73168 2011 World Investment Trends and Corporate Perspectives World Investment Government Takings and Expropriations and Political Risk The Political Risk Insurance Industry © 2011 The International Bank for Reconstruction and Development/The World Bank 1818 H Street, NW Washington, DC 20433 t. 202.473.1000 www.worldbank.org feedback@worldbank.org All rights reserved This volume is a product of the staff of the Multilateral Investment Guarantee Agency/The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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Cover art: Stock.XCHNG Design, cover, and document: Suzanne Pelland, MIGA/World Bank Group ISBN:978-0-8213-8850-1 e-ISBN: 978-0-8213-8853-2 MIGA WIPR REPORT 2011 2011 World Investment and Political Risk World Investment Trends and Corporate Perspectives Government Takings and Expropriations Errata for print edition of MIGA’s The Political Risk World Investment and Political Risk 2011 report Insurance Industry The following errors appear in printed copies of this report but have been corrected in the online version: Page 39: in third paragraph the increase in PRI from 2008 to 2010 has been corrected to 14 percent. Page 56: in Appendix 1 the figures for FDI inflows for the world for 2009 and 2010e have been corrected to 1260 and 1307 respectively. The figures for FDI inflows for developing countries for 2009 and 2010e have been cor- rected to 391 and 507 respectively. TABLE OF Contents FOREWORD ....................................................................................................................................................................1 ACKNOWLEDGMENTS...................................................................................................................................................3 SELECTED ABBREVIATIONS..........................................................................................................................................5 EXECUTIVE SUMMARY. ................................................................................................................................................. 7 CHAPTER ONE World Investment Trends and Corporate Perspectives ............................................................................................ 10 Overview.................................................................................................................................................. 11 Prospects for Global Growth................................................................................................................. 11 Prospects for Private Capital Flows to Developing Countries............................................................12 Political Risks and Developing Countries.............................................................................................18 Spotlight on the Middle East and North Africa...................................................................................23 CHAPTER TWO Government Takings and Expropriations . ................................................................................................................. 28 Overview................................................................................................................................................. 29 Risk of Government Interference in Private Investments.................................................................. 29 Recent Trends in Expropriation ........................................................................................................... 30 Expropriation...........................................................................................................................................31 Risk Perceptions of Foreign Investors in Developing Countries........................................................32 Risk Perceptions of Investors and PRI Providers.................................................................................35 CHAPTER THREE The Political Risk Insurance Industry.......................................................................................................................... 36 Overview..................................................................................................................................................37 The PRI Industry in 2011 – Trends and Prospects...............................................................................38 Pricing and Capacity...............................................................................................................................41 The PRI Cycle and the General Insurance Market.............................................................................. 42 Product Innovation and Regulatory Takings. ....................................................................................... 45 Corporate Approaches to Political Risk Management. .......................................................................46 The MENA Region and the Arab Spring. .............................................................................................49 APPENDICES Appendix 1 FDI Inflows, 2003–2010 . ..................................................................................................................... 56 Appendix 2 MIGA-EIU Political Risk Survey 2011. ....................................................................................................58 Appendix 3 Lloyd’s Syndicates . ............................................................................................................................... 78 Appendix 4 Berne Union and Prague Club Members............................................................................................ 79 MIGA WIPR REPORT 2011 BOXES Box 1.1 Definition of Political Risk..................................................................................................................... 21 Box 2.1 Indonesia in 1997: A Case Study that Underscores the Research Results.......................................34 Box 3.1 The Berne Union . .................................................................................................................................38 Box 3.2 Overview of the PRI Market ................................................................................................................ 40 Box 3.3 Political Risk Insurance and Its Benefits ........................................................................................... 44 TABLES Table 1.1 The Global Economic Outlook, 2008–2012........................................................................................ 12 FIGURES Figure 1.1 Net Private Capital Flows to Developing Countries. ........................................................................... 13 Figure 1.2 Net FDI Inflows by Developing Region............................................................................................... 14 Figure 1.3 Changes in Foreign Investment Plans ................................................................................................ 15 Figure 1.4 Changes in Foreign Investment Plans by Sector................................................................................ 15 Figure 1.5 Net FDI Outflows from Developing Countries...................................................................................16 Figure 1.6 Changes in Foreign Investment Plans for South-based Investors.................................................... 17 Figure 1.7 Ranking of the Most Important Constraints for FDI in Developing Countries. ...............................19 Figure 1.8 Types of Political Risk of Most Concern to Investors in Developing Countries.............................. 20 Figure 1.9 Types of Political Risk and their Effects on the Company ................................................................ 20 Figure 1.10 Proportion of Firms that Have Suffered Losses as a Result of Political Risk over the Past Three Years......................................................................................................................22 Figure 1.11 Proportion of Firms that Have Withdrawn or Canceled Investment Plans on Account of Political Risk over the Past 12 Months. .......................................................................22 Figure 1.12 Cumulative FDI Flows in MENA, 2000-2010. ..................................................................................... 23 Figure 1.13 FDI Flows into MENA...........................................................................................................................24 Figure 1.14 Regional Distribution of FDI in Selected MENA Countries...............................................................24 Figure 1.15 Effect of the Recent Turmoil in MENA on Investment Plans in the Region.................................... 25 Figure 1.16 Effect of the Recent Turmoil in MENA on Political Risk Perceptions in the Region by Type of Risk....................................................................................................................................... 26 Figure 1.17 Effect of Regime and Stability on Investment Plans in the MENA Region..................................... 26 Figure 1.18 Effect of the Recent Turmoil in MENA on Investment Plans in Developing Countries in Other Regions . .................................................................................................................................27 Figure 2.1 Expropriation Acts by Sector.................................................................................................................30 Figure 2.2 Independency of Agencies when Acting Against Investor................................................................. 33 Figure 2.3 Political Regime and Its Impact on Business Decisions. ................................................................... 33 Figure 2.4 Factors that Investors Perceive as Increasing Risk ............................................................................ 35 Figure 3.1 PRI and Foreign Direct Investment Flows into Developing Countries.............................................39 Figure 3.2 Ratio of Premiums to Average Maximum Limit of Liability for BU Members . .............................. 41 Figure 3.3 Available Private Market PRI Capacity..................................................................................................42 Figure 3.4 General Insurance Pricing vs. Private PRI Capacity . .........................................................................43 Figure 3.5 Tools Used to Mitigate Political Risk in Developing Countries.........................................................47 Figure 3.6 Most Effective Tools Used to Mitigate Political Risk in by Type of Risk...........................................48 Figure 3.7 Ratio of New PRI to FDI for Developing Countries and MENA; Maximum Average Liabilities in Developing Countries and MENA................................................ 49 MIGA WIPR REPORT 2011 MIGA WIPR REPORT 2011 Foreword The mission of the Multilateral Investment The report highlights once again the salience of political risk as an important concern for multina- Guarantee Agency (MIGA) is to promote tional enterprises that seek to invest in developing countries. This is also reflected in the increased foreign direct investment (FDI) into issuance of new political risk insurance in 2010, a trend that seems to be continuing in 2011, helped by developing countries to support economic a growing awareness of insurance as a risk-mitigation tool. This year the report also pays special attention growth, reduce poverty, and improve to the FDI picture in the Middle East and North Africa region in light of the Arab Spring, as well as people’s lives. As part of this mandate, the reaction of multinational enterprises to these developments. the agency seeks to foster a better under- This year’s report puts a spotlight on expropriation, standing of investors’ perceptions of a political risk with a long and recurring history, and examines motivations of host-country governments political risk as they relate to FDI, as well in deciding whether to expropriate. The report also highlights the role of political or economic shocks as the role of the political risk insurance in triggering expropriations. It finds that investor disputes are more likely to be resolved by demo- (PRI) industry in mitigating these risks. cratically elected governments rather than non-dem- ocratic regimes. This suggests that the propensity to expropriate is significantly higher in countries with Today’s economic turbulence and fragility in non-democratic regimes, a finding that should be of developed countries are again posing challenges for interest to investors who are more concerned about the global economy. Developing countries are feeling political stability than about regime type and political the impact through multiple channels, including institutions. through the flows of FDI and private capital. Having rebounded sharply in 2010, FDI flows to developing In today’s turbulent world, we hope that this report countries continued to increase in 2011, but are sheds light on different dimensions of political risk expected to moderate going forward. and the role of investment insurance in fostering an environment conducive to attracting FDI and pro- This uncertain economic landscape aside, developing moting development. countries are expected to grow more than twice as fast as high-income economies over the next few years. This continued growth, together with stronger and more business-friendly environments, should enhance their appeal to multinational enterprises worldwide. Izumi Kobayashi Executive Vice President While the views of the companies surveyed for this report confirm this, they also highlight growing investor concern about the state of the global economy and possible financing constraints. MIGA WIPR REPORT 2011 | 1 2 | MIGA WIPR REPORT 2011 Acknowledgments This report was prepared by a team led by Daniel Peer reviews were provided by Mansoor Dailami Villar and comprising Nathan Jensen (Associate (Manager, Development Prospects Group, World Professor, Department of Political Science, Washington Bank), Caroline Freund (Chief Economist, Middle East University in St. Louis), Persephone Economou, and and North Africa, World Bank), Elena Ianchovichina Moritz Zander. Inputs were received from Manabu (Lead Economist, Middle East and North Africa, Nose. Mallory Saleson, Rebecca Post, and Cara Santos World Bank), Jean Pierre Lacombe (Head/Financial Pianesi edited the report. Suzanne Pelland was in Engineering, Corporate Strategy, International Finance charge of graphic design. Saodat Ibragimova, Melissa Corporation), Lennart Skarp (Acting Secretary General, Johnson, and Vladislav Ostroumov provided adminis- Berne Union), Quan Li (Professor and Director of trative support. Program on International Conflict and Cooperation, Department of Political Science at Texas A&M The report benefitted from comments by MIGA’s University), Theodore H. Moran (Marcus Wallenberg senior management team comprising Izumi Chair at the School of Foreign Service, Georgetown Kobayashi, Michel Wormser, Edith P. Quintrell, Marcus University), Stephen Kobrin (William H. Wurster Williams, Ravi Vish, Ana-Mita Betancourt, Kevin Lu, Professor of Multinational Management at Wharton and Lakshmi Shyam-Sunder. Within MIGA, comments School of Business, University of Pennsylvania), and were also received from Marc Roex, Jonathan Halpern, Anthony George (Ince and Co LLP). Paul Barbour, Connor Healy, Franciscus Linden, Mario Marchesini, Stephan Dreyhaupt, Mikael Sundberg, and Aradhana Kumar-Capoor.   The World Bank’s Development Prospects Group, under the guidance of Andrew Burns, provided the macroeconomic data presented in the report. The investor survey was conducted on behalf of MIGA by the Economist Intelligence Unit. The analysis of the political risk insurance market benefited from the gracious participation of political risk brokers in a roundtable discussion in London organized by Exporta Publishing and Events Ltd. Arthur J. Gallagher & Co. provided data on the private insurance market. MIGA WIPR REPORT 2011 | 3 4 | MIGA WIPR REPORT 2011 Selected Abbreviations BRIC Brazil, Russian Federation, India, and China BU Berne Union ECA Export credit agency EIU Economist Intelligence Unit FDI Foreign direct investment GDP Gross domestic product ICIEC Islamic Corporation for the Insurance of Investments and Export Credit ICSID International Centre for Settlement of Investment Disputes III Insurance Information Institute IMF International Monetary Fund MENA Middle East and North Africa MIGA Multilateral Investment Guarantee Agency MNE Multinational enterprise OECD Organisation for Economic Co-operation and Development OPIC Overseas Private Investment Corporation PRI Political risk insurance UNCTAD United Nations Conference on Trade and Development Dollars are current U.S. dollars unless otherwise specified. MIGA WIPR REPORT 2011 | 5 6 | MIGA WIPR REPORT 2011 Executive Summary Since the summer of 2011 some of the a worldwide representative sample of MNEs. The conclusion was that risk perceptions, particularly headwinds facing the world economy have with regard to political risk, are broadly aligned. For 2011, MIGA conducted its third international gotten stronger, resulting in downward survey that measures investor risk perceptions in the short and medium term. The results for the MIGA– revisions of economic growth worldwide. Economist Intelligence Unit (EIU) 2011 survey reveal an increased perception of short-term risk, but con- Within this context, the rate of growth tinued medium-term optimism for investment oppor- tunities in developing countries. of private financial flows into developing In particular, short-term issues identified included countries has continued to moderate heightened concerns over macroeconomic sta- bility and difficulty in obtaining financing. Over the after the flows’ initial recovery from the medium term, structural issues related to political risk remain the major preoccupations among foreign financial crisis. In terms of foreign direct investors with operations in developing countries. Of these concerns, two stand out: breach of contractual investment (FDI) flows in particular, obligations by the state and expropriatory actions (regulatory takings, creeping expropriation, and there are two discernible medium-term outright nationalization). These are the concerns that investors have consistently raised in the MIGA-EIU trends that, while evident a decade ago, surveys when identifying key medium-term risk in developing countries. This year’s World Investment may be in the process of accelerating: (i) and Political Risk report focuses on these risks. the share of FDI flowing to developing Over the past five to 10 years, there has been an increase of expropriatory actions by governments countries has continued to grow; and against foreign investors, although some of this is explained by a significant increase in direct (ii) the share of FDI flows originating in investment generally. While the nature of the expro- priatory actions has changed, so that there are now developing countries has also continued more indirect expropriations—regulatory takings, creeping expropriations—than direct expropriations, to grow. even the latter have increased. Thus, MNE concerns over governmental actions that negatively affect their investment are well grounded in reality. This report seeks to analyze exogenous triggers that can lead to MIGA’s 2009 World Investment and Political Risk expropriations and how the political system inter- report explored whether risk perceptions of the mediates disputes between host governments and largest multinational enterprises (MNEs) based in foreign investors. This empirical analysis explores BRIC (Brazil, Russian Federation, India, and China) the triggers of disputes between governments and countries were significantly different from those of investors, and the conditions under which the prob- MIGA WIPR REPORT 2011 | 7 ability of those disputes becoming expropriatory was empirical results surprising and agreed that these higher. Using data from the 1970s until 2010, these results support their overall underwriting views. On were the main conclusions: the other hand, investors seemed to place a premium on stability regardless of the regime type. PRI experts rr All disputes have been triggered by an economic also reported that it is more difficult to sell coverage shock and/or significant political shift. in seemingly stable non-democratic regimes, as investors seem not to consider political risks that rr In democratic regimes, the actions that initially imminent. This mismatch in perception is illustrated have a negative impact are mostly taken by gov- in the Middle East and North Africa (MENA) region, ernmental actors other than the executive branch where during the last 10 years PRI as a percent of (for example, legislatures, and sub-national total FDI seems to have been lower than the average government entities), but these disputes tend to for all developing countries. However, as events be receptive to a settlement once the executive unfolded over the spring of 2011, many investors branch is responsible for dealing with the con- sought to get coverage at a time when private PRI sequences of the economic shock or political providers were waiting to see how events transpired. shift. It is worth noting that most political risk insurance (PRI) contracts covering expropriation The third chapter of the report focuses on the PRI have imbedded long waiting periods that permit market and how it can support MNEs as they invest such negotiated settlement the time to mature. in developing countries. Rather than being driven by large-scale political events, the supply cycle in the rr In non-democratic regimes, the actions that private PRI market closely follows the trends in the initially have a negative impact are mostly taken broader insurance market. Over the past five years, by the executive branch, and are less likely to be the broader insurance industry has found itself in a resolved subsequently. Therefore, these actions situation of “soft��? pricing. This has also translated become expropriations. into soft pricing of PRI despite the increase in demand for the product. Indeed, PRI demand has These findings speak to how disputes are interme- continued to increase at even faster rates than FDI diated in political regimes. In democracies, there are growth. Over the past decades, there has been an a greater number of players with different abilities upswing of the percentage of FDI covered by PRI, to veto actions. Certainly, the rule of law and policy- growing from a low of 5 to 8 percent in the mid- makers’ concern for their reputation and resultant re- 1990s to a current level of 13 to 15 percent. As a election chances play a role. These findings are also result, maximum aggregate liability has grown to consistent with the academic work on propensity to historical levels. As FDI flows moderate in the short expropriate by regime type. term, it may be expected that the market pricing will remain in a soft state for some time to come. Over Research conducted for this report, including the the medium term, dynamics associated with capital MIGA-EIU survey and discussions with London-based requirements for banks, which are important players private sector PRI underwriters and brokers, showed in this arena, may yet alter this panorama. that the views of investors and PRI providers regarding regime type and expropriation risk differ slightly. Underwriters and brokers did not find the 8 | MIGA WIPR REPORT 2011 MIGA WIPR REPORT 2011 | 9 CHAPTER ONE World Investment Trends and Corporate Perspectives rr The global economy is slowing down in 2011 amidst growing uncertainty and increased downside risks. Growth of private capital flows to developing countries, including foreign direct investment (FDI), is also moderating, but is expected to regain speed in the medium term. rr Developing countries now attract two-fifths of global FDI and originate close to one-fifth of overseas investment. Both shares are expected to increase given the growing importance of developing countries in the global economy, the growth differential between developed and developing counties, as well as structural characteristics and improving business environments in the latter. rr Corporate investors surveyed by MIGA—based both in the North and South—are cautiously optimistic about their investment plans in developing countries over the next 12 months, but are more optimistic over the next three years. However, they are concerned about macroeconomic sta- bility and access to finance as potential constraints in the short term. rr Political risk remains a salient constraint to investment in developing countries, becoming more prominent over the next three years as current concerns about the global economy subside. rr The crisis in the Middle East and North Africa (MENA) region has had a negative effect on FDI, but a significant number of corporate investors surveyed have either not changed their investment plans or have adopted a “wait and see��? approach. Stability is critical for persuading investors to resume investments. 