MIGA, World Bank Group Mitigating Political Risks

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MIGA, World Bank GroupMitigating Political Risks

• October 2009

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MIGA Our Role and Priorities
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MIGA . A member of the World Bank Group
1944 IBRD International Bank for Reconstruction
and Development
1960 IDA International Development Agency
1956 IFC International Finance Corporation
1966 ICSID International Center for the
Settlement of Investment Disputes
1988 MIGA Multilateral Investment Guarantee
Agency
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What we do

• MIGA promotes foreign direct investment by
  providing
• Noncommercial risk insurance (guarantees) for
  investors and lenders
• Online information on investment opportunities
  and operating conditions in developing countries
  (fdi.net, pri-center.com)

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Our development priorities

• Focusing on sustainable development
• Opening up difficult or frontier markets,
  especially in conflict-affected countries
• Supporting investments in Africa and the worlds
  poorest countries
• Supporting infrastructure projects (including
  sub-sovereign risk)
• Promoting cross-border investments between
  developing countries

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Guarantee Program
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MIGAs political risk insurance coverage

• Currency transfer restriction and
  inconvertibility cover protects against losses
  arising from
• inability to convert local currency into forex
  for transfer outside the host country
• inability to transfer/excessive delays in
  acquiring forex (currency depreciation not
  covered)
• War and civil disturbance cover protects against
  losses arising from
• damage/disappearance of tangible assets due to
  war or civil disturbance (including revolution,
  insurrection, coups d'état, sabotage, and
  terrorism)
• prolonged business interruption/short term
  Business Interruption
• Expropriation cover protects against losses
  arising from
• nationalization and confiscation
• creeping expropriation, partial expropriation
  (limited coverage)
• non-discriminatory measures may not be covered

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MIGAs political risk insurance coverage

• Breach of contract cover protects against
  government (including sub-sovereign) actions
  resulting in
• breach or repudiation of an agreement with the
  investor and non-enforcement of an arbitration
  award
• May include Denial of Justice/Arbitration
  Frustration
• Non Honoring of Sovereign Guarantee protects
  against non payment of unconditional and
  irrevocable financial guarantees issued by the
  Government for a specific project (does not
  require arbitration

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Needs for PRI coverage

• Regulatory/policy risk
• Regulatory frameworks are in many cases not
  implemented or untested
• Independence of regulator
• Role of creeping expropriation relating to
  regulatory pronouncements
• Breach of contract
• Offtakers status as sovereign, regulator or
  privatized company
• Sub-sovereign risk
• Growing trend to decentralize government control
  of services such as water delivery from national
  to local authorities
• Linkage between state, local or municipal
  authorities to central government

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Eligibility requirements

• Eligible Investments
• Minimum 1 years, up to 15 years (on occasion 20
  years)
• Cross-border from one member country (developed
  or developing) into another developing member
  country
• New, or, if an existing investment, must be
  associated with an expansion, modernization or a
  financial restructuring
• Investment types
• Equity
• Shareholder loans
• Loan guaranties
• Non-shareholder loans (i.e. loans from financial
  institutions)
• Non-equity direct investment
• Amounts and Coverage
• MIGA typically can arrange cover for all amounts,
  either on its own books or through co/reinsurance
• No minimum amount for guarantee or size of
  investment
• Equity covered up to 90 debt up to 95 (up to
  99 is possible in some cases)

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Why investors choose MIGA

• Umbrella of deterrence
• MIGA is a member of the World Bank Group
• MIGAs shareholders are the countries who are
  also Host Countries of investments
• Only a small proportion of MIGA-supported
  projects encounter difficulties
• Facilitation of settlement of disputes
• Host Country tends to be motivated to find a
  solution, otherwise its reputation in the
  international investment community might be
  damaged
• Project sponsors and financiers have a vested
  interest in continuing success of project
• 3 claims paid out of 556 projects supported
  (Indonesia, Argentina, Nepal)
• Extensive resources and in-depth knowledge of
  emerging economies from all parts of the World
  Bank Group
• Environmental and social expertise, particularly
  for extractive industries where a companys
  reputation is at stake
• May facilitate financing
• Lower costs of borrowing
• Longer tenor of loans

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Facilitation of settlement of disputes - process

