MIGA News Volume 12, No.2
New Vision, New Look for Agency
MIGA’s recent restructuring (see Jan-Feb-Mar 2004 issue of MIGA News) was just the first step in realigning the organization with a changing operating environment.
Speaking recently at Chatham House in London on “OECD Investment Trends and Emerging Market Needs,” MIGA’s new Executive Vice President, Yukiko Omura, told the audience of project finance specialists, policy makers, and insurers that MIGA’s added value lies in its being a member of the World Bank Group. With shareholders from most countries of the world, MIGA is unique among political risk insurers in its ability to open up difficult or frontier markets to foreign investment.
MIGA’s affiliation with the World Bank and its shareholders also provides a critical benefit to investors, bringing security and credibility to an investment that is unmatched. With its new logo and branding, MIGA is reinforcing the value of its association with the World Bank.
“Our presence in a potential investment can literally transform a ‘no-go’ into a ‘go,’” says Omura. MIGA’s involvement can act as a potent deterrent against government actions that may adversely affect investments. And when disputes between investors and host governments do arise, MIGA leverage can bring about a mutually- satisfactory resolution.
Investors and banks have become increasingly risk-averse when it comes to developing country exposure. An analysis of the overall distribution of FDI indicates that more than 30 percent of the flows go to low-risk/low-income countries, whereas only 12 percent go to high-risk/low-income countries.
Omura is calling for special efforts to facilitate investments in high-risk and low-income countries, such as those in Africa. “We have done a good job on this so far: 42 percent of MIGA’s portfolio is in high- risk/low-income countries. This highlights our competitive advantage: As a multilateral we are better able to manage the risks of exposure in these countries.”
The agency also has a strong track record in conflict-affected areas; in recent years MIGA has successfully paved the way for investors in Mozambique, Bosnia and Herzegovina, and Serbia and Montenegro, among others.
In terms of sectors, says Omura, MIGA can provide real added value in complex transactions, particularly in infrastructure. In water, specifically, the fundamental risk of local currency revenues and dollar-denominated debt persists, and is compounded by the low margins on these projects. Furthermore, investments in this sector frequently involve sub-sovereign risk, which can scare off investors. MIGA’s ability to cover sub-sovereign risks can mitigate investor concerns and encourage investment in this area.
Promoting small enterprise development is another target area for MIGA in the coming year. Small to medium-sized infrastructure products will be especially key to Africa’s development. MIGA is providing a guarantee facility for this purpose through the WAEMU Capital Market Development Project prepared jointly with the World Bank and the Agence Française de Développement (see below).
"Going forward, I want to make sure that MIGA uses its political clout and development mandate to best effect,” said Omura. “Investments that support sustainable development and adequately integrate responsible environmental and social practices lead to better long-run returns for investors and host governments alike. MIGA’s involvement in projects should bring comfort to investors not only that their investments are protected, but that they indeed abide by internationally accepted standards and contribute to economic development.”
MIGA/World Bank Launch Broad Development Project in West Africa
$240 million Regional Guarantee Facility will Support Small-scale Infrastructure Projects
In what is a significant first for the agency, MIGA has joined with the World Bank in an effort to develop capital markets and provide infrastructure financing in the counties of the West African Economic and Monetary Union (WAEMU)—Benin, Burkina Faso, Cote d’Ivoire, Mali, Niger, Guinea-Bissau, Senegal, and Togo. In addition to a line of credit from the International Development Association (IDA) to fund high-impact, environmentally-sound public projects, the package includes a guarantee facility comprising of $70 million each from MIGA, IDA and the Agence Française de Développement (AFD).
The guarantee facility will support small and medium-sized infrastructure projects in the WAEMU countries. Banque Ouest Africaine de Développement (BOAD) acts as intermediary.
A MIGA professional will work for two years at BOAD to assist with the implementation of this program and the development of BOAD capacity to undertake private sector operations.
Symposium on Political Risk Management
Mark your calendars and register for the Fourth Biennial MIGA-Georgetown University Symposium on International Political Risk Management, to be held on November 12, 2004, in Washington, DC.
The event is an interactive forum that brings together some of the foremost practitioners from the public and private political risk insurance markets, investors, consultants, and academics for a day-long exchange of ideas and information on critical, current issues in international political risk management. Topics the Symposium will examine include, “Learning from Recent Claims and Arbitration”, “The Future of Privatization, Project Finance, and the Role of Political Risk Insurance”, and “The Evolution of the Private-Public Relationship in Political Risk Insurance”.
For further information or to register, visit www.ipanet.net/symposium, call 202.687.5895, or fax 202.687.6033 or email: email@example.com
MIGA in UGANDA
European-owned Exporter Helps Farmers Weather Coffee Crisis
Ugacof Ltd. started exporting coffee from Uganda in 1994. Today its market share represents about 15 percent of the total export of Uganda’s coffee.
Ugacof is having an important impact on the local economy, providing farmers primarily with stability and the incentive to improve quality. With what is perhaps the most modern coffee factory in Africa, Ugacof has introduced cost-effective processing techniques to Uganda, and buys the bulk of its coffee from small-scale farmers, paying cash on delivery.
The support to Ugacof came at a critical time when Uganda was still facing economic difficulties. The project directly benefits small and medium-sized enterprises, a sector which has played a key role in the country’s remarkable turnaround.
Prior to liberalization of the industry in the mid-1990s, farmers in Uganda received 20 percent of coffee’s export price. Today, exporters proliferate and the price share for farmers has risen to 70 percent. Coffee production is dominated by small holdings accounting for about 94 percent of the 270,000 hectares planted with coffee. Despite recent years’ low prices, Ugandan farmers continue to harvest coffee and receive the same share of price, although the country’s dependence on this commodity has fallen from a high of 90 percent to 30 percent of exports.