10 | MIGA WIPR REPORT 2011 Overview Corporate investor sentiment, based on the MIGA- Economist Intelligence Unit (EIU) survey conducted Over the summer of 2011, it increasingly appeared in the summer of 2011 and elaborated on in this that the rebound following the 2008 global economic report, remains positive over the medium term— crisis was losing momentum. Sovereign debt nearly three quarters of respondents have plans to concerns in Europe, and their contagion to the expand business operations in developing countries banking sector, led to heightened financial vola- over the next three years, and a third of them intend tility. The result was subdued consumption and to do so “significantly.��? investment in addition to strenuous fiscal consoli- dation measures adopted by many countries. Earlier In the MENA region where FDI flows had expanded shocks in the year, including the Japanese earthquake rapidly during the past decade, but are expected to and tsunami and the political turmoil in the MENA decline in 2011, most corporate investors seem to region, also contributed to the slowdown. As have adopted a “wait and see��? approach, putting economic growth in high-income countries remains their investment plans on hold for now. But while stagnant and downside risks increase, developing investors appear willing to ride out this period of countries are affected by the deteriorating global political turmoil, they are also ready to downsize their financial environment and are less likely to post the investment plans should political instability intensify solid growth of the recent past. However, medium- and become more prolonged. term prospects for growth are favorable, showing developing countries growing at a faster pace than Investors’ perceptions of short-term risks have high-income countries. worsened relative to previous years, primarily due to concerns over macroeconomic stability and FDI flows into developing countries, like flows into access to finance. That is not to say, however, that high-income economies, exhibited a sharp fall after corporate investors no longer regard political risk the onset of the 2008 crisis. While they bounced as an important obstacle to investing in developing back quickly, these flows to developing countries countries. In fact, they continue to be particularly have yet to reach their peak level of 2007, and the concerned about adverse regulatory risks and breach recent downshifting of global growth is expected to of contract, given the uncertainty surrounding the weigh heavily on cross-border investment. In fact, future regulatory landscape and regulatory responses the strong rebound of FDI to developing countries to the current macroeconomic difficulties. Not sur- in 2010 is expected to take a slower pace in 2011. prisingly, the recent events in the MENA region have Developing countries now receive about two-fifths accentuated the risks of political violence and non- of global FDI, which in some measure reflects honoring of sovereign financial obligations—not only the growth differential among high-income and in that region, but also more broadly. developing countries. Also, as developing country- based corporate investors are expanding rapidly overseas, they account for close to a fifth of total FDI. Prospects for Global Growth Looking forward, the short-term outlook for cross- border investment flows to developing countries The World Bank’s assumptions about growth under- remains vulnerable to the heightened downside pinning the analysis in this report depict increasing risks to global growth. The longer-term outlook, as fragility and uncertainty in the face of stronger viewed by global investors through the first half of headwinds and a significant slowdown in 2011 2011, augured well for sustained growth of FDI flows. for high-income countries (table 1.1). Developing MIGA WIPR REPORT 2011 | 11 countries have also been adversely affected: the of food, energy, metals, and oil—giving rise to infla- growth assumptions also show a slowdown, raising tionary pressures in a number of countries. The the question of whether developing countries will be financial turmoil that engulfed capital markets in able to support a global recovery as they did in the August 2011 and the growing likelihood of another aftermath of the 2008 crisis. downturn dampened some of these pressures. But rising concerns about counter-party risk in Contagion from the sovereign debt crisis in Europe the European banking system could diminish has increased sovereign credit default swap rates the availability of funds for short-term lending to worldwide. Sovereign debt risk perceptions have now developing countries and non-performing loans affected overall risk appetite in capital markets and could increase in the event of a sharp slowdown in have spread beyond Europe to include a number of growth. Furthermore, developing countries have less developing countries with close ties to the euro zone, fiscal space to weather another economic downturn particularly in Central and Southeast Europe. After because their response to the recession following the July 2011 the cost of insuring sovereign debt (credit 2008 crisis was mainly to create fiscal stimulus. This default swaps) increased and the Morgan Stanley has led to a deterioration of fiscal deficits: 42 percent Capital International emerging markets equity index of developing countries had a government deficit declined. Private capital flows (both portfolio and greater than 4 percent of GDP in 2010, versus only 18 FDI) into developing countries were down by 20 percent in 2007, prior to the beginning of the crisis. percent in July and August 2011. Coupled with these developments are the adverse effects of the ongoing turmoil in the MENA region, where growth, for the Prospects for Private Capital Flows purpose of this analysis, is assumed to be 1.7 percent to Developing Countries for 2011. New challenges have emerged for developing Private capital flows to developing countries are countries. Initially, industrial production recovered still below their peak levels of 2007, although they and even exceeded its pre-crisis level by 20 percent. rebounded strongly by 67 percent in 2010. For 2011, In addition, demand pressures pushed up the prices prospects for sustaining another significant increase Table 1.1 Global Growth Assumptions* Percent change in real GDP from previous year 2009 2010e 2011f 2012f 2013f World -2.4 4.0 2.7 2.8 3.3 High-income countries -3.8 2.9 1.6 1.8 2.2 Developing countries 1.9 7.3 6.1 5.6 6.2 East Asia and the Pacific 7.4 9.7 8.3 7.7 8.1 Europe and Central Asia -6.5 5.2 4.9 3.8 4.2 Latin America and the Caribbean -2.1 6.0 4.2 3.6 4.2 Middle East and North Africa 4.0 3.6 1.7 2.4 3.4 South Asia 6.2 9.1 7.0 6.8 7.9 Sub-Saharan Africa 2.0 4.8 4.9 5.3 5.6 Memo Developing countries excluding China and India -1.7 5.5 4.4 3.9 4.5 Source: World Bank estimates. Note: e=estimate; f=forecast. * This table reports the macroeconomic assumptions about the global economy that underpin the analysis in this report. Given the rapidly evolving global situation, actual results will almost certainly differ from these, with poten- tially important implications for investments in developing economies. 12 | MIGA WIPR REPORT 2011 are diminishing. Private capital flows (net FDI, net Prospects for FDI portfolio equity, and net debt from private creditors) are expected to remain nearly flat in 2011 on account FDI flows worldwide, which had increased very of declines in portfolio equity flows (figure 1.1). Going modestly in 2010 to $1.3 trillion, are forecast to register forward, the pace of growth in private capital flows a moderate increase in 2011 to $1.5 trillion. In the is expected to pick up again and exceed $1 trillion first half of 2011, the global economy continued to in 2013. In relation to the combined size of their recover from the recession, financial and credit market economies, net private capital flows to developing conditions improved, profits increased, and multina- countries have fallen to 4.3 percent of GDP, which is tional enterprises (MNEs) resumed their investment about half the share reached in the peak year 2007. expansion plans. Yet, the pace of such investment is That share is expected to remain around 4 percent of expected to moderate in the second half of the year. GDP until 2012. Cross-border mergers and acquisitions, one of the drivers of global FDI, staged a comeback in 2010 as financing constraints eased, but remain well below the previous peak of 2007. Greenfield investments, Figure 1.1 Net Private Capital Flows another driver of global FDI, continued to decline in to Developing Countries value to $807 billion, also well below the 2008 peak.1 Overall FDI flows have not returned to their pre-crisis Figure $ billion and percent 1.1 highs of $2.3 trillion and conditions do not bode well for a significant rebound in the near future. While early signs in 2011 showed that mergers and acquisitions, as well as greenfield investments, were bouncing back, the current economic outlook could well put a brake on further growth in the second half of the year. 1,200 9 Mirroring their growth performances and prospects, 1,000 8 FDI flows into developing countries increased by 30 7 percent in 2010 to $507 billion, a stronger rebound 800 6 than previously anticipated.2 However, a much smaller increase is expected for 2011 (figure 1.2). FDI flows 5 to developing countries have yet to meet their pre- 600 4 crisis high of $614 billion in 2008; they are forecast to exceed that level only in 2013, when FDI flows 400 3 are projected to reach $660 billion. Nevertheless, 2 developing countries once again have boosted their 200 share of global FDI flows to almost 40 percent in 2010 1 and an estimated 37 percent in 2011. High economic 0 0 growth (even if moderating), rising domestic 00 02 04 06 08 10 11e 12f 13f demand, improving investment environments and -200 infrastructure, and more attractive cost-productivity factors are expected to continue rendering developing FDI countries attractive locations to both North and Portfolio equity Private debt South-based MNEs. Net private capital flows as a The East Asia and Pacific region continues to receive share of GDP (right axis) the bulk of FDI flows into the developing world. With China in the lead, the region absorbed close to half of Source: World Bank. all FDI flows into developing countries in 2010 (figure e=estimate, f=forecast 1.2). China alone, with $185 billion, accounted for 37 percent of all FDI flows into the developing world.3 Latin America and the Caribbean were responsible for another quarter, with Brazil alone receiving $48 billion, followed by Mexico with $19 billion. In the MENA region, FDI flows fell by 7 percent in 2010 and by another 16 percent in 2011. The decline is especially MIGA WIPR REPORT 2011 | 13 evident in the sharp fall in the number of greenfield intentions in light of recent economic and political investment projects in Egypt, Libya, and Tunisia during developments (appendix 2). the first four months of 2011.4 However, a rebound is expected in 2013 as the region will generally remain attractive for foreign investors in the medium term (see the last section of this chapter). A sharp decline Figure Figure 1.2 1.2 Net FDI Inflows by in FDI flows into India, which fell by 30 percent in Developing Region 2010, was responsible for the steep drop in flows into South Asia in that year, but an equally sharp rebound $ billion is expected in 2011 and 2012. Led by Nigeria, FDI flows into sub-Saharan Africa are forecast to nearly double between 2011 and 2013, pushing the region’s share of developing-country FDI flows from 6 to 11 percent. Exposed to the problems of the euro zone, Europe and Central Asia experienced a 10 percent decline in FDI 2,500 flows in 2011. 2,000 Within this picture, FDI remains geographically concentrated in a handful of countries. Brazil, the Russian Federation, India, and China (BRIC) 1,500 continue to be important investment destinations, together responsible for 60 percent of FDI flows 1,000 into developing countries in 2010, a share that has increased during the past decade. A second-tier of 500 middle-income developing countries comprising Chile, Colombia, Indonesia, Kazakhstan, Malaysia, Mexico, Peru, Turkey, and Vietnam, accounted for 0 another fifth. On the other side of the spectrum, 00 02 04 06 08 1011e12f low-income countries received only around 3 percent of all FDI flows, a share that has remained virtually East Asia and Pacific unchanged during the past decade. A group of mostly Europe and Central Asia low-income economies that are also considered Latin America and Caribbean fragile as defined by the World Bank5 continued to Middle East and North Africa be small recipients of FDI, accounting for nearly 3 South Asia percent of the developing-country aggregate. It is Sub-Saharan Africa important to bear in mind, however, that these low- income countries also represent a smaller share of High-income countries global GDP. As was presented in MIGA’s 2010 World Investment and Political Risk report, low-income and Source: World Bank. fragile countries receive a proportionate level of FDI e=estimate, f=forecast flows when measured as a percentage of GDP. Note: FDI inflow forecast for 2012 for high-income countries is not available. MIGA-EIU Political Risk Survey 2011 MIGA commissioned its third annual survey of MNE executives worldwide to gauge investment intentions and political risk perceptions (the MIGA-EIU Political Risk Survey 2011, see appendix 2). Like the previous MIGA-EIU surveys, the 2011 survey sought to gauge the investment intentions of large MNEs vis-à-vis the developing world over the next 12 months and over the next three years. A comparison between the findings of the 2011 survey and the surveys carried out in 2010 and 2009 offers interesting insights as to how corporate investors are re-evaluating investment 14 | MIGA WIPR REPORT 2011 Figure 1.3 Changes in foreign investment plans Figure 1.3 Changes in Foreign Figure 1.4 Changes in Foreign Investment Plans Figure 1.4 Investment Changes Plans in by Sector foreign investment plans Percent of respondents by of Percent respondents sector Over the Over the next 12 months next 12 months Increase substantially Financial sector (20% or +) Manufacturing Primary Increase moderately (> 1% but <20%) Services Utilities Stay unchanged 0 20 40 60 80 100 Decrease moderately ( >1% but < 20%) Over the next three years Decrease substantially (20% or +) Financial sector Manufacturing Don’t know Primary 0 20 40 60 80 Services 100 Over the Utilities next three years 0 20 40 60 80 100 Increase substantially (20% or +) Increase Stay the same Increase moderately Decrease (> 1% but <20%) Source: MIGA-EIU Political Stay unchanged Risk Survey 2011. Decrease moderately ( >1% but < 20%) Decrease substantially (20% or +) The picture emerging from the MIGA-EIU 2011 Don’t know survey findings is cautiously optimistic over the near 0 20 40 60 More than term.80 100half of the respondents surveyed expect to increase their investments in developing countries over the next 12 months (figure 1.3). This is despite deteriorating economic prospects worldwide, concerns about the health of the banking Source: MIGA-EIU Political Risk Survey 2011. sector in Europe, and fiscal austerity programs in several high-income economies. About a quarter Note: Appendix 2 presents the findings for the of respondents expect to increase investments in subgroup of investors who also participated in the developing countries substantially over the next 12 MIGA-EIU Survey on Political Risk in 2009 and 2010. months, a more optimistic picture compared to the one depicted in the 2009 survey in the aftermath of the crisis. Only 10 percent of respondents in MIGA WIPR REPORT 2011 | 15 the 2011 survey planned to decrease investments this investment, when expressed in relation to the in developing countries over the next 12 months, size of their combined domestic economies (GDP), and an even lower share (8 percent) over the next accounts on average for less than 1.3 percent—well three years. For the subset of respondents whose below the corresponding ratio for high-income investment intentions were also tracked in the two economies of 2 to 3 percent. This suggests a sig- previous surveys, this trend clearly supports the nificant potential for further expansion in outward rebound in FDI flows into developing countries in investment.8 2010 and 2011 (appendix 2). There is an important caveat: when the survey was Figure 1.5 carried out in June/July of 2011 the downside risks to Figure 1.5 Net FDI Outflows from the global economic growth scenario were probably Developing Countries not fully appraised in corporate investment plans. With that in mind, there still appears to be a clear $ billion and percent trend of MNEs continuing to have a positive view of developing countries as investment destinations. These findings are corroborated by other regional 1.4 or country surveys. For example, Ernst & Young’s 250 2011 Africa Attractiveness Survey of 562 interna- 1.2 tional decision makers worldwide carried out in 200 early 2011 highlighted the changing investor per- 1.0 spectives on Africa, especially by investors from the continent and other emerging markets.6 The 2011 150 0.8 India Attractiveness Survey, also by Ernst & Young, highlighted the potential of the country’s domestic 0.6 100 market, with just over half of the 500 business 0.4 leaders surveyed at the end of 2010 planning to expand existing facilities and increase operations in 50 0.2 India, especially in states that offer business-friendly policies, fewer bureaucratic obstacles, good gov- 0 0.0 ernance, and infrastructure.7 00 02 04 06 08 10 11e The intent of MNEs to expand operations in developing countries is prevalent across all sectors BRICs over the next three years, with only a small minority Other developing countries of investors anticipating a decrease in investments (figure 1.4). In comparison with the medium-term Net FDI outflows as outlook, investment intentions across all sectors over a share of GDP (right axis) the near term are less optimistic, especially for manu- facturing firms. Source: World Bank. e=estimate FDI Flows from Developing Countries After a temporary setback in 2009, net FDI outflows from developing countries were poised for another growth spurt, as MNEs from these countries As in previous years, the BRIC countries were in the resumed their global expansion plans in search of lead in 2011 with $172 billion, accounting for nearly new markets and resources. In 2011, at $238 billion, three quarters of FDI outflows from the developing the estimated value of FDI outflows from developing world (figure 1.5). China alone invested an estimated countries was a new record, nearly quadrupling $85 billion in 2011, a new record level, as its mostly since 2005 (figure 1.5). Developing countries now state-owned enterprises continued their expansion account for 17 percent of global FDI outflows, a into new markets and strived to become interna- new record share, up from 6 percent in 2005. Yet tionally competitive. Driven by acquisitions, the 16 | MIGA WIPR REPORT 2011 Russian Federation’s FDI outflows rebounded further Figure 1.6 Changes in Foreign in 2011 to $63 billion; more Russian companies are Investment Plans for South-based now investing overseas than foreign companies Figure 1.6 Investors invest in the Russian Federation. India’s FDI outflows also increased to $15 billion, recovering from a decline in 2010. Brazilian investment abroad, which Percent of respondents had rebounded to $12 billion in 2010 driven by the private sector’s quest for new markets and by MNEs in the extractive sector, fell to $9 billion in 2011. Motives for investing abroad vary by country: for large extractive MNEs from the Russian Federation Over the next 12 months and Brazil, the principal motive is accessing natural resources through cross-border merger and acqui- Increase substantially sitions,9 while for Indian—and to some extent (20% or +) Chinese—companies, acquiring international brands is an important driver. Increase moderately (> 1% but <20%) A second tier of developing countries with sizeable and growing investments overseas, comprising Stay unchanged Malaysia ($15 billion), Mexico ($14 billion), Chile ($9 billion), Kazakhstan ($8 billion), Colombia ($7 Decrease moderately ( >1% but < 20%) billion), and Thailand ($5 billion), is following in the footsteps of the BRIC countries. Together these Decrease substantially countries accounted for a fifth of FDI outflows from (20% or +) the developing world in 2010. This trend is expected to continue. A 2011 Grant Thornton survey10 revealed 0 10 20 30 40 that 44 percent of BRIC-based firms were considering expanding through acquisitions, compared with 27 Over the percent in 2010. These expansions, mostly cross- next three years border, are motivated by the desire to access new markets, resources, technologies, and brands—as Increase substantially well as to achieve economies of scale in production. (20% or +) Increase moderately