Journal Issue

MIGA: Up and Running

International Monetary Fund. External Relations Dept.
Published Date:
January 1992
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As the developing world searches for foreign investment, the World Bank Group’s newest affiliate—the Multilateral Investment Guarantee Agency—is poised to help

For developing nations throughout the world, foreign direct investment (FDI) holds enormous attraction. After decades of trying to acquire needed funds through other means—notably commodity cartels, commercial bank lending, and multilateral and bilateral aid—they are increasingly turning to foreign investors, hoping to convince them to take a bigger stake in the emerging private sectors. The capital is out there: in terms of annual flows, FDI rose dramatically during the 1980s, reaching around $132 billion. But very little of that has gone to developing countries, especially in the last few years, with only ten of these countries accounting for the bulk of those funds (see World Economy in Transition on page 50).

A major obstacle to foreign investment in the developing world is that besides the usual commercial risks, potential investors believe they face serious political risks—a perception that often means the difference between proceeding with, or abandoning, a project. Although wholesale nationalizations of foreign investment—such as occurred under Castro in Cuba and Allende in Chile, and in post-revolutionary Iran—are rare, the wave of expropriations and other discriminatory actions in the 1960s and early 1970s have left vivid memories. For that reason, the Multilateral Investment Guarantee Agency (MIGA) was established in April 1988. Its mission: to promote private investment for economic development through insuring investment against noncommercial (i.e., political) risk, and providing promotional and advisory services to help members create an attractive investment climate.

Two years after becoming operational, MIGA is now up and running—indeed, recent indications are that there will be enormous demand for its services, especially in light of changes in the former communist countries. The more pragmatic, less ideological attitude of developing countries toward private investment is being translated into a greater acceptance of the private sector as an engine of growth. Foreign investment, after all, offers far more than just capital; it also holds the promise of technology transfer, training and management expertise, and access to world markets.

Political risk insurance

Insuring investment against political risk, of course, is nothing new. Back in 1948, a US government program first offered this form of “catastrophe” insurance to US firms investing in Western Europe. These days, most industrial countries and a few developing countries have their own national insurance programs, and several private insurers also offer this type of coverage. However, three key problems arise: (1) public insurers generally limit their coverage to investors from their own countries; (2) there are many types of projects that public insurers cannot fully cover (e.g., large extractive or industrial projects, and certain projects involving financial institutions); and (3) the three largest public insurers (Japan, the United States, and Germany)—reflecting the preferences of their nationals—tend to concentrate investment activity on their own regions, leaving large parts of the world, such as Africa, relatively neglected.

MIGA was essentially created to fill these gaps, working, when needed, as a coinsurer with, or a reinsurer of, other insurers (see “Increasing private capital flows to LDCs,” by Ibrahim F.I. Shihata, Finance & Development, December 1984). Four basic types of coverage are available:

Currency transfer. Protects against losses arising from an inability to convert local currency returns into foreign exchange for transfer outside the host country;

Expropriation. Protects against loss as a result of acts by the host government that may reduce or eliminate ownership of, control over, or rights to, the insured investment;

The MIGA guarantee process

1 This phase can vary in duration from a few months to many years.

2 The decisions whether to invest in a project and to purchase investment insurance are often made simultaneously.

War and civil disturbances. Protects against losses arising as a result of any military action or civil disturbance that destroys or damages tangible assets of the project enterprise or interferes with its operations (e.g., those resulting from politically motivated events of revolution, insurrection, coup d’état, sabotage, and terrorism); and

Breach of contract. Protects against losses arising from the investor being unable to obtain and/or enforce a decision or award against a host country that has repudiated or breached an investment contract.

Coverage will normally be limited to protecting new investments in MIGA-member developing countries. But MIGA can also insure acquisitions involving the privatization of state enterprises, and new capital associated with the expansion, modernization, or financial restructuring of an existing enterprise. Forms of investments that may be covered include equity, loans made or guaranteed by equity holders, certain forms of non-equity direct investment (e.g., technical assistance and management contracts, and franchising and licensing agreements), and loansmade by financial institutions under certain conditions.

In an effort to help investors take a longerterm perspective, contracts typically will be written for 15 years (in exceptional cases, 20 years), compared with the one to three years prevalent in the private insurance market (which primarily provides expropriation coverage). During the MIGA application process (see figure), projects are reviewed to make sure that they are financially, economically, and environmentally sound, and contribute to the host country’s development needs (e.g., job creation, technology transfer, foreign exchange benefits, and export generation). While there is no stated minimum investment that may be covered, there is currently a maximum coverage limit of $50 million per project.