• While it is an obligation of the investor to
  inform MIGA of a potential claim, mediation is
  voluntary
• MIGA facilitates access to
• Ministry responsible for the project (e.g.
  Ministry of Energy for power projects) in
  sub-sovereign cases, MIGA will be directed to the
  relevant jurisdiction such as province, state,
  city or municipality
• MIGA will also engage with the Executive Director
  on MIGAs Board of Directors representing the
  host country involved in the dispute
• World Bank country offices are kept informed of
  the process, and, if necessary, actively engaged
• MIGA will retain contact with government
  officials at the highest level, as per its
• Due to ad hoc nature of dispute mediation, there
  is no set format or venue for meetings it is at
  the discretion of the client and government
  officials
• Investor has discretion to ask MIGA for
  assistance for voluntary MIGA facilitation OR
  alternatively, to file a formal claim

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Case Study NAM THEUN II Hydroelectric
Dam Providing two-country coverage for a large
and complex power export project.
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Providing Two-Country Coverage for a Large and
Complex Power Export project.

• US1.25 B trans-basin power plant in Lao PDR
  with transmission facilities to the Thai border
• 20-year Power Purchase Agreement with Thai
  electric utility
• Developed by EDF in partnership with state-owned
  power companies of Lao and Thailand
• Project developed with 80 debt-to-equity ratio.
  Debt arranged by 9 leading commercial banks along
  with guarantees from MIGA, PRG, ADB and ECAs

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Risk Allocation

• Risks associated with relationship between Laos
  and Thailand leveraged through contractual
  obligations of both governments
• Additional leverage created through equity
  ownership by state-owned power companies of both
  countries
• Social and environmental problems resolved
  through the involvement of the World Bank
• Laos state-owned company enabled to make its
  equity contribution by using IDA funds
• Project developed with 80 debt-to-equity ratio.
  Debt arranged by 9 leading commercial banks along
  with guarantees from MIGA, PRG, ADB and ECAs
• Some funds provided by Thai banks

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Project Structure
World Bank
ADB
EDF 1
EGGO
NTP 1
ITD
MIGA
PRG/PRI
Thai Baht Banks
US Dollar Banks
Shareholder Agreement Equity
Coverage
Export Credit Agencies
Loans
Bilateral Agencies
EIB
Nam Theun 2 Power Company
AFD
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Case StudyWest Africa Pipeline Designing Breach
of contract guarantee to address risks of Ghanas
power sector for a multicountry pipeline project
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Project

• US590 million, 678 km pipeline to transport
  natural gas from Nigeria to Ghana, Benin and
  Togo.
• Part of NEPADs action plan.
• Production and delivery risks
• Completion and operational risks
• Downstream/offtake risks

Profile
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Project Structure
PRODUCERS
MIGA 83 M
NNPC/SPBC Joint Venture
NNPC/CNL Joint Venture
200 M total PRI TERMINATION EVENTS
TRANSPORTER
NATURAL GAS FLARE
IDA, 50 M
West Africa Gas Pipeline Co.
Nigeria Gas Company
Private insurers, 83 M
Communauté Électriquedu Bénin
OFFTAKERS GAS SALES AGREEMENTS
Volta River Authority
Key customers CEB (8) and VRA (92) NNPC
Nigerian National Petroleum Corporation CNL
ChevronTexaco N-Gas Limited SPBC Shell
Overseas Holdings Limited
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MIGAs Value Added

• World Bank Group member
• Mitigates risks by providing an umbrella of
  deterrence
• Provides comfort to private sector participants.
• Customized solution Breach of contract guarantee
  designed specifically to cover offtake risk in
  Ghana
• Long tenor 20-year coverage.

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• Case Study Bolivia-Brazil Pipeline
• Covering Consequential losses of Cross Border
  Pipeline Investments

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Project
Construction and operation of a 3,150 km natural
gas pipeline from producing gas field in Santa
Cruz (Bolivia) to consumption centers in Porto
Alegre (Brazil) Total cost US 2.06 billion,
20.5 on Bolivian side, 79.5 on Brazilian side
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Project Structure
debt
US2.06 billion
equity
El Paso, US Enron, US Shell, Netherlands BHP,
Australia BG, UK Transredes, Bolivia Petrobras,
Brazil
Petrobras, Brazil
US280 million
US143 million
El Paso, US Enron, US Shell, Netherlands BHP,
Australia BG, UK Transredes, Bolivia Petrobras,
Brazil
Petrobras, Brazil Multilaterals CAF IBRD IDB EIB

US847 million
US612million
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MIGA Value Added
Expropriation coverage is provided for the total
investment of US23 million in both countries.
The coverage would include adverse actions of the
Brazilian government that may affect the project
in Bolivia and vice versa
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• Case Study Barracuda Platform
• Maximizing Capacity for Covering Leasing Facility