In the MIGA-EIU 2011 survey, South-based firms were (> 1% but <20%) also optimistic about prospects in the developing world (figure 1.6). Over four-fifths of the respondents Stay unchanged indicated their intention to invest in the developing world over the next three years, further supporting Decrease moderately the projected growth of FDI outflows. This is a ( >1% but < 20%) somewhat more optimistic view than the one from investors based in high-income countries; however, Decrease substantially the reverse was true for investment intentions over (20% or +) the short term. 0 10 20 30 40 50 Source: MIGA-EIU Political Risk Survey 2011. MIGA WIPR REPORT 2011 | 17 Political Risks and or empowerment requirements requiring greater Developing Countries local ownership and participation. For example, Zimbabwe’s indigenization program requires foreign mining firms to develop and submit for approval implementation plans that require 51 percent Salient Political Risks indigenous ownership. South Africa’s Black Economic in Developing Countries Empowerment strategy requires meeting empow- erment targets by 2014. In addition, foreign investors in this sector face heightened tensions arising from Growing uncertainty about sustaining the global the distribution of royalties or tax revenues between economic recovery has amplified the inherent local and central governments. political risks of governmental actions that affect private investors. This is illustrated by Aon’s Social and environmental impacts associated Political Risk Map 2011,11 which shows that the level with investments in certain sectors can strain of political risk in 2011 increased in 19 countries and relationships between investors and host-country declined in 11. Maplecroft’s Political Risk Atlas 201112 local or central governments. In Peru, for example, depicts similar trends. the government revoked the Santa Ana mining concession of Bear Creek (Canada) following local Taking a closer look at specific risks, incidents of protests about social and environmental impacts. expropriation have continued to increase over the Competition for scarce water resources can also past few years (Chapter Two). Recent examples draw attention to investments by foreign com- include the expropriation of a foreign utility panies and shape perceptions by local populations. company in Belize13 and a copper mining company Maplecroft’s Water Stress Index 2011,17 a mapping in the Democratic Republic of Congo,14 as well as a of areas within countries with different gradations of reported 41 percent jump in the number of expropri- water-related conflict, illustrates the potential risks ations (domestic and foreign) in Venezuela over the facing foreign companies—especially those engaged previous year.15 These expropriations, combined with in strategic land acquisitions—when investing in elevated concerns about possible expropriations water-stressed locations. in other countries, have put this risk back at the forefront of investors’ concerns. This was illustrated Nearly a third of the 149 national regulatory changes in the MIGA-EIU Political Risk Survey of 2010, which introduced in 2010 that pertained to foreign showed that expropriation and breach of contract investment were in the direction of increased regu- registered the largest increase among political risks lation or imposing new restrictions. This compares of most concern to foreign investors over the next with the results of 10 years ago, when it was estimated three years. The MIGA-EIU 2011 survey also sup- that only 2 percent of regulatory changes in 2000 were ported this finding, with investors perceiving the in the direction of increased regulation or imposing risk of expropriation to be on the rise over the next new restrictions on investments.18 A recent report by three years. Ernst & Young19 that looks at overall risks facing busi- nesses highlights regulation and compliance as the What has been termed “resource nationalism��? most significant threats to global firms. These include persists as energy and extractive commodity prices sector-specific regulatory pressures, new regulations, remain elevated. The Fraser Institute Annual Survey frequent changes in regulations, and new regulatory of Mining Companies 2010/2011 highlighted oversight bodies. Uncertainties surrounding the imple- investor uncertainty regarding the administration, mentation of international regulations such as Basel III interpretation, and enforcement of existing regu- are also of concern to foreign investors. lations as a significant deterrent to investing in a number of resource-rich developing countries such Financial instability and the spectrum of heightened as the Democratic Republic of Congo, the Russian sovereign debt risks in high-income economies, Federation, Venezuela, and Zimbabwe.16 A number of accompanied by numerous incidents of civil dis- developing and high-income countries have revised turbance and asset damage as in Greece and the or are in the process of revising their mining leg- United Kingdom, have accentuated political risks in islation (Guinea, Brazil, Indonesia, and Australia), high-income countries. The deep interconnectedness have raised mining taxes (royalties), or have engaged of high-income economies—which still account for in contract renegotiations to obtain a larger share the bulk of both inward and outward FDI—means of revenues. Added to these are indigenization that the transmission of these risks to other high- 18 | MIGA WIPR REPORT 2011 income economies occurs rapidly. These devel- The growing interdependence of the global economy opments have altered perceptions of political risks also means that production disruptions owing to being specific to developing countries alone. political risk events occurring in one country may have negative effects that extend beyond national boundaries. As global outsourcing, just-in-time pro- duction, and international production supply chains Figure 1.7 Ranking of the Most multiply, so does the risk of disruption from political Important events. Certain industries—such as automobile, Figure 1.7 Constraints for FDI in electronics, and the extractives sector—that depend Developing Countries on closely interconnected but globally located pro- duction networks, are particularly susceptible. The Percent of respondents cost of such disruptions can be significant for MNEs: for example, the 2011 earthquake and tsunami in Japan—although not a political risk, but a significant supply chain disruption—caused an estimated $200 Over the million a day in losses in the automobile industry next 12 months alone.20 Access to financing A recent survey21 on risks and supply-chain dis- Access to qualified staff ruptions highlighted the significance of risk assessment in the supplier-selection process. In Infrastructure capacity selecting suppliers, almost 90 percent of respondents Macroeconomic instability claimed to consider some form of risk assessment, Limited market opportunities with companies taking steps to evaluate the sup- Political risk plier’s exposure to a variety of risks, including geopo- litical risks. Despite this high rate, one of the survey’s Corruption conclusions was that often companies are not well Increased gov’t prepared to respond to supply-chain disruptions and regulation in the aftermath are not proactively managing this risk. of the global financial crisis Other Poor governance continues to plague many countries 0 5 10 15 20 around the world and poses enhanced reputational and integrity risks. To some extent, heightened attention through legislation to these issues by a Over the next three years number of countries that are sources of FDI in the developing world—for example, the Foreign Corrupt Access to financing Practices Act in the United States and the Bribery Act Access to qualified staff in the United Kingdom—help to reduce such risks. In addition, more countries adhere to conventions Infrastructure capacity addressing bribery adopted by the United Nations, Macroeconomic instability the European Commission, and the Organisation for Limited market opportunities Economic Co-operation and Development (OECD).22 Political risk Yet, as of August 2011, only 12 countries are val- idated as compliant with the Extractive Industries Corruption Transparency Initiative;23 certainly governance and Increased gov’t transparency are vital to the extractives sector. regulation in the aftermath of the global financial crisis Other Corporate Perceptions of Political Risk in 0 5 10 15 20 Developing Countries Source: MIGA-EIU Political Risk Survey 2011. All of the above concerns have resulted in investors’ heightened perceptions of political risk in recent years.24 This was also confirmed by the MIGA-EIU 2011 survey, in which political risk was ranked as MIGA WIPR REPORT 2011 | 19 corporate investors’ top concern over the next three participated in the earlier MIGA-EIU surveys on years for MNEs based in both developing and high- political risk (see appendix 2). Despite the weak state income countries (see box 1.1 for the definition of of the global economy taking precedence over the political risk). next 12 months, pushing political risk down in the rankings, political risk nevertheless remains one of the most important concerns for investors. Over the medium term, as concerns about the economy Figure 1.8 Types of Political risk subside,1.9 Figure political risk once again rises in investors’ of most Concern to Investors in perceptions as a significant obstacle to FDI, ranked Figure 1.8 among their top three concerns. Developing Countries Percent of respondents Figure 1.9 Types of Political Risk and their Effects on the Company Percent of respondents Adverse regulatory changes Breach of contract Transfer and con- Transfer and vertibility restrictions convertibility restrictions Civil disturbance Breach of contract Non-honoring of Non-honoring of gov’t guarantees gov’t guarantees Expropriation Expropriation/ nationalization nationalization Terrorism Adverse regulatory changes War War 0 10 20 30 40 50 60 Terrorism In the next 12 months Civil disturbance In the next three years 0 20 40 60 80 100 Source: MIGA-EIU Political Risk Survey 2011. Note: Percentages add up to more than 100 1 (Very high impact) percent because of multiple selections. 2 3 4 5 (No impact) Source: MIGA-EIU Three years since the onset of the global economic Political Risk Survey 2011. crisis, the growing fragility of the global economy and the return of elevated downside risks have placed macroeconomic instability at the forefront of investor perceptions of constraints to FDI (figure 1.7). In the MIGA-EIU 2011 survey (appendix 2), foreign investors ranked macroeconomic instability as their Concerns about political risk are particularly high chief concern over the next 12 months, followed by for South-based investors.25 South-based investors access to financing. This is not surprising given the are also concerned about macroeconomic instability delicate economic situation in high-income countries and limited access to financing in the short term, where most investment originates. The state of the but the majority of them see political risk as the global economy is perceived as a significant and biggest constraint to their investment plans over the growing constraint to investment plans in developing medium term. This is in contrast with North-based countries also for the subgroup of investors who investors, for whom macroeconomic instability 20 | MIGA WIPR REPORT 2011 remains the principal concern in both the short and importance of regulatory risk is a finding that has medium term. been consistently supported in both the 2009 and 2010 surveys, underscoring the weight that investors Regulatory risks (adverse regulatory changes) ranked place on risks posed by regulatory uncertainty and first among concerns in the MIGA-EIU 2011 survey “market-unfriendly��? changes in laws and regulations over the next 12 months and over the next three in host countries. Difficulties in predicting future years, surpassing breach of contract as the political regulatory changes also render investors less able to risk most vexing to investors (figure 1.8). The assess how such changes might affect the value of Box 1.1 Definition of Political Risk Political risk broadly defined is the probability of disruption of the operations of companies by political forces and events, whether they occur in host countries or result from changes in the international environment. In host countries, political risk is largely determined by uncer- tainty over the actions not only of governments and political institutions, but also of minority groups and separatist movements. For the purposes of the MIGA-EIU Political Risk Survey, the definition of political risk includes the following: rr Transfer and convertibility restrictions: risk of losses arising from an investor’s inability to convert local currency into foreign exchange for transfer outside the host country. Currency devaluation is not covered. rr Expropriation: the loss of investment as a result of discriminatory acts by any branch of the government that may reduce or eliminate ownership, control, or rights to the investment either as a result of a single action or through an accumulation of acts by the government. rr Breach of contract: risk of losses arising from the host government’s breach or repu- diation of a contractual agreement with the investor, including non-honoring of arbitral awards. rr Non-honoring of sovereign financial obligations: risk of losses due to non-compliance of government guarantees securing full and timely repayment of a debt that is being used to finance the development of a new project or the enhancement of an existing project. rr Terrorism: risk of losses due to politically motivated acts of violence by non-state groups. rr War: risk of losses due to the destruction, disappearance, or physical damage as a result of organized internal or external conflicts. rr Civil disturbance: risk of losses due to social unrest. rr Other adverse regulatory changes: risk of losses for foreign investors stemming from arbitrary changes to regulations. MIGA WIPR REPORT 2011 | 21 the future income streams and investment in general. The United Nations Conference on Trade and Discussions with investors point to the instability of Development (UNCTAD), World Trade Organization the regulatory regime as the key concern, rather than and OECD, which have been tasked by the G-20 the regulatory regime itself. Especially for investors to track such measures, have concluded that host- in the financial sector, regulatory changes have country governments have not instituted permanent increased in the aftermath of the global financial protectionist measures in response to the crisis. In crisis, as host-country governments have considered the organizations’ latest joint report,26 they note that a range of possible interventions, in particular to the majority of G-20 countries have eliminated most regulate foreign banks and other financial insti- restrictions on international investment put in place tutions. during the financial crisis. Figure 1.11 1.10Proportion Figure1.10 Figure Proportionof firms ofFirms Figure 1.11 Proportion of Firms that have suffered losses as that Have Suffered Losses as a a that Have Withdrawn or Canceled result of political risk over the Result of Political Risk over the Investment Plans on Account of past three years Past Three Years Political Risk over the past 12 Months Percent of respondents Percent of respondents Breach of contract Adverse regulatory changes Transfer and convertibility restrictions Civil disturbance Breach of contract Transfer and con- vertibility restrictions Non-honoring of gov’t guarantees Non-honoring of gov’t guarantees Expropriation/ nationalization Expropriation/nationalization Adverse regulatory Terrorism changes War War 0 10 20 30 40 Terrorism Civil disturbance Source: MIGA-EIU Political Risk Survey 2011. Note: Percentages add up to more than 100 0 20 40 60 80 100 percent because of multiple selections. Withdraw existing investment Cancel planned investments Both withdraw and cancel Neither withdraw nor cancel Don’t know Foreign investors’ concerns with increased adverse government regulation may be validated by national Source: MIGA-EIU Political Risk Survey 2011. policies introduced in response to the 2008 crisis as governments sought to protect key industries or proposed international regulations, such as Basel III. However, with regard to FDI, and in contrast to trends in international trade, host governments have now largely unraveled whatever temporary Political risks can create significant adverse effects policies were put in place in response to the crisis. on the operations of MNEs. Consistent with this, 22 | MIGA WIPR REPORT 2011 adverse government regulation and breach of of both flows (figure 1.12) and stocks—but such contract were the two risks perceived to have the investment is comparatively less significant in biggest negative effects on foreign investments relation to the size of its economy than in smaller (figure 1.9). Political violence risks, especially war countries like Lebanon. The United Arab Emirates and terrorism and to a lesser extent civil disturbance, and Saudi Arabia have also been the biggest sources did not rank high in terms of negative effects. In of FDI in terms of both flows and stocks. Among only fact, a sizeable proportion of respondents claimed developing MENA countries, Libya and Egypt, both they were completely unaffected by the presence of of which were significantly affected by recent events, these risks in the developing countries where they had been the biggest investors overseas. operated. These finding are consistent with losses actually experienced by investors as a result of dif- ferent political risks (figure 1.10). Breach of contract and adverse regulatory changes, political risks that Figure 1.12 Cumulative FDI Flows in investors face frequently in host countries, were also MENA, 2000-2010 the risks for which investors claimed the most losses over the past three years. Figure 1.12 $ billion In general, political risks are not perceived to be very high in the countries where MNEs operate; however, they do have an impact on investments. In particular, adverse regulatory changes and contract breaches forced a significant minority of investors to withdraw 150 or cancel existing or planned investments (figure 1.11). These findings are in line with those of previous 120 surveys. However, the majority of respondents have not experienced political risk in a way that has caused 90 them to take any action. 60 Spotlight on the Middle East and 30 North Africa 0 Algeria Bahrain Egypt, Arab Rep. Iran, Islamic Rep. Iraq Jordan Kuwait Lebanon Libya Morocco Oman Qatar Saudi Arabia Syrian Arab Republic Tunisia United Arab Emirates West Bank and Gaza Yemen, Rep. Despite the overall positive attitudes regarding cor- porate investment intentions in developing countries, the recent unexpected turmoil in the MENA region27 has affected FDI plans there. The turmoil led to dis- ruptions in economic activity, plummeting tourism and FDI flows, all of which have negatively affected economic growth (table 1.1). In Egypt, the economy shrank by 4.2 percent on an annualized basis during Source: World Bank. the last quarter of 2010 and the first half of 2011,28 while in Tunisia the decline in the first quarter of 2011 from the previous quarter was 3.3 percent on an annualized basis.29 For developing countries in the MENA region, estimates for 2011 have been revised downwards.30 This broadly painted picture of the MENA region High-income oil exporters in the MENA region masks important differences across individual receive the bulk of FDI flows overall. Subdividing countries. Such differences were also present in developing MENA countries into oil-exporting and the pattern of FDI prior to the onset of the recent oil-importing economies produces an even more upheaval. When considering both high-income and polarized picture (figure 1.13). Up until the early part developing countries in the region, Saudi Arabia of the past decade, FDI flows into all of these groups emerges as the biggest recipient of FDI in terms were relatively small, fairly equivalent in size, and MIGA WIPR REPORT 2011 | 23 growing slowly at similar rates. Toward the middle of Prospects will depend on the speed of resolving the the past decade, the growth of FDI flows into high- political situation, since investment takes longer to income oil exporters, such as Saudi Arabia and the recover than economic growth.33 The World Bank has United Arab Emirates, accelerated rapidly, while flows forecast that FDI flows into the MENA region will into developing-country oil exporters like Algeria, decline in 2011 and 2012, but it expects them to grow Iran, and Libya increased more slowly. Developing- again in 2013. Over the medium and longer term, country oil importers, in particular Egypt and Tunisia, economic and demographic factors—a combined saw a significant increase in FDI compared with the population of 450 million people, 90 million of whom developing-country oil exporters. are between the ages of 15 and 2534—will continue to attract market-seeking foreign investors, even more so under conditions of improved governance and less cumbersome frameworks for doing business. Figure 1.13 FDI Flows into MENA Figure 1.13 $ million Figure 1.14 Current Regional Distribution of FDI in Selected MENA Countries Figure 1.14 80 70 60 Egypt, Tunisia 50 (Combined inflows) 40 49% Europe 25% North America 30 1% Asia 20 15% MENA 10% Other 10 0 Morocco -10 (Inward stock) 90 95 00 05 10 93% Europe 0.5% North America 1% Asia Developing country oil importers 6% MENA Developing country oil exporters 0.2% Other High-income country oil exporters Source: World Bank. Jordan (Inward stock) 16% Europe 8% North America 1% Asia 69% MENA 6% Other The financial crisis of 2008 led to declines in FDI flows into the MENA region, and as political events Source: IMF, Coordinated Direct unfolded in 2011, the flows plummeted further in Investment Survey Database and national sources. the countries directly affected. In the first quarter of 2011, FDI inflows turned negative in both Egypt and Tunisia,31 while greenfield investments in Egypt declined by 80 percent in the first four months of 2011 compared with the same period in 2010.32 24 | MIGA WIPR REPORT 2011 Traditionally MENA countries have been mostly for longer and rebound more slowly than the rest of reliant on MNEs either from other countries in the MENA region. the region (both high income and developing) Figure 1.16 and Europe. With strong trade relations35 with the European Union and historical ties, Europe has been a big investor in Egypt and Tunisia, accounting for Figure 1.16 Effect of the Recent around half of those countries’ combined FDI flows, Turmoil in MENA on Political Risk and for virtually all of Morocco’s FDI received since independence (figure 1.14). But for other countries Perceptions in the Region by Type of in the region, intra-MENA investment has been Risk responsible for most of their FDI: as of 2009, over two-thirds of Jordan’s stock of FDI originated from Percent of respondents countries within the region (figure 1.14). Figure 1.15 Figure 1.15 Effect of the Recent Transfer and convertibility restrictions Turmoil in MENA on Investment Breach of contract Plans in the Region Non-honoring of gov’t guarantees Percent of respondents Expropriation/ nationalization Adverse regulatory changes War My organization has withdrawn Terrorism from existing investments My organization has cancelled Civil disturbance plans for future investment 0 20 40 60 80 100 My organization is reconsidering its investments in the MENA region Major increase My organization has Minor increase placed current plans on hold No impact My organization Minor decrease has not changed its plans Major decrease My organization has considered new Don’t know investment in the MENA region My organization has increased its Source: MIGA-EIU investment in the MENA region Political Risk Survey 2011. 