New MIGA Cover Tackles Istanbul Gridlock
Getting Down to Business under MIGA’s Expanded Convention
June 13, 2011—Turkey’s bustling economy is an apt host for several MIGA "firsts." The agency’s recent support to the expansion of Istanbul’s metro represents MIGA’s first coverage of sovereign financial obligations, stand-alone debt, and sub-sovereign credit risk. These milestones are a result of recent, historic amendments to MIGA’s convention and operational regulations that greatly expand the pool of investments MIGA is able to insure.
Two MIGA contracts help secure lender West LB’s support to the expansion of Istanbul’s Otogar–Bagcilar–İkitelli–Olimpic Village and Kadikoy-Kartal-Kaynarca metro lines. The metro expansion will help alleviate Istanbul’s notorious traffic, increase access to jobs, and reduce pollution in the city that is home to 18 percent of Turkey's population. Notably, the Kadikoy-Kartal-Kaynarca line will be the first underground metro system on the Asian side of Istanbul and will eventually connect with the European side of city.
Since amendments to MIGA’s convention took effect in November of 2010, the agency has moved forward with several projects that would not have been possible to support under the previous, somewhat restrictive convention. MIGA has done business with WestLB in the past, and the bank welcomed news of MIGA’s expanded authority to support its lending to important projects such as the Istanbul metro.
Through the contract signed in April, MIGA is insuring €280 million on a loan provided to the Metropolitan Municipality of Istanbul by WestLB and a consortium of major international banks. The banks’ confidence in MIGA underscores the agency’s ability to insure against sovereign and sub-sovereign risks for large-scale and complex transactions.
For the Istanbul metro projects, WestLB sought MIGA’s non-honoring of sovereign financial obligations cover—which protects against losses resulting from a government’s failure to make a payment when due under an unconditional financial payment obligation or guarantee given in favor of a project. Indeed, demand for this new MIGA product is largely driven by commercial banks that provide loans to public sector entities. As the Basel II banking framework allows for capital relief to banks that use risk mitigation instruments like MIGA’s political risk insurance, this product enables them to expand their exposure in a given country. The result? Banks are able to support more productive investment, responsibly.
From a development perspective the banks’ ability to lend more to central and local government entities is of utmost importance, as it grants additional access to private sector financing for critical infrastructure projects. These are the projects that move people and products; bring electricity, water, and sanitation to rural areas; modernize economies; and have broad, positive effects on livelihoods.
MIGA’s non-honoring of sovereign financial obligations cover also complements the efforts of national export credits agencies (ECAs). Sometimes there is a gap in the political risk insurance coverage that ECAs are able to offer that MIGA can fill—allowing the project to go forward.
"This is a quantum leap in how we do business," noted MIGA’s Director of Operations, Edith Quintrell. “MIGA has been able to meet investor needs in so many ways—we can insure in some of the most challenging environments, for longer tenors, and with the strong backing of host countries. Now, less constrained eligibility requirements and a new non-honoring product put us in a really strong position to meet the evolving needs of investors and lenders.”
It’s win-win-win for clients, governments, and development.