Ugacof’s strict quality controls seem to be what keeps the competition at bay. The company uses a mobile “storefront,” depending on the season, to buy coffee at the village level, competing with other exporters and middle men (who bring it to Kampala and then try to export it). At the branches, Ugacof samples the beans and establishes the quality as the basis for its price.
“Other companies don’t do quality control batch by batch as we do,” says Rose Kaligirwa, a quality control manager. “We check the humidity, we check for the percentage of foreign matter, and for husks. We then grade the coffee.” Thorough supervision continues throughout the process with the final product reviewed against initial expectations.
Photos | Judith Pearce
Ugacof’s factory in Kampala was built five years ago, an investment by the European company Sucafina, which trades with European roasters and is also Ugacof’s primary buyer. Ugacof is wholly-owned by Afriproduce, which invested in the construction of the coffee-processing facility.Today, the facility has a capacity of 25 tons per hour, and machinery that includes pre-cleaners, dryers, destoners, graders, gravity tables and color sorters. It is linked by rail to the ports of Mombasa and Dar-es-Salaam.
A recent site visit showed that the project is having a significant impact on the local economy. Additionally, the company has made regular contributions to local schools and installed a facility to give the local community better access to water. With more than 200 employees on its payroll, the enterprise has been successful in encouraging knowledge transfer, training and a merit-based system of employment. A significant number of management and supervisory positions are held by women.
The impact of falling prices and wilt disease (an untreatable fungal infection around the root base) has been felt by Ugandan farmers. According to Ugacof General Manager, Claude Auberson, production is also down. Some plants are resistant to wilt disease, but not many. In some areas 70-80 percent of the crop is affected, although on average 40-50 percent is affected.
“Ugacof has been successful because, as a multinational, it has been able to hedge against market fluctuations,” says Aitken. “But it is still hard to make money as our cost base is higher than other ‘cowboys’ in the market. It means we pay more than our competitors.” The fact that Ugacof pays cash on delivery, also makes this exporter more popular than the competition.
According to Ugandan coffee farmers, Ugacof came in with an approach to build up the farmers’ own capacity—something which may also factor into the company’s ever-increasing market share. “First, I was selling anyhow, anywhere,” says Mpibe, a Masaka farmer. “Visitors from Ugacof started to advise me on how to market my coffee, and deal with problems I experience. Two of the major areas they have helped me in is sensitizing me to the quality of coffee, and how to increase production. Before they came on the scene, I had 15 acres, now I have 20 acres. And because of their advice, I am now planting yucca and avocado trees among my coffee plants, and will intercrop vanilla, too. This will give me more things to sell.”
Encouraging Foreign Investment
A World Bank credit of $5 million will provide initial financing for a political risk insurance program in Afghanistan. The Afghanistan Investment Guarantee Facility (AIGF) will have coverage capacity of up to $60 million and will significantly increase the amount of insurance available for potential foreign investment into Afghanistan. MIGA will administer the facility.
Three years into the rebuilding of Afghanistan, private investment is still weak, largely informal and unable to compete in the world marketplace. Perceptions of risk by investors and bankers have been a major obstacle to investment. The facility is designed to encourage foreign direct investment particularly in smaller projects critical right now to the country’s economic development.
MIGA is one of the few providers of political risk insurance providing coverage for Afghanistan at a time when the opportunities for standard risk-sharing with other private and public insurers are limited.
The $5 million credit from the World Bank’s concessional lending arm, the International Development Association (IDA), will be supplemented by a $5 million soft loan from the Asian Development Bank (ADB) and $10 million in insurance capacity from MIGA. This will be co-insured by the ADB in the equivalent amount of $10 million. Together with support to be raised by MIGA from private and other public insurers, the total size of the facility is expected to be $60 million, a significant amount for Afghanistan.
AIGF will not only insure “traditional” FDI projects, but will extend coverage to loans and credits provided to local business by newly-established foreign banks in Afghanistan. Additionally, AIGF will provide coverage to foreign loans to be used to finance local equity investment or the importation of critical capital goods for Afghanistan reconstruction.
This facility is unique in that it leverages the IDA funds and the ADB soft loans by up to six times, which allows more FDI into the country by bringing in investors that would otherwise be wary and so assists Afghanistan in its recovery from decades of conflict.
Looking at the Apparel Industry
Helping to open markets in Africa are the US African Growth and Opportunity Act (AGOA) and the EU’s Everything But Arms Initiative (EBA), which provide a number of sub-Saharan African countries liberal access to US and European markets.
MIGA’s Africa team has been looking at the sectoral opportunities in four politically stable and economically strong beneficiary countries: Tanzania, Mozambique, Ghana, and Senegal. It selected the apparel industry—which is labor-intensive, easy to relocate, and can benefit from preferential access to US and EU markets—as the first effort to implement outreach activities in these countries.
The sector has great potential for African economies—Lesotho and Kenya have become significant apparel exporters over the last decade. The waiver on tariff and quota charges for exporting finished products to the US under AGOA can make the cost of production up to 50 percent less in Africa than in comparable countries.
The largest apparel exporter, Hong Kong, was a logical site for a conference last year (in 2002, Hong Kong exported over $25 billion, not including China’s $36 billion). Duty and quota restrictions mean that Hong Kong firms are actively seeking opportunities in Africa to take advantage of AGOA: 80 percent of the firms invited sent senior managers.
The outreach program also gave MIGA a chance to train a number of African investment promotion agencies in the tactics of attracting investors into a specific sector. The real test will be in the follow-up: In June, a delegation from Guangdong representing 16 large Chinese apparel manufacturers looked at site specifics and visited existing garment factories in Ghana. Says MIGA Africa region head David Bridgman, “Securing investment needs good analysis and persistent follow-up.”