0 10 20 30 Source: MIGA-EIU Political Risk Survey 2011. In the context of developments this year, with turmoil still present and a great deal of uncertainty over ongoing political changes, it is not surprising that a These patterns are likely to affect FDI prospects. recent survey by Grant Thornton37 found that over Despite recent announcements of investment one-fifth of the privately-owned companies partici- intentions in North Africa by other countries in pating disclosed that the events in the MENA region MENA,36 short-term prospects are not promising. have had a negative impact on their business. The With Europe under economic strain and uncertainties positive side was that despite these events, only one- surrounding the political environment of Egypt, Libya, tenth of the companies surveyed expressed a reduced and Tunisia, FDI into North Africa is likely to slump likelihood of doing business there. This finding MIGA WIPR REPORT 2011 | 25 suggests that despite the recent turmoil, the longer or plans to invest in MENA put their plans on hold, term outlook for the region remains promising and reconsidered, canceled, or withdrew their existing companies do not view the present unrest as posing investments (figure 1.15). A higher proportion of a long-term barrier to doing business in that region. firms withdrew existing investments or canceled investment plans compared with the proportion of Figure 1.17 firms that increased investments or considered new investments in that region. However, just below a Figure 1.17 Effect of Regime and third of firms did not alter their investment plans. Stability on Investment Plans in the Despite heterogeneity among the different countries in the MENA region, on balance, the turmoil has MENA Region stressed existing investments and dampened plans for expansion or new investments. Some existing Percent of respondents investors in the countries directly affected by the unrest, especially in the energy sector, have reported suspending operations (for example, ConocoPhillips, Hess Corp., Marathon Oil, and Occidental Petroleum in Libya).38 MNEs in the service sectors, especially A year of stability tourism, have also reported reduced activity. All of under a democratic gov’t this has been amplified by the worsening state of A year of minor instability domestic economies, as current account balances under a democratic gov’t and budget deficits widened, private capital flows A year of significant instability under a democratic gov’t weakened, inflation rose, and production and investment declined. A year of stability under a non-democratic gov’t A year of minor instability Political violence (especially civil disturbance and to under a non-democratic gov’t a lesser extent war and terrorism) ranked particularly A year of significant instability high as the risk of most concern to foreign investors under a non-democratic gov’t (figure 1.16) in the MENA region. Investors have Significant and also been concerned about governments’ ability to continued instability honor their sovereign financial obligations in light 0 20 40 60 80 100 of increased sovereign risk, rising sovereign credit default risk spreads, and foreign currency sovereign debt rating downgrades. Major increase in investment Investors were also surveyed on their attitudes Minor increase in investment on stability and regime type (an element that will No change be detailed in Chapter Two). Just over half of the Minor decrease in investment firms appeared ready to invest in the MENA region Major decrease in investment assuming there is at least a year of stability under Don’t know/Not applicable a democratic government (figure 1.17). The sta- bility factor, however, is not to be underestimated. Source: MIGA-EIU Political Risk Survey 2011. Nearly half of these firms said they would decrease investments should there be significant instability, even in the presence of a democratically elected government. Only 8 percent of these firms would increase their investments under such circumstances. The worst-case scenario from investors’ point of The findings of the MIGA-EIU 2011 survey, which view would be prolonged and significant instability, questioned corporate investors worldwide on their in which case nearly half of the firms would decrease investment intentions in the MENA region, largely investments substantially. Some 44 percent of the reflect the same sentiment. The turmoil did have a firms surveyed claimed that they would not change significant impact on investment intentions—the their plans for investment, essentially adopting a majority of investors who had existing investments “wait and see��? approach in the event of a non-dem- 26 | MIGA WIPR REPORT 2011 ocratic regime that nevertheless succeeds in stabi- countries. However, for a significant minority (about lizing the country for at least a year. a tenth of respondents), the MENA events did lead to withdrawal or cancellation of investments in other developing regions. 1.18 1.18 Effect of the Recent Figure fig Despite growing uncertainties and an increasing Turmoil in MENA on Investment likelihood of a negative economic scenario, foreign investors remain optimistic about prospects in Plans in Developing Countries in developing countries, as reflected in their investment Other Regions plans, especially over the next three years. While political risk remains an important concern as a con- Percent of respondents straint to investment, economic instability has gained prominence in the near term. In the MENA region, there has been an adverse effect on investment intentions arising from the recent turmoil. The longer term implications are uncertain and not favorable My organization has withdrawn should instability persist. Investment plans in other from existing investments developing countries have not been affected signifi- in emerging markets cantly by the events in the MENA region. My organization has canceled plans for future investment in emerging markets My organization is reconsidering its investments in emerging markets My organization has placed current plans on hold in emerging markets My organization has not changed its plans in emerging markets My organization has considered new investment in emerging markets My organization is actively seeking new investment in emerging markets My organization had no plans to invest outside of the MENA region 0 10 20 30 40 50 Source: MIGA-EIU Political Risk Survey 2011. Note: Percentages add up to more than 100 percent because of multiple selections. The turmoil in the MENA region has not significantly affected investment intentions in other developing regions. Political global contagion appears to have been contained. This is also manifested in the findings of the MIGA-EIU 2011 survey, in which nearly half of the respondents had no intention of making any changes to their investment plans in other regions (figure 1.18) as a result of events in MENA MIGA WIPR REPORT 2011 | 27 CHAPTER two Government Takings and Expropriations rr The probability of disputes between governments and foreign investors is materially increased by an economic shock and/or significant political shift. rr Not all disputes between governments and foreign investors result in expropriatory action; this outcome is heavily influenced by the regime type of the host country. rr In democratic regimes, expropriatory actions are mostly taken by governmental actors other than the executive branch. They also are likely to be settled because of insti- tutional characteristics such as rule of law, checks and balances of power, multiple players with veto power, and the importance of reputation to policymakers. rr While using different data sources, MIGA’s analysis cor- roborates recent academic literature on propensity to expropriate by regime types. 28 | MIGA WIPR REPORT 2011 Overview reinforces the value attached to past stability in political regimes. The uncertainty arising from potential governmental intervention in private investments is consistently cited by investors as a key risk factor in many developing countries. This chapter examines the Risk of Government Interference in conditions under which government intervention is Private Investments more or less likely to occur. The empirical analysis of this issue used two data sources: one contains A risk that foreign and domestic investors typically incidences of conflict between an investor and a face is the intervention of governments in their host government with a wide array of outcomes, operations in such a way as to constitute a taking including expropriation, and another only contains or an expropriation of their assets, rights to operate, instances of actual governmental expropriations. or ability to continue an operation. In the past two The analysis tests earlier academic research39 that years, MIGA has published World Investment and questions whether the type of the political regime— Political Risk reports, which have included the surveys democratic vs. non-democratic—makes a difference discussed in Chapter One of this report. In these in the propensity to expropriate in the context of an surveys, investors consistently maintain that gov- economic shock requiring a public policy response. ernmental interference and expropriation of foreign direct investment (FDI) is one of the key risks that Analysis shows that, while economic crises are concern them. This year’s report presents the same highly correlated with disputes between investors finding. and host governments, expropriations themselves are not specifically correlated with these crises. Expropriation of foreign investments has been a Something else triggers the dispute to become recurring risk for a long time. In exploring this topic, an expropriation: the political regime. Democratic the questions investors may be most interested in regimes are less likely, all things being equal, to are: What motivates governments to expropriate? engage in expropriatory behavior compared with What can investors do to understand this motivation non-democratic regimes. The apparent reason is a and mitigate against it? Have anything been learned cost-benefit analysis where the benefit is the asset from recent history? acquired from a private investor, and the cost is the loss of reputation and consequent future decrease This chapter seeks to understand the motivations in investments. It appears that a democracy, with of interference in investment from the host govern- checks and balances, rule of law, and policymakers ment’s point of view. A useful way to look at expro- concerned with their reputations as they face priation risk is illustrated in recent academic literature elections, is more careful in its behavior when that maintains that the government’s decision to dealing with property rights. Thus, there is a lower expropriate has a benefit (control of the assets that probability of expropriations. can be used for productive purposes) and a cost (loss of reputation that will lead other investors not However, investors do not seem to completely to select the country as a recipient for their funds).40 appreciate this effect. In fact, they seem to value The analysis explores why expropriations do not, in political stability over regime type partly because fact, occur more frequently—given that the costs expropriation, even in a high-risk environment, is a are generally intangible and are in the future, yet the low-probability event. Investors also seem to view benefits are tangible and immediate. As the state is the risk in hindsight rather than foresight, which not a single rational actor, but a series of actors with MIGA WIPR REPORT 2011 | 29 different pressures and incentives, the cost-benefit percent of developing countries’ FDI stock, compared calculation becomes potentially more complex. For with 4.4 percent during 1960-1976.46 this reason, the regime type and the existence of few or many actors within it are critical elements in 21. Disputes can arise between understanding expropriation risk. foreign investors and govern- Figure 2.1 Expropriation ment agencies. Acts When these by arise Sector in countries where your organ- Recent Trends in Expropriation isation is investing, how do you Number The frequency and nature of expropriation events relating to FDI has changed over time. During the 1960s and 1970s, acts of expropriation came about in response to political risks centered largely on post- 70 colonial declarations of independence, civil wars, and left-wing takeovers—whether through elections 60 or coups d’état. Newly formed governments con- fiscated or nationalized foreign investors’ property under the argument that this would herald the end 50 of exploitation and the start of national sovereignty. Estimates put the number of expropriation acts 40 during 1960-1979 at 560.41 During that time estimates show that 15-20 percent of the volume of all U.S. FDI 30 abroad measured in volume terms was nationalized. 20 This picture changed in the second half of the 1970s when the number of expropriation acts dropped 10 dramatically,42 in part because most of the vulnerable assets had already been confiscated.43 In the 1980s and up until the early 1990s, new expropriation acts 0 diminished markedly. During 1980-1986, estimates 60 70 80 90 00 of the number of expropriation acts declined to 16.44 During this time, more liberal economic policies were taking root in a number of developing countries, Total and expropriations were associated with the learning Primary curve of initial efforts to enact new regulatory Services frameworks, hesitant reforms, and backsliding. By Manufacturing the early 1990s, when efforts to liberalize, privatize, and deregulate economies were in full swing, there Source: Chris Hajzler (2010), “Expropriation was a sense that expropriations were a thing of the of Foreign Direct Investments: past as governments implemented national foreign Sectoral Patterns from 1993 to 2006,��? investment regimes and participated in international University of Otago. investment treaties. Since 1995, backlash against these liberalizing policies, accompanied by incomplete deregulation of domestic markets and transitions in political systems, led to a higher incidence of expropriation cases, especially in Latin America and Central and The primary sector has seen the largest spike in Eastern Europe. A recent estimate places the number expropriation acts (figure 2.1). Most developing of expropriation acts during 1996-2006 at 41, with countries use royalties or income taxes, as opposed 15 occurring during the period 1996-2000 and 26 to production-sharing arrangements, to draw occurring during the period 2001-2006.45 The value revenues from foreign-owned mining projects. of expropriated assets during 1990-2006, estimated This has not always been satisfactory to host gov- using data from arbitration claims, accounts for 1.6 ernments. Public utilities have also been affected by 30 | MIGA WIPR REPORT 2011 host governments reneging on commitments. This foreign investors or results in an insurer paying for has arisen either from popular pressures—as in the the loss. case of the Cochabamba, Bolivia water concession in 2000; some governments seeking to retain popular For the purpose of this analysis, data of actual expro- support—as in the case of Argentina over the past priations and disputes were tabulated from various decade; or the inability of governments to abide by sources. A regression analysis was then used to commitments made as part of an incomplete reform discover whether a series of variables could explain process—as in the case of the Dominican Republic’s a higher probability of disputes or expropriation. The energy sector in the early 2000s. tested variables related to characteristics of political regimes (democratic vs. non-democratic), the actors The nature of expropriatory acts by governments within the state (for example, executive branch, leg- also changed from the direct expropriations (outright islative branch, sub-national), as well as changes in nationalizations) that were seen in the 1960s to the economic and political conditions. indirect or “creeping��? expropriation acts of the last few years. Despite this trend, outright confiscations Before outlining the results of the findings, a couple still occur. Moreover, as mentioned in Chapter One, of clarifications are needed. In the empirical analysis they have been on the rise in the past few years. a number of existing measures of democracy are used, but for the sake of discussion a democratic regime is defined as one in which the opposition has a reasonable prospect of achieving political Expropriation47 power in the absence of violence. Non-democratic regimes are defined as the contrary. In the analysis, Under what circumstances is the risk of government the political regime type was defined as binary, not- interference in private investment increased? withstanding the reality of shades of gray between the While most governmental interventions in private two extremes. investment are characterized by idiosyncratic factors, some broad risk characteristics can be discerned A second clarification regarding economic shocks from available data on expropriations and other gov- is that they do not only have to be negative. The ernmental interventions into private investments. recent upsurge of resource nationalism is, in fact, an Here, a more critical and less anecdotal treatment example of a positive shock—as commodity prices of this risk both for the political risk insurance (PRI) increase, the incentive of the government to take over industry as well as for foreign investors is warranted. these assets also increases. For the analysis, what The data come from Berne Union (BU) institutions, matters is a material change in economic conditions. as well as from the International Centre for the Settlement of Investment Disputes (ICSID). The BU This analysis shows that the risk of expropriatory is an association of export-credit and investment actions by the state increases in the aftermath of insurance agencies most of which are public insti- major political or economic change. In the last 20 tutions from developed countries (for example, the years there has been no case of an expropriation Overseas Private Investment Corporation of the that has not been preceded, in a narrow or a broad United States, Export Development Corporation of sense, by a political or economic shock. For example, Canada, Coface of France)—though a handful of 23 high-profile expropriations of U.S. investments private insurance firms are also represented (see box were the result of major political transitions such as 3.1). ICSID, whose secretariat is part of the World regime change in Iran after the fall of the Shah, or Bank Group, is an arbitration forum for disputes major economic crises that triggered political change. between host-country governments and foreign In some cases it is difficult to establish whether an investors. economic crisis triggered the political crisis. But it is clear that major political shocks impact a govern- Data from these organizations have important dif- ment’s choice to expropriate. ferences: the BU identifies expropriation claims paid48 and ICSID identifies disputes that may or may not The nature of the economic crisis does not seem to have resulted in the need for the state to indemnify matter; financial, fiscal, or debt crises all can result a private firm. This difference is critical because in an enhanced probability of expropriatory action. expropriation decisions may best be explained as a This may seem intuitive as expropriatory actions tend two-step process: the governmental action itself and to result from the public policy discontinuities that the subsequent negotiation that either compensates crises may bring. The key issue is that an economic MIGA WIPR REPORT 2011 | 31 crisis leads to actions by the government that disputes), there is no significant correlation. This affect—intentionally or not—private investments in indicates that the hypothesis of economic or political the country. This pattern is very clear in the ICSID crises leading to disputes holds, but that there is data, where investment disputes are much more something that is more closely correlated to expro- common in periods of economic crisis. priation. This is the political regime type. It is clear that major political or economic changes The general perception is that the rule of law is can increase the risk of expropriation, but what other stronger in democratic regimes than in non-demo- factors are at play? Since governmental interference cratic ones and permits more scope for legal redress has to go through the public administration, the to wronged investors. But the analysis also suggests nature of the political regime also has an influence. another rationale. If governmental actions to expro- Research has explored the different dimensions of priate result from the cost-benefit analysis described democracy, ranging from free and fair elections, the earlier, where the benefit is access to assets and ability of voters to participate in elections, mech- the cost is a loss of reputation, then the cost anisms to allow true competition between individuals will be greater for policymakers who have to face and parties, and constraints on the executive after electorates. This loss of reputation may exist with an individual wins office. Taking into account these respect to both domestic and external audiences. multiple dimensions of democracy, research shows The linkages between the two, however, appear to clear divisions in the tendency to expropriate based be stronger in democratic regimes than in non-dem- on the type of political regime: ocratic regimes. Therefore, in democratic regimes there is a combination of policymaker incentives and rr In democratic regimes, the actions that initially multiple actors with power to redress acting together have a negative impact are mostly taken by to strengthen the consistency of decisions over time. governmental actors other than the executive The final result is a decrease in expropriation events. branch—such as legislatures, or sub-national Box 2.1 explores the experience of Indonesia in entities of government. But the resulting disputes 1997-98 that illustrates this hypothesis. tend to be settled—either with or without explicit mediation—once the executive branch is Other factors can affect the cost-benefit calculation responsible for dealing with the consequences of expropriation and will be addressed in future of the economic shock or political shift. In fact, research. For example, countries rich in natural most PRI contracts covering expropriation have resources may be less concerned about reputational embedded long waiting periods that can give a issues. Alternatively, countries that are dependent negotiated settlement the time to mature. on foreign aid are especially concerned about their reputation since adverse actions against investors rr In non-democratic regimes, the actions that ini- not only affect private investment flows, but also tially have a negative impact are mostly taken by potentially can affect the flow of foreign aid. the executive branch of government and are less likely to be resolved. Therefore, these actions become expropriations. Risk Perceptions of Foreign rr Expropriations occur in both democratic and Investors in Developing Countries non-democratic regimes, but the propensity to expropriate is significantly higher in non-demo- In the MIGA-EIU 2011 survey, most international cratic regimes.49 investors view disputes as arising from actions by the executive branch of government, either directly or These conclusions derive from the statistical analysis indirectly. Yet, in a separate analysis of expropriation of the two different data sets. First, the correlation and arbitration claims, the role of the executive is between economic or political crisis and investment most pronounced in non-democratic regimes. In disputes was tested using ICSID data. These data democratic regimes, many disputes initiate from refer only to the existence of a dispute, not neces- sub-national governments or regulatory agencies. To sarily its outcome. A significant correlation indicates restate, not all expropriatory actions are initiated by that in the aftermath of an economic or political the executive; in fact, in democratic regimes, usually crisis public policy discontinuities lead to increased the executive is initially not involved. disputes between investors and governments. However, when the same analysis was carried out with data of actual expropriations (as opposed to 32 | MIGA WIPR REPORT 2011 2.2view the relationship between these agencies and other govern- Figure 2.2 Independence of Agencies ment entities? policymakers. It is the key reason why policymakers when Acting Against Investors in democratic regimes understand that their repu- tation will suffer and costs will be incurred as a Percent of respondents result of expropriation. 