MIGA Collaborates with Investment Fund to Help Business in Africa
February 10, 2009—In the best of times, many investors perceive sub-Saharan Africa as a high-risk, high-cost place to do business. Yet, in recent years the continent has become an increasingly attractive destination for investment. Growth rates have averaged 5.3 percent and governments have implemented regulatory and economic reforms to entice business. The ongoing financial crisis, therefore, looms as a significant challenge to Africa’s progress. “We believe the crisis is threatening to turn back the clock on progress achieved during decades of reforms that had paved the way for real improvement. This includes repositioning Africa’s image in the investor community,” says MIGA’s Executive Vice President, Izumi Kobayashi.
Against this backdrop, MIGA has entered into a unique relationship with the African Development Corporation (ADC) to help keep investment flowing to Africa’s small and medium-sized businesses—which account for most of the continent’s jobs. ADC’s CEO Dirk Harbecke is optimistic on Africa as an investment destination. “We see sub-Saharan Africa as one of the biggest growth markets. There’s a huge growing middle class and an increased demand for new products. Some technologies, such as mobile phone banking, are being pioneered in Africa and exported to other regions.”
ADC is a business development company that relies on private equity to invest in sub-Saharan Africa’s banking, IT, financial, and services industries. It approached MIGA to enlist the agency’s support in raising funds for several planned investments. While MIGA had already provided political risk insurance for two of ADC’s investments in the banking sector in Rwanda, both MIGA staff and ADC management saw an innovative and easier way forward.
“This was a client we really wanted to support because of their commitment to Africa. Not only do they invest capital, but they invest know-how and experience that is ultimately owned by the companies they are supporting,” says Edith Quintrell, MIGA’s Director of Operations. From ADC’s perspective, MIGA had a critical role to play in assuaging the concerns of investors accustomed to “developed-country” markets. “We rely on the private equity that investors are giving us. With the support of MIGA, we have insurance against the biggest concerns that investors have,” says Harbecke.
An Innovative Contract
To help streamline the process of working with MIGA, while giving investors the assurance of MIGA’s support, ADC and MIGA have entered into a “master contract.” This contract allows MIGA to provide political risk coverage for up to 20 of ADC’s planned investments – up to a total of $150 million. Most of the investments covered are expected to fall under MIGA’s Small Investment Program – meaning the coverage will be under $10 million per project. The risks covered will be transfer restriction, expropriation, and war and civil disturbance. Each project underwritten by MIGA will be reviewed to ensure compliance with MIGA’s underwriting standards, including environmental and social aspects, and they will also be made public through MIGA’s website. The first proposed investment under the master contract is planned for South Africa’s Iveri Payment Technologies.
At a signing ceremony in Washington, MIGA’s Executive Vice President Izumi Kobayashi explained the project is part of MIGA’s ongoing efforts to help ensure liquidity in the midst of the financial crisis. “We are looking at a number of ways in which we can use our current products to help responsible investors such as ADC continue their good work. Supporting investments into sub-Saharan Africa is a strategic priority for MIGA, so this presented a great opportunity for us.”
In addition to its insurance instrument, MIGA offered ADC several added advantages. “MIGA is a very important partner for us,” noted Harbecke. “As a part of the World Bank Group, it has much more influence and knowledge of Africa than other public or private insurers.”
A slowdown in foreign direct investment to developing countries translates into stark realities for their people. It means fewer jobs, more expensive products and a slow-down in growth. “While public money can help generate jobs through massive infrastructure investments, the nimble, entrepreneurial private sector is really the driving force for innovation and job creation,” says Harbecke. “The kinds of projects that we support are really supporting growth and development.” Kobayashi agrees. “The best safety net in challenging times is a job. We in the development community need to be working in concert with the private sector in emerging markets to ensure that they have access to finance in order to grow, innovate, and prosper.”