Independent Evaluation of MIGA’s Development …Independent Evaluation of MIGA’s Development Effectiveness—2009 SKU 14136 ISBN 978-1-60244-136-7 The World Bank INDEPENDENT EVALUATION

ENHANCING MIGA’s RISK MITIGATION IN IDA AND CONFLICT-AFFECTED COUNTRIES

Independent Evaluation of MIGA’s Development Effectiveness—2009

SKU 14136

ISBN 978-1-60244-136-7

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www.worldbank.org/iegwww.miga.org/ieg202-458-4497

The Independent Evaluation GroupImproving Development Results Through Excellence in Evaluation

IEG–MIGA Reports

Annual Reports2003 Report on Operations Evaluation in MIGA2004 Review of Development Effectiveness in MIGAOperations Evaluation Unit—2005 Annual ReportIndependent Evaluation Group—MIGA 2006 Annual ReportIndependent Evaluation Group—MIGA 2007 Annual ReportIndependent Evaluation Group—MIGA 2008 Annual Report: Evaluating MIGA’s FY05–08 Strategic Directions

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The World Bank Group

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The World Bank Group consists of five institutions—

the International Bank for Reconstruction and De-

velopment (IBRD), the International Finance Corporation

(IFC), the International Development Association (IDA),

the Multilateral Investment Guarantee Agency (MIGA),

and the International Centre for the Settlement of Invest-

ment Disputes (ICSID). Its mission is to fight poverty for

lasting results and to help people help themselves and

their environment by providing resources, sharing knowl-

edge, building capacity, and forging partnerships in the

public and private sectors.

The Independent Evaluation Group

IMPROVING DEVELOPMENT RESULTS THROUGH EXCELLENCE IN EVALUATION

The Independent Evaluation Group (IEG) is an indepen-

dent, three-part unit within the World Bank Group.

IEG-World Bank is charged with evaluating the activities

of the IBRD (The World Bank) and IDA, IEG-IFC focuses on

assessment of IFC’s work toward private sector develop-

ment, and IEG-MIGA evaluates the contributions of MIGA

guarantee projects and services. IEG reports directly to the

Bank’s Board of Directors through the Director-General,

Evaluation.

The goals of evaluation are to learn from experience, to

provide an objective basis for assessing the results of the

Bank Group’s work, and to provide accountability in the

achievement of its objectives. It also improves Bank Group

work by identifying and disseminating the lessons learned

from experience and by framing recommendations drawn

from evaluation findings.

I

ENHANCING MIGA’S RISK MITIGATION IN IDA AND CONFLICT-AFFECTED COUNTRIES

Independent Evaluation of MIGA’s Development

Effectiveness—2009

2009 The World Bank-MIGA

Washington, DC

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TABLE OF CONTENTS

Abbreviations ................................................................................................................................... v

Foreword vii

Definitions of Guarantee-Related Terms Used in the Report ix

IEG-MIGA’s Ex Post Evaluation Methodology xi

Acknowledgments xiii

Executive Summary xv

Chapter 1 : MIGA’s Institutional Setting ......................................................................................... 1

I. Introduction to the Report ......................................................................................................... 1

II. MIGA’s Strategic Context ........................................................................................................ 2

III. MIGA’s Recent Initiatives to Address its Institutional Effectiveness ....................................... 4

IV. Summary ................................................................................................................................... 9

Chapter 2 : Implementation of MiGA’s Strategy in IDA Countries .............................................. 10

I. Introduction: MIGA’s Role in IDA Countries ........................................................................ 10

II. Trends and Characteristics of Guarantees in IDA Countries ................................................... 14

III. MIGA’s Development Results in IDA Countries ................................................................... 17

IV. Project Relevance and Value Added ....................................................................................... 19

V. Implications of Past Crises for MIGA’s Engagement in IDA Countries ................................ 22

VI. Summary of Findings .............................................................................................................. 24

Chapter 3 : Special Issues Relating to MIGA’s Engagement in Conflict-Affected Countries ....... 25

I. Introduction ............................................................................................................................. 25

II. Trends and Characteristics of Guarantees in Conflict-Affected Countries ............................. 27

III. Summary of Findings on MIGA’s Engagement in Conflict-Affected Countries .................... 34

Chapter 4 : Evaluation Update on MIGA’s Technical Assistance Activities ................................. 37

I. Introduction ............................................................................................................................. 37

II. Assessing the Integration Experience to Date ......................................................................... 39

III. Summary of Findings .............................................................................................................. 42

Chapter 5 : summary of Conclusions and Recommendations ........................................................ 43

I. Conclusions ............................................................................................................................. 43

II. Recommendations ................................................................................................................... 44

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FIGURES

Figure 1.1: Institutional Effectiveness Roadmap for MIGA ........................................................... 5

Figure 2.1: Shares of MIGA net exposure and FDI stock in high risk low income countries ....... 12

Figure 2.2: Shares of World Bank, IFC and MIGA support in IDA countries (in percent of total exposure/commitments FY05-08) ............................................................................. 13

Figure 2.3: Sector distribution of new guarantee projects in IDA countries, FY05-08 (guarantee volume) ............................................................................................................ 15

Figure 2.4: Regional distribution of new guarantee projects in IDA countries, FY05-08 (by number of projects) ........................................................................................................... 15

Figure 2.5: Composition of risks triggering pre-claims and claims in IDA and IBRD countries (FY03-08) .......................................................................................................... 16

Figure 2.6: Factors contributing to better development outcomes in IDA countries ..................... 18

Figure 2.7: Factors contributing to lower project development outcomes in IDA countries ......... 19

Figure 2.8: Factors contributing to project strategic relevance in IDA countries ........................... 20

Figure 2.9: Aspects valued most by guarantee holder in projects with high value-added ............ 20

Figure 3.1: Sector distribution of MIGA guarantees (by number of projects) - FY05-08 ............. 29

Figure 3.2: Regional breakdown of new projects in conflict-affected countries, by number – FY00-08 ............................................................................................................................ 30

BOXES

Box 1.1: Key findings from IEG-MIGA 2008 annual report: Evaluating MIGA’s strategic directions ............................................................................................................................. 3

Box 1.2: Implementing a self-evaluation system for guarantees in MIGA ...................................... 8

Box 2.1: There is considerable overlap between IDA and conflict-affected countries .................. 11

Box 2.2: MIGA Project Relevance and Value-added – Some examples ....................................... 21

Box 3.1: Timelines for foreign investments in conflict-affected countries .................................... 26

Box 3.2: Conflict-affected countries – A profile ............................................................................ 27

Box 3.3: MIGA’s post-conflict trust funds – Key features ............................................................ 33

ANNEXES

Annex 1: IEG-MIGA’s Evaluation Approach and Methodology ................................................... 47

Annex 2: Conflict-Affected Countries and MIGA Guarantees (FY00-08) .................................... 48

Annex 3: MIGA’s Guarantee Projects in Conflict-Affected Countries (FY00-08) ....................... 50

Annex 4: South-South Investments Guaranteed by MIGA in IDA Countries (FY00-08) ............. 52

Annex 5: 2009 MIGA Management Action Track Record ............................................................ 54

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Abbreviations

ADB Asian Development Bank AIG American International Group, Inc AMS Agribusiness, manufacturing, and services sector BPR Business Process Review CAS Country Assistance Strategy CODE Committee on Development Effectiveness DFID Department for International Development EA Environmental Assessment EC European Commission ECA Europe and Central Asia region ECG Evaluation Cooperation Group EHS Environmental, Health and Safety EIB European Investment Bank EVP Executive Vice President FDI Foreign direct investment FIAS Foreign Investment Advisory Service FPSD Financial and Private Sector Development (Vice-Presidential Unit) FRR Financial rate of return FY Fiscal year IBRD International Bank for Reconstruction and Development IDA International Development Association IEDR Independent Evaluation of IFC’s Development Results IEG-MIGA Independent Evaluation Group – MIGA IFC International Finance Corporation IICCR Institutional Investor Country Credit Rating IPA Investment Promotion Agency KEIC Korean Export Insurance Corporation LAC Latin America & Caribbean LICUS Low Income Countries Under Stress MATR Management Action Track Record M&E Monitoring and evaluation MENA Middle East and North Africa MIGA Multilateral Investment Guarantee Agency NEXI Nippon Export and Investment Insurance OeKB Oesterreichische Kontrollbank Aktiengesellschaft (Austrian PRI Agency) OPIC Overseas Private Investment Corporation PCR Project Completion Report PER Project Evaluation Report PPP Public-Private Partnership PRC Project Review Committee PRI Political risk insurance PSD Private Sector Development PwC PricewaterhouseCoopers SINOSURE China Export and Credit Insurance Corporation SIP Small Investment Program SME Small and medium-sized enterprise SMI Small and medium-sized investor TA Technical Assistance TAAS Technical Assistance and Advisory Services UNCTAD United Nations Conference on Trade and Development WB World Bank WBG World Bank Group

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Foreword

The Independent Evaluation Group–Multilateral Investment Guarantee Agency’s (IEG-MIGA) Independent Evaluation of MIGA’s Development Effectiveness 2009 focuses on two of MIGA’s operational priority areas: IDA and conflict-affected countries. As MIGA faces a dramatically changed operating environment and global crisis, this report aims to inform CODE, the Board, and MIGA management on MIGA’s institutional effectiveness and operational performance in these areas, and to identify possibilities for enhancing MIGA’s future engagement. The report also provides a CODE-requested update on MIGA technical assistance activities, integrated in fiscal 2007 into the Foreign Investment Advisory Service (FIAS).

MIGA took several initiatives to address its institutional effectiveness, including changes to its Operational Regulations, a business process review, and first steps toward piloting self-evaluation of guarantees. MIGA also developed an Action Plan for Strategic Progress aimed at addressing a number of institutional effectiveness issues identified by IEG-MIGA, including streamlining processes, strengthening business development, and enhancing key systems and standards.

MIGA’s exposure in International Development Association (IDA) countries is important and increasing, although a small share of the political risk insurance market. MIGA has supported projects in high-risk markets underserved by capital flows, with some 37 percent of its exposure in low-income countries, and 60 percent of new guarantees in IDA countries are in Sub-Saharan Africa. Restrictions imposed by MIGA’s Convention on eligible risks it can cover have hampered MIGA’s effectiveness, including in IDA countries. Further, mandate restrictions are limiting MIGA’s ability to respond to country needs in the context of the global financial crisis. Past experience may suggest that demand for political risk cover for existing investments is particularly strong during economic crises.

Approximately half of the IEG-MIGA-evaluated projects in IDA countries during fiscal 2003–06 had satisfactory or better development outcomes. Better outcomes were found in projects with sound business models, financial structures, and concession frameworks and were also associated with intensive due diligence by MIGA. On the risk front, the claims and preclaims experience in IDA countries mirrors MIGA’s overall portfolio. MIGA’s engagement in IDA countries can be strengthened by addressing mandate-related constraints and strengthening its institutional effectiveness, through product innovation, business development, greater client responsiveness, and enhanced business processes. Relevant for MIGA’s operations overall, this has particular urgency for MIGA’s engagement in IDA countries.

MIGA’s past engagement and client surveys show that MIGA has a role in conflict-affected countries. However political risk insurance does not address key bottlenecks in these high-risk countries, and expectations should be realistic. MIGA has not been strategic in its approach to this group of countries and would benefit from a “game plan” going forward, including a clearly articulated approach to the use of Trust Funds. In principle useful for expanding MIGA coverage in high-risk countries, the uptake has been mixed. Broader and more flexible design may increase trust funds’ chances of success.

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The integration of MIGA’s technical assistance into FIAS has been positive from a World Bank Group corporate and client perspective. While integration has further eroded the links between technical assistance and MIGA’s core guarantees business, MIGA continues to benefit from FIAS’ investment climate improvement activities, albeit indirectly. Current FIAS governance arrangements limit MIGA’s voice, although its financial contribution is substantial. Going forward, MIGA needs to better articulate and define its needs and expectations with respect to technical assistance activities and develop a clearly articulated approach and value proposition for its technical assistance consistent with its mandate under the Convention.

Vinod Thomas

Director General, Evaluation, and Senior Vice President

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Definitions of Guarantee-Related Terms Used in the Report

The following are standard definitions for terms frequently used throughout this report. Contract of guarantee: The legal agreement by which MIGA provides a guarantee of compensation for a specified loss in return for payment of a premium.

Guarantee project: A project in which an investment covered by a MIGA contract of guarantee has been made.

Guarantee holder: The holder of a guarantee issued by MIGA.

Host country: A member country, its government, or any public authority of a member in whose territories an investment guaranteed by MIGA is located.

Gross exposure: Maximum amount for which MIGA is liable in the event of a claim, specified in the contract of guarantee.

Net exposure: Amount of gross exposure adjusted for the amount reinsured with other political risk agencies.

Guarantee volume: The dollar amount of exposure issued through MIGA contracts of guarantees.

MIGA risk coverages available during period covered by this report:

Breach of contract coverage protects against losses arising from the host government's breach or repudiation of a contractual agreement with the investor. In the event of such an alleged breach or repudiation, the investor must be able to invoke a dispute resolution mechanism (e.g., arbitration) set out in the underlying contract and obtain an award for damages. The investor may file for a claim if, after a specified period of time, payment is not received.

Expropriation coverage: offers protection against loss of the insured investment as a result of acts by the host government that may reduce or eliminate ownership of, control over, or rights to the insured investment. This policy also covers partial losses, as well as "creeping expropriation," a series of acts that over time have an expropriatory effect. Bona fide, non-discriminatory measures taken by the host government in the exercise of its legitimate regulatory authority are not considered expropriatory.

Transfer restriction coverage: protects against losses arising from an investor's inability to convert local currency (capital, interest, principal, profits, royalties, or other monetary benefits) into foreign exchange for transfer outside the host country. The coverage also insures against excessive delays in acquiring foreign exchange caused by the host government's actions or failure to act. Currency devaluation is not covered.

War and civil disturbance coverage: protects against loss due to the destruction, disappearance, or physical damage to tangible assets caused by politically motivated acts of war or civil disturbance, including revolution, insurrection, and coups d'état. Terrorism and sabotage are also covered. War and civil disturbance coverage also extends to events that result in the total inability of the project enterprise to conduct operations essential to its overall financial viability.

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IEG-MIGA’s Ex Post Project Evaluation Methodology IEG-MIGA uses a standard benchmark-based methodology for its evaluation of MIGA guarantee projects. It rates projects in three dimensions: development outcome, MIGA’s effectiveness, and contribution to MIGA’s financial results. The methodology is consistent with Good Practice Standards established by the Evaluation Cooperation Group (ECG) Working Group for Private Sector Evaluation, an entity that aims to harmonize evaluation standards for private sector operations across multilateral development institutions.

Development outcome aims to capture the project’s overall impact on a country’s economic and social development, and is thus important as an implicit proxy for how well the project has contributed to MIGA’s purpose and mission. The development outcome is evaluated for each project across four dimensions: (i) project business performance, (ii) economic sustainability, (iii) environmental and social effects, and (iv) private sector development impact. Each of these measures rates a distinct aspect of the guarantee project’s performance.

Business Performance measures the guarantee project’s actual and projected financial impact on the project financiers–its lenders and equity investors.

Economic Sustainability measures whether the project has contributed to the country’s development.

Environmental and Social Effects measures a project’s performance in meeting MIGA’s environmental and social requirements, as well as its actual environmental and social impact.

Private Sector Development aims to capture the effects of the guarantee project on the development of productive private enterprise beyond the project, and relates to MIGA’s mandate to enhance the flow of private foreign investment to developing countries.

MIGA’s effectiveness aims to capture MIGA’s work quality in assessing, underwriting, and monitoring its guarantee projects, and the value added it brings to the client or project. IEG-MIGA assesses MIGA’s across three dimensions of MIGA’s operational performance: (i) strategic relevance; (ii) MIGA’s role and contribution; and (iii) MIGA’s assessment, underwriting and monitoring.

Strategic Relevance refers to the degree of consistency of the guaranteed project with the development priorities of the host country and of the World Bank Group.

MIGA’s Role and Contribution relates to the benefits or value added that MIGA brings as a development institution. The contribution may be catalytic (in facilitating FDI in economically sound and sustainable businesses); in encouraging the development of the political risk industry; or in conveying additionality.

MIGA’s Assessment, Underwriting, and Monitoring addresses two questions: (i) how well MIGA’s guidelines were followed such that key material risks were identified and appropriately mitigated; and (ii) subsequent to issuance of a guarantee, did MIGA take adequate remedial action if country or project conditions changed?

Contribution to MIGA’s financial results relates to the financial contribution to MIGA of guarantee projects it underwrites.

Project Ratings. IEG-MIGA rates the development outcome and MIGA’s effectiveness and each of their dimensions based on a four-point rating scale: excellent, satisfactory, partly unsatisfactory, and unsatisfactory.

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Acknowledgments

This report was written by a team of IEG-MIGA staff and consultants led by Ethel Tarazona and Stephan Wegner, including Aurora Medina Siy, under the supervision of Christine I. Wallich, Director, IEG-MIGA. Inputs were provided by Carlos Nunez, Nicholas Burke, Izlem Yenice, Barbara Balaj, Sam Kazdal, and Ian Webb. Garima Sahai and John Hamilton provided research assistance. The authors would like to thank MIGA staff who provided valuable information and feedback during the evaluation. Peer reviews were provided by Amitava Banerjee and Nils Fostvedt. The report was produced under the general supervision of Vinod Thomas, Director-General, Evaluation, and Senior Vice President.

Director-General, Evaluation, and Senior Vice President: Mr. Vinod Thomas Director, IEG-MIGA: Ms. Christine I. Wallich Task Managers: Ms. Ethel I. Tarazona Mr. Stephan Wegner

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Executive Summary 1. The IEG-MIGA Independent Evaluation of MIGA’s Development Effectiveness 2009 is devoted to two MIGA operational priority areas: IDA and conflict-affected countries. In the context of its FY05-08 Strategic Directions, MIGA identified frontier and conflict-affected countries as priority areas. More recently, MIGA’s FY09-11 Operational Directions continued this strategic focus by emphasizing guarantees for investments in IDA countries and conflict-affected countries.

2. As MIGA is facing a dramatically changed operating environment in the global financial crisis, and is considering recommending amendments to its Convention, this report aims to inform CODE, the Board, and MIGA’s new management team about the Agency’s operational performance in these two priority areas to date. The report identifies possibilities for enhancing MIGA’s future engagement in these groups of countries. The recommendations are focused on how MIGA can improve its operational effectiveness and efficiency in IDA and conflict-affected countries. The report also provides a CODE-requested update to IEG-MIGA’s FY04 evaluation of MIGA’s technical assistance activities, which since FY07 have been delivered through the Foreign Investment Advisory Service (FIAS). Finally, the report contains an updated Management Action Track Record, which lists the status of implementation of prior IEG-MIGA recommendations by MIGA management.

3. This report is submitted at a time when MIGA is challenged by the impact of the global financial crisis. Foreign direct investments to developing countries are expected to decrease to $400 billion in 2009, down from a high of $580 billion in 2008, and growth in developing countries is projected to slow 2.2 percent in 2009, from an average of 7.8 percent during 2006-2007. Although the global slowdown began in the industrial economies, developing countries are increasingly feeling the effects through reduced exports to industrialized economies, plunging commodity prices, scaling back of international credit and FDI inflows, higher borrowing costs, currency effects and lower level of remittances from overseas workers. As a consequence, growth in developing countries, which averaged 7.8 percent during 2006 and 2007, is projected to slow to 2.2 percent in 2009.

MIGA’s Institutional Setting

4. IEG-MIGA’s 2008 Annual Report made recommendations aimed at strengthening MIGA’s institutional effectiveness, based on the need for MIGA to consolidate its long term viability; ensure the sustainability of operational results; and strengthen its development results. This year’s IEG-MIGA evaluation indicates that MIGA has begun to address issues relating to its institutional effectiveness in several areas.

First, MIGA has amended its Operational Regulations and some policies, which will enable it to offer an additional risk cover and address some eligibility criteria. Notwithstanding these changes, the narrowly defined Convention continues to hamper MIGA’s effectiveness and its adaptability to market trends and the needs of developing country clients in offering new and innovative types of coverage.

Second, MIGA has conducted a Business Process Review to provide the basis for addressing internal constraints, such as underwriting and decision-making processes, and MIGA’s business development and client relationship function. To address the recommendations of this Review, MIGA has initiated in FY09 an action plan for strategic progress.

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Third, MIGA has taken a first step towards implementing a system of self-evaluation for guarantee projects, by piloting an approach and methodology. Self-evaluation of guarantee projects is key to improving MIGA’s project quality and institutional performance, and enhancing institutional learning and accountability.

5. MIGA’s has also enhanced its coordination with the Bank, and consistent efforts have been made to ensure that MIGA projects are aligned with Bank strategies and policies. Other areas remain to be addressed. For instance, the consistent application of underwriting standards, a key aspect of MIGA’s effectiveness, can be enhanced by strengthening and formalizing systems, standards and processes.

6. IEG-MIGA will continue to monitor MIGA’s efforts to achieve its strategic objectives and to improve its organizational effectiveness.

Implementation of MIGA’s Strategy in IDA Countries

7. The emphasis of MIGA’s FY09-11 operational priorities on support for investments in IDA and conflict-affected countries is relevant, given the challenges faced by this group of countries, and the potential benefits they can reap from investment flows. Private sector development and foreign direct investment are critical to economic growth in IDA countries. MIGA’s strategic focus on IDA and conflict-affected countries echoes similar priorities in the World Bank and IFC. IDA countries stand to benefit from FDI, but foreign investment flows to developing countries are highly concentrated. Few IDA countries have attracted sizeable amounts of foreign investment. MIGA has supported projects in countries with relatively low FDI inflows, in line with its strategic priorities.

8. MIGA’s exposure in IDA countries is important but has remained small as a share of the political risk insurance market. MIGA’s overall share of the political risk insurance market in developing countries has seen a decline from an average of 9 percent during 2001-2004 to 3.6 percent in 2005-07. MIGA’s relative weight in IDA countries, measured as its share of the total political risk insurance exposure in these countries (averaging 7 percent between 2005-2007), is higher than for its portfolio overall. During this period, insurance exposure in IDA countries reported by members of the Berne Union increased from $7.6 billion (2005) to $11.9 billion (2007).