2.3. 2.3 Figure How Political Regime would the and its following Impact on Business Decisions political factors affect your Agencies act independently business’s Percent of expropria- risk of respondents Agencies act on behalf of the tion? Select one answer for national executive (President, Prime Minister, etc.) each factor. Agencies act on behalf of the national legislature Long established democracy Agencies act on behalf of state or provincial executive Long established non-dem. gov’t officials Legacy of stability Agencies act on behalf of state or provincial legislatures Legacy of instability Federal system of gov’t Don’t know Strongly centralized gov’t 0 20 40 60 History of transparency History of corruption Source: MIGA-EIU Political Risk Survey 2011. 0 20 40 60 80 100 Major increase Minor increase No impact Minor decrease Major decrease The results are interesting when the survey questions Don’t know turn to types of governmental regime. There is a strong perception that democratic regimes mitigate Source: MIGA-EIU Political the risk of expropriation due to checks and balances, Risk Survey 2011. rule of law, incentives, and consistent behavior by policymakers. However, results regarding per- ceptions of non-democratic regimes are inconclusive. Investors recognize the value of rule of law, but are not as keenly aware of the risks associated with the absence of democracy. The key risk identified is cor- ruption—which is not associated with a particular regime type, and is often associated instead with a Reputational effects are an important factor in country’s level of development. assessing the results. While expropriations may dramatically lower investment, the political con- Finally, when asked to identify key drivers of expro- sequences of this lack of investment can vary. For priation, the single most important response is the example, entrenched leaders in non-democratic existence of a prior uncompensated expropriation. regimes may be able to weather the political backlash This is important and understood intuitively by caused by the reduction in FDI. Parties of the left and MIGA WIPR REPORT 2011 | 33 Box 2.1 Indonesia in 1997: A Case Study that Underscores the Research Results Since the 1970s, Indonesia experienced stable and rapid GDP growth at an average of 7 percent annually, raising per capita income toward the level of middle-income countries. Sovereign risk spreads had been at a low level prior to the Asian financial crisis, which reflected the stable market perception of the Indonesian economy. On the other hand, the economy was highly centralized under Suharto’s “New Order��? regime, which masked the structural weakness of the economy. Business opportunities were concentrated to politically connected parties, such as the president’s family and relatives. Under this regime, Indonesia’s investment climate suffered in comparison with other ASEAN countries. Concerns included uncertain business operation, excessive regulation, and corrupt transactions. Following the currency turmoil in Southeast Asia in July 1997, Indonesia faced the greatest economic instability among neighboring countries: real GDP declined by more than 10 percent, the rupiah depreciated by 80 percent, and inflation rose to above 60 percent. The crisis not only adversely affected the economy, but also further worsened the social and political environment of the country. World Bank governance indicators confirm the sharp decline in the business environment and the quality of government after the crisis. The deterioration of governance indicator scores relating to rule of law, regulatory quality, government effectiveness, and control of corruption reflect the political turmoil and the increase in expropriation after the 1997 crisis. In this context, two documented cases of expropriation targeted assets held by foreign investors in utility industries in 1998. The crisis severely affected private power projects in Indonesia—long-term power purchasing agreements with private power producers seriously suffered from the increased threat of contract defaults and renegotiations. This demonstrates that economic crisis can trigger expropriation, especially in a non-democratic regime like pre-crisis Indonesia. As indicated by the negative score of the rule-of-law governance indicator, there were few players to veto the expropriatory actions by the executive branch of the Indonesian government. In the recession that followed the crisis, the government placed a higher value on resources and was tempted to expropriate private assets out of desperation—even though this resulted in the loss of reputation, a worsened business climate, and a huge drop in foreign investment. The economic and political turmoil resulted in the resignation of Suharto, followed by the liberalization of the economy, and democratization under the supervision of a three-year stand-by arrangement by the International Monetary Fund. Sources: rr The World Bank. 1998. “The East Asian Financial Crisis – Fallout for Private Power Projects.��? Public Policy for the Private Sector Note No. 146. rr Kaufmann, Kraay, and Mastruzzi. 2004 “Governance Matters III: Governance Indicators for 1996, 1998, 2000, and 2002.��? The World Bank Economic Review. rr IMF. 1998. “Financial Market Contagion in the Asian Crisis.��? IMF working paper 98/155. rr Hajzler, Chris. 2010. “Expropriation of Foreign Direct Investments: Sectoral Patterns from 1993 to 2006.��? University of Otago, Economics Discussion Paper No. 1011. rr Asian Development Bank. 2005. “Improving the Investment Climate in Indonesia.��? Asian Development Bank: Manila. rr Michael Tomz and Mark Wright. 2010. “Sovereign Theft: Theory and Evidence about Default and Expropriation.��? In The Natural Resource Trap: Private Investment without Public Commitment, ed. William Hogan and Federico Sturzenegger. Cambridge, MA: MIT Press 34 | MIGA WIPR REPORT 2011 Figure 2.4 right may also be impacted differently, based on how Figure 2.4 Factors that Investors their core supporters value foreign investment and Perceive as Increasing Risk how supportive they are of expropriation. Percent of respondents Investors responding to questions about how dif- ferent political and economic changes affect political risk said that financial crises rank among the biggest drivers. In addition, most investors viewed potential political change as increasing risk. Yet, while a shift A financial crisis to a left-wing government had a modest increase in political risk perception (37 percent of respondents A recession said it led to a “minor increase��?), a shift to a populist A shift toward government saw a much more dramatic increase. a left-wing gov’t A shift toward a right-wing gov’t Risk Perceptions of Investors A shift toward a populist gov’t and PRI Providers Signing a bilateral investment treaty The analysis shows clear evidence that economic crises and political regime type play a major role An uncompensated in increasing the probability of expropriations. An expropriation of another company by the gov’t interesting characteristic of expropriation risk is that the risk itself has a relatively low probability—but A compensated very high severity. In that sense it is an infrequent, expropriation of another company by the gov’t yet catastrophic, risk. Thus, while there are factors that may substantially increase the probability of A shift to democratic gov’t expropriation, the one-year expropriation probability remains relatively low compared to the probability A shift to of other adverse corporate events. This means that non-democratic gov’t corporate decision makers will not experience many 0 20 40 60 80 100 expropriation claims in their professional careers, if they experience any at all. This leads to a certain Major increase degree of over-confidence in the ability to predict and Minor increase manage the risk. PRI providers, by contrast, see more No impact expropriation events—actual or potential—as they Minor decrease are covering a wide array of firms, industries, and Major decrease countries. Don’t know This difference in perception leaves MNEs exposed to Source: MIGA-EIU risk. According to the survey, investors appear more Political Risk Survey 2011. concerned about stability than about regime type and political institutions in general. And the most important factor that will impact an MNE’s decision whether to move forward with an investment is the existence of uncompensated expropriations in the country being considered. This may be useful for potential new entrants, but is too late for those already present in that country, indicating investors would benefit from considering additional elements in their decisions that are more forward-looking. MIGA WIPR REPORT 2011 | 35 CHAPTER three The Political Risk Insurance Industry rr Demand for political risk insurance (PRI) is on the rise. Heightened global risk perceptions in the aftermath of the global financial crisis, further fueled by sovereign credit risk in the developed world and political crises such as the Arab Spring, have led to unprecedented levels of demand for the product. rr High demand for PRI was reflected in a sharp uptick in new investment insurance issued by Berne Union members since 2008. 2010 marked a record year for the industry. In the first half of 2011 this trend appears to be continuing, although downside risks have started to emerge from a weakening of Europe’s banking sector. rr PRI supply remains abundant and pricing reflects a buyer’s market. Mirroring the now longest period of a “soft��? supply cycle in the general (non-life) insurance industry, the private PRI market appears robust and well-positioned to meet the high demand for the product. 36 | MIGA WIPR REPORT 2011 Overview ficult to measure historically. Investment insurance claims paid by BU members in 2010 spiked to $221 The first months of 2011 were a reminder of the million, a tenfold increase over 2009, leading to a unique risks that foreign investors face in emerging markedly higher aggregate loss ratio of 20.5 percent. markets. Côte d’Ivoire experienced months of turmoil However, single-year loss ratios are sensitive to after a contested presidential election in November single-event data points and may not give an 2010, which ultimately led to an armed and pro- adequate picture of industry-combined ratios, espe- longed standoff. Food-price inflation, a long-term cially when losses are smoothed over time. Overall, ill affecting countries suffering from demographic the PRI industry remains well capitalized and the pressures and simultaneous nutrition shortages, trend of further “softening��? of premium rates con- has led to social unrest in Bolivia, Burkina Faso, tinued well into 2011. Mauritania, Mozambique, Uganda, and other countries. In North Africa, social uprisings arising Most significantly, political risk was brought to the from dissatisfaction with public mismanagement fore in what came to be known as the Arab Spring. and corruption led to the removal of long-established The Arab world shares a variety of economic woes rulers. The salience of political risk in the broader and there is certainly no shortage of social pressure context of emerging-market risk is consistently points that governments will have to address across mirrored in this and past editions of the MIGA-EIU the region, as discussed earlier in this report. A survey on political risk. common shortcoming in many of these countries is that the private sector has been insufficiently Heightened political risk perceptions are reflected harnessed as an engine for job creation, social devel- in a marked increase in issuance of PRI. In 2010, opment, and economic growth. Some economies, the Berne Union (BU) insurers (box 3.1) reported particularly those that are not large oil producers, a record $65.8 billion in new underwriting, up also lagged behind other regions’ levels of foreign approximately 30 percent over 2009. Similarly, private investment and private capital formation. This means market underwriters and brokers report an all-time they have often fallen short of what is necessary for high demand for insurance against political risk. an effective process of economic modernization. PRI issuance has grown, not only in absolute terms, but also relative to foreign direct investment (FDI). For the PRI industry, the significance of the Arab Over the past five years, the rate of growth of PRI Spring is twofold. First, it demonstrates how sudden has exceeded that of FDI, meaning that a higher and unexpectedly political order can erode in percentage of FDI is now insured for political risk. changing societies. For investors, PRI can serve as an In 2011, this trend appears to be continuing as new effective hedge against the risks of sudden political business written by BU members between January disruption, and already the industry has begun to and July remained brisk. However, higher capital see a significant increase in demand for its products. requirements and a weakening of Europe’s banking Second, the PRI industry can play an important sector could potentially slow new business in the role in restoring investor confidence in the region. second half of 2011 if financing becomes scarcer. As MENA countries stabilize in the medium term, attracting foreign capital will be paramount and PRI Commensurate with this increase in new business providers can support foreign investors in tapping in 2010, premium revenues reported by BU the region’s potential. members increased to $1.16 billion, a 15 percent increase over 2009. Loss ratios in PRI are more dif- MIGA WIPR REPORT 2011 | 37 The PRI industry in 2011 – innovation environment. As a result, PRI products Trends and Prospects have adapted to the changing needs in the mar- ketplace, both by increasing the scope of coverage as The high volume of new investment insurance issued well as developing very specialized subcategories of by BU members in 2010 marks the continuation insurance. of a longer-term trend of rising demand for PRI. During the 1990s new PRI cover provided by political Coverage against political violence, for example, was risk insurers was nearly flat, and actually decreased made available for a greater number of contingencies slightly in real terms. Measured as a ratio to annual including political riots, demonstrations, civil dis- FDI flows into developing countries, PRI underwriting turbance, insurrections, and terrorism—with policies declined from 25 percent in the mid-1980s to a low being able to approach coverage selection with more point of nearly 5 percent in 1997. flexibility. Terrorism insurance itself became a primary catastrophe insurance product after the events of At the end of the 1990s, the declining real demand September 11, 2001 in the United States, although it for PRI gradually reversed. More private political risk is generally offered in the property/casualty market. insurers entered the market to compete with, and More recently, non-payment insurance on financial offer coinsurance alongside, public insurers. Capacity obligations from sovereign obligors and contract frus- in the market surged with the entry of new private tration/non-payment cover have become the fastest insurers and the increased competition among pro- growing products in the PRI market. viders of PRI led to an increasingly dynamic product- Box 3.1 The Berne Union The Berne Union (BU) was founded in 1934 with the mandate to promote international acceptance of sound principles in export credit and investment insurance. Today, the BU has 78 members (including Prague Club membersa) comprising mainly export credit agencies (ECAs), multilaterals, and private insurers (appendix 2). Most ECAs and multilaterals are BU members, as are a smaller number of commercial insurers including Chartis (formerly AIG), Zurich, and Sovereign Risk Insurance. In October 2008, Hiscox became the first private insurer under- writing in Lloyd’s to join the BU. In 2010, ECAs accounted for about 79 percent of the BU’s out- standing investment PRI portfolio, private members accounted for 19 percent, and multilaterals accounted for 5 percent. The BU plays an important role in bringing together the public and private insurers to enhance cooperation and information sharing. Members meet on a regular basis to discuss industry trends and challenges. In recent years, there has been a concerted effort on the part of the BU secretariat to promote transparency and disclosure in the industry and to represent member interests in order to encourage global trade and investment. a The Berne Union’s Prague Club was started in 1993 with funding from the European Bank for Reconstruction and Development. It is an information exchange network for new and maturing insurers of export credit and investment. The Prague Club supports members’ efforts to develop their export credit and investment insurance facilities by hosting technical discussions at twice- yearly meetings, as well as ad-hoc information exchanges. A number of Prague Club members have gone on to meet the requirement for full BU membership. 38 | MIGA WIPR REPORT 2011 Figure 3.1 Figure 3.1 PRI and Foreign direct The trend toward enhanced supply of PRI through investment flows into Developing product innovation and the growing financial capacity of market players occurred alongside rising demand, countries driven primarily by increased global FDI flows. Since 2000, investment flows into developing countries nearly quadrupled from $160 billion in 2000 to $580 billion in 2008 (a annual growth rate of 17.5 percent). The surge of FDI flows into developing countries Ratio of PRI to FDI (percent) since 2000 gave support to a very rapid growth of 30.0 PRI issuance over the last decade, which occurred at even higher rates of growth than FDI. New investment insurance cover provided by BU members grew even more rapidly from $12.7 billion in 2000 to 22.5 $66 billion in 2010, representing an annual growth rate of 18.6 percent. Consequently, the ratio of PRI to FDI in developing countries increased to 14 percent 15.0 in 2010—the highest level since the early 1990s (figure 3.1). 7.5 However, the ratio of FDI and PRI issuance differs significantly across developing-country regions. Proportionally, most PRI is issued for investments in Africa. Between 2005 and 2010, the average ratio of 0.0 FDI to PRI for sub-Saharan Africa was 18 percent. In 85 90 95 00 05 10 Latin America and the Caribbean, the corresponding ratio was 12 percent, followed by Eastern Europe and Growth of new PRI vs. FDI flows (1998=100) Central Asia (10 percent), the Middle East and North 600 Africa (9 percent), and Asia (6 percent). 