100 for war and civil disturbance in FY09)  Madagascar ($12,824 for war and civil disturbance in FY09)  All other cases have been resolved (before or after the claim was filed) or the claim was withdrawn

14. 1.An overview of MIGA 2.FDI and political risk pre- and post financial crisis 3.Outlook and MIGA’s positioning MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP

15. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 15 Before the Financial Crisis Source: World Bank. Note: 2008 figures based on staff estimates Net Private Capital Inflows to Emerging Markets 2005-2008, billion USD

16. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 16 Pre-crisis: A Fairy Tale World?

17. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 17 October 2008: The World Erupts

18. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 18 The Fallout … and Start of Recovery

19. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 19 Impact of the Financial Crisis  The crisis ended the four-year global FDI boom  Collapse of demand and volatility of commodities prices  Dramatic changes in capital structure of projects - debt capital market not fully open  Increasing cost of capital and equity requirements  Delays with projects in infrastructure, oil, gas, mining, and energy sectors

20. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 20 The Impact of the Crisis on FDI  Global FDI – declined to $1.5 trillion in 2008 and to $850b in 2009; sharp decline in cross border M&As  Emerging markets capture increasing share of FDI

21. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 21 ECA Region Hardest Hit by the Crisis  Largest reversal in economic growth  2010 expected to be particular difficult with GDP growth forecast between 2- 3%  Foreign capital flows declined more than in any other region GDP Growth (%)

22. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 22 MIGA’s Response to the Global Financial Crisis  Support private investment and bolster confidence in government commitments through credit enhancements by MIGA  Joint IFI Action Plan  IFC, MIGA, European Bank for Reconstruction and Development, European Investment Bank mobilize up to €24.5 billion to banking systems and lending to the real economy in Central and Eastern Europe  €2 billion of MIGA’s PRI capacity to support banking sector recapitalization (€1.8 billion signed by December 2009)  Guarantee Framework for Private Equity Funds  to help clients raise financial capital for multiple investments into emerging markets

23. 1.An overview of MIGA 2.FDI and political risk pre- and post financial crisis 3.Outlook and MIGA’s positioning MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP

24. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 24 Impact of the Financial Crisis on Political Risk  Degradation of perceptions: political risk score increased for 52 countries out of 126 from June 2008 to June 2009 (EIU’s Risk Briefing 2009)  Biggest escalation of political risks in Eastern Europe, Latin America and developing Asia  Top concerns: social unrest, violent demonstrations, and the imposition of capital account controls Need for contractual political risk management products Increasing FDI into EMs Political risk as top investment constraint Political risk as top investment constraint

25. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 25 Landscape for Political Risk (cont’d) Major constraints on foreign investment in emerging markets percent of respondents Source: MIGA-EIU Political Risk Survey 2009. Note: Percentages add up to more than 100 percent due to multiple selections.

26. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 26 INVESTOR CONCERNS ABOUT POLITICAL RISK Political Risk Mitigation: Views and Practices Use of a wide range of mechanisms, including informal means, for managing political risk About 6 percent of investors reported that they do not mitigate political risk at all

27. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 27 Risk mitigation tools by sector: all emerging markets INVESTOR CONCERNS ABOUT POLITICAL RISK Political Risk Mitigation: Views and Practices

28. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 28 Outlook for Political Risks Types of political risks of most concern to investors in emerging markets percent of respondents Source: MIGA-EIU Political Risk Survey 2009. Note: Percentages add up to more than 100 percent due to multiple selections.

29. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 29 INVESTOR CONCERNS ABOUT POLITICAL RISK Political Risk Mitigation: Views and Practices The crisis has made investors in Eastern Europe much more aware of risks and seek risk mitigation Proportion of respondents that consider that the crisis has increased their willingness to contract risk mitigation going forward Interest in PRI – in different regions

30. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 30 The Role of Multilateral Providers of PRI  Multilaterals are better able to maintain capacity, prices and tenors in times of crisis, and can fill the gaps in the private market  Higher selectivity, stricter underwriting conditions and reduced capacity in the private insurance market  Banks unwilling to lend without PRI; view multilateral involvement as a positive indicator  High deficit countries perceived to be at a higher risk for transfer restrictions  Facilitation of high development impact investments and investments into underserved markets  Not subject to shareholder pressures for profitability

31. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 31 Why Investors Choose MIGA: Our Value Added  MIGA’s PRI is particularly suitable for complex projects  PRI coverage may facilitate financing: lower costs of borrowing, longer tenor of loans (up to 15-20 years)  MIGA’s transfer and convertibility cover is seen by the banks as an effective mitigant of country risk  Credit enhancement and mobilization of reinsurance capacity  Environmental and social risk mitigation  Honest broker between the government and investor  Strong track record of ensuring continuing viability of investments in times of stress: Venezuela, Argentina, Russia  Prompt claims payment  Access to World Bank Group expertise and resources

32. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 32 MIGA’s Comparative Advantage More risky Environments Costs MIGA’s comparative advantage Private PRI providers’ costs Less risky Environments MIGA’s costs MIGA has a higher administrative cost than private PRI providers

33. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 33 Conclusion  Financial and economic crisis was an adjustment from unsustainable trends  FDI prospects remain optimistic and awareness of political risk is more in line with reality  Political risks will remain a major concern for investors in the medium term given the growing economic weight of the "South" both as a source and destination for FDI  Conflict-Affected and Fragile States remain a challenge for PRI providers

34. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 34 Working at MIGA

35. I N S U R I N G I N V E S T M E N T S E N S U R I N G O P P O R T U N I T I E S for more information www.miga.org

36. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 36 Agribusiness, manufacturing and services  MIGA guarantees can cover a project’s physical assets or losses incurred by temporary business interruption in the event of civil disturbance, cover the inability to repatriate locally earned currency, and mitigate concerns related to unclear laws on property ownership  $300 million guarantee (expropriation, war and civil disturbance, and breach of contract) to Oy Metsä-Botnia Ab of Finland for its equity investments in a greenfield pulp mill, a free trade zone, and plantations in Uruguay – the largest ever foreign investment in the country’s history  $13.7 million in guarantees (expropriation, transfer restriction, and war and civil disturbance) supporting the development of a greenfield sugar mill in Kenya  MIGA’s Small Investment Program particularly relevant to this sector - $4.3 million in guarantees (transfer restriction, expropriation, and war and civil disturbance) supporting the installation and operation of a vegetable oil refinery in Boma, Democratic Republic of Congo

37. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 37 Telecommunications  MIGA’s cover can address concerns related to regulatory issues, licensing and frequency allocations, conversion of locally earned currency, performance-related clauses, and protection of assets (such as cell towers) in conflict-affected environments  Guarantee of $76.5 million against the risks of transfer restriction and expropriation to the MTN Group of South Africa, backing its $85 million investment in Afghanistan’s telecommunications sector (installation, operation, and maintenance of a 100 percent digital GSM technology network via its Afghan subsidiary, Areeba Afghanistan LLC).  Guarantees of $25.9 million (transfer restriction, expropriation, war and civil disturbance, and breach of contract) to Senegalese telecommunications operator Sonatel for its $25.8 million equity investment in, and shareholder loans to, its subsidiary in Guinea Bissau.  Guarantee of $37.9 million (transfer restriction, expropriation, war and civil disturbance, and breach of contract) to Orange Participations S.A. of France for the installation, operation and maintenance of a telecommunications network in Central African Republic operating on 100 percent digital GSM technology

38. MULTILATERAL INVESTMENT GUARANTEE AGENCY WORLD BANK GROUP 38 Infrastructure (water and transport)  MIGA’s cover can address investor concerns related to tariff adjustments, license modification, creeping expropriation, sub-sovereign regulatory and contractual risks, and other issues  Dominican Republic Toll Road – MIGA guarantees of $107.6 million (transfer restriction, expropriation, war and civil disturbance, and BOC) resulted in higher rating of bond issuance allowing financing gap to be filled  Deqing Darco Producing Water Co. Ltd project in China – $7.1 million cover against risks of transfer restriction, expropriation, war and civil disturbance. MIGA helped resolve a dispute between the investor and a municipal authority in which each party claimed breaches of the joint venture contract by the other party.  MIGA issued guarantees of $427 million ($5 million for equity and $422 in Islamic project financing) backing a project funded under an Islamic financing structure – Doraleh Container Terminal in Djibouti. Mitigated against key risks of asset damage/business interruption due to conflict and risk of non-payment of a final arbitration award against the government for BOC of the concession agreement.