9. Currently, 78 countries are eligible for IDA assistance, and MIGA has an outstanding portfolio in 31 of them. MIGA’s portfolio in IDA countries is sizeable and has increased, accounting for 36 percent of guarantee amounts issued, and more than half of projects supported by MIGA during FY05-08. This is above the share seen for political risk insurers as a whole. In all, MIGA has supported 116 projects in IDA countries during FY00-08, catalyzing investment flows of $11.8 billion. MIGA projects in these countries differ in important ways from MIGA’s overall portfolio: they are on average smaller, and exposure tends to be concentrated in the infrastructure sector (rather than in finance as is the case for MIGA’s overall portfolio).

10. MIGA projects in IDA countries have not proven to be more risky in terms of claims paid and pre-claims situations, despite higher country risk. This is likely due to MIGA’s project-level risk mitigation.

11. Approximately half of the projects in IDA countries evaluated ex post by IEG-MIGA had satisfactory or better development outcomes. This is similar to the share found in IEG evaluations of IFC projects for the same period. The findings are based on a small sample of 34 IEG-MIGA evaluations of guarantee projects, including 20 in IDA countries. All projects with

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satisfactory or better development outcomes were found to have had sound business models and a manageable debt burden. In addition, most of these more successful projects benefited from the concurrent implementation of sector and regulatory reforms and from sound due diligence by MIGA. The presence of other multilateral institutions in the project improved the chances of satisfactory and better project performance. On the other hand, lower project development outcomes -- implying limited economic benefits to the countries -- are associated for almost all projects with weak project design or business models that resulted in poor business performance, and weak MIGA work quality, among others. MIGA’s effectiveness in IDA countries overall has been hampered by institutional constraints arising from mandate restrictions, and internal constraints such as processes perceived as long and cumbersome, and by MIGA’s failure to develop a systematic approach to business development. 12. MIGA guarantees in IDA countries have been strategically aligned with World Bank country strategies, and most of them were relevant to the country, based on IEG-MIGA evaluations. The consistency of projects with sector policies, however, merits further attention. In addition, in most cases, MIGA’s guarantee was valued highly by guarantee holders.

13. MIGA’s strategic priority of focusing on IDA countries is relevant, and it should continue giving priority to this group of countries. Its effectiveness in implementing the strategy in IDA countries can be improved by strengthening MIGA’s institutional effectiveness in line with observations made in paragraph 4 above, including updating MIGA’s Convention and innovating products, enhancing the business development function and processes, and strengthening MIGA’s systems, standards, and processes. While these are relevant for MIGA’s operations overall, they have particular urgency for MIGA’s engagement in IDA countries, in light of their development needs and the low levels of foreign investment they attract.

14. In the wake of the global financial crisis, developing countries have seen dramatic decreases in FDI flows. IDA countries are increasingly affected during the crisis. Reduced capital flows and heightened risks will have implications for MIGA’s business. Despite the projected decline in FDI flows to developing countries, the demand for political risk insurance may increase among investors who are considering new investments. In the short term, the overall decline in FDI flows will reduce the volume and number of MIGA guarantees in FY09. MIGA’s ability to assist countries in crisis is limited due to mandate restrictions. The crisis has heightened the need for MIGA to take steps to enhance its range of products to better serve its client countries, especially those most dependent on capital flows including conflict-affected and IDA countries.

Special Issues Relating to MIGA’s Engagement in Conflict-Affected Countries

15. MIGA’s portfolio in conflict-affected countries is substantial. MIGA has an active portfolio in 13 of the 32 countries classified as conflict-affected; overall it has supported 69 projects in these countries during FY00-08. It has a role to play to catalyze foreign direct investments and facilitate the market entry of other providers of political risk insurance. However, providing PRI in conflict-affected countries poses challenges for MIGA, and it is also important to be realistic and manage expectations about what PRI can deliver. MIGA’s guarantee projects in conflict-affected countries are much smaller than the overall average and are concentrated in manufacturing, services, and agribusiness. Despite heightened country risk, only one claim has been paid; ex post riskiness seems to have been reduced due to effective project-level risk management and carve-out of risks. Guarantees have been delivered both directly by MIGA and through special Trust Fund vehicles.

16. MIGA’s engagement in conflict-affected countries seems to reflect an ad hoc and supply-driven approach. A more strategic approach would likely enhance MIGA’s development

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effectiveness in conflict-affected countries and would allow MIGA to utilize its resources and capital more effectively. MIGA also did not have clear criteria for the level of acceptable risk on its own balance sheet, and its considerations for creating Trust Funds versus insuring projects directly. There was modest usage of two of the three Trust Funds, all of which have been hampered by narrow mandates and complex structures. Further, using scarce IDA funds to resource post-conflict trust funds may have high opportunity costs. A multi-country fund for conflict-affected countries would be a more effective tool. Finally, the Trust Funds lacked realistic goals, based on a credible results framework.

Evaluation Update on MIGA’s Technical Assistance Activities

17. This report also provides the CODE-requested update of IEG-MIGA’s earlier evaluation of MIGA’s technical assistance (TA) activities, focusing on aspects relating to the merger of MIGA’s technical assistance activities with FIAS. The integration of MIGA TA has been positive from a World Bank Group corporate, operational, and client perspective. While the integration has weakened the links between FIAS TA and MIGA’s core guarantees business, MIGA benefits from FIAS’ investment climate improvement activities, albeit indirectly. MIGA has had limited input into FIAS’ strategy and work program planning, and there are not yet any mechanisms in place to coordinate activities of the two institutions. MIGA’s financial contribution to FIAS has been substantial, considering its size. Given the scale of its support, MIGA needs to articulate and define its expectations and preferences with respect to Technical Assistance activities.

Recommendations

1. MIGA should strengthen and formalize its systems and standards for underwriting and introduce a robust quality assurance system for its operations as a key element of enhancing its overall institutional effectiveness, including for its engagement in IDA countries. The need to formalize systems and standards and to introduce quality assurance is particularly acute in light of the expansion of MIGA’s mandate following the recent approval of changes to MIGA’s Operational Regulations, and MIGA’s rapid pace of hiring new operational staff and team heads. Formal written guidelines, business processes and procedures can enhance the consistent application of underwriting standards across projects and teams, by providing clarity and transparency on the standards expected. A comprehensive induction program for newly hired operational staff, and structured ongoing training are needed to promote a common skill set and understanding of requirements. MIGA should also step up the implementation of self-evaluation of guarantee projects.

2. MIGA needs to underpin its engagement in conflict-affected countries with a game plan. Such a game plan would enable MIGA to enhance its development effectiveness in conflict-affected countries, and would allow the Agency to utilize its administrative budget and capital more effectively. This includes developing some staff with specialist knowledge and expertise of the issues and needs of operating in a conflict environment; aligning MIGA’s business functions – such as marketing, business development, client aftercare, and risk management – to effectively support this business; and assessing the financial implications of its engagement in conflict-affected countries. MIGA may also wish to assess its project-level risk management approach (i.e., contract exclusions) to assure itself of the consistency of its stated strategic priority and its actual implementation.

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In the future, MIGA would also need to define criteria for acceptable risk levels on its own balance sheet versus the use of Trust Fund instruments. Should MIGA decide to pursue Trust Funds in the future, it should enhance their efficiency and effectiveness. This includes implementing multi-country and untied Trust Funds with broad and flexible mandates that have no restrictions with respect to the eligible investments or investors. Trust Fund arrangements should be underpinned by realistic objectives (including with respect to expected demand) and a results framework.

3. MIGA needs to better articulate and define its expectations and preferences with respect to technical assistance activities in the context of its mandate. The end of FIAS’ current strategy period is an opportunity for MIGA to present a clearly articulated approach and value proposition for its technical assistance in the context of its mandate under the Convention for the period FY12 and beyond, and to define the commensurate funding. In addition, mechanisms to strengthen MIGA’s influence on FIAS’ strategy and priority-setting, as well as coordination at the operational level should be agreed.

INDEPENDENT EVALUATION OF MIGA’S DEVELOPMENT EFFECTIVENESS 2009: PAGE | 1 ENHANCING MIGA’S RISK MITIGATION IN IDA AND CONFLICT-AFFECTED COUNTRIES

CHAPTER 1 : MIGA’S INSTITUTIONAL SETTING

I. Introduction to the Report

1.1 The IEG-MIGA Independent Evaluation of MIGA’s Development Effectiveness is the annual flagship report produced by the Independent Evaluation Group-MIGA (IEG-MIGA). It reviews MIGA’s effectiveness in supporting foreign direct investment and contributing to economic growth and poverty reduction, as well as to environmentally and socially sustainable development. The aim of the evaluation is to document the effectiveness and performance of MIGA projects and strategies based on international best practice evaluation standards, and to present lessons that may help strengthen future decision-making on MIGA’s strategy, resource allocation, institutional processes and/or operational performance.

1.2 IEG-MIGA has submitted an annual evaluation report to CODE and the Board since 2003. Past reports have examined a range of MIGA products and themes, including the development effectiveness of a sample of MIGA guarantees and the effectiveness of MIGA’s online information services (2006); the ‘quality at entry’ of guarantees and the implementation of the Small Investment Program (2007); and MIGA’s strategic directions during FY05-08 (2008).

1.3 The IEG-MIGA Independent Evaluation of MIGA’s Development Effectiveness 2009 is devoted to two of MIGA’s four operational priority areas -- IDA and conflict-affected countries. As MIGA is facing a dramatically changed operating environment in the global financial crisis, and is considering recommending amendments to its Convention, this report aims to inform CODE, the Board, and MIGA’s new management team about the Agency’s operational performance in these two priority areas to date. The report identifies possibilities for enhancing MIGA’s future engagement in these groups of countries. The recommendations are focused on how MIGA can improve its operational effectiveness and efficiency in IDA and conflict-affected countries. The report also provides a CODE-requested update to IEG-MIGA’s FY04 evaluation of MIGA’s technical assistance activities (IEG report on investment climate), which since FY07 have been delivered through the Foreign Investment Advisory Service (FIAS).

1.4 In the context of its FY05-08 Strategic Directions, MIGA identified frontier1 and conflict-affected countries as priority areas.2 More recently, MIGA’s FY09-11 operational directions reconfirmed and continued this strategic focus by emphasizing guarantees for investments in IDA countries3 and conflict-affected countries.

1.5 Within its scope, this report examines the impacts of the global financial crisis on MIGA’s effectiveness in supporting FDI in developing countries, in particular IDA and conflict-affected countries, and the implications for future operations. Although the global slowdown began in the industrial economies, developing countries are increasingly feeling the effects through reduced exports to industrialized economies, plunging commodity prices, scaling back of international credit and FDI inflows, higher borrowing costs, currency effects and lower level of remittances from overseas workers. Growth in developing countries averaged 7.8 percent during 2006 and 2007 but is now projected to slow to 2.2 percent in 2009.4 Slowing growth and tighter credit have had a significant impact on inward FDI flows to developing countries. The World Bank estimates that FDI in developing nations will decrease to US$400 billion in 2009 – a decrease of $180

1 The term frontier markets is no longer used by MIGA as a classification. 2 World Bank. 2005: MIGA 2005 Review for FY00-04 and Strategic Directions for FY05-08. Washington, DC. 3 In this report, the term “IDA countries” refers to all IDA-eligible countries, i.e., IDA and Blend countries, and more specifically, to countries that were IDA-eligible in the FY00 – FY08 period. 4 World Bank: Global Economic Prospects 2009. Forecast Update. March 30, 2009.


billion from a high of US$580 billion in 2008 and from US$ 500 billion in 2007. The significant decrease in projected FDI may continue in the near future and have an impact on the levels of new guarantees sought by potential clients in FY09.5

1.6 The report is organized as follows: Chapter 1 presents the context of MIGA’s strategy and provides an update on MIGA’s efforts to strengthen the institutional underpinnings of its strategy as a basis for the report’s focus on IDA and conflict-affected countries. Chapter 2 focuses on MIGA’s engagement in IDA countries and evaluates the implementation of MIGA’s strategy of supporting investments in IDA countries; Chapter 3 discusses special considerations for MIGA’s engagement in conflict-affected countries. Chapter 4 provides an update on MIGA’s technical assistance activities delivered by FIAS, as requested by CODE. Conclusions and recommendations are presented in Chapter 5. The report contains a Management Action Track Record, which provides an update on the status of implementation of IEG-MIGA recommendations to MIGA management from prior annual flagship reports and thematic evaluations (see Annex 5).

1.7 This chapter first provides an overview of the independent evaluation of MIGA’s Development Effectiveness (2009 report), which covers aspects of MIGA’s effectiveness in IDA and conflict-affected countries, as well as an update on MIGA technical assistance activities delivered through FIAS. Section II reviews MIGA’s strategic context including issues of strategic and institutional effectiveness identified in IEG-MIGA evaluations. Section III reports on recent efforts in strengthening MIGA’s effectiveness so as to deliver its mandate on development effectiveness, and Section IV concludes with a summary.

II. MIGA’s Strategic Context

1.8 The IEG-MIGA 2008 Annual Report: Evaluating MIGA’s Strategic Directions focused on MIGA’s overall strategic choices in the context of evaluating key aspects of the design and implementation of MIGA’s FY05-08 Strategic Directions and its results up to the time of that annual report. It pointed out that MIGA was created with a specific role and narrowly defined product, that MIGA has the most well-defined and tested guarantee product within the WBG, and that its product is the most unbundled of the guarantee instruments within the WBG, allowing clients to purchase exactly what they need. MIGA had been able to enhance its capacity despite the limitations imposed by its Convention. In addition, IEG6 identified institutional strengths and weaknesses of the Agency, and MIGA’s need to pursue organizational change to better fulfill its development mandate and better serve its clients. In parallel, MIGA conducted its own review of the implementation of its FY05-08 strategy, reaching broadly similar conclusions.7 The following paragraphs summarize IEG’s findings on MIGA’s strategic effectiveness.

1.9 IEG-MIGA concluded that there was a role and demand for MIGA’s political risk insurance product, based on key strengths such as its ability to insure difficult projects in difficult markets. MIGA faced some challenges in its operating environment and constraints of it Convention and Operational Regulations. It needed to take advantage of the growing demand for risk mitigation instruments and find solutions to address institutional constraints (Box 1.1). On this basis IEG-MIGA’s FY08 Annual Report made a number of recommendations that are still

5 MIGA expects that the deepening crisis will reduce its business volume in FY09 compared to the previous year, as projects are delayed due to the difficulty of arranging project finance. See MIGA/Sec2009-0007: MIGA EVP Report – Second Quarter. FY09. 6 IEG-MIGA 2008 Annual Report: Evaluating MIGA’s Strategic Directions FY05-08; and CODE2008-0037: World Bank Group Guarantees Instrument, 1990-2007s. An Independent Evaluation (IEG 2009). 7 MIGA’s Operational Directions FY09-11; and PricewaterhouseCoopers 2008 market study of political risk insurance.


highly relevant. The recommendations were based on the need for MIGA to consolidate its long term viability; ensure the sustainability of operational results; and strengthen its development results. To this end, IEG recommended, inter alia, that MIGA needed to:8

Develop a strategic directions framework that would consider the external and internal environment, MIGA’s value to its clients, and necessary changes to processes and resource allocations;

Ensure that in the strategic framework, developmental, operational, financial, and risk dimensions are all aligned;

Ensure that the strategy identifies performance indicators to track progress in implementation; Improve product innovation to meet investors’ changing risk mitigation needs; and Make significant progress in implementing initiatives related to ensuring quality-at-entry of

the assessment of development impact during underwriting, and in developing a self-evaluation system for guarantee projects.

Box 1.1: Key Findings from IEG-MIGA 2008 Annual Report: Evaluating MIGA’s Strategic Directions

IEG’s 2008 Annual Report focused on MIGA’s overall strategy and key aspects of its design and implementation. Some key findings were that:

MIGA had changed its business model to better align its operations with the Bank’s country strategies and policies and had scaled up consultations and collaboration at the project level with the World Bank, in a significant departure from past practice.

MIGA had also made progress in developing its methodology for assessing development impact, and in using this methodology in its project assessments, but this had not yet reached consistent application. In addition, MIGA had improved risk and finance analytics underpinning its decision making with respect to pricing, provisioning, reinsurance and capital deployment. Performance management, internal reporting, and monitoring continued to be weak.

MIGA had underwritten innovative projects within its limited product range. But, partly due to constraints in its Convention, MIGA had not been able to make progress in more general and systematic product development as envisioned in the Strategic Directions.

MIGA had steadily increased its business volume from the very low level of FY04, but had fallen short - until fiscal year FY08 - of the annual business target range of $1.6-$1.8 billion. At the same time, the international political risk insurance industry experienced rapid growth.

MIGA has a strong capital base, and has had few claims to date. Net income, however, had declined and effective premium rates remained above industry averages. With net premium income declining since FY04, the ratio of administrative cost to net guarantee income increased to 80 percent in FY07--up from 68 percent in FY04. If this trend were to continue, it could raise concerns about MIGA’s financial sustainability.

The report noted that it was too early to assess the development outcomes of MIGA projects approved during the FY05-08 period. However, “quality at entry” assessments suggested that MIGA strengthened several aspects of its underwriting work quality at entry.

1.10 The next section reviews MIGA’s efforts in the above-mentioned areas. The test of a sounder strategic and implementation framework will be in MIGA’s accomplishment of development results that support inclusive and environmentally sustainable growth. In this regard, to ensure that MIGA-supported projects are economically sound and have positive and sustainable development impacts, the consistent application of MIGA’s development impact assessment guidelines is crucial.

8 A complete set of recommendations is reflected in the Management Action Track Record in Annex 5.


III. MIGA’s Recent Initiatives to Address its Institutional Effectiveness

1.11 MIGA has taken some steps to tackle institutional effectiveness issues and to address several outstanding IEG-MIGA recommendations. It is also carrying out some of the recommendations from its own earlier Business Process Review. In this regard, MIGA has initiated in FY09 an Action Plan for Strategic Progress, which covers areas of MIGA’s strategic and institutional effectiveness, including (i) clarifying MIGA’s mission and strategy, (ii) updating MIGA’s Convention, Operational Regulations, and policies, (iii) reviewing underwriting processes, (iv) aligning MIGA’s organizational structure, (v) strengthening outreach and business development processes, (vi) implementing strategic pricing, (vii) launching a new guarantee database, and (viii) tracking strategic progress.

1.12 To support a business model based on increased delegation of authority and streamlined decision-making, MIGA has identified the need to ensure clear accountability and quality standards. MIGA has observed that it has few explicit (and stated) service standards that are widely accepted and shared by staff both at the department and Agency levels. It further noted that this could result in inconsistent levels of quality among projects and, potentially, client dissatisfaction, as well as diffused accountability. MIGA has therefore initiated a Service Standards Review, which would take stock of existing “internal service standards” (operational guidelines, procedures, etc.), and assess relevant statistics on average processing times and costs. It would identify areas and processes in MIGA that need service standards, and seek to develop such standards and key targets to improve quality and effectiveness. The objective of the Review is to identify any gaps in service standards and propose a new set of standards to enhance the quality of products and client satisfaction, as well as to identify issues of accountability, quality assurance, and necessary changes in organizational culture and behavior.

1.13 Successful implementation of these initiatives to address MIGA’s institutional effectiveness will require strong managerial leadership and institutional efforts to make the Action Plan for Strategic Progress a priority, in the context of a broader change management process. In recent years, internal proposals designed to improve effectiveness have gained little traction. Consequently, several IEG-MIGA recommendations in this respect have been outstanding for several years. IEG-MIGA has a role in evaluating MIGA’s implementation of its Action Plan for Strategic Progress. Figure 1.1 below attempts to demonstrate how MIGA’s ongoing initiatives would address the identified weaknesses in its institutional effectiveness, and shows how the implementation of the initiatives, if successful, could be linked to enhanced strategic and operational outcomes.


Addressing identified weaknesses in MIGA’s institutional effectiveness is linked to desired outcomes

Figure 1.1: Institutional Effectiveness Roadmap for MIGA

MIGA has begun initiatives to address its effectiveness…

1.14 MIGA has amended its Operational Regulations and policies. MIGA’s Board of Directors approved changes to MIGA’s policies and Operational Regulations in April 2009. These amendments added a new risk coverage, non-honoring of sovereign guarantees, and enhanced the existing coverages for breach of contract, and war and civil disturbance risks. It also expanded MIGA coverage for the acquisition of existing assets such that they may include enhancements not only from monetary investments, but also from intangible assets or benefits. These changes relate to constraints previously identified by IEG-MIGA, and the changes, taken as a whole, are consistent with the recommendations of the IEG-MIGA evaluation aimed at improving the utilization and impact of MIGA’s guarantee instrument and capabilities.

1.15 However, these amendments are just the first of several steps needed to enhance MIGA’s capacity and effectiveness in deploying guarantees and in meeting evolving market demands. An immediate priority for MIGA is operationalizing the approved changes by developing policies and guidelines for their implementation, refining its risk management, strengthening its outreach and business origination, and aligning skills and resource allocation.

1.16 Restrictions imposed by the Convention continue to hamper MIGA’s effectiveness. MIGA’s 1985 Convention defines narrowly the types of coverages MIGA can offer, and has never been changed since its adoption, limiting MIGA’s scope for product innovation. Importantly, the Convention restricts the eligibility requirements and the types of risks MIGA is able to cover, which poses a challenge to MIGA’s ability to adapt to market trends that have changed considerably since the mid-1980s. Among the new types of coverages for which there is market demand are: comprehensive non-payment coverage, sovereign non-honoring coverage, investments in existing equity and acquisitions, and stand-alone debt coverage. Notwithstanding the limitations imposed by the mandate, IEG-MIGA also indicated that MIGA has not sufficiently pursued opportunities for product innovation, beyond those which require changes to the Convention.9

9 IEG-MIGA 2008 Annual Report: Evaluating MIGA’s Strategic Directions FY05-08.

•Convention Constraints•Links between strategic goals and resources are lacking•Cumbersome business processes•Lack of systematic business development process•Customer relationship management is weak

IEG Findings on MIGA's Institutional Effectiveness

•Implementing Operational Directions FY09-11•Discussions about broader changes to MIGA Convention•Amendments to Operational Regulations and Policies•Action Plan for Strategic Progress•Focus on business development•Pilot approach for self-evaluation•Review of Internal Service Standards

MIGA’s Ongoing Initiatives

•Improved organizational effectiveness •Resources aligned to strategy•Increased Operational efficiency•Ensure better development outcomes•Improved client experience

Desired Institutional Effectiveness Outcomes


1.17 MIGA’s effectiveness has also been increased by its enhanced coordination with the Bank. This has taken place at several levels -- institutional, policy, strategic, and operational. MIGA has implemented systematic project-level coordination with the World Bank. More systematic consultations between MIGA and the Bank’s country and sector departments have also helped ensure that MIGA-supported projects are consistent with the Bank’s strategy in a country. Although there are no formal mechanisms to structure these interactions, staff indicated that this coordination happens systematically as part of the regular course of work. Coordination with the Bank is an important way for MIGA to manage risks and to leverage its relationship with the WBG in projects. With respect to strengthening coordination with the IFC, MIGA concluded a Memorandum of Understanding (MOU) in FY09 to promote the cross-marketing of MIGA and IFC financial products.

