You are investing in a mine in a volatile emerging market, how do you protect your asset?
One answer: Political risk insurance.
The mission of the Multilateral Investment Guarantee Agency (MIGA), a member of the World Bank Group, is to promote foreign direct investment in developing countries to help bolster local economies, reduce poverty and improve lives.
In order to do that, investors need to have confidence that their investments will be protected. MIGA, particularly given its connection to the World Bank, gives investors that confidence.
In the 28 years since it was founded, MIGA has provided over $40 billion in political risk insurance to over 800 projects all over the world – and had only eight claims, according to Gloriana Echeverria, a Senior Underwriter at MIGA who recently spoke with OnFrontiers.
“Political risk insurance is an instrument that investors obtain from either MIGA or other providers, like OPIC or the private market,” Echeverria said. “It is basically an instrument to cover equity or debt investments in countries where there is a perceived risk of political unrest or intervention.”
Echeverria explained the specific events MIGA covers such as expropriation – the nationalization of entities, confiscation of assets and other measures a government can take to effectively take control of an investment. They also cover what they call “creeping expropriation” – where the government doesn’t actually outright confiscate an asset, but they do things like revoke licenses, cut utilities to an entity, and other measures that effectively take control of the project away from the investor.
“Basically, a series of actions that in and of themselves independently don’t constitute an expropriatory action, but when you put them all together, they do,” said Echeverria.
They also cover war and civil disturbance, which includes any acts of destruction of assets or inability to operate a project because of war, sabotage, or terrorism; transfer and inconvertibility, which is the ability to take local currency, convert it into hard currency, and transfer it out to other countries to repatriate dividends or pay loans; and breach of contract.
MIGA’s biggest guarantee to date was for a mine in Mongolia for $1 billion in the 2016 fiscal year, according to Echeverria. Since their mission is to encourage development, they work on small projects under $10 million in fragile or post-conflict countries and in countries eligible for International Development Association financing (the poorest countries in the world); Echeverria said the smallest guarantee was for $250,000 for a bottling company in Ecuador. But the average size of investments covered by MIGA’s guarantees is between $100-150 million.
MIGA’s big point of difference with private insurers is its connection to the World Bank and its ability to use the relationships inherent in that to its clients benefit. That’s why they’ve only had eight claims in their 28 year history.
“It’s not that MIGA doesn’t want to pay – it’s that we’re part of the World Bank,” said Echeverria. “Our business model is very different from a private insurer in the sense that we urge our investors to get in touch with us at the slightest sign of trouble.
“So what happens is that as soon as there is some sign of trouble, they call us, and we immediately start liaising with the government.
“The host country is our member, it’s a shareholder, and we have a direct relationship with them as part of the World Bank,” Echeverria explained. “So as soon as something happens, we talk to them and find out what is going on.”
She explained in some instances, it’s the local government causing problems and that often times the central government isn’t even aware. But once they get the call from MIGA, the central government often intercedes and helps resolve the issue. Since the host countries are part of the World Bank and want foreign direct investment, it behooves the central government to help find a solution.
Echeverria added that out of the eight claims MIGA has ever gotten six were for “war and civil disturbance” – meaning there was destruction of assets because of violence. So, those weren’t exactly situations that could be settled through negotiations between the government and the investor with MIGA’s assistance.
She said that the other two cases were for expropriation claims. And in one of those two cases the investor asked for MIGA not to get involved because they were divesting anyway and preferred to receive the claim compensation.
So effectively they’ve only had one situation where they haven’t been able to help settle differences through diplomatic means and had to pay a claim.
“So we have a very strong track record on handling what we call ‘pre-claims.’ That’s part of our mandate. What we want as part of the World Bank is for those investors to stay in the country and continue to produce the benefits to the local community and the economy. And that’s what the investor wants too.”