The purpose of the Bill is to authorise the Minister for Finance to subscribe to the 1998 capital increase of the Multilateral Investment Guarantee Agency – MIGA.
The Multilateral Investment Guarantee Agency is part of the World Bank Group. It shares a president and board or directors with the bank. It was created in April 1988 to encourage the flow of investments for productive purposes among member countries and, in particular, to developing member countries, in many of which the perception of political risk remains a significant barrier to investment. The need for such an agency had become apparent from the experience gained by the World Bank group in working with developing countries.
Earlier, in 1956, the International Finance Corporation, or the private sector arm of the bank, was established when it became clear that there was a need for a specific agency to encourage private foreign investment as opposed to the bank's own role in the public sector. Equally, when it became clear that poorer countries could not afford to borrow on the bank's commercial terms, the International Development Association, or the bank's "soft" window, was set up in 1960, to make concessional financing available for development. MIGA is the latest of the institutions to be set up aimed to fill another gap where political uncertaintly was acting as a deterrent to foreign private investment.
MIGA improves the investment climate by issuing guarantees against political risk and engaging in other investment promotion activities. Its primary role, to facilitate foreign private direct investment, complements other investment agencies such as the International Finance Corporation and national insurance and promotional bodies.
Prospective projects for MIGA coverage must be financially, economically and environmentally sound. The first two of these are normal considerations in any commercial insurance operation. The question of environmental sustainability, however, is a more recent consideration. It arises from fears that multinational corporations may bring investment to developing countries only at the cost of the degradation of their environment. MIGA is conscious of this danger and has recently taken steps to address such concerns.
In June 1999, an environmental and social compliance adviser/ombudsman – CAO – was appointed to review any complaints that MIGA or the IFC might have violated their own environmental, social and/or disclosure policies. This was the result of efforts by IFC and MIGA, their shareholders, NGOs and members of the business community to find a workable and constructive approach to dealing with environmental and social concerns. The ombudsman's role will include an infomal advisory function as well as that of reviewing complaints.
MIGA operates by issuing guarantees against non-commercial or political risks for foreign direct investments – FDI – in its developing member countries and by providing technical assitance to governments of such countries to improve their ability to attract foreign direct investment. MIGA covers private investments but may cover State projects where these are being privatised or run on a commercial basis.
MIGA provides political risk insurance to private investors for specific projects in developing countries. Its objective is to facilitate foreign direct investment by alleviating negative investor sentiment regarding political stability in the host country. MIGA does not provide export credit insurance nor does it provide insurance against normal commercial risk.
MIGA has accomplished a great deal in its ten years of operation and has implemented several initiatives. It has become a significant agency in the world of international risk capital. On the guarantee side, the agency is now one of the largest political risk insurers in the world. Through reinsurance and co-insurance agreements, and through syndication of political risk insurance, MIGA now occupies a unique and central position as a standard setter for political risk insurers. It can now proceed with confidence to assume more risk in more complicated and larger projects. On the technical assistance side, MIGA's institution building activities for investment promotion agencies are highly appreciated by many host countries. These activities are drawing the attention of many senior executives and MIGA's contribution on the legal side is highly valued by many governments.
In this context it can be asked whether we need a multilateral agency such as MIGA, and whether the service it provides might not be equally well provided either by the private sector or by national governments. It is true that about 20 countries have national political risk investment insurance programmes. MIGA was created in recognition of the fact that various eligibility criteria of these national programmes rendered them unable to offer meaningful coverage to a considerable number of investors. Moreover, most developing countries do not have such programmes, leaving any of their national investors undertaking foreign direct investment no potential source of long-term coverage.
Private insurers were writing political risk investment insurance when MIGA was created in 1988 and operate successfully now in a growing market. Thanks in part to MIGA's reinsurance activities, the private market has stretched the tenor of its coverage. Currently, the private market is flourishing in a very complementary fashion to the operations of the agency and the national insurers. Not only have private insurers not been crowded out, they have been crowded in by MIGA's operations. They have willingly joined MIGA in its co-operative underwriting programme which combines the agency and private sector coverage in a single policy for the insured investor.
Senators do not need to be reminded of the importance of foreign direct investment. Over the past decades capital inflows have laid the basis for the current success of our economy. Our pioneering approach to the attraction of foreign investment has attracted considerable international attention, and many countries are now seeking to emulate our success in utilising such capital inflows to best advantage.
In many of these countries perceptions among investors of political risk or instability can deter them from making large or long-term investments. This in turn retards the industrialisation of these countries and compounds existing social problems, such as endemic poverty. MIGA was created as a contribution to solving some of these problems.
MIGA works very closely with other agencies and its convention specifically requires it to supplement the activities of the World Bank, the International Finance Corporation, and other international development finance institutions. It is also required to complement the activities of existing national and regional investment insurance entities. It does this through co-insurance and reinsurance with these institutions, bilateral exchanges of information, and its membership of the Berne Union.
The MIGA guarantee is designed to promote new investments and new contributions to expand, privatise, or financially restructure existing projects in developing member countries. MIGA's long-term, that is 15 to 20-year, non-can celable guarantee serves to mitigate investors' concerns about political risks and facilitates investments that otherwise might not be made.
What does political or non-commercial risk insurance cover? Very broadly, MIGA offers guarantees to cover the following risks: currency transfer restrictions that prevent investors or lenders from converting local currency into foreign exchange and transferring the proceeds abroad; expropriation by a host government that affects the insured investment; war and civil disturbance, including politically motivated acts of sabotage or terrorism; and breach of contract by a host government in certain circumstances. These are all essentially actions by a host government which would jeopardise the return on the investment and if not insured against would deter much needed foreign direct investment.
