Abstract
This paper elaborates the introduction of surveillance that gave the IMF broader responsibilities with respect to oversight of its members’ policies than existed under the par value system. The IMF’s purview has been broadened under the new system but, by the same token, its members are no longer obliged to seek its concurrence in changes in exchange rates. The continuing volatility of exchange rates, and their prolonged divergence from levels that appear to be sustainable over time, have been matters of growing concern.
At its 1985 Annual Meeting the World Bank’s Board of Governors approved the Convention Establishing the Multilateral Investment Guarantee Agency. The Convention will enter into force upon ratification by 5 capital-exporting countries and 15 capital-importing countries, if subscriptions of these countries total at least one third of MIGA’s authorized capital. MIGA could begin operations as early as 1986.
MIGA’s broad mandate is to stimulate capital flows to its member countries, particularly to its developing member countries. To this end it will issue guarantees for investments against noncommercial risk and, among other activities, conduct research and provide technical assistance and information on investment opportunities.
MIGA is not intended to displace national and private investment insurance programs already in effect in many developed and some developing countries. MIGA will be in a position to supplement these schemes through co-insurance and reinsurance. It will also concentrate on extending guarantees to investments not currently eligible for national or private coverage. Some of the salient features of MIGA are:
Risk coverage
To discourage irresponsible behavior by investors, MIGA will not fully cover losses. It is envisaged that MIGA typically will cover 70–95 percent of the investment (similar to national programs). The following risks are covered:
• Risk of host government restrictions on currency conversion and transfer.
• Risk of loss resulting from legislative actions or administrative actions and omissions of the host government that have the effect of depriving foreign investors of ownership or control of, or substantial benefits from, their investments.
• Risk of repudiation of government contracts where investors have no access to a competent forum, face unreasonable judicial delays, or are unable to enforce rulings issued in their favor.
• Risk of armed conflict or civil unrest.
• Other noncommercial risks, to be added on a case-by-case basis at the joint request of the investor and the host country and with the approval, by a special majority, of MIGA’s Board.
For a detailed discussion of the initial plans for MIGA see “Increasing private capital flows to LDCs” by Ibrahim Shihata in the December 1984 issue of Finance & Development.
Eligibility
Eligible investments: new investments, of a medium- to long-term nature, judged by MIGA to be both sound and in accordance with the declared development objectives of the host country, including equity and direct investments, as well as medium- or long-term loans made or guaranteed by owners of equity in the enterprise concerned. Direct investment may include franchising, licensing, leasing, and production-sharing. MIGA will not guarantee or reinsure any export credit provided, guaranteed, or reinsured by a government or an official export credit agency. Commercial loans may be covered if they are related to a specific investment otherwise covered, or to be covered, by the Agency.
Eligible investors; nationals of member countries, or corporations whose principal places of business are in member countries (or have the majority of their capital owned by nationals of member countries). Eligibility may be extended to nationals of developing countries who invest in their own countries, if invested assets are transferred from abroad. This is designed to help reverse capital flight.
Eligible host countries: except for sponsored investments (see below), MIGA is only able to guarantee investments in developing member countries, with priority given to lesser developed member countries.
Organization
Membership: open to World Bank member countries and Switzerland. There is, however, no obligation upon any country to join.
Organizational structure: MIGA is an autonomous agency, with its own Council of Governors, Board of Directors, and President and staff. The President of the World Bank, as ex officio Chairman of MIGA’s Board, nominates the Agency’s President.
Voting rights: developing and developed member countries will have equal voting power as groups once all Bank members join MIGA. During MIGA’s first three years the minority group will be guaranteed 40 percent of total votes and decisions will be taken by a two-third majority of the total votes representing not less than 55 percent of subscriptions to MIGA’s capital. In the third year, MIGA’s Council will review the voting structure with a view to assuring parity between the two groups.
MIGA and host countries
Host country approval: MIGA “shall not conclude any contract of guarantee before the host government has approved the issuance of the guarantee by the Agency against the risks designated for cover.”
Subrogation: if MIGA pays a claim, it assumes the rights of the indemnified investor. (See following paragraph for procedures for settling disputes between MIGA and host countries with respect to such rights.)
Settlement of disputes: if negotiations between MIGA and the host country fail, either party will have access to international arbitration unless both agree to resort first to conciliation. However, MIGA will be authorized to agree with individual host countries on alternative dispute settlement procedures.
Financing
Capital base: SDR 1 billion initial share capital: 10 percent in cash; 10 percent in promissory notes; the remainder subject to call.
MIGA guarantees: initially totaling no more than one and a half times the capital plus reserves and a portion of MIGA’s reinsurance coverage. This could increase, with experience and the formation of a balanced risk portfolio, to a maximum ratio of 5 to 1.
Sponsorship
In addition to guarantee operations based on the Agency’s capital and reserves, MIGA can cover investments sponsored by member countries as trustee for these countries. Revenues from these operations accumulate in a separate fund out of which claims and expenses are paid. (If this fund is totally depleted, liabilities would be shared proportionately by all sponsoring countries.)