500 In the wake of the global financial crisis, developing- country FDI fell sharply in 2009 and rebounded only partially thereafter. New PRI coverage also declined 400 during the crisis, but only slightly. The amount of new business underwritten by BU members in 2009 300 was only marginally lower than in 2007, the year prior to the financial crisis. While nominally PRI 200 business did not grow during the crisis, it remained stable in relative terms. Measured as a ratio to FDI flows into developing countries, PRI increased 100 from 9 percent in 2008 to 14 percent in 2010. In absolute terms, new business in 2010 was up about 0 34 percent over 2009, or around 12 percent over 98 00 02 04 06 08 10 its peak level in 2008. The swift recovery of PRI issuance is particularly striking in North America and New PRI Western Europe, which remain the primary markets FDI for PRI even though FDI flows today are still around Source: Berne Union Secretariat and World Bank. 50 percent below pre-crisis levels.50 Note: Investment insurance data for 2010 cannot readily be compared with previous years’ data The speedy recovery of the PRI market since the due to a new classification of this business. financial crisis of 2008 mirrors the prominence of political risk in an environment of heightened global risk aversion. Since MIGA launched its annual political risk survey in 2009, political risk has featured consistently among the highest-ranked constraints to FDI in emerging markets. This year, events sur- MIGA WIPR REPORT 2011 | 39 Box 3.2 Overview of the PRI market The PRI market includes three broad categories of providers and covers both export or trade credit and investment insurance. For the purposes of this report, PRI refers to investment insurance. The public PRI market comprises both national and multilateral PRI providers. The private market’s PRI falls into two main categories: (i) political risk activities similar to that of the public insurers, such as coverage for investments in emerging markets against expropriation, political violence, and other such risks; and (ii) emerging market non-payment insurance covering contract frustration and default by governments. The National PRI Providers: These include national export credit agencies and investment insurance entities. They focus on cross-border trade and investment, generally for con- stituents in their own countries. The Multilaterals: These include the African Trade Insurance Agency, the Asian Development Bank, the Inter-American Development Bank, the Inter-Arab Investment Guarantee Corporation, the Islamic Corporation for the Insurance of Investment and Export Credit, and the Multilateral Investment Guarantee Agency. The World Bank, the Asian Development Bank, and the Inter-American Development Bank also provide risk mitigation instruments, such as partial risk guarantees.a The Private PRI Market: The majority of private insurers are based in three insurance centers—London, Bermuda, and the United States (primarily New York City). Several of the larger insurers have offices in Singapore; Hong Kong SAR, China; Sydney; and elsewhere. As well as traditional equity PRI, the private market offers protection for a wide variety of developing-country payment risks, either for political perils alone or comprehensive non-payment cover. Brokers play an important role in promoting and sourcing PRI for the private market. This market segment is dynamic: over the past year, some players have exited the PRI market, while new entrants have appeared. The Reinsurers: Reinsurance companies underwrite PRI-related coverage for both trade and investment. Reinsurance is an underlying factor driving both pricing and capacity in the private market. Some of the top reinsurers include Munich Re and Hannover Re of Germany, Swiss Re of Switzerland, and Berkshire Hathaway/General Re of the United States. Export credit agencies and multilaterals also participate as reinsurers of PRI, although on a smaller scale. a A partial risk guarantee covers private lenders against the risk of government failure to honor contractual obligations relating to private projects. Source: Data on national providers from Berne Union and on private providers from Arthur J. Gallagher & Co., London. 40 | MIGA WIPR REPORT 2011 rounding the Arab Spring, election uncertainty in a In the private PRI market, pricing continued to number of still nascent democracies, and popular soften throughout 2011. According to London-based unrest following exorbitant food price inflation have broker RFIB, pricing for specific country coverages further underscored the salience of political risk. In quoted by Lloyd’s and company underwriters has the broader context of uncertainty over the future of either remained stable or decreased since January the euro zone, the long-term fiscal health of high- 2011, both in the investment insurance and the sov- income economies, and anemic growth of the global ereign non-payment segments of the market. The economy, developing-country risk aversion is likely to exception to this trend is the MENA region where remain elevated for some time to come. non-payment pricing increased for a small number of sovereign borrowers including Algeria, Egypt, High demand for PRI is observed by a number Syria, and Yemen. of market participants. Marsh insurance brokers reported an unprecedented level of demand for PRI in its 2011 mid-year market update.51 Similarly, the African Trade Insurance Agency reported that Figure 3.2 Ratio of Premiums “the demand for political risk insurance surged in to Average PRI Exposure for BU light of increased debt protection costs and yields on government debt across the Gulf region��?52 and Members Figure 3.2 Lloyd’s underwriters speak of the biggest upsurge in business since September 11, 2001.53 MIGA has Percent of insured amount received a continuously growing number of inquiries for political risk guarantees since the onset of the financial crisis. Guarantee applications received by MIGA in 2011 increased by 15 percent over 2010, fol- lowing a 34 percent increase in the previous year. 1.2 Pricing and Capacity 0.9 Despite a global environment of heightened risk aversion and increased demand for the product, for now the PRI market remains “soft��?. Premium rates 0.6 remain subdued and capacity is widely available. As a Lloyd’s broker noted recently, the PRI market in London continues to be robust. The market had a difficult patch when a wave of claims came through 0.3 as the financial crisis hit the real economy after the failure of AIG. While these losses primarily hit the trade finance side of the business, they indi- rectly affected the investment side through reserves 0.0 required by insurers. As a large fraction of the private 95 00 05 10 PRI business covers comprehensive non-payment Source: Berne Union Secretariat. insurance, with much of this issuance covering obligations from private sector obligors, one could expect that losses would have caused underwriters to withdraw from the market, resulting in a reduction of market capacity. But there is no evidence that the financial crisis had that effect. A Lloyd’s underwriter commented on the continued robustness of the Pricing reported by BU members rose somewhat in market, explaining that not only were the financial the aftermath of the financial crisis in 2008. Figure crisis-related claims dealt with very efficiently, but in 3.2 shows the ratio of annual premium income addition, the private market capacity increased over to average outstanding liabilities reported by BU the period that included the crisis. members. While this remains an imprecise measure of prevailing price levels, this ratio gives a rough MIGA WIPR REPORT 2011 | 41 estimate of how premium income from new con- region is relatively small: BU members’ liabilities in tracts compares to income under expiring contracts. Egypt, Libya, Tunisia, Syria, and Yemen account for The ratio was at its lowest level at 0.56 percent in only about 5 percent of global outstanding insurance 2007, before it increased to 0.7 percent in 2009 as contracts (also see figure 3.7). new contracts were booked at proportionally higher premium rates. In 2010, the premium level stabilized In terms of capacity, the PRI industry appears to be at 0.58 percent. well positioned to respond to the ongoing rise in demand for PRI. Arthur J. Gallagher & Co. brokers estimate in their July 2011 market update54 that capacity in the private market has increased by Figure 3.3 Available Private Market almost 25 percent since July 2010 (see figure 3.3). PRI Capacity Lloyd’s capacity also increased, though by a smaller degree—8 percent. According to market reports, $ million Figure 3.3 single providers have tended to increase available line sizes and tenors, indicating that the industry continues to have solid risk appetite—contrary to the apparent general increase in risk aversion among international investors. Overall, the increase in 1,200 insurance capacity reported in July 2011 continues a long-term trend. The 2009 exit of a major player in 1,000 the industry, Chubb Insurance—which at the time accounted for the reduction in capacity in 2010—has been more than compensated over the past year by 800 expanded capacity of remaining members and some new participants. 600 400 The PRI Cycle and the General 200 Insurance Market 0 The persistence of the soft PRI market is not an Sept 01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 isolated phenomenon. Market conditions in the broader general insurance market are equally soft and liquid. Insurance broker Marsh notes that in Private insurers the first half of 2011, the multinational insurance Lloyd's market continued to experience softening across some global property and all international casualty Source: Arthur J. Gallagher & Co. segments. Indeed, the commercial side of the PRI industry appears to closely mirror the conditions of the general insurance market. To the extent that PRI is often managed as a specialty line by general insurance companies, liquidity and pricing cor- relate with the general insurance market. As the PRI Brokers report that the Arab Spring so far has portfolio is dwarfed by that of general insurance, produced a relatively small number of claims in the the PRI supply cycle is not idiosyncratic, but closely investment insurance segment of the market. Trade follows trends in the general insurance cycle. credit losses did arise in several MENA countries, but risk exposure in the region has traditionally been Figure 3.4 illustrates how PRI market capacity and small. Several brokers report a large number of trade general insurance pricing have trended together over credit claims in Libya and estimate that total losses the past 10 years. There are several ways to measure resulting from the Libyan conflict could amount to the softness of the insurance market, including $300-500 million. However, so far it appears that insurance pricing indexes or the available amount most of those potential claims have not translated of policy holder surplus. The chart tracks capacity in into losses for insurers. PRI exposure in the MENA the PRI market since 2001 against Advisen insurance 42 | MIGA WIPR REPORT 2011 consultants’ ADVx Composite Index of general on a scale exceeding those of September 11, 2001, insurance pricing (a pricing benchmark utilized in but failed to lead to a new hardening of the market. the insurance industry). The Advisen index shows the Buoyant investment yields and liquid financial change in average pricing in various commercial lines markets allowed insurers to weather losses. in the United States since 2001. The insurance cycle is driven by a myriad of factors, but eventually, as in other markets, it is subject to the laws of supply and demand. Insurance Figure 3.4 General Insurance supply is determined by insurers’ capital position, Pricing vs. Private PRI Capacity which in turn depends on liquidity and pricing in Figure 3.4 the reinsurance market and the investment-yield $ million and index for 2001=100 environment. When investment income is high, insurance companies tend to engage in “cash-flow underwriting��? (as opposed to “technical under- writing��? where pricing follows actuarial measures of 1,000 170 risk), by lowering underwriting standards and cutting 155 premium rates to compete for new policyholders. 800 140 The current soft insurance market has persisted 125 throughout the crisis. Despite the temporary rise in 600 110 claims in the aftermath of the global financial crisis, 95 premium levels have steadily declined and capacity 400 80 has increased in both the general insurance and PRI 65 market. Benign insurance market conditions held 200 50 up despite the unfavorable environment in financial 45 markets. 0 40 01 02 03 04 05 06 07 08 09 10 11 Interest rates and investment yields have remained low, but insurance capacity is still plentiful. In Private insurers contrast with PRI, the real demand for general Lloyd’s insurance has remained sluggish as high-income economies are recovering slowly from the 2008 ADVx Composite Index recession. Industry capitalization, or aggregate “poli- cyholders’ surplus��? (the difference between insurers’ Source: Arthur J. Gallagher & Co., assets and liabilities), continued to grow, fueling Advisen competition and downward pressure on premium rates. Leverage ratios—such as annual premiums to surplus or loss reserves to surplus—are at record lows, and serve as rough indications of the amount of risk each dollar of surplus is supporting.55 General insurance pricing in the United States peaked in 2003, largely as a result of low investment income According to the Insurance Information Institute (III), and insurers’ need to replenish capital after the property/casualty policyholders’ surplus in the United payouts associated with catastrophe losses related States increased to $564.7 billion in March 2011, up to September 11, 2001. At the time, the industry from $556.9 billion in December 2010. As the III says, came from a distinctly soft period in the market that “to the extent these leverage ratios provide insight had developed during the stock market boom of the into insurers’ capacity utilization and the potential 1990s. September 11, 2001 brought the largest catas- supply of insurance, they help explain why some trophe losses in the industry’s history and, coupled commercial insurance markets have remained ‘soft’ with the economic downturn, led to a tightening of for so long.��?56 market conditions. However, the relationship between loss events and the insurance cycle is not always Another driver of primary insurance pricing is linear and also depends on the level of accumulated capacity and pricing in the reinsurance market. reserves and investment income. For example, in How much insurance providers in any business 2005 Hurricane Katrina resulted in catastrophe losses segment are willing (and able) to underwrite is largely MIGA WIPR REPORT 2011 | 43 determined by the availability of reinsurance. While of continued sluggish growth in the developed reinsurance capacity contracted slightly during the countries materialize, interest rates and investment first quarter of 2011, catastrophe losses, particularly income will likely remain subdued for some time. in the Pacific region, failed to translate into higher On the other hand, lower economic activity will also primary insurance rates.57 According a report from reduce the real demand for insurance services. Aon Benfield brokers, reinsurance market capacity is also strong despite the large losses accruing Advisen’s RIMS Benchmark Survey shows that from the December 2010 Queensland floods in renewal premium rates in the property insurance Australia, the February 2011 Christchurch earthquake market continued to fall in 2011, though the in New Zealand, and the March 2011 tsunami and softening trend appeared to be bottoming out by the earthquake in Japan. end of the second quarter.58 Marsh brokers reported continued pricing reductions, but that the trend had It is unclear how long the current soft state of the appeared to stabilize as a result of high catastrophe global insurance market will persist. If the predictions losses and declining investment income. So far, the Box 3.3 Political Risk Insurance and Its Benefits PRI captures most, but not all, non-commercial risks. It covers political events, including the direct and indirect actions of host governments that negatively impact investments and for which the investor is not compensated. This report focuses on investment insurance. In addition to providing compensatory value in the event of claims, PRI can help investors access finance and, in some cases, on better terms, increasing the tenors and size of available loans. Investors are often required to get this insurance in order to obtain financing from banks. For lenders, PRI can provide regulatory relief from country-risk provisioning requirements. When provided by multilateral and large national insurers, PRI can also help deter harmful actions by host governments, help resolve investment disputes, and provide access to best practices in environmental and social standards. Motivations driving the public and private segments of the market are fundamentally dif- ferent, which is partly reflected in the cover they are able to provide. National PRI providers have strict mandates from their authorities to serve constituent interests and are also bound by foreign policy considerations. Multilateral providers ensure that their activities are con- sistent with broad developmental goals. Private providers, are motivated by the need to make profit. As a result, national and multilateral providers are usually able to offer longer tenors and higher capacity than private insurers, but private providers can be more responsive to customer needs for product variations or complementary products. The following are the political risks commonly insured by the PRI industry. There are dif- ferences in the terminology and definitions used by the various insurers, particularly between the public and private insurers. Expropriation PRI protects against losses caused by host government actions that may reduce or eliminate ownership or control. It covers outright confiscations, expropriations, and nationalizations, as well as losses resulting from a series of acts that over time have an expropriatory effect. 44 | MIGA WIPR REPORT 2011 industry has been able to weather the 2011 catas- business lines, the PRI supply cycle depends dispro- trophe losses without a noticeable effect on primary portionately more on events such as natural disasters insurance premium rates. However, more catas- than on political events such as the Arab Spring. trophe losses could potentially reverse the declining pricing trend and cause markets to harden across insurance business lines, including PRI. Product Innovation and The risk appetite, pricing, and capacity of PRI pro- Regulatory Takings viders will depend as much on loss events outside the narrow PRI industry as on financial losses from, While outright nationalization of foreign investments much less the occurrence of, significant political today is less frequent than in the 1960s and 1970s, events. To the extent that large catastrophe losses a more subtle form of governmental interference, directly influence reinsurance availability and often “regulatory takings,��? has come to the fore of investor require private insurers to deploy capital across concerns since the mid-1990s. Regulatory takings Currency Inconvertibility and Transfer Restrictions PRI protects against losses arising from an investor’s inability to convert local currency into foreign exchange and to transfer it out of the host country. It also covers excessive delays in acquiring foreign exchange. Typically, this coverage applies to the interruption of interest payments or repatriation of capital or dividends resulting from currency restrictions. It does not cover devaluation risk. Political Violence (War, Terrorism, and Civil Disturbance) PRI protects against losses resulting from the damage of tangible assets or business inter- ruption caused by war, insurrection, rebellion, revolution, civil war, vandalism, sabotage, civil disturbance, strikes, riots, and terrorism. Coverage usually applies to politically motivated acts. Certain insurers offer terrorism coverage on a stand-alone basis to supplement property insurance policies, which have largely excluded terrorism as a peril since September 11, 2001. Terrorism insurance increasingly offers cover against broader political violence risks. Breach of Contract/Arbitration Award Default PRI protects against losses arising from a host government’s breach or repudiation of a contractual agreement with an investor. Claims are usually payable only after an investor has invoked a dispute resolution mechanism (such as arbitration), has obtained an award for damages, and the host government has failed to honor the award. Non-honoring of Sovereign Financial Obligations PRI 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 that otherwise meets an insurer’s requirements. It does not require the investor to obtain an arbitral award. This coverage is usually applicable in situations when a sovereign’s financial payment obligation is unconditional and not subject to defenses. Source: MIGA and market consultations. MIGA WIPR REPORT 2011 | 45 largely comprise unlawful and often discriminatory to the changing needs of the marketplace. But the sets of new regulations that in effect deprive the absence of an internationally accepted legal defi- investor of ownership rights, or impair the value of nition of regulatory takings has meant that the PRI an investment to an extent that it is deemed to be industry has not been able to offer a standardized expropriated. insurance product that addresses this particular risk. Instead of developing a stand-alone product for regu- Regulatory expropriation, including “creeping��? or latory risk, some insurers have decided to broaden “indirect��? expropriation, can come in many shapes the scope of their conventional expropriation cover. and forms and includes renegotiation of concessions, changes in the terms of commercial agreements, Traditionally, expropriations have been defined in discriminatory fees or taxes, or the failure of gov- PRI policies as actions of governments that cause ernments to enforce property rights. The challenge a full cessation of operations, deprive property, or is to distinguish between legitimate and unlawful prevent the control of funds. PRI policies typically actions. Renegotiations of large infrastructure exclude bona fide acts of governments that are non- contracts, for example, are the rule rather than discriminatory and taken in the public interest. To the exception. In a data set of one thousand infra- extend the scope of expropriation coverage some structure projects awarded in Latin America between insurers have deliberately opened the above criteria 1985 and 2000, a 2004 World Bank study estimated to a broader set of contingencies. MIGA’s contract that 30 percent of all contracts were renegotiated.59 of guarantee, for instance, defines actions of expro- priation as “any direct or indirect action or inaction, Periods of social and economic change will in one or a series of events��?, thus including almost inevitably lead to shifts in public policy. omissions by governments. “Series of events��? These shifts in policy may embrace a wide range was added to protect investors against “creeping of views, including a more statist stewardship expropriation,��? in which the cumulative effect of of national economies, a change in the level of a number of government interventions result in enforcement of property rights, greater reliance the loss of a substantial portion of the guaranteed on state-owned enterprises, or large discoveries investment.60 of natural resources. In all these circumstances it is reasonable to expect changes in the regulatory However, there are inherent limits to which the framework and its enforcement. Even if involving a traditional expropriation coverage can be extended financially negative effect on investors, such regu- to cover regulatory risk. In standard expropriation latory changes may not always be unlawful. After coverage, a claim payment gives the insurer a all, the ability to regulate sectors of the domestic right of subrogation on the indemnified assets and economy is an inherent attribute of state sover- allows the insurer to seek recovery from the expro- eignty. priating government at a later stage. In the case of regulatory takings, subrogation and recovery are To identify regulatory takings, and distinguish hard to come by as the investor often has not been between legitimate and unlawful regulatory inter- deprived of ownership rights, and the extraction of vention, both procedural and substantive character- economic value is often the motivation for regu- istics of the government intervention need exami- latory intervention in the first place. As recovery nation. These include, among other issues: (a) prospects are built into insurers’ pricing models, whether the regulation interfered with recognized a broader application of the expropriation product property rights of the investor, (b) whether the would require insurers to restructure and reprice regulation was enacted for a public purpose, was insurance policies accordingly. Moreover, the dif- non-discriminatory, followed due process, and was ficulty of defining regulatory takings further com- proportional, and (c) whether the economic impact plicates the estimation of claim frequencies for is substantial enough to warrant compensation. insurers, and would likely significantly restrict the However, there is still no single and internationally duration of contract tenors. recognized definition of regulatory takings that enables expropriatory and legitimate regulation to be distinguished on a consistent basis. Corporate Approaches to Political The PRI industry has tried to keep pace with the Risk Management changing nature of political perils, including adverse effects of regulatory changes, and adapt its products On the PRI demand side, as more firms invest in 46 | MIGA WIPR REPORT 2011 Figure 3.5 more countries around the world, their ability to Figure 3.5 Tools Used to Mitigate assess and manage political risk becomes more Political Risk in Developing important, and political risk analysis becomes an integral component of the investment location Countries process. With political risks increasing, more multina- tional investors are putting in place political risk man- Percent of respondents Joint venture Invest gradually agement processes. Such processes are quite diverse, Risk analysis ranging from monitoring political developments to Consultants applying contractual risk-mitigation tools such as Scenario planning PRI. As awareness of potentially significant losses Engagement with host gov’t arising from political events has grown over time, Relationships with political leaders Engagement with local communities more companies are asking corporate risk officers to Political risk insurance manage these risks. As described above, real demand Engagement with NGOs for PRI is driven by a combination of increasing FDI Operational hedging flows, greater risk aversion including awareness of CDS political risk, and increasing sophistication of risk- Support to political figure No tools or products management processes. 