MIGA has not aligned the deployment of its resources to strategic priorities…

1.18 On a strategic level, MIGA does not yet link its resource deployment to strategic objectives necessary for the effective implementation of a strategic framework. MIGA’s Operational Directions FY09-1110 and its business plans and administrative budget document contain little information with respect to the resource requirements for implementing its operational priorities and for scaling up the business, including requirements for staff capacity and skills. Implementing substantively MIGA’s operational priority areas would require a more strategic deployment of resources, as well as ensuring that policies, procedures, systems, and costing information are in place to achieve strategic objectives.

…and business development, client relationship management, and client responsiveness remain weak

1.19 Client perceptions confirm that MIGA’s business processes for underwriting guarantees remain cumbersome. Client perceptions indicate that MIGA is performing below its peers in terms of the time needed to process applications and in customer service.11 MIGA’s internal Business Process Review in 2008 also noted that its internal management and decision-making processes are bureaucratic, exemplified by non-binding decisions and multiple review cycles that negatively impact organizational effectiveness. The Business Process Review identified a lack of clarity regarding the ultimate accountability for the project underwriting, the various tasks, and the primary interface with the client. This approach leads to higher costs, increased response times, and negative client experiences. MIGA’s Business Process Review therefore highlighted the need to improve client responsiveness through more efficient processes, improved decision-making, and delegation of authority while ensuring accountability and quality control.12 As a first step, MIGA has begun to address issues related to its internal business process by adopting on a pilot basis, for low risk projects, a streamlined project underwriting approval process. Other steps should include implementing client-focused and client-friendly processes to improve the client experience in dealing with MIGA, such as streamlining the responsibility for client interface as recommended in the Business Process Review.

1.20 Although MIGA has now assigned responsibility for business development to Operations, business development and client relationship management remains weak. MIGA’s

10 MIGA. MIGA Operational Directions FY09-11. 11 MIGA. Political Risk Insurance Study. MIGA commissioned in 2008 a study from PricewaterhouseCoopers on the political risk insurance industry, which included a review of client perceptions about MIGA’s services and strengths and weaknesses. Among other things, the study confirmed IEG-MIGA project evaluation findings related to client feedback. 12 Gupton Marrs International, Inc. Presentation. September 8, 2008.


2008 Business Process Review resulted in some re-alignment of units and the shift of business development and origination functions to MIGA’s Operations Department. In addition, MIGA is piloting an “Agent program” to help market MIGA guarantees in financial centers, and has recently signed a MOU with IFC on cross-marketing of MIGA products.

1.21 However, more is needed. MIGA still lacks a systematic approach to identifying and managing key investors in each sector (e.g., a “client book”), and to cultivating relationships with clients (“client after-care”). Both IEG-MIGA and MIGA’s Business Process Review have noted that the business development and client relationship management functions remain underdeveloped. The Business Process Review also indicated that MIGA’s marketing efforts were informal, largely uncoordinated, tactical, and unmeasured, while IEG-MIGA pointed out that the roles and responsibilities for marketing and business development were not clearly defined. In addition, no resources have been earmarked for developing a business pipeline and client management in MIGA’s strategic priority areas, including in IDA and conflict-affected countries.

For MIGA, consistent application of underwriting standards is key to MIGA’s effectiveness and requires strengthened systems, standards, and processes.

1.22 IEG-MIGA observed that MIGA does not have functional and consistent underwriting standards or systems for quality assurance. MIGA’s institutional effectiveness depends on developing, formalizing, and adhering to such systems and standards. The need to formalize systems and standards and to introduce quality assurance and knowledge management is now urgent in light of the expansion of MIGA’s mandate following the recent changes to MIGA’s Operational Regulations, and MIGA’s rapid pace of hiring new operational staff and team heads. Suggested areas for improvement include the following:

Underwriting standards: These need to be defined and formalized. MIGA can spell out minimum standards for underwriting a guarantee, including minimum requirements for assessment of risks and project impacts. Currently, some individual standards are available from different sources, such as a guideline on assessing development impact. MIGA’s Operational Regulations provide high level requirements for its underwriting, and the template of MIGA’s underwriting document contains some further guidance. However, none of these documents spell out MIGA’s institutional requirements for minimum quality standards and components of analysis, which may lead to different quality standards and interpretations of requirements across the Agency.

Underwriting Handbook: Similarly, a MIGA underwriting handbook of guidance and reference material needs to be developed. Currently, there is no up to date guidance and reference material available to MIGA staff. Such a handbook would cover MIGA’s operational policies, procedures and reference materials, and would serve as a compendium of standards and requirements for underwriting and risk assessment. It would also cover underwriting procedures such as clearance and approval processes.

Quality assurance: MIGA needs to introduce a robust quality assurance process into its approval process for guarantees. Current quality assurance processes remain largely informal and add little value. IEG-MIGA had earlier identified the importance of strengthening MIGA’s quality assurance to ensure that underwriting products meet MIGA’s standards for “quality at entry” and due diligence. Implementing robust quality assurance processes would help MIGA to deliver higher quality and more consistent products across projects, teams, and staff.

Knowledge management: IEG-MIGA has observed that MIGA does not provide regular training. MIGA needs to develop formal and regular training for its underwriting teams, for new


staff, and for ongoing skills development to ensure that there is a common understanding of skills and analytical requirements. In particular, given the increase in new hires, MIGA should prioritize the development of a MIGA-specific orientation and training for new staff to ensure a common knowledge base of technical and institutional expertise and a shared awareness of underwriting standards and guidelines and other operational processes.

Implementing and institutionalizing self-evaluation of guarantee projects is a priority.

1.23 Self-evaluation of guarantee projects is key to institutional learning and accountability and to improving MIGA’s institutional performance. Throughout MIGA’s history, IEG has been the only source of evaluative information on MIGA projects and institutional effectiveness, and IEG-MIGA Annual Reports since 2004 have identified the need for MIGA to introduce self-evaluation as a tool for institutional learning and to improve MIGA’s institutional performance. Without a robust self-evaluation system, MIGA has no own means of knowing whether its projects have development impact or not, nor means of assessing its effectiveness in underwriting guarantees. This point was also highlighted by MIGA’s 2008 Business Process Review.

1.24 MIGA management committed to CODE and the Board, in FY08, to implement such a self-evaluation system. To support this, IEG-MIGA led a series of workshops to familiarize MIGA underwriters with its project evaluation methodology, and prepared a set of guidelines and handbooks. These are currently being piloted by MIGA and its first Project Evaluation Report – for an infrastructure project - is due to be completed in FY10, based on a field mission planned for end-FY09. This initiative is an important step towards a more comprehensive self-evaluation system for guarantees in MIGA to support institutional learning and accountability.

1.25 For FY10 and beyond, the challenge for MIGA is to quicken the pace of implementation of the self-evaluation program for guarantees. Under its self-evaluation pilot, MIGA expects to self-evaluate three to four guarantee projects in FY10. Going forward, MIGA should self-evaluate a growing proportion of the guarantee projects sampled each year by IEG-MIGA,13 and as a medium term goal, should aim to fully mainstream self-evaluation. Once fully mainstreamed, all sampled projects would be self-evaluated by MIGA, with IEG-MIGA validating the findings to ensure consistency of ratings and the integrity of the self-evaluation system. Future IEG-MIGA flagship reports will continue to inform CODE on MIGA’s progress in implementing its self-evaluation system (Box 1.2).

1.26 MIGA also needs better indicators for measuring its institutional performance and the implementation of its strategy. MIGA’s Operational Directions and business plan set out several key performance indicators (KPIs) for monitoring its performance.14 The proposed metrics and milestones are limited in scope and are inadequate for tracking MIGA’s progress in achieving its strategic and operational objectives, and do not provide management with timely or relevant information on progress towards stated objectives.

Box 1.2: Implementing a self-evaluation system for guarantees in MIGA

In FY08, MIGA management agreed to introduce self-evaluation of guarantee projects, and the first steps towards implementing such a system began in FY09. MIGA appointed an advisor in the Operations

13 IEG-MIGA’s target is evaluation of a 50 percent sample of eligible projects from the cohort of guarantees underwritten by MIGA three years earlier. See CODE-approved methodology established in A Multi-Year Evaluation Framework in MIGA: FY03-07. 14 MIGA identified the following key performance indicators: gross guarantee issuance ($); volume of guarantees in IDA countries ($); return on capital; ratio of administrative expenses to net premium income; and the number of guarantee projects underwritten.


Department to spearhead and coordinate efforts within MIGA, and has also identified several projects to be evaluated in its pilot effort.

IEG-MIGA has been supporting MIGA’s capacity building efforts and this will continue to be an area of emphasis for IEG-MIGA in FY10 and beyond. Initiatives have included workshops to familiarize MIGA staff with the evaluation methodologies used for assessment of private sector projects. This methodology is benchmark-based and rates projects across three dimensions: Development outcome, MIGA’s effectiveness, and contribution to MIGA’s financial results. The methodology is consistent with Good Practice Standards established by the Evaluation Cooperation Group (ECG) Working Group for Private Sector Evaluation, an entity that aims to harmonize evaluation standards for private sector operations across multilateral development institutions. IEG-MIGA has also developed guidelines and prepared several handbooks on self-evaluation of guarantee projects, together with a self-evaluation template which are currently being piloted.

Mainstreaming a self-evaluation system will bring MIGA in line with the World Bank Group, where the fundamental principle is to have operational departments self-evaluate their products, and to validate these through independent evaluation. IEG-MIGA will therefore continue to play a key role in ensuring the integrity of MIGA’s self-evaluation system once it is fully established, as is the case in the World Bank and IFC.

IV. Summary

1.27 This IEG-MIGA evaluation indicates MIGA efforts in several areas, including MIGA’s Operational Directions FY09-11, implementing changes to its Operational Regulations, undertaking the Business Process Review, and taking some initial steps in piloting self-evaluation of guarantee projects. Other areas where efforts have been made include the recent adoption -- for low risk projects -- of streamlined underwriting procedures and approval processes. Also, consistent efforts have been made to ensure that MIGA projects are aligned with World Bank country strategies and policies. More needs to be done regarding the effective deployment of MIGA’s resources to its priorities; the administrative cost structure relative to premium income; the effectiveness of its business development and client relationship function; and more efficient business processes and decision making to enhance client responsiveness and the efficiency of the underwriting process.

1.28 MIGA has recently developed an Action Plan for Strategic Progress that includes an initiative on “Internal Service Standards”. Several initiatives under the Action Plan address issues that IEG-MIGA has identified and that were discussed earlier in this chapter, including updating of MIGA’s Convention and Operational Regulations, streamlining processes, and strengthening the business development function.

1.29 IEG-MIGA will continue to monitor MIGA’s efforts towards achieving its strategic goals and improving organizational effectiveness. If implemented successfully, the ongoing MIGA initiatives described above could address some of the weaknesses identified in MIGA’s institutional effectiveness.


CHAPTER 2 : IMPLEMENTATION OF MIGA’S STRATEGY IN IDA COUNTRIES

2.1 This chapter seeks to assess MIGA’s engagement in IDA countries, including those that are conflict-affected, unless otherwise stated. The chapter reviews the scale of MIGA’s engagement as well as the trends and characteristics of MIGA’s guarantee projects in IDA countries. It also assesses MIGA’s guarantees in IDA countries in terms of their development outcome, relevance and alignment to country strategies and their contribution to MIGA’s financial results. The chapter also includes a discussion of likely implications of the current financial crisis for MIGA. It concludes with a summary of findings for MIGA’s future engagement in IDA countries.

I. Introduction: MIGA’s Role in IDA Countries

Under the right circumstances, foreign direct investment can fuel economic growth, which may contribute to a reduction in poverty

2.2 IDA countries’ development challenges and financing needs, including through FDI, remain a top priority of the World Bank Group. Economic growth is an important factor in poverty reduction,15 and for most countries, foreign direct investment is part of the growth equation: it facilitates the transfer of knowledge and technology across borders, thus contributing to productivity gains in developing countries.16 Additionally, FDI can build local managerial capacity, provide tax revenues to host governments, contribute to improved corporate governance, and support improved environmental and social standards.

2.3 IDA countries, the world’s poorest, stand to benefit from FDI. Yet FDI to developing countries is highly concentrated and only a few IDA countries have attracted sizeable amounts of foreign investment. Risk perceptions are a significant factor in patterns of private investment,17 signaling a continued role for MIGA’s political risk insurance product.

2.4 MIGA’s role in IDA countries derives from its mandate as a development institution. MIGA’s Convention firmly calls for the Agency to promote foreign direct investment to developing countries for productive purposes, and under conditions consistent with their development needs, policies, and objectives. Guarantees for investments in IDA countries have been a priority area for MIGA since FY00, when the Agency first formulated a strategic framework. Subsequently, MIGA’s FY05-08 Strategic Directions included a focus on frontier and conflict-affected countries, taking into account the needs of MIGA’s developing country members, the changing environment for foreign direct investment (FDI) and political risk insurance market, and MIGA’s desire to complement other insurers.18 The current MIGA strategy, spelled out in MIGA Operational Directions FY09-11 continued this strategic focus by emphasizing investments in IDA countries and conflict-affected countries, based on MIGA’s own assessment that it continues to have a role and relevance in these areas. In addition, the Operational Directions also emphasized investments in complex projects and support for South-South investments.

15 Dollar, David and Aart Kraay. 2002: Growth is Good for the Poor. Journal of Economic Growth. Volume 7, No. 3. 16 Klein, Michael, Carl Aaron, and Bita Hadjmichael. 2001. Foreign Direct Investment and Poverty Reduction (2001). World Bank Policy Research Working Paper No. 2613. Washington, DC. 17 World Bank. 2008: World Bank Group Guarantee Instruments 1990-2007. An Independent Evaluation. Washington, DC. 18 World Bank. 2005. MIGA 2005 Review for FY00-04 and Strategic Directions for FY05-08. Washington, DC.


Box 2.1: There is considerable overlap between IDA and conflict-affected countries

Since the beginning of the decade, some 38 of the 82 IDA countries have been conflict-affected. (An additional 11 IBRD countries were conflict-affected.) Almost half (20) of the 49 conflict-affected countries are in Sub-Saharan Africa. (For a definition of terms and classifications see footnote 47.) Similarly, the sample of evaluated projects for the Report also overlapped. This report covers 34 projects, including 20 in IDA countries. Out of the 20 projects in IDA countries, ten were in conflict-affected countries at the time of underwriting, eight of which in Sub-Saharan Africa.

Mapping overlaps for country groups - IDA, conflict-affected countries and Sub-Saharan Africa (FY00-08). Source: IDA Countries: IBRD. Operational Policy 3.10 Annex D. IBRD/IDA and Blend Countries: Per Capita Incomes, Lending Eligibility, and Repayment Terms (1999-2008)

2.5 MIGA’s prioritization of IDA and conflict-affected countries echoes similar priorities in the World Bank and IFC. The World Bank Group’s vision of inclusive and sustainable globalization19 includes IDA and conflict-affected countries within its six strategic themes: (1) helping to overcome poverty and spur sustainable growth in the poorest countries, especially in Africa; and (2) addressing the special challenges of states coming out of conflict or seeking to avoid breakdown of the state (“fragility and conflict”). Similarly, the first of IFC’s five strategic pillars, which have guided its operations since 2004, aims to strengthen the focus on frontier markets (IDA countries, fragile and conflict-affected situations, and frontier regions in middle income countries).20

2.6 MIGA has supported projects in higher risk low income countries in line with its strategic priorities. FDI flows to developing countries are highly concentrated in a small number of countries, almost all of which are middle income. The top ten recipient developing countries of FDI accounted for 65 percent of investment flows to developing countries during 2000 to 2006. In line with its strategic priorities, MIGA has supported projects in markets underserved by capital flows: low income countries account for 37 percent of MIGA’s outstanding exposure, but represent only 12 percent of global FDI stocks and 11 percent of the world’s gross national income (GNI) (Figure 2.1). MIGA’s outstanding net exposure in Sub-Saharan Africa (22 percent) was more than twice the region’s share of global FDI stocks (9 percent).

19 World Bank. 2007: Catalyzing the Future: An Inclusive and Sustainable Globalization. Remarks of Robert B. Zoellick, President, World Bank Group, October 22, 2007. 20 IFC Road Map FY10-12: Creating Opportunity in Extraordinary Times.

(25)

(11)

(8)

(19)

(20)

(0)

(18)

Developing Countries

IDA Countries(82)

Conflict-AffectedCountries (49)

Sub-Saharan AfricanCountries (47)


MIGA’s portfolio is concentrated in markets that attract relatively little foreign investment.

High-risk low-income countries

Figure 2.1: Shares of MIGA net exposure and FDI stock in high-risk low-income countries

2.7 MIGA’s exposure in IDA countries is important but has remained small as a share of the political risk insurance market. MIGA’s overall share of the Berne Union portion of the political risk insurance market in developing countries has seen a decline from an average of 9 percent during 2001-2004 to 3.6 percent in 2005-07.21 In IDA countries, MIGA’s market share of new exposure is somewhat higher, and has averaged at approximately 7 percent during 2005-2007. During this period, insurance exposure in IDA countries reported by members of the Berne Union increased from $7.6 billion (2005) to $11.9 billion (2007).22 However, Berne Union data are not easily lent to comparing MIGA’s share of PRI with that of other PRI providers, as Berne Union data reports only aggregate exposures and are not broken down by type of cover. Since MIGA under its Convention or Operational Regulations could not provide some types of PRI cover (e.g., non-honoring of sovereign guarantees), one would have to “net out” such coverages to make an accurate comparison.

2.8 MIGA’s market share has declined due to the entry of private insurers, who have ventured into higher risk countries that were traditionally served by national insurance agencies and MIGA. Private insurers have also been able to move beyond the limits of traditional products, type of investment, and coverage range currently constraining MIGA and other national insurers. On average, more than half of the Berne Union PRI exposure in IDA and conflict-affected countries was provided by private Berne Union member insurers during 2005-2008, a share that is expected to be reduced in 2009 due to the current global crisis.

2.9 Public insurers, particularly from Asia, are also increasingly engaged in these countries. Many of the Asian public insurers have become quite active players in IDA and conflict-affected markets, providing very large guarantee amounts. Key insurers in this context include: SINOSURE (China), NEXI (Japan), and KEIC (Korea).

2.10 Another measure to capture the impact of MIGA in IDA countries is the leverage of investments flows. MIGA’s leverage of actual investment flows is similar to IFC’s mobilization ratio. During the period of analysis (FY00-08), MIGA guarantee projects in IDA countries

21 Data correspond to new business and was reported by the Berne Union, the association of investment insurers and export credit agencies. Estimates exclude some important insurers, such as Lloyd’s syndicates. In addition, membership in the Berne Union has evolved over time, adding new members. Berne Union members report exposure for transfer restriction, expropriation, war and civil disturbance, breach of contract and non-honoring of sovereign guarantees; the latter type of coverage is not offered by MIGA. 22 MIGA’s percentage share was affected by several large public insurers, including KEIC (Korea), NEXI (Japan), and SINOSURE (China), which reported significant increases in new exposure during 2006 and 2007.

37%

12% 11%

% MIGA portfolio

% FDI Stock GNI Share


leveraged an estimated $11.8 billion in investments in IDA countries, implying a leverage ratio of 3.8 for every dollar guaranteed by MIGA.23

2.11 With the recent changes to MIGA’s Operational Regulations approved by the Board, MIGA will have enhanced flexibility and greater breadth of coverage – all of which should give MIGA the capacity to respond to market demand in developing countries in general, and IDA and conflict countries in particular.

2.12 MIGA’s engagement in IDA countries is comparable to IFC commitments in IDA countries. The share of MIGA’s guarantees in IDA countries (36 percent of total exposure on average for FY05-08) is similar to the share of IFC commitments in IDA countries (39 percent). This suggests that MIGA is making a proportionate contribution to supporting private sector investment in the poorest countries, relative to IFC (Figure 2.2).

MIGA’s engagement in IDA countries is comparable to IFC’s

Percentage of total exposure or commitments in IDA countries

Source: MIGA, World Bank Annual Reports, IFC Annual Report, * IFC data are for FY07 and FY08 only.

Figure 2.2: Shares of World Bank, IFC and MIGA support in IDA countries (in percent of total exposure/commitments FY05-08)

MIGA’s constrained mandate and self-imposed limitations hamper its effectiveness in IDA countries

2.13 Limitations from MIGA’s mandate have constrained the underwriting of projects in IDA countries. As noted earlier, restrictions imposed by MIGA’s Convention (as well as some internal self-imposed constraints) have hampered MIGA’s effectiveness, including in IDA countries. MIGA has had to turn down projects in IDA countries, many in the infrastructure sector, due to its inability to offer specific coverages requested by investors (such as extending the scope of breach of contract coverage to cover commercial risks or other risks of state-owned enterprises) and due to narrowly defined eligibility criteria. While it is difficult to quantify the volume of coverage MIGA was unable to offer, the most important mandate-related constraints for MIGA’s work, in IDA and conflict-affected countries and elsewhere, have been: (i) inability to offer coverage for non-honoring of sovereign obligations, (ii) inability to insure breach of contract coverage related to state-owned enterprises, (iii) inability to offer coverage for temporary business interruption resulting from war and civil disturbance, (iv) inability to cover investments

23 Leverage ratios are based on new guarantee projects. The ratios were calculated as follows: (Guarantee Amount for New Projects underwritten during FY00-08) / (Investment Cost for New Projects).

43% 39% 36%

As percentage of total World Bank/IDA lending

As percentage of total IFC commitments *

As percentage of total MIGA Guarantee

Exposure


due to strict requirements relating to the date of project implementation, and (v) inability to insure existing assets.

