The Multilateral Investment Guarantee Agency, established in 1988, provides political risk insurance to private companies investing in developing markets. As a member of the World Bank Group, its principal goal is to encourage foreign direct investment in developing markets by augmenting privately and publicly available political risk insurance coverage. Such insurance reduces the risk of investing in developing markets and makes them more attractive hosts for foreign direct investment.
In providing political risk insurance, the Multilateral Investment Guarantee Agency, more commonly known as MIGA, is guided by its principal mission of aiding in the economic development of member countries. This objective is reflected in its insurability criteria, which require insured projects be economically viable, environment-friendly, and contribute to the economic development of their host countries. Consistent with its goals of facilitating economic development, infrastructure projects are a stated priority area for MIGA. This priority reflects the essential nature of infrastructure such as power, telecommunications, transportation, water, and waste management in support of economic development and the inability of many developing country governments to finance its development. A second priority area for MIGA is post conflict countries. These countries, because of their war histories, are often viewed as politically risky. This perception makes it particularly difficult for these economies to attract foreign direct investment and restart the process of rebuilding their economies. This creates a particularly important role of MIGA, which, through the provision of political risk insurance, increases the likelihood of such investment.
The insured, companies that are nationals of MIGA member countries, invest outside their home markets in developing countries that are also members of MIGA. Member countries include both developed and developing countries. Developed country members include Canada, the EU-15, Japan, Switzerland, and the United States, which together account for the vast majority of outward foreign direct outflows. Most developing countries including those in Asia, Africa, the Middle East, and Latin America and the Caribbean are members of MIGA. This extensive membership implies that foreign investment in most developing countries may be eligible for MIGA coverage provided other insurability criteria are met.
MIGA provides four types of political risk insurance: expropriation, war and civil disturbance, breach of contract, and transfer restriction. Both expropriation and war and civil disturbance coverages provide insurance against asset loss. Expropriation coverage protects against actions by the host government that restrict or eliminate the policyholder’s ownership rights without compensation. War and civil disturbance coverage, as its name suggests, protects the insured against the loss of physical assets due to acts of war and civil disturbance. Breach of contract coverage protects the investor against the possibility that the host country government fails to fulfill its contractual obligations. The final type of insurance offered, transfer restriction, protects the insured against actions such as the imposition of capital controls that limit their ability to convert local currency to foreign currency for transfer outside the country. Insurance may be purchased individually or in any combination desired by the insured. Insurable projects include equity investments and shareholder loans. Coverage is generally available for a period of no more than 15 years.
While MIGA’s political risk coverage is similar to coverage that may be provided by private and individual home country governments, MIGA also coordinates coverage from multiple insurers, both private and public. This works to increase the available coverage for a given investment by having multiple insurers—private, public, and MIGA—that share the project risks. In the first 19 years of its existence, MIGA has facilitated in excess of $28 billion in investment guarantees for infrastructure projects. This is in contrast to the approximately $5.6 billion directly guaranteed by MIGA during this time period. This reflects the insurance expansion effect of MIGA’s dual activities.
In addition to providing and facilitating coverage of political risk events, MIGA further manages political risk through its stature as an international institution funded by member country contributions. This stature provides access to member governments that is generally not available to private and public insurers. MIGA uses this access to reduce the likelihood of the political risk events it insures by leveraging its relationship with host country governments. This unique ability confers further advantages to potential investors due to the effective reduction in political risk exposure of their project.
- Theodore H. Moran, Gerald T. West, and Geral-Keith Martin, Needs of the Present, Challenges for the Future (World Bank, 2008);
- Multilateral Investment Guarantee Agency, “Investment Guarantee Guide,” miga.org (cited March 2009).
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