0 10 20 30 40 50 60 PRI is by no means the most widespread form of political risk mitigation. Most of the firms responding to the MIGA-EIU surveys address political risks through concluding joint ventures with domestic partners, exercising caution by implementing investment plans gradually, and performing political risk analysis and monitoring developments (figure 3.5). Only one in five firms surveyed in 2011 used investment insurance to mitigate political risk, a proportion that has not changed from last year. The use of PRI also varies by sector. Of the firms MIGA surveyed in the primary and utilities sectors, 28 percent and 27 percent respectively reported using PRI as a tool to mitigate political risk. In the financial services sector, 25 percent of the firms surveyed reported using PRI, followed by manufacturing (21 percent) and non-financial services (12 percent). The perceived usefulness of risk-mitigation tools also varies significantly by type of political risk (figure 3.6). For example, informal risk mitigation through engagement with key political figures or local com- munities remains the most prevalent approach used by foreign investors to mitigate expropriation. In the case of political violence, many investors seem to believe that no risk-mitigation tool can effectively alleviate this risk, despite the fact that PRI is a viable and available option. PRI was not perceived to be an effective tool for mitigating regulatory risk, which investors cited as the risk of most concern in this year’s survey—and the one that is rarely eligible for investment guarantee coverage. MIGA WIPR REPORT 2011 | 47 Figure 3.6 Most Effective Tools informal risk-mitigation tools also begs the question Figure 3.6 Mitigate Political Risk in Used to of the extent to which firms might be exhibiting a degree of overconfidence in addressing political risk, Developing Countries by Type of for relationships with key political leaders are an Risk effective risk-mitigation tool only so long as those leaders are in power. PRI, on the other hand, can Percent of respondents be a very effective tool to hedge against cataclysmic and unexpected risk events such as the Arab Spring. This is not to say that contractual risk mitigation through PRI should be the only instrument used by Transfer and MNEs to manage political risk. Instead PRI should convertibility restrictions be regarded by MNEs as a supplement to a broader Breach of contract strategy of engagement with the host country society, including contacts with civil society groups Non-honoring of or local business alliances. Furthermore, in periods gov’t guarantees of profound uncertainty and rapid change, PRI can Expropriation/ nationalization give comfort to investors who simply lack sufficient confidence in an institutional environment, even Adverse regulatory when economic fundamentals appear to be sound. changes War The perception of expropriation risk discussed Terrorism in Chapter Two is a case in point. As the chapter shows, there is a sizeable disconnect between risk Civil disturbance perceptions of investors and PRI underwriters over Other the likelihood of expropriation in different types of political regimes. In preparation for this report, 0 20 40 60 80 100 MIGA conducted discussions with the private market about underwriting practices in different Engage with local public entities regime type environments. Broadly speaking, most Joint venture with local enterprises PRI insurers agree that there is a higher propensity Risk analysis/monitor for non-democratic regimes to follow through with Relationships with key political leaders expropriations, and that lower recovery prospects Political risk insurance are directly priced in risk assessment methods. Risk is not significant for my projects No existing tool can alleviate this risk Since a pay-out on a PRI contract arises from a gov- ernmental action that changed pre-existing rights (for Source: MIGA-EIU Political example, over ownership, management, or control Risk Survey 2011. of assets), most recoveries are focused on claiming a breach of existing of rights and asking the gov- ernment for compensation. In the experience of PRI providers, this process is most likely to be successful in countries with judicial redress and where multiple actors can be appealed to in order to right the wrong. Despite the longer-term trend of an increasing real Such regimes tend to be democratic. demand for PRI, a majority of risk managers are still either agnostic as to how political risk can be Like investors, the private market is also concerned mitigated most effectively, or prefer informal miti- about the risk of policy discontinuity arising from gov- gation methods—that is, risk assessments and ernmental changes—even in democratic regimes. In relationships with key political leaders. Most likely, addition, the most significant risk for insurers relates this is because the value of political risk protection to the existing exposure and, in case of a turn for the is inherently difficult to monetize. As political risk is worse in the policy environment, the key risk factors hard to quantify in terms of probability and severity that private political risk insurers look to are related ex-ante, cost-benefit calculations to determine to ease of recovery. the value of PRI are difficult. But the reliance on 48 | MIGA WIPR REPORT 2011 The MENA Region and Further, unemployment in MENA tends to fall dis- the Arab Spring proportionately on the young. Youth unemployment is twice as high as the global average, and labor Aside from the geopolitical hotspots of Iran, Iraq, force participation is especially low among Arab and the West Bank and Gaza, the MENA region has women.62 The World Bank warned in a 2009 report not traditionally been perceived by foreign investors on private sector development in the Arab World that as particularly prone to political risk. In fact, overall, an estimated 40 million jobs had to be created in many investors had perceived the region as largely the private sector over the coming decade to provide stable and predictable. This view is borne out by BU opportunities for a growing, young, and increasingly data on regional PRI issuance. New PRI business educated labor force.63 issued in MENA since 2005, scaled by FDI flows, has been broadly in line with emerging-market averages. In the years between 2007 and 2009, the trend for new PRI issuance in the region was markedly lower Figure 3.7 Ratio of new PRI to FDI than in the rest of developing economies, though for Developing Countries and PRI issuance rebounded in 2010 (see figure 3.7). PRI contracts in MENA as a share of BU members’ global MENA; PRI Exposure in Developing liability portfolios were stable at around 8 percent. Countries and MENA Figure 3.7 Most MENA countries were stable for a very long $ billion and percent time indeed. On average, political leaders of the region have been in power for more than 17 years. The former presidents of Egypt, Libya, and, Tunisia held office for 30, 42, and 24 years, respectively. 200 18 However, political stability—defined backward-looking as the longevity of a particular regime—is seldom a good predictor of prevailing structural political risk. 150 Various editions of the Arab Human Development Report, prepared by the United Nations Development 9 100 Program since 2002, argued that the region’s demo- graphic structure, labor markets, civic life, private enterprise, and income distribution had made it a 50 much less stable region than was widely believed. “The Middle East region is more complex, more fragile, and more dangerous than it has been for a 0 0 very long time. […] There are a number of growing 05 06 07 08 09 10 causes of instability and uncertainty in this region,��? the authors wrote in 2009.61 MENA PRI exposure Compared with other regions, Arab societies are World PRI exposure overwhelmingly young and urbanized. By 2005, 60 MENA ratio new PRI to FDI percent of Arabs were estimated to be younger than Developing countries ratio 25, with a median age of 22. The global average age new PRI to FDI is 28. Fifty-five percent of the Arab population was estimated to live in cities. In addition, real economic Source: Berne Union, World Bank. growth across the Arab world has been slow, often lagging behind population growth. Real per capita gross domestic product growth since 1980 was less than 0.5 percent annually. As a result, unem- ployment rates among Arab youth have been persis- tently high for many years, exceeding corresponding Anemic job creation and economic growth are unemployment rates in Latin America or Asia by a direct corollary to an underperforming private sometimes well over 10 percent. sector. Particularly in developing (non-oil exporting) MENA economies, the private sector’s contribution MIGA WIPR REPORT 2011 | 49 to domestic capital formation—a measure of under former ruler Anwar al-Sadat in 1977. Bread investments by businesses—is low by comparison: riots tipped Tunisia into turmoil as early as 1984. in some countries this contribution is more than Consequently, when bread prices soared in early 50 percent less than the world average, and cor- 2008, Egyptian newspaper columnists began to relates with lower real growth rates. Insufficient proclaim that the country was headed for a “revo- reliance on private enterprise and businesses has lution of the hungry.��? precluded some MENA economies from undergoing an effective process of economic diversification, In conclusion, a long period of political stability in including a greater reliance on outward-oriented the MENA region masked social tensions and the sectors. Consequently, MENA economies score low heightened risk of an outbreak of public discontent. in measures such as export diversification or contri- Relatively low levels of domestic private investment bution of exports to real economic growth. Indeed, should have been a sign of a difficult business by some accounts MENA economies have de-indus- environment, and combined with mounting demo- trialized since the 1970s, taking into consideration graphic and economic pressures, an indication of manufacturing as a share of GDP.64 growing political risk. Clearly, predicting the timing and outbreak of social upheavals such as the Arab Much of this private sector underperformance is due Spring will always be elusive. However, the dif- to the discretionary implementation of regulatory ficulty of predicting the occurrence of such political policies and a lack of government credibility, as events does not preclude risk analysts from paying several reports have pointed out. Firm-level survey careful attention to underlying economic, social, and findings conducted by the World Bank show that demographic factors that can point to an elevated issues related to the rule of law, property rights, level of structural political risk. PRI, whose financial and favoritism are among the top concerns of local value is difficult to quantify on the basis of probabi- business communities in many MENA countries.65 listic metrics, remains an effective hedge to protect At a micro-level, such as in firm and household-level investments in times of political change and stress. survey data, political risk in the MENA region was very much apparent. Furthermore, stagnating income levels, latent food insecurity, unemployment, and the lack of social perspectives have exacerbated a sense of political disenfranchisement and mistrust toward the public sector. Egypt experienced its first severe bread unrest 50 | MIGA WIPR REPORT 2011 endnotes MIGA WIPR REPORT 2011 | 51 Endnotes 1 17 Data on M&As and greenfield investments are Maplecroft. The Sub-National Map of the Water from the United Nations Conference on Trade and Stress Index 2011. (online at http://www.ipoliti- Development (UNCTAD), World Investment Report calrisk.com/2011/05/maplecroft-examines-water- 2011. stressed.html). 2 18 MIGA. 2010. World Investment and Political Risk UNCTAD, op. cit. 19 2010. Washington DC: World Bank. Ernst & Young in collaboration with Oxford 3 China’s State Administration of Foreign Exchange Analytica. Turn Risks and Opportunities into has recently revised FDI flows into China (and other Results. 2011. 20 items in the financial account) to better capture “Effects of Japan Disaster on Global Supply Chain reinvested earnings of foreign affiliates. Still Unknown.��? Minyanville. March 29, 2011. 4 21 UNCTAD. World Investment Report 2011. Geneva: Bill McBeath. 2011. Urgency for Supply Chain UNCTAD. Resilience: Results from ChainLink’s 2011 Supply 5 Based on the World Bank’s Harmonized List of Chain Risk Survey. 22 Fragile Situations FY12, which consists of IDA- Such as OECD Principles of Corporate Governance, eligible countries with a harmonized CPIA country OECD Convention on Combating Bribery of rating of 3.2 or less and countries with a UN and/ Foreign Public Officials in International Business or regional peace-keeping or peace building mission Transactions, United Nations Convention Against during the past three years. Corruption. 6 23 Ernst & Young. 2011 Africa Attractiveness Survey: For more information on EITI, see http://eiti.org/. 24 It’s Time for Africa. Economist Intelligence Unit and VCC. 2007. World 7 Ernst & Young. 2011 India Attractiveness Survey: Investment Prospects to 2011: Foreign Direct Reaching Towards its True Potential. Investment and the Challenge of Political Risk. New 8 For a discussion of FDI from developing York: VCC and EIU. 25 countries see Global Development Horizons 2011 This finding was also documented in MIGA’s World (Washington, DC, World Bank). Investment and Political Risk 2009 (Washington 9 Institute of World Economy and International DC, World Bank). 26 Relations of the Russian Academy of Sciences UNCTAD-OECD. 2011. The UNCTAD-OECD Report and VCC. June 23, 2011. Investment from Russia on G20 Investment Measures. 27 Stabilizes after the Global Crisis. Unless otherwise specified, the MENA region 10 Grant Thornton. Mergers and Acquisitions: Global excludes high-income countries. 28 Prospects for Growth 2011. Six thousand pri- Central Bank of Egypt. August 25, 2011. Press vately held companies across 39 economies were Release. 29 surveyed. Global Arab Network. September 15, 2011. “Tunisia: 11 Aon. Political Risk Map 2011. Industry Looking to Rebound.��? 12 30 Maplecroft. Political Risk Atlas 2011. World Bank. 2011, Investing for Growth and Jobs. 13 Belize Electricity Ltd., majority-owned by Fortis Inc. World Bank: Washington, DC. 31 (Canada). Case in courts. Central Bank of Egypt, August 2011, Monthly 14 First Quantum Minerals (Canada). Statistical Bulletin and Central Bank of Tunisia, 15 “Venezuelan Government Has Seized 988 Development of Main Flows and Balance of Companies.��? El Universal. August 29, 2011. External Payments Receipts (online: http://www.bct. 16 The Fraser Institute. Survey of Mining Companies gov.tn/bct/siteprod/english/indicateurs/paiements. 2010/2011. Vancouver, Canada: The Fraser Institute. jsp#qqind). 52 | MIGA WIPR REPORT 2011 32 43 UNCTAD, op. cit. Chris Hajzler. “Expropriation of Foreign Direct 33 Freund, C. and L. Mottaghi. 2011. Transition to Investments: Sectoral Patterns from 1993 to 2006.��? Democracy. World Bank: Washington, DC. Otago, New Zealand: University of Otago. 34 44 Farzaneh Roudi. 2011. Youth Population and M. Minor, op. cit. 45 Employment in the Middle East and North Chris Hajzler, op. cit. 46 Africa: Opportunity or Challenge? United Nations Ibid. 47 Department of Economic and Social Affairs: New This section summarizes the initial findings of a York. joint research effort by Nathan Jensen (Washington 35 The European Union has singed Association University, St. Louis) and Daniel Villar (MIGA). Agreements with these countries. Detailed findings are being prepared for an 36 “Qatar pledges $10 billion investment in Egypt.��? academic journal. 48 AFP. May 28, 2011. MIGA is not making an attempt to opine on the 37 Grant Thornton’s International Business Report validity of the underlying data of expropriations 2011 surveyed 2,697 medium to large privately and disputes. The existence of what PRI providers owned companies worldwide. For more infor- have accepted as expropriation claims and what mation, see http://www.internationalbusinessreport. a respected arbitration forum has accepted as a com/. dispute is used as a data point to determine corre- 38 Business Law Currents. August 25, 2011. “Arab lations among variables. 49 Spring Cleaning: What Regional Turmoil Has Meant Quan Li. 2009. “Democracy, Autocracy, and for Western Investment.��? Expropriation of Foreign Direct Investment.��? 39 For research that looks at the propensity to expro- Comparative Political Studies. 50 priate on the basis of regimes types, see Quan Li, UNCTAD, op. cit. 51 2009, “Democracy, Autocracy, and Expropriation of Marsh 2011 Insurance Market Midyear Update 52 Foreign Direct Investment,��? Comparative Political African Trade Insurance Agency. March 11, 2011. Studies. This work looks at pre-conditions that “Turmoil in the MENA region & Increased Risk activate the propensity to expropriate. Premiums Prompts Insurers to Strengthen Support 40 Michael Tomz and Mark Wright. 2010. “Sovereign to Exporters and Investors.��? Press release 53 Theft: Theory and Evidence about Default and ��?Rich Rush for Insurance Cover Amid Middle East Expropriation.��? In The Natural Resource Trap: Turmoil.��? The Guardian. March 5, 2011. 54 Private Investment without Public Commitment, Capacity here refers to total possible maximum ed. William Hogan and Federico Sturzenegger. USD (in millions) per risk. 55 Cambridge, MA: MIT Press. Also Nathan Jensen Verisk Analytics. June 22, 2011. “Property/Casualty and Noel P. Johnston. 2010. “Political Risk, Insurers’ Profits And Profitability Fell In First Reputation, and the Resource Curse.��? St. Louis, Quarter 2011 As Net Losses On Underwriting MO: Washington University. Ballooned.��? Press Release. 41 56 Data by S. Kobrin cited in “Expropriation of Foreign Ibid. 57 Direct Investments: Sectoral Patterns from 1993 Aon Reinsurance Market Outlook. June/July 2011. 58 to 2006,��? Chris Hajzler, University of Otago, Rims. August 11, 2011. “Soft Market May be Near Economics Discussion Paper No. 1011. Bottom, According to Latest RIMS Benchmark 42 Michael Minor. 1994. “The Demise of Expropriation Survey.��? Press Release. as an Instrument of LDC Policy: 1980-1992.��?,Journal of International Business Studies. MIGA WIPR REPORT 2011 | 53 59 62 Guasch, J.L. 2004. Granting and Renegotiating Demographic and economic data cited are all World Infrastructure Projects: Doing it Right. Washington, Bank statistics (World Development Indicators, DC: World Bank Institute. 2011). 60 63 As per MIGA’s contract of guarantee, a loss can World Bank. 2009. From Privilege to Competition also include “[depriving] the guarantee holder or – Unlocking Private-led Growth in the Middle East the project enterprise of a substantial benefit of the and North Africa. World Bank: Washington, DC. 64 guaranteed investment constituting a fundamental UNDP. 2009. Arab Human Development Report right essential to the overall financial viability of 2009. UNDP: New York. 65 the guaranteed investment and/or the project Ibid. enterprise.��? 61 UNDP. 2009. Arab Human Development Report 2009. UNDP: New York. 54 | MIGA WIPR REPORT 2011 AppendiCES MIGA WIPR REPORT 2011 | 55 Appendix 1 FDI Inflows, 2003–2010 $ billion 2003 2004 2005 2006 2007 2008 2009 2010e World 646 784 1183 1576 2341 1918 1260 1307 Developed countries 493 576 871 1,185 1,810 1,303 869 800 Developing countries 153 207 312 391 531 614 391 507 Latin America and the Carribbean 43.3 65.9 72.2 72.0 109.4 127.9 73.6 112.6 Argentina 1.65 4.12 5.27 5.54 6.47 9.73 4.01 6.34 Brazil 10.14 18.17 15.07 18.78 34.58 45.06 25.95 48.44 Chile 4.31 7.17 6.98 7.30 12.53 15.18 12.70 15.10 Colombia 1.72 3.02 10.25 6.66 9.05 10.60 7.26 6.77 Costa Rica 0.58 0.79 0.86 1.47 1.90 2.08 1.35 1.47 Dominican Republic 0.61 0.91 1.12 1.08 1.67 2.87 2.07 1.63 Jamaica 0.72 0.60 0.68 0.88 0.87 1.44 0.54 0.23 Mexico 16.59 23.82 22.34 19.78 27.31 23.17 11.42 18.68 Peru 1.34 1.60 2.58 3.47 5.49 6.92 4.76 7.33 Uruguay 0.42 0.33 0.85 1.49 1.32 2.21 1.14 1.63 Venezuela, R.B. de 2.04 1.48 2.60 (0.51) 1.01 0.35 (3.11) (1.40) East Asia and the Pacific 57.1 71.0 143.1 153.1 200.7 215.1 138.4 227.6 China 47.08 54.94 117.21 24.08 60.05 175.15 114.22 185.08 Indonesia (0.60) 1.90 8.34 4.91 6.93 9.32 4.88 13.30 Malaysia 2.47 4.62 3.97 6.08 8.45 7.38 1.61 9.51 Philippines 0.49 0.69 1.85 2.92 2.92 1.54 1.95 1.71 Thailand 5.23 5.86 8.06 9.45 11.32 8.57 5.96 6.31 Vietnam 1.45 1.61 1.95 2.40 6.70 9.58 7.60 8.00 South Asia 5.4 7.6 11.2 26.0 32.3 48.7 38.3 28.0 Bangladesh 0.27 0.45 0.81 0.70 0.65 1.01 0.67 0.97 India 4.32 5.77 7.61 20.34 25.13 41.17 34.58 24.16 Pakistan 0.53 1.12 2.20 4.27 5.59 5.44 2.39 2.02 Sri Lanka 0.23 0.23 0.27 0.48 0.60 0.75 0.40 0.48 Europe and Central Asia 23.8 41.9 51.1 92.5 132.6 158.9 86.0 84.9 Belarus 0.17 0.16 0.31 0.35 1.79 2.18 1.88 1.35 Bosnia and Herzegovina 0.38 0.71 0.61 0.77 2.07 0.92 0.23 0.07 Bulgaria 2.10 2.66 4.31 7.76 13.21 9.94 4.49 2.17 Kazakhstan 2.09 4.16 1.97 6.28 11.12 15.78 12.60 9.96 Romania 1.84 6.44 6.48 11.39 9.93 13.88 6.31 3.45 Russian Federation 7.96 15.44 12.89 29.70 55.07 75.00 37.13 42.87 Turkey 1.70 2.79 10.03 20.19 22.05 18.27 7.96 9.28 Ukraine 1.42 1.72 7.81 5.60 9.89 10.91 4.82 6.50 56 | MIGA WIPR REPORT 2011 Appendix 1 FDI Inflows, 2003–2010 (cont’d) $ billion 2003 2004 2005 2006 2007 2008 2009 2010e Middle East and 10.0 9.7 16.8 27.2 27.6 29.3 24.4 22.7 North Africa Algeria 0.63 0.88 1.08 1.80 1.66 2.65 2.85 2.29 Egypt, Arab Rep. 0.24 1.25 5.38 10.04 11.58 9.49 6.71 6.39 Iran, Islamic Rep. 2.70 2.86 3.14 1.65 1.67 1.62 3.02 3.62 Jordan 0.55 0.94 1.98 3.54 2.62 2.83 2.38 1.70 Lebanon 2.86 1.90 2.62 2.67 3.38 4.33 4.80 4.95 Morocco 2.31 0.79 1.62 2.37 2.81 2.47 1.33 1.24 Syrian Arab Republic 0.16 0.28 0.50 0.66 1.24 1.47 1.43 1.38 Tunisia 0.59 0.64 0.72 3.27 1.53 2.64 1.60 1.40 Sub-Saharan Africa 13.3 11.0 18.0 20.2 28.5 34.5 30.4 31.1 Angola 3.50 1.45 (1.30) (0.04) (0.89) 1.68 2.21 2.05 Botswana 0.42 0.39 0.28 0.49 0.65 0.11 0.23 0.53 Congo, Dem. Rep. 0.39 0.41 .. 