2.14 Several of these -- including non-honoring of sovereign guarantees -- have become possible with the recent amendment of the Operational Regulations. Addressing the remaining mandate restrictions would enable MIGA to offer a greater menu of coverages to better meet the specific needs of IDA countries and demand for political risk insurance in these countries, such as the ability to insure existing investment, foreign-funded investments by local investors, and stand-alone debt.

2.15 In addition, IEG has noted that MIGA had not taken full advantage of the opportunities available under its Convention and Operational Regulations.24 This referred to the scope of eligibility requirements and some degree of flexibility allowed in the Convention for covering non-equity direct investments and other types of investments.

II. Trends and Characteristics of Guarantees in IDA Countries

MIGA’s portfolio in IDA countries is sizeable

2.16 MIGA issued guarantees for 116 projects in IDA countries between FY00 and FY08. These represent a sizeable and increasing proportion of the number of projects in its overall portfolio. In FY09, 78 countries have been classified as IDA, of which 39 are in sub-Saharan Africa. Projects in IDA countries account for 46 percent of all projects underwritten in this period. The share of projects supported in IDA countries has increased over time, rising from 42 percent of projects with guarantees issued between FY00 and FY04 to 52 percent in the period FY05 to FY08. Currently, MIGA has active guarantees in 31 out of 78 IDA countries. Similar issues relating to conflict–affected countries are addressed in Chapter 3 (see Box 2.1 for overlaps of country classifications).

2.17 MIGA guarantees in IDA countries accounted for over a third of its gross exposure. Between FY05 and FY08, MIGA issued $2.1 billion in guarantees to IDA countries. These accounted for over half of all guarantees written during the period and amounted to 36 percent of MIGA’s gross exposure (up from 30 percent between FY00-04).

Guarantee Projects in IDA countries differ in important ways

2.18 Projects in IDA countries are smaller on average than projects in the portfolio as a whole. The size of guarantee projects in IDA countries insured during FY05-08 averaged $30 million, compared to $51 million for MIGA’s portfolio as a whole.

2.19 There are also important differences in the sector composition, as guarantees in IDA countries are more concentrated in infrastructure (58 percent of guarantee projects during FY05-08). This is an important difference from MIGA’s portfolio overall, in which financial sector guarantees figure most prominently (45 percent). Manufacturing, services and agribusiness accounted for 13 percent of exposure in IDA countries and 11 percent of MIGA’s overall portfolio. In addition, extractive industries accounted for a smaller share of MIGA’s exposure in IDA countries than for MIGA overall (see Figure 2.3).

24 The World Bank Group Guarantees Instruments 1990-2007. An Independent Evaluation. p. 27f.


Guarantee volume in IDA countries is concentrated in infrastructure

IDA Countries MIGA’s Overall Portfolio

Figure 2.3: Sector distribution of new guarantee projects in IDA countries, FY05-08 (guarantee volume)

2.20 “South-South” investments in IDA countries account for a much higher share than for the portfolio overall. South-South investments are defined as investments made by investors incorporated in MIGA-eligible Part 2 countries -- countries that are eligible host countries for a MIGA guarantee.25 Over the FY05-08 period, South-South investors accounted for 57 percent of MIGA’s guarantee volume in IDA countries, twice their share in MIGA’s portfolio overall, where South-south investments made up 27 percent (see Annex 4).

2.21 MIGA has increased its support for IDA countries in Africa. MIGA guarantees in Sub-Saharan Africa have been 60 percent of all new projects in IDA countries during FY05-08. This is a substantial increase from 45 percent of new guarantee projects in the period FY00-04. MIGA has also increased its engagement in Asia (from 9 to 20 percent between the same time periods) (see Figure 2.4).

MIGA’s Guarantees in IDA countries are concentrated in Sub-Saharan Africa

FY05-08 FY00-04

Source: MIGA.

Figure 2.4: Regional distribution of new guarantee projects in IDA countries, FY05-08 (by number of projects)

25 Such comparisons of South-South investment need to be interpreted with care, as the “south-south” classification includes some high income countries and international financial centers, such as Singapore, United Arab Emirates, Cyprus, Israel, and Mauritius. Projects by investors incorporated in any of these countries or financial centers are counted as “south-south” investments by MIGA, based as their emanating from an eligible Part 2 member country. A complete list of eligible Part 2 countries is in MIGA’s 2008 Annual Report, p. 106.

Infrastructure58%

Oil, Gas & Mining

7%

Agribusiness, Manufacturing,

Services & Tourism

13%

Financial22%

Infrastructure34%

Oil, Gas & Mining

10%


Services & Tourism

11%

Financial45%

ECA16%

MENA2%

LAC2%

Sub-Saharan Africa60%

East & South Asia

20%

ECA41%

MENA0%

LAC5%


East & South Asia

9%


MIGA’s portfolio in IDA countries has not been more risky.

2.22 One of the three claims paid during MIGA’s 20-year history has been in an IDA (and conflict-affected) country. This claim was paid in FY05 under a war and civil disturbance policy for a hydro-power project in Nepal, and compensated the guarantee-holder for partial damage to the business assets.26

2.23 MIGA’s “pre-claims” experience in IDA countries has been similarly modest. Pre-claims are defined as situations in which MIGA and/or the guarantee-holder apprehend that a claimable event could occur – for example, early indications that the government may not honor a tariff increase, or may wish to renegotiate a concession agreement. MIGA monitors such pre-claims situations closely, with the aim of mediating any emerging disputes to prevent them from becoming actual claims. The mediation function is what distinguishes MIGA from other insurers (who would write off a claim rather than invest in mediation), and is a key aspect of MIGA’s value-added for investors who are in a country “for the duration”. Mediation is a time-consuming, lawyer-intensive and therefore high-cost activity for MIGA (in terms of administrative budget), but with a high payoff when potential claims are avoided. Between FY03 and FY08, IDA countries accounted for fifteen of the 31 projects with “pre-claims” activities” – projects on which disputes arose between MIGA clients and the host government that required MIGA’s involvement. Half of these were in infrastructure, and about 40 percent in manufacturing and services.

2.24 Pre-claims and claims are triggered by different risks in IDA and IBRD countries. The number of pre-claims triggered by breach of contract and war and civil disturbance events is twice as high in IDA countries than in IBRD countries, reflecting the risk profile of projects. Expropriation is the predominant risk to trigger pre-claims activities for projects in both IDA and IBRD countries (Figure 2.5). Pre-Claims and claims are triggered by different events in IDA and IBRD countries

Source: MIGA. Multiple risks can trigger a pre-claim and claim event therefore the percentages add up to more than 100%.

Figure 2.5: Composition of risks triggering pre-claims and claims in IDA and IBRD countries (FY03-08)

26 In FY05, MIGA paid out a claim for Himal Power Limited, Nepal in the amount of $144,660. MIGA’s gross exposure to the project amounted to $32.4 million. The two other claims paid by MIGA were in Indonesia and Argentina, both for claims brought under expropriation policies, for $4.5 million and $558,311, respectively. At the time of the claim Indonesia was not an IDA-eligible country, nor was it classified as conflict-affected.

75%

26%

6%12%

80%

7%13%

27%

Expropriation Transfer War and Civil Disturbance

Breach of Contract

IBRD

IDA


III. MIGA’s Development Results in IDA Countries

2.25 This section presents findings and lessons on project outcomes in IDA countries, using IEG-MIGA’s standard ex-post project evaluation methodology supplemented by project surveys specifically designed for this evaluation (see Annex 1 for the methodology). The findings are based in the first instance on IEG-MIGA’s sample of 21 completed project evaluation reports (PERs), with supplementary findings drawn from 13 additional project evaluations for which ratings are being finalized. These projects were underwritten between FY96 and FY06, and evaluated from FY03 to FY09.27

2.26 Development effectiveness is part of MIGA’s mandate and “product brand,” and related to MIGA’s role as a catalyst of ‘high quality’ FDI flows -- FDI that sees value in MIGA’s environmental and social safeguards and its developmental orientation. Development outcome measures aim to capture a project’s overall economic and social impacts, and reflect how well a project has contributed to fulfilling MIGA’s mission of facilitating FDI that promotes sustainable growth and development. IEG-MIGA evaluates project development outcome across four different dimensions: (a) project business performance; (b) its economic sustainability; (c) its environmental and social effects; and (d) its private sector development impact.28 Each of these indicators measures a distinct aspect of the guarantee project’s performance and is assessed separately, and “development outcome” is a synthesis of them. A project’s development outcome thus encompasses all its effects (positive and negative) on economic and social development.

2.27 Approximately half of evaluated MIGA projects in IDA countries have development outcomes of satisfactory or better. IEG-MIGA’s 2006 Annual Report noted that evaluated projects in middle income countries had better development outcomes than those in IDA countries.29 In this year’s evaluation of projects in IDA countries, similar results have emerged. These results are similar to the share found in IEG evaluations of IFC projects for the same period.

2.28 What makes for satisfactory project development outcomes in IDA countries? MIGA’s guarantees in IDA countries with satisfactory and better development outcomes share several characteristics in common.30 Satisfactory and better development outcomes are associated with projects with sound business models, and those with a manageable debt burden.31 For projects involving public-private partnerships, sound concession frameworks and equitable terms for the government and the investors were key to getting better development outcomes. Many of the evaluated projects with satisfactory and better development results also benefited from the implementation of sector and other reforms that eliminated uncertainties and bottlenecks and improved project competitiveness. Finally, more intensive due diligence that did not rely solely on investor representations was key to better performance: large projects that were subjected to greater scrutiny by MIGA had satisfactory and better development outcomes; such projects were

27 IEG-MIGA reviewed a total of 34 MIGA guarantee projects underwritten between FY96 and FY06. Twenty of the 34 evaluated projects are in IDA countries (classified as at the time of guarantee issuance). The sample of 34 projects includes 12 projects in conflict-affected countries; all but two of these are in IDA countries. 28 The methodology is consistent with Good Practice Standards established by the Evaluation Cooperation Group (ECG) Working Group for Private Sector Evaluation. 29 Independent Evaluation Group-MIGA 2006 Annual Report. Para 2.3. page 5. 30 Satisfactory and better development outcomes are defined as projects with a development outcome rating of “Satisfactory” or “Excellent”. Lower development outcomes are defined as projects with “Partially Unsatisfactory” or “Unsatisfactory” development outcome ratings. 31 These findings are based on IEG-MIGA’s sample of 21 completed project evaluation reports (PERs) and supplemented by 13 additional project evaluations whose ratings are being finalized.


frequently supported by the World Bank or IFC, with MIGA also benefiting from project appraisal and supervision conducted by these institutions (Figure 2.6).

Figure 2.6: Factors contributing to better development outcomes in IDA countries

2.29 Better project development outcomes are linked to intensive MIGA due diligence.32 Better MIGA project work quality and selection (e.g., with respect to the investor, sector structure and adequacy of regulatory frameworks) is associated with better development outcomes. Most of the evaluated projects in IDA countries with satisfactory or better performance showed evidence of independent verification of business plans, projections, and other documentation provided by the prospective guarantee holders by MIGA staff, as well as consultations with Bank staff and other stakeholders, to ascertain the financial viability and commercial factors or risks. This included several large-sized projects implemented jointly projects with the World Bank or IFC. The participation of donors or development banks in projects involving public-private partnerships also provided a buffer against political interference. In contrast, inadequate work quality by MIGA underestimated and in some cases, did not consider the commercial and economic costs and risks and overlooked weaknesses in the project design and business model (see Figure 2.7). The absence of other donors as partners in many projects in IDA countries also deprived MIGA of valuable help in project appraisal and monitoring that could boost development results. Improved MIGA work quality at underwriting and monitoring of projects are critical in ensuring better development outcomes.

2.30 What can we learn from evaluated projects in IDA countries with lower development outcomes? Evaluation results point to a number of elements shared in common by guarantee projects with lower development outcomes.33 Just as a sound business model ensures good development results, a flawed project design or financial structuring (e.g., highly leveraged projects, those with over-optimistic business projections, inadequate analysis of economic and commercial risks, etc.) is at the core of all evaluated projects with lower development outcome. Weak project design and business models resulted in poor business performance and limited economic benefits to host IDA countries. Projects that were not competitively bid also experienced financial difficulties at the outset and lower development outcome at evaluation. These projects were not able to compete in the face of sector and market changes, and may also have faced legitimacy problems, in contrast to projects that had sound business models and structures (Figure 2.7).

32 These findings are based in the first instance on IEG-MIGA’s sample of 21 completed project evaluation reports (PERs) with supplementary findings in some cases drawn from 13 additional project evaluations for which ratings are being finalized. 33 See footnote 35.

Characteristics of Projects with Better Development Outcomes

Significant net economic benefits

Contribution to the development of private sector

Good project design and structure

Financially viable

Intensive due diligence

Sector and regulatory reforms

Projects with better Development Outcomes with the characteristic below

20% 40% 60% 80% 100%0%


Figure 2.7: Factors contributing to lower project development outcomes in IDA countries

IV. Project Relevance and Value Added

2.31 Strategic relevance relates to projects’ consistency with the development priorities of the host country and World Bank country and sector strategies. Indicators of alignment include the project’s consistency with the CAS or partnership strategy, and with the Bank’s sector policy and good practice approaches.

2.32 The findings reported below are based in the first instance on IEG-MIGA’s sample of 21 completed project evaluation reports (PERs) with supplementary findings drawn from 13 additional project evaluations for which ratings are being finalized. While the smaller sample size limits their statistical significance, the results provide some indication of the relevance and value-added of MIGA projects in IDA countries.

MIGA guarantees in IDA countries are strategically relevant at the country level

2.33 Project-level findings indicate that MIGA guarantees in IDA countries are broadly consistent with the CAS at the time of underwriting. This corroborates with IEG-MIGA’s findings reported in the IEG-MIGA 2007 Annual Report and validates the efforts MIGA management has made to ensure that guarantee projects are aligned with country strategies. MIGA’s underwriting template now requires a description of the project’s alignment with the CAS and underwriters and the risk management team consult regularly with World Bank sector and country staff to ensure that MIGA projects are consistent with country assistance strategies. Many MIGA staff also participated in CAS preparation, in varying degrees based on the nature of the CAS (whether a joint CAS or not) and on the MIGA country program. The alignment of MIGA projects with the host country development priorities indicates that MIGA is delivering on its goal of supporting host country development objectives (see Figure 2.8).

2.34 Consideration of sector policies during underwriting is important and may need further attention. MIGA’s underwriting documents do not provide much insight on the projects in relation to sector policies and reforms. MIGA’s closer examination during the underwriting process of projects’ alignment with Bank-supported sector policies and reform programs will help ensure guarantees are also more consistently aligned at the sector level.

2.35 What makes for higher project relevance in IDA countries? Evaluation findings34 have shown that beyond CAS relevance, high relevance projects in IDA countries have several features in common, including:

34 See footnote 35.

Charateristics of Projects with Lower Development Outcomes

Flawed project design and structuring

Financial difficulties

Inadequate work quality

Sector and market changes

Modest economic benefits

Absence of other multilateral or bilateral partner

Projects with lower Development Outcomes with the characteristic below

20% 40% 60% 80% 100%0%


A salient role in the sector: Particularly projects that are either designed as part of sector reforms or projects that help to alleviate inefficiencies and bottlenecks in the sector in which they operate.

High economic sustainability: Projects that provided significant economic and social benefits to their host countries in relation to their size.

Figure 2.8: Factors contributing to project strategic relevance in IDA countries

2.36 MIGA’s role and contribution relates to the unique benefits, contribution, and “additionality” (value-added) that MIGA as a development institution brings. This dimension relates to an assessment of the question “What special or unique benefit did MIGA bring to the client or project that private political risk insurers did not offer?” MIGA’s “contribution” can take many forms depending on the client and project, including providing a product that is better or more valuable than what other insurers are able to offer.

2.37 MIGA’s political risk guarantee is valued by all guarantee holders of evaluated projects in IDA countries. In most of the evaluated projects in IDA countries, MIGA was the only insurer that was willing or had the capacity to provide PRI coverage to the investor (Figure 2.9). Guarantee holders also valued MIGA’s credibility as a member of the WBG and its ability to resolve disputes.

Figure 2.9: Aspects valued most by guarantee holder in projects with high value added

2.37 At the project level, MIGA’s value-added enhanced development outcomes. MIGA’s value added was positive and high in all of the evaluated projects in IDA countries. Achieving a high level of MIGA additionality is essential, not only in ensuring that MIGA grows its PRI business but also in enhancing development outcomes. Evaluation findings35 indicate that MIGA tends to add value in complex projects and in sensitive environmental and social issues (see Box 2.2).

35 See footnote 35.

Characteristics of Projects with High Strategic Relevance

Aligned with CAS at underwriting

Aligned with MIGA operational priorities

Project has a prominent role in the sector

Project has high economic sustainability

0% 60% 80% 100%

Projects with High Strategic Relevance with the characteristic below

20% 40%

Aspects Valued Most by Guarantee Holders in Projects with High Value-Added

Guarantee holder valued highly MIGA's PRI

MIGA is the only PRI provider supporting the project

MIGA assisted in resolving disputes

0% 100%40% 60% 80%20%

Projects with High Value-Added with the characteristic below


Box 2.2: MIGA Project Relevance and Value Added – Some Examples

Many MIGA projects were found to be highly relevant and value-adding to the host country. Their value-added and relevance was associated with, e.g., playing a vital role in the sector; making a significant economic contribution relative to the project size; having a positive demonstration effect in relation to sector policies; introducing a new technology or know-how. In other cases projects had limited relevance and value-added. Examples (positive and negative) include:

A large project in a post-conflict country contributed considerably through employment and its confidence building demonstration effect.

Two large power projects in China which helped alleviate peak power shortages for industries and services in the region; spillover effects included strengthening local fuel suppliers, and local employment.

An agribusiness project in Uganda built the country’s largest privately-owned processing plant equipped with an automated color-sorter and made a unique contribution to processing technology for Uganda’s coffee export sector, while also contributing to government revenues and foreign exchange earnings.

A credit facility in Ghana experienced very limited take-up. The partial use of the credit line limited its relevance and value-added.

A housing development project that was expected to address the acute affordable housing shortage and demonstrate increased private sector participation in the housing sector did not materialize because of inequitable risk sharing arrangements between the public and private sector partners.

Collaboration between MIGA and World Bank/IFC has benefits for complex projects

2.38 World Bank Group involvement in a MIGA-guaranteed project was seen as facilitating the underwriting process. In cases where the World Bank was directly involved in the project, MIGA could draw on due diligence done by Bank specialists for its underwriting. Such projects however had a longer underwriting period than those without direct World Bank involvement. Evaluated MIGA guarantee projects that were consistent with WBG strategies were equally likely to have high or low development outcomes, although MIGA projects that were not consistent with existing WBG strategies generally had lower development outcomes.

2.39 Closer WBG cooperation is beneficial in complex projects. With respect to the cooperation between the World Bank, IFC, and MIGA in its guarantees projects, IEG’s 2008 evaluation of World Bank Group Guarantee Instruments noted that MIGA and the Bank have both provided PRI to five high-risk projects. In these instances, MIGA benefited in terms of risk sharing and reduced cost for due diligence; however, such cooperation and involvement of various parties tended to involve transaction costs. The report also noted that cooperation between IFC and MIGA had been limited by pledge of shares issues, and the perception among staff of competition between the two institutions. The principles governing the relationship between MIGA and IFC products have not been clear. The evaluation noted limited coordination among the three WBG institutions in the development of new products, and limited synergies in marketing WBG guarantee products, due to a lack of incentives and familiarity with the products of the other institutions.36 As a first step intended to strengthen collaboration between the two institutions, MIGA and IFC signed a MOU in February 2009 to promote the cross marketing of MIGA and IFC financial products.

36 The World Bank Group Guarantee Instruments 1990-2007. An Independent Evaluation.


V. Implications of Past Crises for MIGA’s Engagement in IDA Countries

2.40 As a result of the deepening financial crisis, developing countries will see FDI flows decrease. Against the backdrop of a rapidly deteriorating global economic environment since mid-2008, UNCTAD estimates that global FDI decreased by 21 percent in 2008.37 In spite of the overall decrease, FDI inflows to developing countries grew at an estimated 3.6 percent. There were distinct regional differences in these inflows in 2008: Sub-Saharan Africa and Latin America experienced a growth of FDI flows of 16.8 percent and 12.7 percent respectively, while Asia witnessed a modest decline. FDI inflows for 2009 are projected to be lower for all regions.

2.41 IDA countries, although less integrated into global financial markets, will be increasingly affected during this crisis as the more limited FDI flows they receive are further reduced. Also, lower demand for and lower prices of commodities, increased risk perceptions, and lower remittances will affect growth and fiscal balances. Many countries will be less able to implement programs and reforms aimed at strengthening economic growth, reducing poverty, and enhancing their infrastructure, and businesses will be affected by the scarcity of private credit.

2.42 Reduced capital flows and heightened risk will have implications on MIGA’s business. Despite the projected reductions in FDI flows to developing countries, higher perceived risk levels may increase the demand for PRI among investors who are considering new investments in developing economies. To date, the financial crisis has impacted the timing of many projects in MIGA’s pipeline, due to the difficulty in arranging project finance. At the same time investors have indicated that they place increased value on MIGA’s political risk mitigation services, as these services are particularly relevant in the current environment. On balance however, despite the expected increase in the demand for PRI from investors who are able to go ahead with their investment plans, the overall decline in FDI will likely reduce the volume and number of MIGA guarantees in FY09.

2.43 The global crisis may have the most significant impact on the two industries in which MIGA currently underwrites the majority of its policies: financial services and infrastructure, which comprised 60 and 36 percent of total new exposure underwritten in FY08 respectively. Both of these sectors have been significantly impacted by the disruption in credit markets.

2.44 IDA countries may be impacted significantly by the crisis, as FDI and project finance dry up, while their investment and infrastructure needs continue to grow. Notwithstanding the impact of the global economic crisis on FDI and project finance flows and therefore on key elements of MIGA’s business, it may also present opportunities to maintain higher levels of outstanding exposure, if there are fewer cancellations of active guarantees and new policies are underwritten in response to increased investor risk awareness.

2.45 MIGA guaranteed projects in IDA countries have been impacted by the crisis. IEG-MIGA’s project surveys conducted for this report38 showed that several projects have already been negatively affected by the crisis and downturn in commodity prices. Other projects are expected to be affected by a drop in demand for exports, and scarcity of additional external financing. This could affect MIGA’s guarantees as projects under stress are more likely to experience disputes and therefore potential claims. To date, however, MIGA has not seen any impact on its operations in terms of an increase in pre-claims or in early cancellations of existing projects.