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Barracuda

• oil and gas in Brazil
• US3 billion financing of a deep-sea oil and gas
  production project, Barracuda
• awarded PF Latin American Oil and Gas Deal of
  the Year

Multilateral Investment Guarantee Agency WORLD
BANK GROUP
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CASE STUDYBarracuda project

• financing of two deep-sea floating production,
  storage and offloading facilities - FPSO - the
  largest project financing for Petrobras
• a precedent-setting project in the oil gas
  sector, in terms of covering the leasing of an
  asset. This financial structure can be
  replicated in other sectors
• project will produce 18 of Brazils oil
  production

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project structure
MIGA
EID/MITI
MIGA
Itochu and Mitsubishi (equity investors)
Japanese Bank for International Cooperation
BNDES
the lenders
assignment of charter/lease payments and SVPs
security package
Barracuda-Carratinga Oil Development Facility
(SVP)
Netherlands
Brazil
ownership interest
Charter/lease payments
FPSOs and auxiliary equipment, pipelines, and
hookups
assets charter and lease agreements
Petrobras
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Case Study Biothermica Biogas Improving Risk
Profile of a Carbon Finance Transaction
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Biothermica Biogas Emission Reduction Mechanism
Under the Kyoto Protocol

• Allowance-based and project-based carbon
  transactions
• Project-based transactions buyer purchases
  emission credits from a project
• Kyoto Protocol establishes mechanism of trading
  of Certified Emission Reduction (CER) credits for
  all country members
• An Executive Board created under the UN Framework
  Convention on Climate change (UNFCCC) deals with
  CER issuance and allocation
• UNFCCC validation process includes a Letter of
  Approval (LA) from the government of a country
  that signed and ratified the Kyoto Protocol
• LA allows the transfer of CERs to the projects
  sponsor or other private parties
• After the LA is in place, CERs are issued by the
  Executive Board based on a report on projects
  performance by an independent auditor

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Biothermica Biogas Concerns related to CER
delivery
For the CER market, the most important concern is
related to CER delivery risks, related to project
performance

• Measures that reduce the CER delivery risks
  include
• explicit delivery guaranties (or partial
  guaranties) from the seller
• Instruments of hedging technical risks
• options of monitoring of the CER data
• participation in operation and maintenance
• Instruments of hedging political risks such as
  political risk insurance

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Biothermica Biogas the Project
Involve capturing and flaring of methane gas
generated by a large municipal waste landfill in
El Salvador

• Reduces Greenhouse Gas emission, making the
  project eligible for the CER trading under the
  Kyoto Protocol
• Completed the validation process under the UNFCCC
  criteria for the CDM
• Government of El Salvador issued the LA to
  Biothermica Energy of Canada, who, in turn, will
  sell its rights to the CERs to a private carbon
  fund for an upfront payment of USD2 million plus
  additional payments upon CER delivery
• USD2 million will be used for equity investment
  into the Bioenergia S.A. incorporated in El
  Salvador. Biocarbon Development, a wholly-owned
  subsidiary of Biothermica Energy will perform the
  installation of equipment.

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Biothermica Biogas the Landfill

• Landfill is owned and operated by MIDES, a
  privately-owned company which as signed a 20-year
  waste disposal agreement with 10 municipalities

• Since 2002, the landfill has received 400,000
  tons/year of municipal solid waste, and is
  designed to continue at that capacity until the
  year 2026. This activity generates more than 40
  million m3/year of methane gas, which will
  increase over time to nearly 80 million m3/year

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Project Structure
USD2M Equity
USD2M financing for CERs
Canada
Biogas Right Agreement
El Salvador
Letter of Approval CERs
MIDES Private Landfill Owner
Waste Disposal Contract
Government of El Salvador
Municipalities of El Salvador
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Biothermica Biogas Risks covered by MIGA

• Administrative/regulatory decisions that may
  indirectly cause a reduction in waste quantities
  delivered to the landfill covered under
  Expropriation coverage
• Expropriation of assets
• Breach of Contract that protects against a loss
  of CERs due to withdrawal of El Salvador from the
  Kyoto Protocol
• Physical damage to the asset and,
• Inability of auditors to enter the project site
  due to politically motivated violence.

MIGA did not cover the non-renewal of Kyoto
Protocol.
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• For more information, please contact
• Elena Palei epalei_at_worldbank.org
• www.miga.org