MIGA Helps Tackle Immediate Fallout from the Pandemic
MIGA typically works to bring in foreign investment to developing countries, but the fallout from the COVID-19 pandemic called for taking on more immediate challenges like helping small firms get cash needed to pay bills and employees. We spoke with Sarvesh Suri, Director for Climate, Energy, Extractives, Capital and Financial Markets Operations at MIGA, about how the Agency rose to the pandemic’s challenge, and how MIGA will deploy $12 billion in new COVID-19 relief during 2021-23.
What was MIGA’s response to COVID-19?
In March of 2020, COVID-19 was spreading all around the world and the situation was going from grim to grimmer. Economies were facing immense pressures and we didn’t know how our portfolio of guarantees would perform. Moreover, with a business model predicated on meeting with clients across the globe to do due diligence, we had more questions than answers. But clients needed our insurance, so we put together a $6.5 billion COVID-19 Response Program that we could deliver while working from our homes. It had three parts: supporting procurement of medical supplies; countering the economic fallout; and supporting trade finance.
After MIGA’s Board of Directors approved the program in April 2020, we signed about twenty projects—delivering $2.5 billion in investment guarantees—just in the first quarter by June 2020, which was amazing. We kept plugging away, and by the end of June 2021, the Board gave us full support for an extension of the COVID-19 Response Program. Now, we’re working on a $12 billion program for the next two years. We’ve also secured approval for a new trade finance program.
How did working with other parts of the World Bank Group help MIGA shape its response?
We worked very closely with our colleagues at the World Bank and IFC to figure out the best approach. For example, we insured banks that were financing government medical expenditures, and we often learned about those deals from World Bank and IFC colleagues.
Our support for small businesses in Colombia went through Bancóldex, which acts as Colombia’s import-export bank. That project came together after Bank and IFC colleagues connected us with government officials. Bancóldex was the first project we delivered within 60 days from start to finish. Similarly, we don’t normally issue guarantees like the one for upgrading two public hospitals that we closed recently in The Bahamas, but with the expertise of the World Bank and other partners such as the Pan American Health Organization (PAHO), we were able to make it happen.
What kind of pressures were MIGA clients facing during the pandemic?
Our clients were very worried that projects they were financing would be nationalized as demand slumped, or that governments would stop making payments that were negotiated under power purchase agreements. The transportation sector was hit particularly hard, with traffic to airports and ports just collapsing. What’s more, governments in developing countries, unlike those in advanced economies, couldn’t step in with increased public expenditure to support their economies.
Financial institutions that were our clients were well-capitalized compared to the 2008 financial crisis. They had adequate liquidity and wanted to help but faced pressure to focus on their own countries. Those that didn’t have liquidity were looking to tap institutional investors, but it was difficult.
To navigate all these challenges, we worked with our World Bank and IFC colleagues, looking sector by sector for projects that were under pressure. We encouraged our clients to be patient with governments and to grant leeway on payments. We used our credit enhancement product to get clients to focus on the countries where we saw the most need. With partners like Citibank, we supported SOE banks such as Caja de Ahorros to secure affordable, long-term funding from institutional investors.
How important was it to streamline the approval process for COVID-19 projects?
It was critical. It shortened timelines. Our clients were eager for expedited funding so they could respond to their citizens and to their own clients. On average, our fast-tracked projects went from early screening to Board approval in 51 days, compared with 129 days for routine projects. That was very much in line with what our clients were asking us to do.
While MIGA’s core mandate is to drive foreign direct investment (FDI) to support project finance, the Response Program ended up focusing on banks. What’s your outlook on project finance and FDI?
Foreign direct investment has been falling since 2011, but it plummeted 42 percent in 2020. That makes our role even more important. Project finance is trickling back, but in a different way. Many investors who have had cash flow issues during the pandemic are acquiring assets in emerging markets rather than creating new projects. They’re looking at refurbishment opportunities.
We just signed a project with a billion-dollar private equity fund called Kasada that’s making acquisitions in Sub-Saharan Africa. The group is upgrading twenty hotels. Similarly, new investors are coming into the power sector to acquire existing sponsors and then upgrade plants and machinery.
What should we expect from MIGA’s FY22-23 COVID-19 Response Program?
Requests for support keep coming. Governments continue to ask for financing, and they want it in 60 days, so it's important that we deliver quickly. Our core business is picking back up, too, so probably half our projects next year will be part of our COVID-19 Response Program.
With the World Bank Group’s new Climate Change Action Plan (CCAP) in place, climate is front-and-center. Initially during our COVID-19 Response program, our work was aimed at delivering medical supplies and unlocking credit to struggling banks and businesses, but by October 2020, we were focusing on building back better and several projects entailed significant climate finance.
Take PT Perusahaan Listrik Negara (PT PLN), Indonesia’ largest utility. We provided badly-needed working capital and nudged them toward supporting renewable energy during the COVID-19 crisis. We’re also supporting banks that specialize in climate finance, like ProCredit of Germany, using our credit enhancement program to support additional climate finance lending through its subsidiaries in Eastern Europe. As part of the World Bank Group Climate Change Action Plan, MIGA is targeting to issue 35 percent of its guarantees in climate finance and to fully align all projects with the Paris Agreement by 2025. And to get there, we’re hiring more climate experts to build capacity and are innovating to launch new product applications.
Tell us about MIGA’s new opportunity in trade finance.
In May, our Board approved a new partnership with IFC, through which MIGA will issue $1 billion in new trade finance guarantees to the poorest countries and to low-income emerging markets that have seen trade shrivel during the pandemic. The need is tremendous. Trade finance fell by 80 percent in Africa. That’s bad for foreign direct investment because investment follows trade. We’ll team up with IFC to provide trade finance to private sector institutions. It’s an interesting business proposition for us.