37 UNCTAD. 2008. Assessing the Impact of the Current Financial and Economic Crisis on Global FDI Flows. 38 IEG-MIGA surveyed 20 MIGA projects in IDA and conflict-affected countries for this evaluation to complement evidence available from its project evaluation report (PER) database.


2.46 Political risk is typically heightened during crises, over concerns that host governments may respond to stress in public finances by revisiting their contractual commitments or by imposing transfer and convertibility restrictions to stem an outflow of reserves, as noted by a recent IEG study on lessons from past financial crises. 39, 40 Similarly, there are concerns that unpopular economic measures will increase the likelihood of civil disturbance. With respect to the risk of restrictions on transfer/convertibility of foreign exchange, past crises have seen the use of capital controls to contain banking and balance of payment crises.

2.47 Crises have tested MIGA’s risk mitigation capacity in several ways. Two of the three claim payments in MIGA’s entire history arose during crisis episodes: MIGA paid a claim for East Java Power Corp (Indonesia), one of several power projects cancelled by a presidential decree in the late 1990s. The second claim was for a logistics services project in Argentina in the aftermath of the country’s financial crisis. In addition, crises have also provoked several pre-claim situations which MIGA successfully mediated.

2.48 Although causality is difficult to establish, the volume of MIGA guarantees decreased significantly in the years of the Asian and Argentina crises but continued to grow during smaller crisis episodes. Twenty-five percent of the total volume of MIGA guarantees issued between 1995 and 2002 were in crisis-affected countries, including guarantees issued during crisis episodes in Argentina, Brazil, Pakistan, Indonesia, Ecuador, Russian Federation and Turkey. The bulk of MIGA’s guarantees in crisis-affected countries were for financial sector and infrastructure projects. The overall volume of MIGA guarantees grew during crisis episodes in Russia, Turkey, and Brazil, and there is some evidence that cancellations of active contracts tended to diminish in difficult economic times.

2.49 MIGA’s potential to assist countries in crisis is currently limited due to mandate restrictions. Past experience may suggest that the demand for political risk cover for existing investments is particularly strong during economic crises. However, MIGA’s Convention does not allow it to cover existing investments, among others, despite the potential impact of such cover for reducing investor exit. On the other hand, if risk perceptions lead investors to pull back, PRI demand may decline, as happened with the volume of MIGA guarantees in the Asian crisis years and in Argentina, where investors withdrew following government measures perceived as expropriatory.

2.50 An increasing range of MIGA coverage would enable greater responsiveness. The Board of Directors has amended MIGA’s Operational Regulations, and MIGA is also considering changes to its Convention, which would enable the organization to expand its range of products. The crisis has heightened the need for MIGA to take the steps necessary to enhance its range of products available to better serve its client countries, especially those most dependent on capital flows including conflict-affected and IDA countries. Authorizing MIGA to be able to insure existing investments, against the backdrop of declining FDI flows and capital flight, would seem particularly beneficial to both groups of countries.

2.51 MIGA may face challenges in the management of its existing portfolio. Certain sectors and countries could be particularly adversely impacted by the crisis. In particular, MIGA’s outstanding portfolio in the financial sector in Eastern Europe merits close monitoring, including tracking of scheduled payments from shareholder loans that could be affected by restrictions on transfer and convertibility of currencies. Continued importance will also need to be placed on risk assessment and risk management.

39 Notable cases include Venezuela during its 1994 banking crisis, Thailand and Malaysia during the 1997-1998 Asian crisis, and Argentina in 2001. 40 IEG. 2009: Lessons from World Bank Group Responses to Past Financial Crises. Evaluation Brief 6.


VI. Summary of Findings

2.52 MIGA’s Operational Priorities FY09-11 emphasizes support for investments in IDA and conflict-affected countries. This strategic focus is relevant, given the challenges faced by this group of countries, and the potential benefits they can reap from investment flows. Private sector development and foreign direct investment are critical to economic growth in IDA countries, and to the rehabilitation of economies of conflict-affected countries. IDA countries and fragile states remain top priorities of the World Bank Group.

2.53 MIGA has supported projects in countries that receive relatively low FDI inflows, in line with its strategic priorities. In particular, its exposure is higher in low income economies than the relative share of FDI stocks for these countries. MIGA’s guarantee exposure in IDA countries is sizeable and has increased since earlier in the decade, accounting for 36 percent of guarantee amounts issued, and more than half of projects supported by MIGA during the FY05-08 period. MIGA’s market share of the political risk insurance market is higher for IDA countries than for its portfolio overall. Its share has nevertheless remained relatively modest, due in part to the entry of private insurers and national insurance agencies from Asia into these markets.

2.54 MIGA projects in IDA countries have not been more risky in terms of claims paid and pre-claims situations, despite higher country risk. Results for a small sample of projects in IDA countries show that approximately half have development outcomes of satisfactory and better.41 Projects with satisfactory and better development outcomes were designed and structured well and had sound business models. In addition, projects benefited from the implementation of sector and regulatory reforms, and importantly, from sound due diligence by MIGA. The presence of other multilateral institutions in a project improved the chances of project success. On the other hand, projects with flawed project designs, financial difficulties, sector changes that introduced competition, as well as inadequate work quality, were associated with lower development outcomes.

2.55 MIGA’s effectiveness in IDA countries overall has been hampered by institutional constraints arising from mandate restrictions, processes perceived as long and cumbersome, and the lack of a functioning business development process. MIGA’s effectiveness in implementing the strategy in IDA countries can be improved by strengthening MIGA’s institutional effectiveness, including product innovation, enhancing the business development function and processes, and strengthening MIGA’s systems, standards, and processes. While these are relevant for MIGA’s operations overall, they have particular urgency for MIGA’s engagement in IDA countries, in light of their development needs and the low levels of foreign investment they attract.

2.56 As a result of the global financial crisis, developing countries will see FDI flows decrease. IDA countries will be increasingly affected by the decline in FDI. Lessons from previous financial crises indicate that political risks are typically heightened during crises. Reduced capital flows and heightened risk will have implications for MIGA’s business. Despite decreases in FDI flows, demand for political risk insurance may go up as risk perceptions also increase. On balance, in the short term, MIGA’s guarantee volume is expected to decline.

41 See footnote 35.


CHAPTER 3 : SPECIAL ISSUES RELATING TO MIGA’S ENGAGEMENT IN CONFLICT-AFFECTED COUNTRIES

3.1 This chapter seeks to assess MIGA’s engagement in conflict-affected countries. It reviews the scale of MIGA’s engagement as well as the trends and characteristics of MIGA’s guarantee projects in conflict-affected countries. The chapter also evaluates the efficiency of MIGA’s mechanisms for delivering guarantees in conflict-affected countries, including the use of Trust Funds as a mechanism for increasing MIGA’s gross exposure in conflict-affected countries.42 The effectiveness of MIGA’s guarantees in delivering development impact, their relevance and alignment to country strategies in the IDA countries as a whole was reviewed in Chapter 2; this area is not separately addressed in this chapter. A summary of findings relating to MIGA’s engagement in conflict-affected countries concludes the chapter.

I. Introduction

3.2 Economic recovery is the cornerstone of peace and stability, but investors face particular difficulties in countries affected by conflict. Recovery of conflict-affected countries involves re-building institutions, restoring service delivery and infrastructure, and the resumption of economic activity. Private investment is therefore also part of the equation of creating the jobs and livelihoods that will enable conflict-affected countries to transition to stability and sustainable growth. Foreign investors face particular challenges in conflict-affected and post-conflict environments, including security challenges, resource constraints, and low trust in government institutions, and therefore, most private investment in the early stages will be domestic and very small scale, with the more significant investments coming only later (see Box 3.1). 43

3.3 MIGA has a role to play in conflict-affected countries. In these circumstances, MIGA political risk insurance can be a tool to support foreign direct investors and to catalyze much-needed private sector inflows to conflict-affected countries, complementing the donor support from multi-lateral and bilateral sources for the public sector and institution-building elements of post-conflict reconstruction and recovery.

3.4 MIGA’s role in conflict-affected countries derives from its mandate as a development institution whose mission is to “promote foreign direct investment (FDI) into developing countries to help support economic growth, reduce poverty and improve people’s lives.”44 MIGA’s value-added, and the strengths it brings to bear in these markets has often been noted by clients and peers, including being able to insure projects and underwrite long tenors in difficult

42 In addition to the term “conflict-affected countries,” the World Bank classification used for this report (see Box 3.2 for a definition and Annex 2 for a listing of conflict-affected countries), there are several other World Bank categorizations relating to such countries that are used by different parts of the WBG for different purposes, and that involve different country groupings: “Post-Conflict Country” is the terminology used by the World Bank to define countries eligible for exceptional IDA

allocations and includes (i) countries that have suffered from a severe and long-lasting conflict leading to inactivity of the borrower for an extended period, or at least a substantial decline in the level of external assistance, including from IDA; (ii) countries that have experienced a short but highly intensive conflict leading to a disruption of IDA support; and (iii) newly sovereign states that have emerged through the violent break-up of a former sovereign entity.

“Fragile States” is the term the World Bank uses for countries facing particularly severe development challenges such as weak institutional capacity, poor governance, political instability, and frequently on-going violence or the legacy effects of past severe conflict.

“LICUS countries” (low-income countries under stress) are countries with weak policies, institutions and governance. The term is synonymous with “Fragile States.” (LICUS was replaced by “Fragile States” in January 2006, with the same definition).

43 Bray, John. 2005: International Companies and Post-conflict Reconstruction. World Bank Conflict Prevention and Reconstruction Working Paper No. 22. Washington, DC. 44 MIGA’s Mission Statement, May 2004.


markets thanks to its financial strength and its special country knowledge, and its leverage and influence, derived from MIGA’s status as a member of the World Bank Group and its strong relationships with host member country governments. These strengths contrast with the reluctance of private sector insurers to enter markets during a conflict situation or in its immediate aftermath, and the scarcity of political risk insurance in high-risk countries such as Afghanistan.45

Box 3.1: Timelines for foreign investments in conflict–affected countries

The timeline for foreign investment in conflict-affected settings is linked to security and political risk considerations. - and varies by sector: telecoms companies and foreign banks often enter rapidly after a conflict, while heavier infrastructure projects such as power start up much later -- 3 to 5 years after a conflict -- and private investment in transportation (ports) and water supply tend to come last. Public-private partnerships (PPPs) can, under the right circumstances, support rebuilding by providing public services, strengthening the local private sector, and reinforcing a sense of state legitimacy. Diaspora investments are often important – in Afghanistan, about 20 percent of FDI came from Diaspora investors, and the proportion in West Bank and Gaza is higher.

This timeline may prove useful for MIGA in tailoring and targeting its products to attract investors to these sectors and to market its products and services to Diaspora/expatriate investors. 46

Conflict Ends Years 1 – 3 Years 3 – 5 Years 5 +

Telecommunications Electricity generation, distribution, Transport, Water

Banking (esp. services for the international community)

Construction & engineering, esp. for short-term projects

Diaspora/expatriate investors

3.5 However, providing PRI in conflict-affected countries poses challenges for MIGA. For example, MIGA’s engagement in conflict-affected countries raises issues with respect to MIGA’s risk management and risk-bearing capacity. The likelihood of a claim in cases of war and civil disturbance coverage, where MIGA is generally unable to recover paid-out claims, is much higher.

3.6 In addition, the inflexibility of MIGA’s guarantee contract terms, identified in client feedback, may also limit MIGA’s effective engagement in these countries. These constraints derive from its Convention, and until recently, MIGA’s Operational Regulations. The following sections analyze these and other issues related to the overall quality of MIGA’s engagement in conflict-affected countries, after first reviewing trends and characteristics of MIGA’s guarantee projects in conflict-affected countries.

45 MIGA’s exposure accounted for 63% of all PRI exposure in Afghanistan as of the end of 2008, and apart from MIGA, only OPIC, AIG and Zurich had any exposure at all in Afghanistan. In Bosnia-Herzegovina, in the late 1990s, political risk insurance was offered only by MIGA, and by OPIC, OeKB, and PwC (Austrian and German public PRI providers, respectively.) 46 Bray, John. 2005: International Companies and Post-conflict Reconstruction. World Bank Conflict Prevention and Reconstruction Working Paper No. 22. Washington, DC.


II. Trends and Characteristics of Guarantees in Conflict-Affected Countries

MIGA’s Portfolio in conflict-affected countries is substantial

3.7 MIGA has insured 69 projects in conflict-affected countries between FY00 and FY08, including eight projects in IBRD countries – about 27 percent of the total number of projects underwritten by MIGA over this period.47 The number of projects MIGA has underwritten in conflict-affected countries has risen in recent years, reaching 30 percent of projects supported by MIGA between FY05 and FY08 (up from 25 percent between FY00 and FY04). Support for projects in conflict-affected countries thus represents an important and growing share of MIGA’s business, in terms of the number of projects underwritten.

3.8 Guarantees to conflict-affected countries have accounted for one-fifth to one-sixth of MIGA’s gross exposure in recent years. MIGA issued $868 million in guarantees to conflict-affected countries between FY05 and FY08. During this recent period, about 15 percent of MIGA’s guarantee volume was in conflict-affected countries. This compares to $1,520 million underwritten during FY00-04, equivalent to 21 percent of guarantee volume. While these numbers do underscore the importance of these host countries for MIGA’s business, the growing share of guarantees by number, in relation to the declining share by volume may have implications for MIGA, discussed below.

Box 3.2: Conflict-affected countries – A profile

Some 49 countries have been considered conflict-affected by the World Bank over the period under review. “Conflict-affected countries” are defined by the World Bank as countries that: (i) have experienced violent conflict in the past five to ten years, (ii) are currently experiencing violent conflict, or (iii) are perceived as being at risk of violence. The category includes countries that have or are experiencing regional or localized conflict -- such as Indonesia, Nigeria, Uganda, and the Philippines -- but that are not conflict-affected at the national level. A complete list of countries categorized as conflict-affected is in Annex 2.

Within the conflict-affected group, some countries have been considered conflict-affected throughout the FY00-FY08 period, while others have been considered conflict-affected for only certain years within this period. Currently (FY08) 32 countries are considered conflict-affected, plus West Bank/Gaza.

The conflict-affected group includes mostly IDA countries, but also four IBRD countries -- Colombia, Indonesia, Iraq, and the Philippines. Of the 49 conflict-affected countries in FY00-FY08, 20 are in sub-Saharan Africa, ten are in South and East Asia/Pacific, nine in Europe and Central Asia, and five in LAC and the Middle East, respectively.

Almost all of the countries listed as conflict-affected during FY00-FY08 are MIGA members, excepting Comoros, Myanmar, and Somalia.

Source: IBRD.

Projects in conflict-affected countries differ in important ways from MIGA’s overall portfolio

3.9 Projects are much smaller on average. Projects in conflict-affected countries are on average smaller than those in MIGA’s portfolio as a whole ($17 million vs. $51 million,

47 IEG-MIGA considered projects in countries classified as conflict-affected at the time of underwriting (see Annex 2).


respectively, in FY05-08). This difference in average project size is even more evident in FY08, the most recent year under review, when the average project size in conflict-affected countries was approximately $13 million, compared with $96 million for MIGA’s guarantee projects overall.

3.10 In addition, the size distribution of projects in conflict-affected countries is quite skewed towards very small projects (under $5 million), which account for a much larger proportion of projects in conflict-affected countries than in MIGA’s business as a whole. About 22 of the 69 guarantee projects (32 percent) underwritten during FY00-08 involve gross exposures of less than $5 million (compared to 58 of the 254 guarantees (22 percent) underwritten for the business as a whole during this period). Half of MIGA’s guarantees in conflict-affected countries (34 of the 69) were for less than $10 million (6 percent of guarantee volume) and would have met the financial criteria for MIGA’s Small Investor Program (SIP).48 By comparison, SIP projects account for 24 percent of projects underwritten by MIGA during FY06-08. 49

3.11 And projects are concentrated in manufacturing, services and agribusiness. There are also important differences in the sector composition, as guarantees in conflict-affected countries are more concentrated in manufacturing, services and agribusiness, (52 percent of guarantee projects during FY05-08), and less in the financial sector (24 percent) and infrastructure (21 percent). A small number of projects was in extractive industries (oil, gas and mining) (3 percent).

3.12 This is a striking difference from MIGA’s portfolio overall, in which financial sector guarantees (34 percent) and infrastructure (32 percent) figure most prominently, and manufacturing, services and agribusiness account for 30 percent of all projects underwritten in FY04-08 (Figure 3.1).

3.13 The concentration in manufacturing, services and agribusiness reinforces the tendency toward smaller average project sizes in conflict-affected countries, as projects in the manufacturing, services and agribusiness sector are much smaller on average than projects in other sectors.50 Considering the substantial allocation of MIGA administrative resources applied to projects the agribusiness, manufacturing, and services sector – implied by the large number of small transactions – the outcome in terms of guarantee volume booked is rather small. MIGA should satisfy itself that this allocation of MIGA administrative resources is consistent with achieving its intended development impact in conflict-affected and other countries.

48 The comparison includes guarantees in conflict-affected countries underwritten from FY00-FY08 and is only for illustrative purposes -- SIP was approved by the Board only in 2004. 49 The Small Investor Program (SIP) is MIGA’s vehicle for targeting small and medium-sized investors and SMEs. To qualify, the guarantee coverage must not exceed $10 million, the investee company may have a maximum of: 300 employees and an asset value of $15 million; and the investor company may have a maximum of: $50 million in assets and total sales of $100million. Eligible sectors include finance, agribusiness, manufacturing, and services, and projects’ environmental and social classification must be B or C. MIGA offers flat premium rates which do not recover MIGA’s full underwriting cost, to make PRI rates attractive to smaller investors. MIGA estimates that it is generating about $250,000 (0.5%) of gross premium revenue from its SIP portfolio, although SIP projects account for 24 percent of projects underwritten by MIGA during FY06-08. 50 MIGA’s agribusiness, manufacturing, services projects averaged $17 million while the average size of MIGA’s oil, gas and mining projects was $127 million, financial sector projects $68 million, and infrastructure projects $54 million, during FY05-08.


Guarantees in conflict-affected countries are concentrated in agribusiness, manufacturing and services…

Conflict-Affected Countries

Overall portfolio

Figure 3.1: Sector distribution of MIGA guarantees (by number of projects) - FY05-08

3.14 “South-South” investments are a much higher share of guarantees in conflict-affected countries. South-south investments are investments made by investors incorporated in countries that are eligible host countries for a MIGA guarantee. Over the FY05-08 period, South-South investors accounted for 38 percent of MIGA’s guarantee volume in conflict-affected countries, a much higher share than for MIGA’s portfolio overall, where guarantees of South-South investments made up 19 percent.51

3.15 The regional focus of MIGA’s guarantees in conflict-affected countries has shifted with the locus of crisis and conflict. In the period from FY00 to FY04 -- the time of the Balkan crisis -- most of the new guarantee projects in conflict-affected countries were in the ECA region (63 percent), followed by Africa (23 percent). In the FY05 – FY08 period the regional distribution of projects supported in conflict-affected countries has shifted considerably towards Sub-Saharan Africa. That region accounted for the bulk of MIGA’s engagement in conflict-affected countries (55 percent), notably, Uganda, Rwanda, Guinea-Bissau, the Democratic Republic of Congo (DRC) and Nigeria, although MIGA remained engaged in the Balkans (24 percent (ECA)) and also supported projects in South and East Asia (22 percent), notably in Bosnia-Herzegovina, and Afghanistan respectively. Most recently (FY08), 19 of the 32 countries classified as conflict-affected are in sub-Saharan Africa. MIGA has also supported projects in Latin America and Caribbean and Middle East and North Africa regions during FY00–08 (see Figure 3.2 and Annex 3).

51 “South-south investments” are defined as investments made by investors incorporated in “MIGA-eligible Part 2 countries” - countries that are eligible host countries for a MIGA guarantee. See Annex 4 for a complete list of South-South investments guaranteed in conflict-affected countries. Of MIGA’s 26 projects in conflict-affected countries involving south-south investors, 12 were from MIGA-eligible Part 2 countries that have graduated from the Bank, are IBRD Part I countries, or international financial centers.


Services & Tourism

52%Financial

24%

Infrastructure21%

Oil, Gas & Mining

3%


Services & Tourism

30%

Financial34%

Infrastructure32%

Oil, Gas & Mining

4%


MIGA’s support in conflict-affected countries is now concentrated in Sub-Saharan Africa…..

FY05-08

FY00-04

Figure 3.2: Regional breakdown of new projects in conflict-affected countries, by number – FY00-08

MIGA faces special risks and challenges in conflict-affected countries

3.16 Country risks are higher, and business environments are fragile. Most MIGA projects in conflict-affected countries are in high-risk country environments. Based on Institutional Investor’s country risk ratings,52 fully eighty-six percent of such projects underwritten between FY05 and FY08 were in countries classified as “high risk”, almost twice the proportion (47 percent) for all MIGA projects as a whole. Only fourteen percent of MIGA’s guarantees in conflict-affected countries were in “medium risk” countries such as Bosnia-Herzegovina, Indonesia, and Nigeria.53 Thus, the 15 percent of MIGA’s gross exposure that is in conflict-affected countries represents a high-risk engagement, and MIGA could face risk management challenges as it focuses on this priority area in the coming years.

3.17 Despite the higher country risk ex ante, only one claim has been paid in a conflict-affected country to date. MIGA has paid out only one claim in a conflict-affected country to date. This claim, one of the three MIGA has paid, was paid in FY05 under a war and civil disturbance policy,54 which compensated the guarantee-holder for partial damage to the business’ assets; the project continues to operate to date.

3.18 MIGA’s “pre-claims” experience and mediation efforts in conflict-affected countries have been similarly modest. Project-related disputes arising between MIGA clients and the host government requiring MIGA’s involvement and mediation have emerged in only four conflict-affected countries between FY03-FY08.55 Such “pre-claims,” are situations in which MIGA and/or the guarantee-holder apprehend that a claimable event could occur – for example, early indications that the government may not honor a tariff increase or concession agreement. MIGA

52 Institutional Investor’s International Country Credit Rating, by Euromoney Institutional Investor, plc. High risk countries are defined as having a risk score below 30, on a scale of 0-100. 53 In addition, one MIGA guarantee was in the Central African Republic, which had not yet been rated by Institutional Investor. 54 As noted in Chapter 2, in FY05, MIGA paid a claim for Himal Power Limited in Nepal, in the amount of $144,660. MIGA’s gross exposure to the project was $32.4 million. The two other claims paid by MIGA were in Indonesia ($4.5 million in net terms, i.e., after reinsured amounts), which was not at that time (1998) categorized as a conflict-affected country, and Argentina ($558,311), both for claims brought under expropriation policies. 55 Based on MIGA’s claims records and provisioning memoranda.