Premiums are based on the type of project (e.g., manufacturing) and type of coverage (e.g., currency transfer) desired, taking into account project-specific conditions. Annual premiums for each coverage generally fall in the range of 0.50-1.25 percent of the amount insured. MIGA’s rates tend to be slightly higher than those of other national insurers, owing to the fact that the agency must be financially self-sustaining.

At this stage, it is impossible to predict the size and number of claims that MIGA will realize in the years ahead—no actuarial loss tables exist in the investment insurance business—but the experience of other insurers suggests that: (1) currency transfer will be the most frequent form of claim; (2) expropriations will be the largest individual claims; and (3) there will be a great variation in the number and size of claims in any given year. Over 1948-90, for example, US-insured investors received more than $510 million from the US national scheme in settlement of 241 claims, with currency transfer by far the most frequent type of claim.


When the Freeport McMoran Copper Company began to investigate ways of expanding its copper, gold, and silver mining project in Irian Jaya, Indonesia a few years ago, it ran into problems that are fairly typical for such complex undertakings in the developing world. The original project, constructed in the early 1970s, had involved building a 104-kilometer access road through the jungle, tunneling through two mountains, erecting an aerial tramway from the mine to the mill site, and constructing a 115-kilometer slurry pipeline to the coast The $500 million expansion was intended to develop a new mine site nearby, thereby boosting ore production from 21,000 metric tons per day to 52,000. In the process, an additional 1,100 jobs would be generated, and the Indonesian Government stood to receive $90 million in foreign exchange.

The US-German-Indonesian owners wanted to raise about 75 percent of the capital from commercial banks in the form of “non-recourse” financing. But this type of financing—which relies on cash flow from the project, as nonproject assets are not pledged—requires a complex division of the risks and rewards among the lenders, suppliers, buyers, and owners. MIGA found it could play a catalytic role in assembling the final financing package by providing the initial $50 million in coverage. The US national insurer, the Overseas Private Investment Corporation, followed by extending $100 million in coverage (it had already been involved in the original project). Private insurers then completed the package with significant amounts of short-term, renewable coverage.

Progress report

Contrary to perhaps overly optimistic business expectations, MIGA has devoted its first two years largely to recruiting staff, developing contract language and necessary procedures, trying to publicize MIGA’s services and recruiting country members. As of mid December 1991, 74 states had completed their membership requirements (16 developed and 58 developing countries), with another 37 in various stages of joining. These countries are spread across the globe, including all of Eastern and Central Europe.

On the guarantee side, the first two fully operational years (ended June 30, 1991) have resulted in 15 guarantee contracts being executed, supporting investments totaling nearly $2 billion; MIGA’s maximum contingent liability on these contracts totaled $191.2 million. These projects are expected to generate an estimated 6,380 jobs, as well as $1 billion in foreign exchange earnings over a five-year period. The insured investors come from Canada, Denmark, France, Japan, Luxembourg, the Netherlands, and the United States; the host countries are Bangladesh, Chile, Hungary, Indonesia, Madagascar, Poland, and Turkey.

The investments themselves are in a wide variety of sectors (services, mining, tourism, telecommunications, agriculture, and manufacturing), although mining has tended to dominate. Some of the projects include:

  • a $6 million guarantee to Bering Netherlands B.V. for a newly privatized potato and grain processing company in Poland;

  • a $49.8 million reinsurance agreement with the Export Development Corporation of Canada to enable Canadian-based Placer Dome, Inc. to develop a $335 million gold and silver mining joint venture in Chile; and

  • $3.6 million in guarantees to Holding Savanna S.A., a French company, for three separate investments in hotel companies that will erect garden-style hotels in Madagascar.

As for policy and advisory services, MIGA has recently stepped up its efforts in that area. Promotional conferences have been held in Hungary, Jamaica, Ghana, and Pakistan, resulting in numerous joint ventures. Through the Foreign Investment Advisory Services (FIAS), a joint facility of MIGA and the International Finance Corporation (IFC), 21 advisory projects in 18 countries were completed in the past fiscal year (see article on page 46).

Looking ahead

MIGA is now poised to shift into a higher gear, ready to take on what should be a rapidly growing demand for its services. The early indications are quite positive: in fiscal year 1991, the number of applications received increased by 66 percent to 397 (besides the sectors already being insured, applications were received in oil and gas, agri/fishing, construction, forestry, power, and financial); in the first five months of FY 1991, there has been an additional 17 percent increase. Granted, most of these projects will not go forward in the near future, others will be delayed, and still others will proceed without MIGA support. However, the sheer size of this project pipeline bodes well for the new agency.

Laura Wallace

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