0.26 1.81 1.73 0.95 2.96 Congo, Rep. 0.32 (0.01) 0.51 1.49 2.64 2.48 2.08 2.82 Ghana 0.14 0.14 0.14 0.64 0.97 2.11 1.68 2.53 Liberia 0.37 0.08 0.08 0.11 0.13 0.14 0.38 0.45 Madagascar 0.01 0.05 0.09 0.29 0.78 1.11 1.38 0.86 Mauritius 0.06 0.01 0.04 0.11 0.34 0.38 0.26 0.43 Mozambique 0.34 0.24 0.11 0.15 0.43 0.59 0.88 0.79 Niger 0.01 0.03 0.04 0.05 0.13 0.57 0.74 0.74 Nigeria 2.01 1.87 4.98 8.82 6.03 4.88 5.79 6.05 Seychelles 0.06 0.04 0.09 0.15 0.25 0.24 0.25 0.37 South Africa 0.78 0.70 6.52 (0.18) 5.74 9.64 5.63 1.57 Sudan 1.35 1.51 2.30 3.53 2.43 2.60 2.92 2.89 Swaziland (0.06) 0.07 (0.05) 0.12 0.04 0.11 0.07 0.09 Uganda 0.20 0.30 0.38 0.64 0.79 0.73 0.60 0.82 Zambia 0.35 0.36 0.36 0.62 1.32 0.94 0.70 1.04 Source: World Bank. Note: Figures in parentheses represent negative numbers; e=estimate. MIGA WIPR REPORT 2011 | 57 Appendix 2 MIGA-EIU Political Risk Survey 2011 The data provided herein are based on a survey conducted on behalf of MIGA by the Economist Intelligence Unit. The survey, which was carried out in June/July 2011, contains the responses of 316 senior executives from multinational enterprises annex 2 FIGURE investing in developing A2.1 What countries. is your industry Eighteen percent of the respondents in the 2011 sector? survey also participated in the MIGA-EIU Political Risk Surveys of 2009 and 2010. Quota sampling was used to ensure that the industry and geographic composition of the survey sample approximates the composition of actual FDI outflows to developing countries: following a first round of responses to the questionnaire, addi- tional email campaigns targeting respondents in specific industries or geographic locations were conducted until all demographic quotas were met. For some questions, percentages add up to more than 100 percent because of multiple selections. Figure A2.1 What is your industry sector? Percent of respondents Services Manufacturing annex 2 FIGURE A2.2 What are your organisation’s global annual revenues? Finance sector Primary Utilities, transport, storage, and communications 0 20 40 Figure A2.2 What are your organization’s global annual revenues? Percent of respondents $500 million or less $500 which to annex 2 FIGURE A2.3 In million $1 billion region is your company headquarters located?$1 billion to $5 billion $5 billion to $10 billion $10 billion or more 0 20 40 60 Figure A2.3 In which region is your company headquarters located? Number of respondents Western Europe North America Asia and the Pacific Middle East and Africa Latin America Eastern Europe 0 20 40 60 58 | MIGA WIPR REPORT 2011 annex 2 QUESTION 1. In which developing countries is your firm presently investing? Select all that apply. . Question 1. In which developing countries is your firm presently investing? Percent of respondents China India Brazil Russian Federation Mexico Argentina South Africa Turkey Indonesia Malaysia Chile Vietnam Philippines Saudi Arabia Thailand Other Egypt, Arab Rep. Romania Ukraine Colombia Peru Pakistan Nigeria Kazakhstan Morocco Bahrain Bangladesh Ghana Panama Iraq Serbia Bulgaria Algeria Costa Rica Cambodia Oman Tanzania Angola Honduras Kuwait Albania Georgia Tunisia Belarus Uruguay Dominican Republic Guatemala Jordan Lebanon Turkmenistan Bosnia and Herzegovina Uganda Congo, Dem. Rep. Congo, Rep. Lithuania El Salvador Uzbekistan Iran, Islamic Rep. Jamaica Sudan Yemen, Rep. Madagascar Zambia Armenia Montenegro Syrian Arab Republic 0 10 20 30 40 50 MIGA WIPR REPORT 2011 | 59 annex 2 QUESTION 2. How do you expect your company’s planned investments in emerging markets to Question change this2. How year do you compared expect with your last year andcompany’s over the planned investments in emerging markets next three years with the this to change compared year previous compared with last year and over three years? the next three years compared with the previous three years? Percent of respondents This year compared with last year Percent of respondents Increase substantially (20% or more) Increase moderately (more than 1% but less than 20%) Remain the same Decrease moderately (more than 1% but less than 20%) Decrease substantially (20% or more) Don’t know 0 10 20 30 40 50 Over the next three years compared with the previous three years Percent of respondents Increase substantially (20% or more) Increase moderately (more than 1% but less than 20%) Remain the same Decrease moderately (more than 1% but less than 20%) Decrease substantially (20% or more) Don’t know 0 10 20 30 40 50 60 | MIGA WIPR REPORT 2011 annex 2 QUESTON 3. What is the greatest constraint to cross-border investments in developing countries in the Question 3.next What12 months is theand in the next greatest three years? to cross-border constraint investments in developing countries in the next 12 months and in the next three years? Percent of respondents In the next 12 months Percent of respondents Access to financing Access to qualified staff Infrastructure capacity Macroeconomic instability Limited market opportunities Political risk Corruption Increased gov’t reg. in the aftermath of the global financial crisis Other 0 10 20 30 In the next three years Percent of respondents Access to financing Access to qualified staff Infrastructure capacity Macroeconomic instability Limited market opportunities Political risk Corruption Increased gov’t reg. in the aftermath of the global financial crisis Other 0 10 20 30 MIGA WIPR REPORT 2011 | 61 annex 2 QUESTON 3*. What is the great- est constraint to cross-border invest- ments in developing countries in the next 12 Question months 3a. and What is in the the next greatest three constraint to cross-border investments years? in developing countries in the next 12 months and in the next three years? Percent of respondents In the next 12 months Percent of respondents Access to financing Access to qualified staff Infrastructure capacity Macroeconomic instabilty Limited market opportunities Political risk Corruption Increased gov’t reg. in the aftermath of the global financial crisis Other 0 5 10 15 20 25 In the next three years Percent of respondents Access to financing Access to qualified staff Infrastructure capacity Macroeconomic instability Limited market opportunities Political risk Corruption Increased gov’t reg. in the aftermath of the global financial crisis Other 0 5 10 15 20 25 Note: These findings apply to 18 percent of respondents in the MIGA-EIU political risk survey 2011 who also participated in the MIGA-EIU Political Risk Surveys for 2009 and 2010. 62 | MIGA WIPR REPORT 2011 Question 3b. What is the QUESTON greatest 3*. What constraint is the to cross-border investments greatest con- in developing countries straint in the next to cross-border in in the next three years? 12 months and investments developing countries (Responses of South investors) in the next 12 months and in the next three years? (Responses of South investors) Percent of respondents In the next 12 months Percent of respondents Access to financing Access to qualified staff Infrastructure capacity Macroeconomic instabilty Limited market opportunities Political risk Corruption Increased gov’t reg. in the aftermath of the global financial crisis Other 0 5 10 15 20 25 In the next three years Percent of respondents Access to financing Access to qualified staff Infrastructure capacity Macroeconomic instability Limited market opportunities Political risk Corruption Increased gov’t reg. in the aftermath of the global financial crisis Other 0 5 10 15 20 25 MIGA WIPR REPORT 2011 | 63 of most concern to your company when investing in developing countries? Select up to three risks for each time frame. Question 4. Which types of political risk are of most concern to your company when investing in developing countries? Percent of respondents Transfer and convertibility restrictions Breach of contract Non-honoring of government guarantees Expropriation/nationalization Adverse regulatory changes War Terrorism annex 2 QUESTION 5. In the developing countries where your how company invests presently,Civil do each disturbance of the risks listed below affect your company? 0 20 40 60 80 100 In the next 12 months In the next three years Question 5. In the developing countries where your company invests presently, how do each of the risks listed below affect your company? Percent of respondents Transfer and convertibility restrictions Breach of contract Non-honoring of gov’t guarantees Expropriation/nationalization Adverse regulatory changes War Terrorism Civil disturbance 0 20 40 60 80 100 1 (Very high impact) 2 3 4 5 (No impact) 64 | MIGA WIPR REPORT 2011 annex 2 QUESTION 6. In the past three years has your company experienced financial losses caused by any of the following risks? Question 6. In the past three years has your company experienced financial losses caused by any of the following risks? Percent of respondents Breach of contract Adverse regulatory changes Civil disturbance Transfer and convertibility restrictions Non-honoring of government guarantees Expropriation/nationalization Terrorism War 0 any of annex 2 QUESTION 7. To your knowledge, have the following 20 40 60 caused80 risks 100 your company to withdraw an existing investment or cancel planned investments over the past 12 months? Select one answer for each risk. Question 7. To your knowledge, have any of the following risks caused your company to withdraw an existing investment or cancel planned investments over the past 12 months? Percent of respondents Transfer and convertibility restrictions Breach of contract Non-honoring of government guarantees Expropriation/nationalisation Adverse regulatory changes War Terrorism Civil disturbance 0 20 40 60 80 100 Withdraw existing investment Cancel planned investments Both withdraw and cancel Neither withdraw nor cancel Don’t know MIGA WIPR REPORT 2011 | 65 annex 2 QUESTION 8. What tools or mechanisms does your company use to mitigate political risk when investing in developing countries? Question 8. What tools or mechanisms does your company use to mitigate political risk when investing in developing countries? Percent of respondents Use of joint venture or alliance with local company Invested gradually while developing familiarity with the local environment Political/economic risk analysis Use of third-party consultants Scenario planning Engagement with government in host country Develop close relationships with political leaders Engagement with local communities Political risk insurance Engagement with non-governmental organizations Operational hedging (eg, setting up multiple plants to spread risk) Credit default swaps Provide support to a well-connected political figure We don’t use any tools or products to mitigate political risk Other Don’t know 0 20 40 60 80 66 | MIGA WIPR REPORT 2011 annex 2 QUESTION 9. In your opinion, in the countries where your company invests, what are the most effective tools or mechanisms available to your firm for alleviating each of the following risks? Select one tool for each risk. Question 9. In your opinion, in the countries where your company invests, what are the most effective tools or mechanisms available to your firm for alleviating each of the following risks? Percent of respondents Transfer and convertibility restrictions Breach of contract Non-honoring of government guarantees Expropriation/nationalization Adverse regulatory changes War Terrorism Civil disturbance Other 0 20 40 60 80 100 Engage with local public entities Joint venture with local enterprises Risk analysis/monitor Relationships with key political leaders Political risk insurance Risk is not significant for my projects No existing tool can alleviate this risk MIGA WIPR REPORT 2011 | 67 Question 10. How has the recent turmoil in the Arab World affected your for investments plansannex in the 2 QUESTION 10. How Middle has the East and recent turmoil North in the Africa Arab World (MENA) affected region? your plans for invest- Select that all in ments apply. the Middle East and North Africa (MENA) region? Select all that apply. . Percent of respondents My organization has withdrawn from existing investments My organization has canceled plans for future investment My organization is reconsidering its investments in the MENA region My organization has placed current plans on hold My organization has not changed its plans My organization has considered new investment in the MENA region My organization has increased its investment in the MENA region Not applicable: my organization had no plans to invest in this region 0 20 40 60 68 | MIGA WIPR REPORT 2011 annex 2 QUESTION 11. How has the recent turmoil in the Arab World affected your perception of the following types of political risk in the MENA region? Select one. answer for each type of risk. Question 11. How has the recent turmoil in the Arab World affected your perception of the following types of political risk in the MENA region? Percent of respondent Transfer and convertibility restrictions Breach of contract Non-honoring of government guarantees Expropriation/nationalization Adverse regulatory changes War Terrorism Civil disturbance 0 20 40 60 80 100 Major increase Minor increase No impact Minor decrease Major decrease Don’t know MIGA WIPR REPORT 2011 | 69 annex 2 QUESTION 12. How would the following affect your decision to invest in the MENA region? Select one for each factor. Question 12. How would the following affect your decision to invest in the MENA region? Select one for each factor. Percent of respondents A year of stability under a democratic gov’t A year of minor instability under a democratic gov’t A year of significant instability under a democratic gov’t A year of stability under a non-democratic gov’t A year of minor instability under a non-democratic gov’t A year of significant instability under a non-democratic gov’t Significant and continued instability 0 20 40 60 80 100 Major increase in investment Minor increase in investment No change Minor decrease in investment Major decrease in investment Don’t know / Not applicable 70 | MIGA WIPR REPORT 2011 Question 13. How has the recent turmoil in the Arab World affected your annex 2 QUESTION 13. How has the recent turmoil in the Arab World affected your plans for invest- plans for investments in emerging markets outside MENA? ments in emerging markets outside MENA? Select all that apply. Percent of respondents My organization has withdrawn from existing investments in emerging markets My organization has canceled plans for future investment in emerging markets My organization is reconsidering its investments in emerging markets My organization has placed current plans on hold in emerging markets My organization has not changed its plans in emerging markets My organization has considered new investment in emerging markets My organization is actively seeking new investment in emerging markets My organization had no plans to invest outside of the MENA region 0 20 40 60 80 100 MIGA WIPR REPORT 2011 | 71 annex 2 QUESTION 14. In your opinion, which of the following is the most likely to be actively Question 14. involved with In an your opinion, which of the following is the most likely to expropriation? be actively involved with an expropriation? Percent of respondents Head of government (President, Prime Minister, etc.) National agencies or bureaucracies National legislature State or provincial governors State or provincial bureaucracies State or provincial legislatures State-owned companies Don’t know Other 0 20 40 72 | MIGA WIPR REPORT 2011 Question 15. Disputes can arise between foreign investors and government agencies. When these arise in countries where your organization is how2do investing, annex you view QUESTION the relationship 15. Disputes between can arise between these agencies foreign investors and agencies. When and government these arise in other government entities?countries where your organisation is investing, how do you view the relationship between these agencies and other government entities? Percent of respondents Agencies act independently Agencies act on behalf of the national executive (President, Prime Minister, etc.) Agencies act on behalf of the national legislature Agencies act on behalf of state or provincial executive officials Agencies act on behalf of state or provincial legislatures Don’t know 0 20 40 60 80 100 MIGA WIPR REPORT 2011 | 73 annex 2 QUESTION 16. Many countries with non-democratic governments have elected legislatures. In your opinion, how do such legislatures affect the following kinds of risk? Question 16. Many countries with non-democratic governments have elected legislatures. In your opinion, how do such legislatures affect the following kinds of risk? Percent of respondents Transfer and convertibility restrictions Breach of contract Non-honoring of government guarantees Expropriation/nationalization Adverse regulatory changes War Terrorism Civil disturbance 0 20 40 60 80 100 Major increase Minor increase No impact Minor decrease Major decrease Don’t know 74 | MIGA WIPR REPORT 2011 annex 2 QUESTION 17. How would the following structural market conditions affect your business’s risk of expropriation? Select one answer for each condi- Question tion. 17. How would the following structural market conditions affect your business’s risk of expropriation? Percent of respondents The country is undergoing IMF or World Bank programs The country is dependent on foreign aid The country is rich in natural resources The country is poor in natural resources The country’s economy is heavily involved in international trade The country’s economy has little involvement in international trade The market price of your product rises sharply The market price of your product falls sharply 0 20 40 60 80 100 Major increase Minor increase No impact Minor decrease Major decrease Don’t know MIGA WIPR REPORT 2011 | 75 annex 2 QUESTION 18. How would the following political factors affect your business’s risk of expropriation? Select one answer for each factor. Question 18. How would the following political factors affect your busi- ness’s risk of expropriation? Percent of respondents Long established democracy Long established non-democratic gov’t Legacy of stability Legacy of instability Federal system of government Strongly centralized government History of transparency History of corruption 0 20 40 60 80 100 Major increase Minor increase No impact Minor decrease Major decrease Don’t know 76 | MIGA WIPR REPORT 2011 annex 2 QUESTION 19. How would the following events affect your business’s risk of expropriation? Select one answer for each event. Question 19. How would the following events affect your business’s risk of expropriation? Percent of respondents A financial crisis A recession A shift toward a left-wing government A shift toward a right-wing government A shift toward a populist government Signing a bilateral investment treaty An uncompensated expropriation of another company by the gov’t A compensated expropriation of another company by the gov’t A shift to democratic government A shift to non-democratic government 0 20 40 60 80 100 Major increase Minor increase No impact Minor decrease Major decrease Don’t know MIGA WIPR REPORT 2011 | 77 Appendix 3 Lloyd’s Syndicates Lloyd’s Syndicate Members Company ACE Global Markets Kiln Amlin Liberty Syn. Mgmt. Ark O’Farrell Ascot Marketform Aspen MAP Beazley Novae Catlin Starr PFR Consortium Chaucer Pembroke Hardy QBE Hiscox Talbot 78 | MIGA WIPR REPORT 2011 Appendix 4 Berne Union and Prague Club Members Berne Union Members Year Year Company Country Company Country joined joined ASEI Indonesia 1999 Private ASHRA Israel 1958 ATRADIUSa Netherlands 1953 CESCE Spain 1972 CGIC South Africa 1958 ECGC India 1957 CHARTIS United States 1999 ECGD United Kingdom 1934 COFACEa France 1948 ECIC SA South Africa 2004 COSECa Portugal 1977 EDC Canada 1947 ECICS Singapore 1979 EFIC Australia 1957 a Germany 1953 EH GERMANY EGAP Czech Republic 1996 FCIA United States 1963 EKF Denmark 1997 HISCOX Bermuda 2008 EKN Sweden 1947 OEKBa Austria 1955 EXIMBANKA SR Slovak Republic 2004 a Germany 1974 PWC EXIM J Jamaica 1983 a Brazil 2001 SBCE FINNVERA Finland 1964 SOVEREIGN Bermuda 2001 GIEK Norway 1951 Hong Kong SAR, ZURICH United States 2001 HKEC 1969 China KSURE Korea, Rep. of 1977 KUKE Poland 1999 Multilateral MEXIM Malaysia 1985 ICIEC Multilateral 2007 MEHIB Hungry 2000 MIGA Multilateral 1992 NEXI Japan 1970 ONDD Belgium 1954 OPIC United States 1974 SACE Italy 1959 SERV Switzerland 1956 SID Slovenia 1998 SINOSURE China 1996 SLECIC Sri Lanka 1984 TEBC Taiwan, China 1996 a Some medium- or long-term export credit insurance or investment insurance or both THAI EXIMBANK Thailand 2003 provided on account of the state. TURK EXIMBANK Turkey 1992 US EXIMBANK United States 1962 MIGA WIPR REPORT 2011 | 79 Appendix 4 Berne Union and Prague Club Members (cont’d) Prague Club members Year Year Company Country Company Country joined joined Public Private AOFI Serbia 2007 LCI Lebanon 2009 BAEZ Bulgaria 1997 BECI Botswana 2005 Multilateral ECGA Oman 2000 ATI Multilateral 2002 ECGE Egypt, Arab 2003 Rep. DHAMAN Multilateral 2000 ECIC SA South Africa 2002 ICIEC Multilateral 2001 ECIE United Arab 2009 Emirates EGAP Czech Republic 1993 EGFI Iran, Islamic 1999 Rep. of EXIM R Romania 1993 EXIMBANKA SR Slovak Republic 1993 EXIMGARANT Belarus 1999 HBOR Croatia 1997 IGA Bosnia and 1999 Herzegovina JLGC Jordan 2001 KECIC Kazakhstan 2004 KREDEX Estonia 1999 KUKE Poland 1993 MBDP Macedonia, FYR 1999 MEHIB Hungary 1993 NAIFE Sudan 2007 NZECO New Zealand 2010 PHILEXIM Philippines 1997 SEP Saudi Arabia 2000 SID Slovenia 1993 THAI EXIMBANK Thailand 1997 UKREXIMBANK Ukraine 2008 UZBEKINVEST Uzbekistan 1996 VNESHECONOMBANK Russian 2008 Federation 80 | MIGA WIPR REPORT 2011 Multilateral Investment Guarantee Agency World Bank Group 1818 H Street, NW Washington, DC 20433 USA t. 202.458.2538 f. 202.522.0316 www.miga.org/wipr