ECA24%

Sub-Saharan Africa55%East & South

Asia21%

ECA62%

LAC8%

MENA3%


East & South Asia5%


monitors such pre-claims situations closely, with the aim of mediating any emerging disputes to prevent them from becoming actual claims. The mediation function is what distinguishes MIGA from other PRI insurers (who would write off a claim rather than invest in a mediation process), and is a key aspect of MIGA’s value-added for long-term investors who are in a country “for the duration.” Mediation is a time-consuming process requiring substantial legal expertise and as such it can be a costly activity in terms of administrative budget, however there is a high payoff in terms of potential claims are avoided.

3.19 The claims record suggests that MIGA did not face higher instances of claims in conflict-affected countries, as compared to the overall portfolio. This is consistent with the experience of other PRI providers which have also reported below-average claims events in conflict-affected countries. This outcome is likely due to MIGA’s project-level risk mitigation. MIGA has several ways of managing risk at the project level: the first is deciding which coverage(s) to offer, i.e., MIGA may not offer a specific type of cover if the risk is assessed as high for that type of cover.56 Second, MIGA uses contract “exclusions” and other contract-level features such as extensions of waiting periods, “carve-out” of specific risks, inclusion of deductibles, and the like.57

3.20 This project-level risk management approach may not fully support MIGA’s strategy. Despite projects’ apparent high risk, the ex post claim experience appears to have benefited from effective risk management at the project level. While such risk management techniques enable MIGA to engage in conflict-affected countries, they may also lead MIGA to carve out specific risks that the clients were particularly interested in, possibly diminishing the value of the guarantee. The use of this risk management tool may then not be fully consistent with a strategy to focus on promoting investment in conflict-affected countries. MIGA may wish to conduct an assessment of its project risk management techniques (including, e.g., contract exclusions or carve-outs) in conflict-affected countries to ascertain the extent to which the actual risk taken on by MIGA is consistent with its stated strategy.

3.21 Guarantees in conflict-affected countries are managed no differently from other guarantees. MIGA has not established any special processes or knowledge management for underwriting guarantees in conflict-affected countries. For example, there is no provision for, or practice of assigning these guarantees to underwriters already experienced in underwriting such guarantees in conflict-affected countries, or of underwriters with experience of conflict-affected guarantees advising those new to this business area. There is no “review” system that brings to bear MIGA’s expertise and accumulated staff knowledge on guarantees in conflict-affected countries. Similarly, when contracts are drafted, there is no lawyer “specialized” in drafting guarantee contracts in conflict-affected countries, and no provision for assigning this work to a conflict-experienced legal staff. Thus there is no knowledge management to back up MIGA’s engagement in conflict-affected countries or process for sharing accumulated expertise, potentially limiting the development of good practice and innovation for this business line.

MIGA has sometimes used special instruments to support its engagement in conflict-affected countries

56 Each of MIGA’s coverages is risk-rated, and the risk rating may differ for different types of coverage in a given country. 57 MIGA assesses country-level political risk for a typical (“benchmark”) project based on the likelihood of a claimable event in that country, differentiated by the types of coverage offered by MIGA. By contrast, the project-level risk assessment seeks to determine the probability of a claim for a particular project. Therefore, project-specific risk ratings may differ from country ratings.


3.22 Guarantees in conflict-affected countries have been supported both directly and through special vehicles. MIGA has supported investments in conflict-affected countries either on its own balance sheet or through special trust fund vehicles. Although MIGA has supported most of the projects in conflict-affected countries on its own balance sheet (58 of the 69 projects, or 84 percent), in several instances, MIGA chose to expand its guarantee coverage through a Trust Fund vehicle, limiting the exposure on its own balance sheet.58 To date, eleven of MIGA’s 69 guarantee projects in conflict-affected countries (16 percent) have been insured through Trust Funds.

3.23 MIGA has three country-specific guarantee trust funds: West Bank/Gaza, Bosnia-Herzegovina, and Afghanistan. Their aim is to leverage MIGA’s capacity to provide long-term insurance for eligible investments in risky areas and give a positive signaling effect to foreign investors. Under these facilities, guarantees are issued by MIGA on behalf of the trust fund. The Bosnia and Afghanistan trust funds were both designed with implicit “leverage ratios,” where MIGA would directly provide coverage for some portion of each investment, with the balance insured under the trust fund (up to an agreed project limits, with the intended aim of leveraging MIGA’s guarantee capacity.59 MIGA is required to apply the same “standard of care” and diligence in underwriting guarantees under the trust fund as it would for its own balance sheet. The leverage requirement –that MIGA directly insure a portion of any projects insured under the trust fund – helps to reinforce this same standard of care.

3.24 Operationally, the trust fund receives the guarantee-related premium income and in the event of a claim, MIGA would pay the guarantee-holder from the trust fund. To date, no claims have been registered or paid for any project insured under a trust fund, and MIGA is not currently monitoring, nor mediating any pre-claims situations. This is in part because the universe is only a handful of projects, half of which are quite new. It may also relate to MIGA’s contract-level project risk management (see para. 3.19).

58 In the case of West Bank/Gaza, because it is not a (MIGA member) country, MIGA’s engagement required a trust fund approach. 59 The leverage aspect of the trust funds has the same effect as co-insurance – expanding the available cover for a project while limiting the insurer’s balance sheet exposure. Such leverage could not be part of the West Bank/Gaza trust fund as MIGA can only provide guarantees in MIGA-eligible host countries. The Afghanistan trust fund also included an implicit leverage ratio for ADB.


Box 3.3: MIGA’s post-conflict trust funds – Key features

I. INVESTMENT GUARANTEE TRUST FUND FOR WEST BANK/GAZA (FY97)

Financed by: Total trust fund amount of $20 million, financed by Japan, the EIB, and the Palestinian Authority (using proceeds of a $10 million IDA credit).

Guarantee projects supported and outcomes: The trust fund saw no utilization, and in 2008 was extended substantially, with some modifications in eligibility rules (see below). There have been no guarantee projects to date, and therefore no impacts.

Features: When initially established, the trust fund’s eligible investments mirrored MIGA’s Convention and Operational Regulation in terms of the type of investments that could be covered. An amendment in FY09 broadened this to allow (i) guarantee of non-shareholder loans (both foreign and domestic) in freely usable currency without the need to cover equity; (ii) locally made investments in freely usable currency by financial institutions in the Territories; and (iii) existing investments, in association with coverage of new investments, where the value of the coverage of the existing investment may not exceed 50 percent of the total value of the new investment amount.

II. INVESTMENT GUARANTEE TRUST FUND FOR BOSNIA-HERZEGOVINA (FY97)

Financing: Total trust fund amount of €10.5 million, financed by the European Commission.

Guarantee projects supported and outcomes: The trust fund has been fully utilized to provide guarantees for five projects; 60 percent of the total went to projects in the financial sector (3), services (1), and manufacturing (1). The fund will most likely have had a positive impact, perhaps significant, on financial intermediation by the banking sector, given the collapse of financial institutions during the war and need for credible banks to serve the private sector.

Features: This was designed as a “tied” trust fund, and supported only investors from EU countries. Otherwise, the trust fund mirrors MIGA’s Convention and Operational Regulations, in terms of the type of investments that can be covered. The Fund was structured so that claims would be paid out pro-rata, based on insured amounts, between MIGA and the Fund.

III. AFGHANISTAN INVESTMENT GUARANTEE FACILITY (FY05)

Financed by: Total trust fund amount of $12 million, financed by ADB, DFID (UK), Afghanistan (using the proceeds of a $5 million IDA credit).

Guarantee projects supported and outcomes: The trust fund was almost 30 percent utilized at end-2008 after more than three years of operation, with about $3.5m of guarantees underwritten. MIGA issued six guarantees for five projects in agribusiness, construction material, manufacturing, banking, and telecoms (the latter also benefited from a direct MIGA $74 million guarantee). Except for the banking project, all have faced difficulties, some of them linked to the deteriorating security and governance situation in the country, and several have ceased to operate in the country. The impact of the fund so far has been moderate in terms of achieving its main stated purpose of developing the private sector in Afghanistan.

Features: The trust fund was designed to enable MIGA to guarantee activities beyond those allowed under its Convention and Operational Regulations, including foreign loans without equity, and local loans provided in a freely useable currency. However, since MIGA is only allowed to cover foreign-investments, the latter could not be leveraged with guarantees from MIGA’s own balance sheet. Unlike the others, this Trust Fund was structured to take the “first loss” – so that payments for any claim would first come out of the fund, up to its limit, and only above that limit be paid by MIGA.


III. Summary of Findings on MIGA’s Engagement in Conflict-Affected Countries

3.25 MIGA has not been strategic in its engagement in conflict-affected countries. Although its engagement in conflict-affected countries is a “strategic priority”, its approach to underwriting guarantees in conflict-affected countries seems to have been ad-hoc, and it has not developed a “game plan” for its engagement: While MIGA has underwritten a large number of projects (30 percent of the total between FY05-FY08), the average project size is small (one tenth of the average project in FY08). Almost half of the guarantees are SIPs, which are not priced to recover administrative costs. Projects are concentrated in small-scale manufacturing, agribusiness and services that may have less potential for economy-wide impact than may infrastructure or financial intermediation.

3.26 MIGA’s engagement seems to reflect a non-strategic, supply-driven approach. A more strategic approach would likely enhance MIGA’s development effectiveness in conflict-affected countries, and would allow the Agency to utilize its administrative resources and capital most effectively. Managing work programs with an eye to developing some staff (e.g., underwriters and lawyers) with specialist knowledge and expertise of the particular issues and needs of operating in a conflict environment would likely be one aspect of such a strategic approach. Aligning MIGA’s other business functions -- marketing, business development, and client aftercare – to effectively support this business would be another, as would an assessment of the financial dimensions of its engagement in conflict-affected countries.

3.27 Past engagement and client surveys show that MIGA has a role to play in conflict-affected countries but expectations about PRI should be realistic. MIGA has engaged substantially and has a role to play to catalyze foreign direct investments and lead the entry of other PRI providers. However, it is important to be realistic and manage expectations about what PRI can deliver. Especially in the highest-risk environments there is the question whether the political risk guarantee instrument can address the key bottlenecks for private sector investment: Key security issues may be more important, perhaps also corruption and delays in government decision-making. For the banking sector, issues such as small company size, lack of collateral and enforcement mechanisms and other situational problems may matter more.

3.28 MIGA’s project-level risk management may not be fully aligned with its engagement strategy. The risk mitigants employed by MIGA include the carve-out of specific risks (contract “exclusions”), extension of waiting periods, claims deductibles and other specific requirements. While these risk management techniques enable MIGA to engage in conflict-affected countries, staff interviews indicated that MIGA has not always provided the coverage the clients requested, which may have reduced the value of the guarantee. MIGA’s strategic priority to mitigate risks in conflict affected countries may require further consideration of appropriate risk management tools.

With respect to Trust Funds...

3.29 Trust Funds can be useful tools for MIGA to expand its coverage in high risk countries beyond what can be managed on its own balance sheet, however they have not been a necessary condition for MIGA to engage in conflict affected countries. Despite their high risk ratings, the majority of such projects have been directly insured -- projects in conflict-affected countries underwritten on MIGA’s balance sheet carry an average Institutional Investor Country Credit Rating score of 23. Projects underwritten under the Afghanistan Trust Fund were inherently more risky, with an average IICCR score of 13. However, MIGA has insured directly several projects in countries with risk scores that were similar to Afghanistan, e.g., Burundi, Democratic Republic of Congo, Guinea-Bissau and Sierra Leone. MIGA also (co-) insured on its


own account a $74 million guarantee project in Afghanistan (telecoms), with the balance insured under the trust fund.

3.30 It is not clear from these cases what MIGA’s criteria are for acceptable “own” risk and for its considerations for creating Trust Funds vs. direct insurance. While MIGA relied on special vehicles for its engagement in Bosnia-Herzegovina and Afghanistan, whether MIGA needed the special vehicles to engage is not clear. Feedback from staff interviews suggested that MIGA likely could have insured projects directly, but that having the Trust Funds allowed MIGA to extend greater coverage than it would otherwise have, given concerns over high risk and protecting its balance sheet. Although a reasonable point of departure, the analysis of risk management implications has not been explicit.

3.31 Broader and more flexible structures may increase trust funds’ chances of success. There are several dimensions to this: First, is the issue of which investments are eligible for cover. The first fund in West Bank/Gaza was structured to mirror MIGA’s product range and eligibility criteria, and experienced no uptake. The later West Bank/Gaza and Afghanistan funds were more flexible in terms of capacity to guarantee activities not normally covered by MIGA, and performed better in terms of uptake. Flexibility beyond the Convention is a useful way to make the trust fund instrument more effective, although it is of course no guarantee of this.60 Second, is the issue of whose investments can be covered: The European Commission-funded Bosnia-Herzegovina Trust Fund was a “tied” fund that could only insure investments from EU countries. This limited its effectiveness, thus raising questions about the benefits of MIGA’s administering Trust Funds with such narrow mandates as investments of nationals of a donor country/ies. There is also the matter of principle – should MIGA accept to manage tied resources with a limited set of potential investors?

3.32 Using scarce IDA funds to resource post-conflict trust funds may have high opportunity costs. Some $15 million of IDA funds were used to resource the West Bank and Gaza and Afghanistan trust funds, with the result that these countries’ scarce IDA resources would be part of the payout in the event of a claim. More generally, it is not clear that using IDA funds to establish PRI trust funds is a good use of IDA for conflict-affected countries, especially if IDA funding is scarce and there are alternative uses which would bring higher development benefits.

3.33 A multi-country fund for conflict-affected countries would be a more effective tool. Trust Funds can be useful tools for MIGA to expand its coverage in high risk countries beyond what can be managed on its own balance sheet. However, their effectiveness can be improved: The three funds have had different degrees of utilization: Bosnia-Herzegovina was fully utilized; West Bank/ Gaza has seen no utilization at all, and Afghanistan has been only 30 percent utilized after more than three years of operation. Given the costs of establishing, managing and monitoring/reporting on each trust fund, including the cost of tying up resources in “slow-disbursing” funds, there is a strong case to be made for designing a future fund, if any, on a multi-country basis, and for donors to provide resources on that basis. A multi-country fund will also enable risk-pooling which may allow some leveraging of the trust fund resources to take place.

3.34 MIGA’s trust funds have not had realistic goals, based on a credible results framework. All three MIGA trust funds were targeted towards “small and medium sized enterprises” and trust fund documents typically claimed that projects would contribute to private sector development, job creation, technology transfer, and export generation. The Bosnia trust fund was expected to promote 40 - 50 projects with an average size (not guarantee size) of €1 million, and ended up promoting only five projects. The West Bank/Gaza trust fund has seen no uptake. The

60 All such broadenings of possible scope should be encouraged, but their practical impact may be limited – lack of (flexibility in) PRI cover may not be the deciding factor for investments in many post-conflict settings.


Afghanistan trust fund, whose stated purpose was “to help kick-start the private sector in Afghanistan and bring foreign investment to the country”, has insured several projects, however, the impact of the fund so far has been moderate in terms of achieving its main purpose of developing the private sector. Formulating more realistic objectives, based on rigorous analysis of the market and potential demand for political risk insurance would improve trust fund design. Any trust fund design should also include suitable milestones and performance indicators to track the use and effectiveness of Trust Funds, from the outset.


CHAPTER 4 : EVALUATION UPDATE ON MIGA’S TECHNICAL ASSISTANCE ACTIVITIES

4.1 This chapter aims to provide an update on specific aspects of MIGA’s Technical Assistance activities. It responds to a request by CODE in 2007, following discussion of the IEG-MIGA 2007 Annual Report, for IEG-MIGA to update IEG’s earlier evaluation (on investment climate) and review MIGA’s technical assistance for investment promotion since its integration into FIAS. The chapter first reviews the mandate for, and history of TA activities in MIGA. It then addresses the more recent history and experience with the integration of MIGA’s erstwhile TA activity into FIAS. Based on an assessment of this experience, the chapter concludes with a section of findings and recommendations.

4.2 This update is not designed as a comprehensive evaluation of MIGA TA delivered through FIAS, nor does it evaluate specific TA projects or activities. Rather, it focuses on key aspects relating to the merger of MIGA’s TA activities into FIAS. Moreover, a comprehensive activity-level evaluation would at this stage be difficult, since “MIGA’s TA” activities are now fully co-mingled within FIAS and since the merger, do not exist separately. IEG-IFC’s Independent Evaluation of IFC’s Development Results 2009 (IEDR) undertook a comprehensive review of IFC’s advisory services, including those of FIAS.61 IEDR findings on TA activities are referenced in this chapter where they are relevant to MIGA’s erstwhile TA activities delivered through FIAS.

I. Introduction

4.3 MIGA’s TA activities are governed by its 1985 Convention, which set out the agency’s mandate to provide technical assistance to member countries to encourage FDI flows. Article 2(b) of the Convention mandates that MIGA shall “carry out appropriate complementary activities to promote the flow of investments to and among developing member countries”, while Article 23 requires MIGA to “...carry out research, undertake activities to promote investment flows…in developing member countries, with a view to improving the environment for foreign investment flows to such countries.” MIGA’s mandate for TA is also supported in its Operational Regulations which authorize MIGA to undertake “TA advisory services…on investment policies.”

MIGA’s implementation of its TA mandate has evolved over time.

4.4 Until 2007, MIGA’s technical assistance was carried out by MIGA staff directly, and focused mainly on building the capacity of investment promotion agencies (IPAs). With the aim of increasing a country’s ability to attract foreign direct investment, MIGA’s menu of TA activities included needs assessments of investment promotion agencies; advice and assistance to IPAs to develop and implement strategies and marketing plans; development of investment promotion support tools (IT and online tools, and promotional material), and training of IPA staff. By FY07, some 14 regular staff, 12–14 percent of MIGA staff was dedicated to TA work,62 and activities under the TA mandate accounted for 12 percent of MIGA’s budget.

61 Independent Evaluation of IFC’s Development Results 2009. Knowledge for Private Sector Development – Enhancing the Performance of IFC’s Advisory Services. 62 This includes both open-ended and term higher level and support staff.


4.5 IEG-MIGA’s evaluation found the effectiveness of MIGA’s TA program was limited. First, the 2004 IEG-MIGA evaluation63 found that MIGA had been effective within its narrow focus of strengthening investment promotion agencies, and that these clients were generally satisfied with MIGA’s work. Second, however, with respect to relevance, the evaluation noted that investment climate and level of economic development are more important in influencing FDI flows to a country than investment promotion activities. Since IPAs are not responsible for the actual policies affecting FDI, they have limited influence on the overall investment climate, and MIGA’s TA was therefore only indirectly relevant to improving the climate for FDI.

4.6 Third, on a strategic level, there was no integration, complementarity, or “spillovers” in the delivery of guarantees and technical assistance activities: There was no evidence that TA activities contributed to the generation of guarantees, or vice versa, and the TA activities had limited potential to make the investment climate more conducive to MIGA guarantees. Linkages between the two activities were quite weak in practice as they were run essentially as separate business lines. IEG’s evaluation recommended that MIGA’s strategy should integrate TA and guarantee products to reap synergies within the agency, as well as improving MIGA’s additionality and development impact.64 MIGA took steps to implement this recommendation between 2004-2007, however, the initiative bore limited fruit.

4.7 IEG’s 2004 evaluation also noted the institutional overlap of MIGA’s TA and FIAS. Both MIGA and FIAS were providing TA for investment promotion.65 The scope of work of FIAS work tended to be more policy-focused and involved broader investment climate issues than MIGA’s TA which focused on capacity building of IPAs, but their TA activities were not clearly distinguishable to clients and donors. Also, while the coordination and cooperation between MIGA and FIAS had improved over time, there remained a clear potential for reduced overlap and improved synergies. There was thus a clear possibility that under the then set-up the WBG might provide sub-optimal services to clients, and that institutional (WBG) resources would be deployed in a less than fully efficient manner. IEG’s evaluation recommended further improving coordination and collaboration, including codifying the respective roles of FIAS and MIGA on investment promotion.66

4.8 MIGA’s technical assistance activities and TA staff were integrated into FIAS in 2007. This decision was grounded importantly in IEG’s evaluation findings and recommendations. The goal was to consolidate the delivery of business environment advisory services and to simplify service delivery. Specific aims included: (i) greater coherence in the delivery of investment climate-related TA activities, (ii) having a more coordinated approach to donors, (iii) aligning the (formerly) MIGA TA and FIAS work programs in investment promotion, and (iv) broadening the TA client base by having a single window for investment climate services. Internally, MIGA expected that the efficiency gains from the transfer of MIGA’s TA program and staff to FIAS, together with increased donor funding, would reduce the cost to MIGA of providing TA by 20 percent in real terms by FY09.

63 Findings of this evaluation were reported in IEG’s Improving Investment Climates: An Evaluation of World Bank Group Assistance (Part IV), and IEG-MIGA’s 2004 Review of Development Effectiveness in MIGA. 64 IEG-IFC’s IEDR 2009 found similar challenges for IFC in integrating advisory services and investments (pp 23, 29). 65 This overlap was a function of institutional history in which MIGA, under its TA mandate of promoting investment flows, focused on providing support to IPAs, while FIAS’ mandate of providing advisory services for improving the business environment, includes support for IPAs. 66 Internal discussion paper on FIAS from 2004, prepared for IEG’s: Improving Investment Climates: An Evaluation of World Bank Group Assistance.


4.9 The integration of MIGA’s TA services into FIAS took place in April 2007, and included the transfer of MIGA’s ongoing TA work program,67 some 14 MIGA staff plus consultants, and the portion of the MIGA budget dedicated to TA (staff, consultants and program costs) to FIAS. MIGA’s TA trust funds were also transferred to FIAS. As part of the integration, MIGA and FIAS also agreed on resource and budget issues, including MIGA’s contribution to FIAS’ core budget going forward.