MIGA covers several forms of investment including equity, commercial bank loans, loans made or guaranteed by foreign equity holders and technical assistance and management contracts. This flexibility is designed to encourage private foreign investors to expand their activities in the developing world.
MIGA is mandated to assist investments that contribute to the host country's development. The equity related direct investments that it facilitates are more stable than portfolio investments and are a necessary element of long-term sustainable development.
MIGA assesses its success in terms of the number of jobs created, foreign exchange earnings and savings produced, tax and other revenues generated for the host government, and advanced technology and management practices introduced.
All MIGA insured projects must be environmentally and financially sound. They must also be technically sound. MIGA's technical assistance work is designed to promote the flow of investment to its developing member countries and economies in transition. These activities focus primarily on sectoral ministries and national and local investment promotion agencies. It assists the agencies in capacity building and dissemination of information on investment opportunities in their countries. It also supports the investment marketing efforts of agencies by organising multi-country single sector conferences that bring together potential investors, local partners and host country investment promotion officers.
The fulfilment of MIGA's objectives contributes to the development of the private sector in host countries and increases the ability of these countries to achieve economic and social development in an environmentally sustainable way. The agency's success in promoting foreign direct investment in its developing member countries and economies in transition makes an important contribution to the attainment of the overall development objectives of the World Bank group.
Global private flows to developing countries increased from $42 billion in 1990 to $256 billion in 1997, although we witnessed a slight slowdown in 1997 which was due largely to the crisis in East Asia. Growth has resulted from a combination of factors: the liberalisation and private sector growth in developing economies, particularly in the infrastructure sector; strong macroeconomic growth; an increase in trade; and a more integrated global investment and production regime overall. Against this background foreign direct investment continued to form the largest portion of net private flows and rose fivefold from $24 billion to $120 billion in the same period.
The growth of foreign direct investment in developing countries acted as a catalyst for and benefited from the expansion of the investment insurance market. Concerns of project sponsors about restrictions on transfer of remittances, expropriation or nationalisation, and war and civil disturbance have inhibited the flow of foreign investments in the past. The increasing availability and use of political risk insurance as a risk mitigation mechanism have boosted investors' confidence to invest in developing countries.
The Berne Union, which comprises 25 investment insurers including MIGA, reports that the use of political risk insurance has more than doubled since 1990 when it was $17 billion and reached $38.9 billion in 1997. In response to global trends private investment insurers are increasing the capacity and scope of their coverage and providing longer periods of insurance
MIGA's role in relation to Africa may be of interest to Senators. It wants to respond to the growing needs of African countries. Several African countries have undertaken rigorous structural reform and adjustment efforts and these measures have begun to show rewards in the form of steady economic growth. Though these efforts have unfortunately been undermined by the spread of the AIDS epidemic and the resurgence of conflict in many parts of the continent, the economic potential of Africa remains enormous.
I am aware that many Senators are closely concerned with the resolution of the debt burden which constrains the development of many African countries. Even after this burden is alleviated for the countries affected, they will still badly need foreign direct investment. Many of these are still shaky economies and they are not immune either from economic crises such as that which hit East Asia or from renewed political instability. MIGA's technical assistance and guarantee activities will be crucial to such African countries. The difference MIGA makes for them will be a key test by which the agency will be evaluated in terms of its effectiveness in diversifying foreign direct investment to poorer countries. Since its inception, the agency has underwritten 62 contracts of guarantee in Africa, facilitating an estimated $3.7 billion in foreign direct investment. The activities of the agency in providing technical assistance to promote foreign direct investment by strengthening the capacity of investment intermediaries to attract and retain foreign direct investment are of particular relevance to Africa.
MIGA obtains its resources from the capital subscriptions of its members. MIGA's initial authorised capital was SDR 1 billion. The current authorised capital is SDR 1.86 billion. The increase is accounted for by an increase of SDR 77 million in the initial capital to accommodate an increase in membership over that initially provided for and the current capital increase of SDR 786 million.
As of 30 September 1999, full membership requirements in the agency have been completed by 150 countries. The current amount of the capital subscribed by full members is SDR 1.04 billion or $1.124 billion. On 29 March 1999 the Council of Governors of MIGA adopted a resolution for a general capital increase. Under this the authorised capital stock of the agency will be increased by SDR 786 million - $850 million.
The proposed capital increase will help to underpin an underwriting strategy which envisages between $15 billion and $24 billion of new guarantees being issued up to the year 2006. After allowing for existing guarantees, cancellations, reductions, expiries and losses, MIGA's outstanding contingent liabilities would be about $15.7 billion gross by the end of that period. Based on historic ratios, new guarantees of between $15 billion and $24 billion could facilitate an estimated $105 billion to $168 billion of new foreign direct investment to developing and transition countries.
Ireland has been a member of MIGA since its establishment in 1988 having ratified the convention establishing MIGA on 5 July 1989. The cost of the shares allocated to Ireland was about $4 million, of which 10% – $400,000 or £280,000 – was paid in cash. Under the proposed capital increase Ireland will receive additional shares involving an additional subscription of $3 million. This will consist of a cash payment of $537,000 – £396,000 – and callable capital of $2.5 million. Cash payment will be made in two equal instalments in the first two years of the capital increase. The first payment fell due before 29 March 2000; the second is to be made before 29 March 2001. Each payment will amount to £198,000.
Ireland's contributions to MIGA are accountable as part of our official development assistance programme and count towards Ireland's UN GNP percentage target for overseas development assistance. Contributions to MIGA are payable from the Central Fund.
Section 1 amends section 3 of the Multilateral Investment Guarantee Agency Act, 1988, to allow the Minister to subscribe to the 1998 capital increase of the agency as set out under resolution 57, adopted by the Council of Governors of the MIGA on 29 March 1999. Section 2 contains the short title.
I commend the Bill to the House.