II. Assessing the Integration Experience to Date

Integration of MIGA TA has been positive from a WBG corporate operational and client perspective…

4.10 The integration of MIGA’s TA with FIAS aimed to increase synergies and efficiencies in the delivery of investment climate related technical assistance by the WBG, and reduce potential confusion for stakeholders by offering a single window for clients and donors.68 Some preliminary findings on the results of the integration are that:

4.11 The scope of FIAS’ investment generation advisory services (the area corresponding to support to IPAs formerly provided by MIGA) and the regions/countries covered have increased since the merger, according to interviews with former MIGA TA staff in FIAS and based on the number of approval documents for advisory services projects since the merger.

4.12 FIAS is able to offer more continuous and coordinated policy and investment promotion support to clients than MIGA could provide before the integration, when its effectiveness was constrained by being able to address only a very limited area of the investment climate agenda, building capacity of investment promotion intermediaries.

While integration has weakened the links between FIAS TA and MIGA’s core guarantees business, MIGA benefits from FIAS’ investment climate improvement activities ….

4.13 Integration has eroded the links between TA and MIGA guarantee operations. Prior to the merger, there had been, at best, a weak link between MIGA TA and guarantee operations in practice, and these links have now been substantially broken with the integration of MIGA TA into FIAS.69 This is in part due to FIAS’ governance and management arrangements, in which strategy, program management, and day-to-day decision-making are completely separated from MIGA, and higher-level reporting mechanisms and board governance structures have tended to leave MIGA without influence on FIAS, reflecting the underlying reality that FIAS is de facto a program implemented by IFC (see next section).

4.14 However, MIGA continues to benefit from FIAS’ investment climate improvement activities, albeit indirectly. FIAS’ investment climate improvement activities, being broader in scope, are arguably more relevant to MIGA’s core business than were the previously-supported, more narrowly focused, investment promotion TA activities. Moreover, MIGA and FIAS

67 Eight ongoing projects were transferred to FIAS’ portfolio with MIGA’s integration into FIAS. In the run-up to the merger, MIGA had had 44 active TA projects, 30 of which were closed before the merger, two were under development, and 4 were piggy-backed onto FIAS projects. 68 There is further room to clarify and delineate the functions and services provided by (a) FIAS, (b) the “Business Enabling Environment” business line within IFC’s Advisory Services Vice-Presidency, and (c) the Financial and Private Sector Development Network (FPD), the joint IFC-WB VPU. 69 An Evaluation of MIGA Investment Climate Activities, IEG-MIGA Report (2004), prepared for Improving Investment Climates: An Evaluation of World Bank Group Assistance, The World Bank, 2006.


emphasize similar strategic priorities in terms of regions and sectors. Under its Operational Directions FY09-11, MIGA’s strategy emphasizes four priority areas: (i) investment in IDA countries; (ii) investments in post-conflict countries; (iii) investment in complex projects; and (vi) support for south-south investments. FIAS’ strategy (FY08-11), linked with IFC’s, emphasizes all of MIGA’s priority areas except one -- complex projects. In terms of actual TA activities, FIAS has increased its TA in IDA countries, including conflict-affected countries in recent years, and in FY08, over 50 percent of FIAS’ activities were in IDA countries, including Sub-Saharan Africa.70

4.15 While these broad areas of overlap provide the basis in principle for links between TA and MIGA’s PRI to be re-developed, more country-specific analysis would be needed to determine the actual scope for synergistic collaboration between FIAS and MIGA.

Current FIAS governance arrangements give MIGA limited voice….

4.16 FIAS is a joint IFC-World Bank-MIGA department, formally administered by the Financial and Private Sector Development Vice-Presidency, a joint department of the World Bank and IFC. Administratively, it is governed by IFC rules and procedures.

4.17 MIGA is represented in FIAS’ Supervisory Committee but has had limited input into FIAS’ strategy or work program planning. The highest decision-making body is the FIAS Supervisory Committee, which is chaired by IFC’s Executive Vice President and includes as members the Vice President (FPSD-joint WB/IFC), the Vice President of IFC Business Advisory Services, and MIGA’s EVP. This committee meets twice a year and focuses largely on strategic and high level operational, resource, and staffing issues, including on developing new products or exiting existing ones. FIAS’ general manager is in charge of day-to-day operations, and reports to the Supervisory Committee. Beyond that, the reporting lines for the general manager (who has several other roles), and thus for FIAS as a whole, are focused towards IFC. FIAS’ general manager has no direct reporting responsibility to MIGA.

4.18 Although FIAS’ strategy (FY08-FY11) references a close cooperation with MIGA management in developing FIAS’ investment generation practice, thus far there has been only limited interactions between the two institutions. There is no indication that MIGA's views and needs have been considered in FIAS’ work program planning, commensurate with its status as a main stakeholder. In practice, due to FIAS’ implementation through IFC, and reporting relationships which are focused towards IFC, FIAS’ operations appear to be largely driven by IFC. MIGA has had very limited influence over FIAS strategy, work program or resource management.

4.19 Collaboration between MIGA and FIAS is not yet institutionalized. There is little evidence of coordinated work programs, operations or field missions, or of collaboration between the two institutions at the management or staff level. There is a lack of arrangements to share information and coordinate work program efforts, both at the management and operational staff level. Interviews with staff indicate that there is no formal coordination between MIGA and FIAS staff, and few incentives to do so; instances where coordination takes place happen on an ad-hoc basis. In addition, MIGA has yet to define its value proposition from FIAS, to articulate its needs and, more generally, to engage effectively with FIAS.

4.20 Recently several areas for closer coordination and cooperation have been identified. MIGA and FIAS have established a working group to identify areas where both could benefit from closer coordination and cooperation, such as in Africa, conflict-affected countries, and

70 2008 FIAS Annual Report, 2009, www.fias.org.


south-south investments. Recently, MIGA and FIAS concluded a two-year agreement confirming MIGA’s financial support to FIAS, through FY11. MIGA has also identified the possibility of FIAS staff contributing to business origination for MIGA. While business development is not regularly part of FIAS field work and cannot become the focus of their activities, FIAS staff may be able to complement MIGA’s own business development activities. This would require coordinating missions, providing training on MIGA products to FIAS staff, and above all, aligning incentives.

4.21 Regular reporting to MIGA on FIAS’ project implementation and outcomes and the use of resources can be improved. There is no structured organization or reporting mechanism between FIAS and MIGA similar to the arrangements in place between FIAS and IFC. MIGA’s Quarterly EVP Reports list FIAS’ investment generation projects and some highlights, but there is no other formal results reporting on outcomes and impacts of investment generation activities of FIAS to MIGA.

MIGA’s financial contribution to FIAS has been substantial for its size…

4.22 For FY09, MIGA contributes nine percent of its administrative budget to FIAS. MIGA’s budget contribution to FIAS was agreed for four years between the two institutions at the time of the integration. In FY07, the year of the merger, MIGA contributed $2.2 million (for six months) to FIAS’ core funding.71 (FIAS’ core fund is the principal vehicle to flexibly finance the overall strategy and work program and its funds are untied as regards purposes, projects or programs.) In FY08, MIGA contributed $4.0 million; or 42 percent of FIAS’ core budget, and in FY09, MIGA contributed $3.5 million, equivalent to 38 percent of FIAS’ core funding. MIGA recently confirmed its support to FIAS through FY11, entailing a budget contribution of $3 million for FY10.

4.23 While the merger had clear benefits for the World Bank Group and delivery of investment-related TA, MIGA’s value-added from FIAS and its influence in FIAS governance appear at odds with the level of its current financial support to FIAS. MIGA’s contribution of 38 percent of FIAS’ core funding is large in relation to MIGA’s size and administrative budget in FY08. MIGA’s contribution is also striking in relation to IFC and the Bank, which also contribute to FIAS’ core funding out of dramatically larger administrative budgets. IFC and the Bank account for 44 percent and 18 percent of FIAS’ core funding, respectively. Given the scale of its support, MIGA needs to better articulate and define its expectations and preferences with respect to technical assistance activities.

4.24 The end of FIAS’ current strategy period is an opportunity for MIGA to present a clearly articulated approach and value proposition for its technical assistance in the context of its mandate under the Convention for the period FY12 and beyond, and to define the commensurate funding.

It is premature to rate the performance and effectiveness of FIAS’ TA activities

4.25 FIAS has only recently begun to track the performance of its TA activities. FIAS’ TA projects fall under IFC’s monitoring and evaluation system for advisory services. In this system, at the completion of a TA activity, the project team now self-assesses the performance of a TA activity and prepares a TA Project Completion Report (PCR), which is independently reviewed and validated by IEG-IFC. IEG-IFC recently evaluated the performance of IFC’s advisory

71 MIGA’s contribution was considered to be broadly commensurate with resourcing the program of investment promotion activities that was transferred to FIAS from MIGA, including the staff complement (14) and consultants.


services.72 Based on a first batch of validated TA Project Completion Reports (PCRs), IEG-IFC found the quality of PCRs needed considerable improvement, including with respect to setting baselines and tracking performance against them. Second, some IFC-commissioned reviews of facilities, products, and projects lacked independence from management. Third, IEG-IFC noted methodological shortcomings in the way reviews had been conducted. As a result, findings remain tentative and it is too early to draw conclusions.

III. Summary of Findings

4.26 The integration of MIGA TA into FIAS has been positive at the corporate and WBG institutional level, and from a client perspective. From the perspective of streamlining the delivery of investment climate-related advisory services within the World Bank Group, it has reduced potential overlaps between departments and client confusion about which part of the Bank is offering which service.

4.27 While integration has weakened the links between FIAS TA activities and MIGA guarantee operations, MIGA benefits from FIAS’ investment climate improvement activities, albeit indirectly. MIGA’s influence over FIAS’ strategy and work program is limited, reflecting FIAS’ governance and reporting structure. MIGA does not regularly receive information on the implementation or outcomes of FIAS’ TA activities. There is a lack of coordination between MIGA and FIAS at the activity level, and there are no structured mechanisms in place to address coordination issues. MIGA needs to better articulate and define its expectations and preferences with respect to technical assistance activities.

4.28 MIGA’s share of FIAS’ core funding appears high in comparison with MIGA’s size and budget; further, MIGA’s value-added from FIAS and influence in FIAS governance appear at odds with its current level of financial support. MIGA should formulate a value proposition and approach for technical assistance in line with its mandate stipulated in the Convention. The end of FIAS’ current strategy period is an opportunity for MIGA to present a clearly articulated approach and value proposition for its technical assistance in the context of its mandate under the Convention for the period FY12 and beyond, and to define the commensurate funding.

4.29 MIGA should also identify with FIAS the areas where both stand to benefit from increased collaboration. This would include improving coordination of activities on a case-by-case basis where synergies could be expected, raising awareness among staff of the products and business model of both institutions, and providing staff incentives to encourage collaboration. Finally, MIGA should work with FIAS to improve regular reporting to MIGA and other shareholders regarding work program implementation, outcomes and impacts of ongoing and closed projects, and its use of funds, for accountability purposes.

72 This year’s IEG-IFC’s Independent Evaluation of IFC’s Development Results 2009 – Knowledge for Private Sector Development: Enhancing the Performance of IFC’s Advisory Services, provides details on the PCR system as well as indicative findings and recommendations on strengthening the delivery and performance of IFC’s advisory services.


CHAPTER 5 : SUMMARY OF CONCLUSIONS AND RECOMMENDATIONS

I. Conclusions

5.1 IEG concluded in 2008 that there was a role and demand for MIGA’s political risk insurance product, based on key strengths. MIGA faced some challenges in its operating environment and from institutional and internal constraints, and IEG recommended that MIGA needed to consolidate its long-term viability and ensure the sustainability of operational results.

5.2 MIGA has made efforts to address institutional issues, including changes to Operational Regulations, a review of business processes, and piloting self-evaluation, among others. More needs to be done in other areas vital to the MIGA’s effectiveness, such as strengthening business processes, the deployment of resources to strategic priorities, and enhancing business development capacity. IEG will continue to monitor MIGA’s efforts towards achieving its strategic objectives and to improve its institutional effectiveness.

5.3 MIGA’s operational priorities for FY09-11 emphasize support for investments in IDA and conflict-affected countries. This strategic focus is relevant, given the challenges faced by this group of countries, and the potential benefits they can reap from investment flows. Private sector development and foreign direct investment are critical to economic growth in IDA countries, and to the rehabilitation of economies of conflict-affected countries. IDA countries and fragile states remain top priorities of the World Bank Group. Thus, MIGA’s strategic directions echo priorities for the World Bank and IFC.

5.4 MIGA has supported projects in countries that receive relatively low FDI inflows, in line with its strategic priorities. In particular, its exposure is higher in low income economies than the relative share of FDI stocks for these countries. MIGA’s guarantee exposure in IDA countries is sizeable and has increased, accounting for 36 percent of guarantee amounts issued, and more than half of projects supported by MIGA during the FY05-08 period. This is above the share seen for political risk insurers as a whole.

5.5 MIGA projects in these countries differ in important ways from MIGA’s overall portfolio: they are on average smaller, and exposure tends to be concentrated in the infrastructure sector (rather than in finance as is the case for MIGA’s overall portfolio). A higher share of guarantee projects originates from developing and emerging markets through south-south investments.

5.6 MIGA projects in IDA countries have not proven to be more risky in terms of claims paid and pre-claims situations, despite higher country risk. Approximately half of evaluated projects in IDA countries had development outcomes of satisfactory or higher. This is similar to the share found in IEG evaluations of IFC projects. Projects with satisfactory and better development outcomes were designed and structured well and had sound business models. In addition, projects benefited from the implementation of sector and regulatory reforms, and importantly, from sound due diligence by MIGA. The presence of other multilateral institutions in a project improved the chances of project success. On the other hand, projects with flawed project designs, financial difficulties, sector changes that introduced competition, as well as inadequate work quality, were associated with lower development outcomes. MIGA’s effectiveness in IDA countries overall has been hampered by institutional constraints arising from mandate restrictions, ineffective processes, and the lack of functional business development processes.

5.7 MIGA’s effectiveness in implementing the strategy in IDA countries can be improved by strengthening MIGA’s institutional effectiveness, including updating MIGA’s Convention and innovating products, enhancing the business development function and processes, and


strengthening MIGA’s systems, standards, and processes. While these are relevant for MIGA’s operations overall, they have particular urgency for MIGA’s engagement in IDA countries, in light of their development needs and the low levels of foreign investment they attract.

5.8 As a result of the global financial crisis, developing countries will see FDI flows decrease. IDA countries may be the hardest hit by the drop of FDI. Lessons from previous financial crises indicate that political risks are typically heightened during crises. Reduced capital flows and heightened risk will have implications for MIGA’s business. Despite decreases in FDI flows, demand for political risk insurance may go up as risk perceptions also increase. On balance, in the short term, MIGA’s guarantee volume is expected to decline.

5.9 MIGA’s portfolio in conflict-affected countries is substantial. It has a role to play to catalyze foreign direct investments and facilitate the market entry of other providers of political risk insurance. However, providing PRI in conflict-affected countries poses challenges for MIGA, and it is important to be realistic and manage expectations about what PRI can deliver. Despite heightened country risk, only one claim has been paid; ex-post riskiness seems to have been reduced due to effective risk management and carve-out of risks. Guarantees have been delivered both directly by MIGA and through special Trust Fund vehicles. However, MIGA’s approach to its engagement in conflict-affected has not been strategic and could have benefited from a “game plan”, including aligning better its business functions and resources. MIGA also did not have a clear rationale or criteria for using Trust Funds vs. insuring projects directly. There was modest usage of two of the three Trust Funds, which have been hampered by narrow mandates and complex structures. Resourcing trust funds with scarce IDA funds should be considered carefully, in light of their likely high opportunity costs.

5.10 This report also provided an update on specific aspects relating to the merger of MIGA’s technical assistance activities in FIAS. The integration of MIGA TA has been positive from a World Bank Group corporate, operational, and client perspective. While the integration has weakened the links between FIAS TA and MIGA’s core guarantees business, MIGA benefits from FIAS’ investment climate improvement activities, albeit indirectly. MIGA has had limited input into FIAS’ strategy and work program planning, and there are not yet any mechanisms in place to coordinate activities of the two institutions. MIGA’s financial contribution to FIAS has been substantial, considering its size. Given the scale of its support, MIGA needs to articulate and define its expectations and preferences with respect to Technical Assistance activities.

II. Recommendations

1. MIGA should strengthen and formalize its systems and standards for underwriting and introduce a robust quality assurance system for its operations as a key element of enhancing its overall institutional effectiveness, including for its engagement in IDA countries. The need to formalize systems and standards and to introduce quality assurance is particularly acute in light of the expansion of MIGA’s mandate following the recent approval of changes to MIGA’s Operational Regulations, and MIGA’s rapid pace of hiring new operational staff and team heads. Formal written guidelines, business processes and procedures can enhance the consistent application of underwriting standards across projects and teams, by providing clarity and transparency on the standards expected. A comprehensive induction program for newly hired operational staff, and structured ongoing training are needed to promote a common skill set and understanding of requirements. MIGA should also step up the implementation of self-evaluation of guarantee projects.


2. MIGA needs to underpin its engagement in conflict-affected countries with a game plan. Such a game plan would enable MIGA to enhance its development effectiveness in conflict-affected countries, and would allow the Agency to utilize its administrative budget and capital more effectively. This includes developing some staff with specialist knowledge and expertise of the issues and needs of operating in a conflict environment; aligning MIGA’s business functions – such as marketing, business development, client aftercare, and risk management – to effectively support this business; and assessing the financial implications of its engagement in conflict-affected countries. MIGA may also wish to assess its project-level risk management approach (i.e., contract exclusions) to assure itself of the consistency of its stated strategic priority and its actual implementation.

In the future, MIGA would also need to define criteria for acceptable risk levels on its own balance sheet versus the use of Trust Fund instruments. Should MIGA decide to pursue Trust Funds in the future, it should enhance their efficiency and effectiveness. This includes implementing multi-country and untied Trust Funds with broad and flexible mandates that have no restrictions with respect to the eligible investments or investors. Trust Fund arrangements should be underpinned by realistic objectives (including with respect to expected demand) and a results framework.

3. MIGA needs to better articulate and define its expectations and preferences with respect to technical assistance activities in the context of its mandate. The end of FIAS’ current strategy period is an opportunity for MIGA to present a clearly articulated approach and value proposition for its technical assistance in the context of its mandate under the Convention for the period FY12 and beyond, and to define the commensurate funding. In addition, mechanisms to strengthen MIGA’s influence on FIAS’ strategy and priority-setting, as well as coordination at the operational level should be agreed.

PAGE | 46

Annexes

PAGE | 47

Annex 1: IEG-MIGA’s Evaluation Approach and Methodology

For the assessment of MIGA’s effectiveness in IDA and conflict-affected countries, IEG used the following methods: a desk review of MIGA strategy and operational reports, recent surveys of MIGA clients, and literature relating to the role of political risk insurance. IEG reviewed secondary data on foreign direct investment flows and political risk insurance into IDA and conflict-affected countries; and conducted a review of MIGA’s portfolio data in IDA and conflict-affected countries, focusing on the FY05-08 period. The report presents results from a small sample of IEG-MIGA project evaluations of MIGA guarantees, based on random sampling for IEG’s annual cohort of project evaluations, and using IEG’s approved methodology that covers (i) development outcomes, and (ii) MIGA’s effectiveness.

IEG considered for this assessment 34 MIGA projects. Twenty are in IDA countries, 12 of which are in sub-Saharan Africa.73 The projects covered were insured between FY96 and FY06. Twelve of the twenty projects in IDA countries are also in conflict-affected countries (eight of which are in Sub-Saharan Africa). Findings on development outcomes are based in the first instance on IEG-MIGA’s sample of 21 completed Project Evaluation Reports (PERs) with supplementary findings from 13 additional project evaluations for which ratings are being finalized.

To address evaluative questions posed in the Approach Paper for this Report not captured in the PERs, IEG-MIGA undertook 20 streamlined project surveys for a sample of MIGA projects in IDA and conflict-affected countries especially in Sub-Saharan Africa. Seventeen of these streamlined surveys were for projects with existing Project Evaluation Reports.

IEG’s analysis derived findings and lessons from MIGA guarantee projects in IDA and conflict-affected countries. Just over half of MIGA’s projects in IDA countries are in Sub-Saharan Africa (60 projects supported during FY00-08), a region that has been a particular focus of the Agency since 2000. Between FY00 and FY08, MIGA has supported 116 projects in IDA countries. During the same period, it guaranteed 69 projects in conflict-affected countries (including eight projects in IBRD countries). Of the 60 MIGA projects in IDA countries in Africa, 25 were in conflict affected countries (or 36 percent of MIGA’s projects in conflict affected countries), and the remainder (35) in non conflict-affected countries.

73 Findings on Development Outcomes in Chapter 2 are based on projects with completed IEG-MIGA Project Evaluation Reports (21), and supplemented by Project Evaluation Reports that are being finalized (13). Of these 34 projects, 20 are in IDA countries, and 12 in conflict-affected countries.

INDEPENDENT EVALUATION OF MIGA’S DEVELOPMENT EFFECTIVENESS 2009: PAGE | 48


Annex 2: Conflict-Affected Countries and MIGA Guarantees (FY00-08)

Conflict-Affected Countries

(years in which country was affected by conflict in parenthesis)

Number of new MIGA guarantee

projects

IDA (FY00-08)

1 Afghanistan (FY00-08) 5 X

2 Albania (FY00-01) 2 X

3 Algeria (FY00-05) 1

4 Angola (FY00-08) 1 X 5 Azerbaijan (FY00-08) 2 X

6 Bosnia and Herzegovina (FY00-08) 17 X

7 Burundi (FY00-08) 1 X

8 Cambodia (FY00-05) X

9 Central African Republic (FY00-08) 1 X

10 Chad (FY06-08) X

11 Colombia (FY00-08) 1

12 Comoros (FY01-08) * X

13 Congo, Republic of (FY00-08) X

14 Congo, Democratic Republic of (FY00-08) 3 X

15 Cote d’Ivoire (FY03-08) X

16 Croatia (FY01-04) 3

17 Djibouti (FY00-03) X

18 Ecuador (FY00)

19 Eritrea (FY00-08) X

20 Ethiopia (FY00-02) (FY06-08) X

21 Georgia (FY00-08) X

22 Guatemala (FY00-05) 1

23 Guinea-Bissau (FY00-08) 2 X

24 Haiti (FY00-08) X

25 Indonesia (FY00-08) 2 X

26 Iraq (FY03-08)

27 Kosovo (FY00-08) ** X

28 Lebanon (FY00-03)

29 Liberia (FY00-08) X

30 Macedonia, Former Yugoslav Republic of (FY00-03)

1 X

31 Madagascar (FY02-03) 1 X

32 Mozambique (FY00) 1 X

33 Myanmar (FY00-08) * X

34 Nepal (FY02-08) 1 X

35 Nigeria (FY02-08) 10 X



Cont’d

Conflict-Affected Countries (years in which country was affected by conflict in parenthesis)

Number of New MIGA Guarantee

Projects

IDA (FY00-08)

36 Peru (FY00) 1

37 Philippines (FY00-08) 1

38 Rwanda (FY00-03) (FY06-08) 1 X

39 Serbia and Montenegro (FY03-05) 7 X

40 Sierra Leone (FY00-08) 2 X

41 Solomon Islands (FY01-08) X

42 Somalia (FY00-08) * X

43 Sri Lanka (FY00-08) X

44 Sudan (FY00-08) X

45 Tajikistan (FY00-05) X

46 Timor-Leste (FY00-08) X

47 Uganda (FY04-08) 2 X

48 Vietnam (FY00) X

49 West Bank and Gaza (FY00-08) * ** X

Total Conflict-Affected Countries (FY00-08) 49

Total Conflict-Affected Countries (FY08) 34

Total Countries with MIGA Guarantee Activity 25

Total Conflict-Affected IDA Countries (FY00-08) 38

Total Conflict –Affected IBRD Countries (FY00-08)

9

Note: * Comoros, Myanmar, Somalia and West Bank and Gaza are not MIGA member countries. ** Kosovo and West Bank and Gaza are not members of the IBRD and not classified by lending category. Source: - IBRD. - IDA Countries: IBRD. Operational Policy 3.10 Annex D. IBRD/IDA and Blend Countries: Per Capita Incomes, Lending Eligibility, and Repayment Terms (1999-2008). Conflict Affected Countries are defined by the World Bank as countries that: (i) have experienced violent conflict in the past five to ten years, (ii) are currently experiencing violent conflict, or (iii) are perceived as being at risk of violence.



Annex 3: MIGA’s Guarantee Projects in Conflict-Affected Countries (FY00-08) Fiscal Year of Underwriting

Host Country Project Enterprise

2000 Albania Giorgi Alfo Sh.p.k.

Algeria Natexis Al Amana Banque -Groupe Banques Populaires

Azerbaijan Azercell Telecom MMM

Bosnia and Herzegovina Coca-Cola Beverages B-H d.o.o.

Macedonia, Former Yugoslav Republic of

A.D. Cementarnica USJE

Mozambique Motraco-Mozambique Transmission Company S.A.R.L.

Peru Consorcio TransMantaro S.A.

2001 Albania Intercommercial Bank (Albania) S.A.

Angola Desco Angola Lda.

Bosnia and Herzegovina Raiffeisenbank d.d.

Hypo Alpe-Adria-Bank d.d.Bosnia i Hercegovina

International Dialysis Center Banja Luka D.O.O.

Colombia Banco Santander Colombia S.A.

Guatemala Distribuidora Electrica del Caribe, S.A.

Philippines Manila North Tollways Corporation

2002 Bosnia and Herzegovina CommerceBank d.d.

Mercator Trzni Centar Sarajevo

Madagascar Hydelec BPA

Nigeria MTN Nigeria Communications Limited (MTNN)

Econet Wireless Mobile

2003 Azerbaijan Fatoglu Istehasal Azerbaycan Ltd.

Bosnia and Herzegovina HVB-Bank Bosnia and Herzegovina d.d.

Kristal Banks AD Banja Luka

Raiffeisen Bank d.d. Bosnia Herzegovina

Burundi Africell S.A.

Croatia Mercator-H-d.o.o.

HVB Bank Croatia d.d.

Splitska Banka d.d.

Indonesia PT MTU Detroit Diesel Indonesia

Nigeria Cotecna Inspection Limited Nigeria

Ewekoro Power Ltd

Serbia and Montenegro Hypo Leasing Doo Beograd

Hypo Alpe-Adria-Bank A.D. Beograd

Meshulam Levinstein d.o.o.

2004 Bosnia and Herzegovina Central Profit Banka d.d. Sarajewo

Raiffeisen Bank d.d. Bosnia & Herzegovina

Nigeria IP Satellite Services Ltd. of Nigeria

Serbia and Montenegro Raiffeisenbank A.D.

Raiffeisen Leasing d.o.o.

HVB Banka Jugoslavija a.d.



Cont’d Fiscal Year of Underwriting

Host Country Project Enterprise

2005 Bosnia and Herzegovina Raiffeisen Leasing d.o.o. Sarajevo

Raiffeisen Leasing d.o.o.

Raiffeisen Bank d.d.

Raiffeisen Bank d.d. Bosnia & Herzegovina

Congo, Democratic Republic Anvil Mining Congo S.A.R.L. (AMC)

Nigeria MINL Ltd.

Bel Papyrus Ltd.

Serbia and Montenegro Sartid Fahop d.o.o.

Uganda Umeme Limited

2006 Afghanistan NAPCOD LLC

Bosnia and Herzegovina Raiffeisen Leasing d.o.o., Sarajevo

Indonesia PTU MTU Detroit Diesel Indonesia (PT MDDI)

Nigeria SGS Societe Generale de Surveillance SA

Sierra Leone Intertek International Ltd

PCS Holding Sierra Leone Ltd. (PCSH)

2007 Afghanistan Baz International Pharmaceutical Company (BIP

Areeba Afghanistan LLC

BRAC Afghanistan Bank

Guinea-Bissau Sociedade Guineense de Promocao Hoteleira S.A

Nigeria Aarti Steel (Nigeria) Limited

Uganda Bujagali Energy Limited

2008 Afghanistan Geo-Building Technologies LLC, Afghanistan

Bosnia and Herzegovina Coprotec sistemi d.o.o. Orasje

Central African Republic Orange Centrafrique S.A.

Congo, Democratic Republic Congo Equipment SPRL

Congo International Co. SPRL

Guinea-Bissau Orange Bissau S.A.

Nigeria New Age Beverage Company Ltd. (NBA)

Rwanda Compagnie Generale de Banque SA

Total Number of New MIGA Projects Underwritten in Conflict-Affected Countries (FY00-08)

69

Total Number of Conflict-Affected Countries (FY00-08)

24



Annex 4: South-South Investments Guaranteed by MIGA in IDA Countries (FY00-08) MIGA-Eligible Part 2

Investor Country Investor Project Name Host Country

Costa Rica Corporacion Interfin, S.A. Financiera Arrendadora Centroamericana

Nicaragua

Cyprus Balkcem Limited A.D. Cementarnica USJE Macedonia, Former Yugoslav Republic of

Finatrade Holdings Ltd. New Age Beverage Company Ltd. Nigeria

Czech Republic Raiffeisenbank Raiffeisenbank a.d. Serbia and Montenegro

Raiffeisenbank Raiffeisen Bank A.S. Serbia and Montenegro

Egypt, Arab Republic of

Orascom Telecom Sheba Telecom (Pvt.) ltd. Bangladesh

Orascom Telecom Pakistan Mobile Communications Pakistan

India Amco Fabrics Pvt Ltd Congo International Co. SPRL Congo, Democratic Republic

Manaksia Limited MINL Ltd Nigeria State Bank Of India MINL Ltd Nigeria Rockland Steel Trading Ltd. Aarti Steel (Nigeria) Limited Nigeria Israel Bank Hapoalim B.M. Ormat Momotombo Power

Company Nicaragua

Sierra-Com Ltd. PCS Holding Sierra Leone Ltd. (PCSH)

Sierra Leone

Lebanon Antoine & Gabriel Boulos Bel Impex Ltd. Nigeria Byblos Bank SAL New Age Beverage Company Ltd. Nigeria

Malaysia Metro Ikram Sdn Bhd Meridian Development Limited Ghana

Mali SMPH S.A. Societe Burkinabe de Promotion Hoteliere S.A

Burkina Faso

Societe Malienne de Promotion Hoteliere S.A.

Sociedade Guineense de Promocao Hoteleira S.A

Guinea-Bissau

Mauritius Mauritius Telecom Ltd. Africell S.A. Burundi

Loita Capital Partners International Limited National Financial Credit Bank S.A.

Cameroon

Bartrac Equipment GBL Congo Equipment SPRL Congo, Democratic Republic

Energy Engineering Investment Ltd Hydelec Madagascar S.A. Madagascar

I&P Capital (Indian Ocean) Ltd. I&P Capital (Indian Ocean) Ltd. Madagascar

Sena Development Limited Companhia de Sena S.A.R.L. Mozambique

Societe Marromeu Limited Companhia de Sena S.A.R.L. Mozambique

The Mauritius Commercial Bank Ltd. Companhia de Sena S.A.R.L. Mozambique

Mobile Telephone Networks International Ltd.

MTN Nigeria Communications Limited (MTNN)

Nigeria

Panama Agro Industrial Investment and Development S.A.

Societe des Grands Moulins de Guinea S.A.

Guinea

Peru Banco Credito de Bolivia Banco de Credito de Bolivia, S.A. Bolivia

Romania Raiffeisenbank I.C.S. Raiffeisen Leasing S.R.L. Moldova

Senegal Sonatel Orange Guinee S.A. Guinea Sonatel Orange Bissau S.A. Guinea-Bissau

Sonatel Ikatel S.A. Mali



Cont’d

MIGA-Eligible Part 2 Investor Country

Investor Project Name Host Country

Singapore MTU Asia Pte Ltd. PT MTU Detroit Diesel Indonesia Indonesia

MTU Asia Pte Ltd. PTU MTU Detroit Deisel Indonesia (PT MDDI)

Indonesia

France Cables Et Radio Vietnam Pte Ltd. France Cables et Radio Vietnam Vietnam

SembCorp Utilities Pte Ltd. Phu My 3 BOT Power Company Ltd

Vietnam

Slovenia Slovene Export Corporation, Inc. CommerceBank d.d. Bosnia and Herzegovina

Poslovni Sistem Mercator d.d. Mercator Trzni Centar Sarajevo d.o.o.

Bosnia and Herzegovina

South Africa MTN Group (Pty) Ltd. Areeba Afghanistan LLC Afghanistan

Industrial Development Corporation of South Africa Limited

Kibos Sugar and Allied Industries Limited

Kenya

Imperial Group (Proprietary) Limited Imperial Fleet Services-Lesotho (Proprietary) Limited

Lesotho

Eskom Motraco-Mozambique Transmission Company S.A.R.L.

Mozambique


Companhia de Sena S.A.R.L. Mozambique

Sasol Sasol Petroleum Temane Limitada Mozambique

Standard Bank of South Africa Limited Sasol Petroleum Temane Limitada Mozambique

Standard Corporate and Merchant Bank Sasol Petroleum Temane Limitada Mozambique

HSBC Bank plc (formerly Midland Bank plc)

Econet Wireless Mobile Nigeria

IP Direct, (PTY) Ltd. IP Satellite Services Ltd. of Nigeria Nigeria

Eskom Umeme Limited Uganda

Anglovaal Mining Ltd. Chambishi Metals Plc. Zambia


Agriflora Limited Zambia

St. Kitts and Nevis Millco Limited Millco Limited Uganda Tunisia L'Office National des Telecommunications Societe Mauritano-Tunisienne des

Telecommunications (MATTEL) Mauritania

Turkey Azertel Telekominikasyon Ve Dis Ticaret A.S.

Azercell Telecom MMM Azerbaijan

Pamukbank T.A.S Azercell Telecom MMM Azerbaijan

Fatoglu Gida Sanayi Ve Ticaret A.S. Fatoglu Istehasal Azerbaycan Ltd. Azerbaijan

United Arab Emirates

DP World FZCO Doraleh Container Terminal SARL Djibouti

Dubai Islamic Bank Doraleh Container Terminal SARL Djibouti

Number of South-South Projects in IDA Countries 50

Number of South-South Projects in Conflict-Affected Countries 26

Number of IDA Host Countries 30

Number of Conflict-Affected Host Countries 13

Number of South-South Investor Countries 21

Source: -MIGA. South-south investments are defined as investments made by investors incorporated in “MIGA-eligible Part 2 countries” -- countries that are eligible host countries for a MIGA guarantee.



Annex 5: 2009 MIGA Management Action Track Record

1. All outstanding IEG-MIGA recommendations to MIGA management are contained in the updated MIGA Management Action Track Record (MATR) presented here. It lists all recommendations from previous evaluation reports that are still outstanding and under implementation, and provides MIGA management comments and an IEG assessment of the status of implementation. The outstanding recommendations have been grouped under four main themes:

I. Alleviating constraints II. Strategic framework III. Strengthening MIGA’s development results IV. MIGA information services.

2. IEG is currently undertaking a review of the Management Action Record with the objective of making it a more relevant and effective instrument for the Board and IEG. Once the review is complete, IEG-MIGA will assess the implications for the MIGA MATR, and will update the Board in due course with respect to any changes in format or process.

PAGE | 55

2009 MIGA Management Action Track Record

IEG-MIGA Recommendations MIGA Management Comments Status of Implementation (IEG Assessment): Completed, Medium, Low

I. Alleviating Constraints

1. Proposing to MIGA’s shareholders amendments to its Convention in order to remain relevant and meet its market potential. Constraints imposed on MIGA by its 1985 Convention need to be reconsidered to enable MIGA to better serve its developing country members and clients. The most notable constraint is the inability to insure stand-alone debt (with no equity participation), coverage of existing assets, and coverage of local in addition to foreign investors among others. While amending the Convention is likely to be a lengthy process involving shareholders approval and ratification from members, it would be important for MIGA to take the necessary steps now in order to retain its relevance in the future. (World Bank Group Guarantee Instruments 1990-2007)

Following the approval by the Board of changes to MIGA’s Operational regulations and Policies on April 14, 2009, MIGA management has launched a consultative process with the Board members to review whether there is sufficient support for a change to MIGA’s Convention. The outcome of this process is expected to lead to a proposal to the Board (if there is sufficient support) by the end of calendar year 2009.

Medium Some progress has been made




2. Considering, in the meantime, alleviating several constraints derived from its operational regulations and policies. Several changes to MIGA’s Operational Regulations to add new eligible investments and risks can help MIGA to develop new products and meet evolving market demands. Several changes in policy and to MIGA’s Operational Regulations are being discussed internally within MIGA. (World Bank Group Guarantee Instruments 1990-2007)

Modifications to MIGA’s Operational Regulations and Policies were approved by MIGA’s Board on April 14, 2009. These modifications will give the agency more flexibility to design and implement new products and structures and allow it to better meet the need of its clients (see #8 below).

Completed To be retired

3. Increasing its responsiveness to market demand by addressing internal weaknesses that reduce efficiency and slow responsiveness without lowering MIGA’s financial, social and environmental standards. These include organizational issues in staffing, performance review, and incentives as well as consideration of matters such as inflexibility on guarantee contract terms and conditions. However, efficiency in its underwriting process must not come at the expense of quality, risk mitigation, safeguards, and development impacts of the projects it insures. (World Bank Group Guarantee Instruments 1990-2007)

During FY08, as part of the efforts to support the formulation of a new strategy (the FY09-11 Operational Directions), reviews of MIGA’s key business processes (BPR) and business development were launched. These reviews were carried out to improve the way MIGA conducts business in order to improve the operational efficiency while ensuring quality control and to improve MIGA’s client responsiveness. In early FY09, MIGA management established an Action Plan for Strategic Progress to implement the changes in the areas including business processes, business development, and organizational structure. The Action Plan has been implemented and progress is being monitored (see #7).

Low Limited progress has been made




4. Improving its client relationship management, including after-care, to enhance MIGA’s value added and increase client retention. Improving client relationships could be the most cost-effective marketing that MIGA could undertake to increase its business volume. Managing client relationship requires a focused and coherent business development plan implemented by a staff with expertise in the guarantee business and/or financial markets. (World Bank Group Guarantee Instruments 1990-2007)

To improve client relationship management, MIGA’s Operations Group (MIGOP) is taking a lead to introduce changes, including:

redefining the process to identify new business opportunities, creating more proactive client management system, establishing a sector- by-sector business development plan

based on a thorough market analysis and market knowledge, and

prioritizing business development activities.





II. Strategic Framework

5. Develop a new strategic directions framework that carefully considers the external and internal context in which MIGA is involved, the proposed performance dimensions and the linkages between the latter, the expected value to its customers, the necessary changes in internal processes, and the human capital and technological demands of the strategy. Aspects to be considered include: the potential demand and appetite for risk mitigation products, the agency’s market position vis-à-vis other providers of political risk mitigation tools, the changing international market conditions, the effectiveness of delivering guarantee instruments and potential synergies across the World Bank Group, remedies to address institutional and external restrictions imposed by MIGA’s Convention, its competitive advantage, potential areas of growth and high development impact, and factors affecting the achievement of the objectives of the FY05-08 strategy. It would need to address the weaknesses of the current strategy by linking objectives, resource allocation, processes, and expected development results. As part of this strategic exercise MIGA management would need to consider:

In FY08, the FY09-11 operational directions were circulated to the Board and discussed at the Committee of the Whole. The new strategic directions framework, which was presented in the paper, reflects an evolution drawing upon experience and reflecting the changing environment, and reviews performance dimensions, linkages, the value to customers, internal processes, and human capital and technological demands. During the fourth quarter of FY09, under the leadership of the Executive Vice President, a cross-departmental working group was formed to create a new vision for MIGA, and to propose specific recommendations for realizing that vision. The working group will offer recommendations for MIGA’s business strategy and goals, as well as proposals for changing the business model and internal culture, building on the various on-going strategic initiatives (see #7). The work is expected to be completed by the first quarter of FY10, and the group’s product will be presented and discussed at MIGA’s all staff retreat in September 2009.

Medium Progress has been made




(i) Tackling the issue of administrative costs, as reflected by the increasing ratio administrative costs to net premium income; (ii) Improving the effectiveness of its business development and client relationship functions; and

(i) Cost containment is not only a fiduciary responsibility of MIGA to its shareholder countries but it is also a critical element of MIGA’s business strategy as all administrative costs are ultimately passed through to guarantee clients. For a small organization like MIGA, where fixed costs (representing staffing, benefits, contribution to pension plans, office rent and WBG) comprise nearly 68% of its total budget, there are many constraints to its flexibility and limited options available to reduce its costs, particularly fixed costs. Nonetheless, MIGA undertook deliberate steps to address this issue by embarking in FY08 on a thorough review of its twelve cost sharing agreements with the corresponding service providers within the World Bank Group to ensure that the agency is purchasing corporate services in the most efficient and cost effective manner. This exercise, which involved negotiations and changes to costing methodologies, has resulted in savings of nearly $1 million for FY09 to MIGA’s overall cost sharing allocations. In addition, staff resources are being redeployed in accordance with a strategic staffing exercise to more effectively manage fixed costs. (ii) In FY09, MIGA has undergone reorganization, and the business development and contract management teams have been transferred to MIGOP. The newly appointed Sector Leaders in MIGOP have a primary responsibility for business development, including client management and coordination.

Medium Progress has been made Low Limited progress has been made




(iii) Continuing enhancing the value added and the efficiency of business processes and decision making to ensure impact and cost-efficiency in underwriting. (IEG-MIGA 2008 Annual Report)

(iii) As mentioned above, during FY08 the business process review (BPR) was conducted to improve the operational efficiency, and a number of the BPR recommendations have been implemented during FY09. Most notably, a streamlined decision making process has been introduced as a pilot. A working group has been formed to monitor the implementation of the pilot process. The streamlined process is expected to shorten the project processing time for lower risk projects, and to reduce the time spent by management and staff on project preparation, thus to improve cost efficiency in underwriting.


6. Ensure that the new strategic directions make explicit the link between risk levels, pricing, and financial, operational, and development impact objectives. The strategy should include a portfolio perspective that would consider net guarantee income across risk, financial performance, and development objectives to facilitate decision making and performance monitoring of indicators such as expected income, costs, risk, and development impact. Similarly, MIGA should obtain more accurate unit cost data for underwriting individual guarantees. Finally, it could clarify further its pricing relative to market pricing throughout the insurance business cycle. (IEG-MIGA 2008 Annual Report)

MIGA support is provided only to projects that are developmentally sound, consistent with country strategies and good policy, and meet high social and environmental standards. In addition, Management has taken several initiatives that would further strengthen the links between strategy, operations, finances and development impact. E.g., for the past 20 months, MIGA has been systematically collecting costing data which would inform MIGA of the dynamics of project unit cost. MIGA has also refined its pricing mechanism to reflect both the principle of cost recovery and the fact that MIGA is facing a market test every day.





7. Ensure that the new strategy identifies the set of performance indicators to track progress in implementation. The strategic exercise needs to include the development of a framework of strategy metrics as well as the further improvements in internal systems for performance measurement, reporting, and monitoring. (IEG-MIGA 2008 Annual Report)

As mentioned above, during FY09, various strategic initiatives were launched to better support MIGA’s strategic direction. Detailed action steps to implement the strategic initiatives were established (Action Plan for Strategic Progress), with specific target dates and responsible persons. A tracking system has been developed to monitor the progress of the Action Plan for Strategic Progress. Since February 2009, regular updates have been provided both to the senior management team and all staff.


8. Strengthen systematic support to innovative projects and improve product innovation and internal processes to meet investors’ changing risk mitigation needs. The Agency needs to strengthen innovation through systematic support to innovative projects and for new product development and innovation. It should address changes to its eligibility requirements not demanding amendments to the Convention. In the medium term, ensuring MIGA’s innovation capability, vital for its relevance and sustainability, may require changes to the Convention. (IEG-MIGA 2008 Annual Report)

Subsequent to the Board approval of changes to MIGA’s Operational Regulations and Policies, a preliminary list of items and forms that need to be updated has been prepared, and an internal cross-departmental working group was formed for the purpose of designing the four new products: The team is expected to deliver a proposal to management on pricing, scope of cover, contract language and other requirements by the end of FY09. In addition, internal work on a proposal to amend MIGA’s Convention has commenced.

Medium Some progress has been made




9. Build on recent developments to improve tracking and management of progress during implementation. MIGA should systematize its recent efforts to develop metrics to monitor progress for improving management decision making, allocating resources to the desired areas of growth and impact, and communicating results to the Board and other stakeholders. (IEG-MIGA 2008 Annual Report)

Given that MIGA’s main product is the issuance of guarantees, it was viewed that all units are directly or indirectly linked in promoting, monitoring, reporting and accounting for this product. As such, a decision had been made to monitor KPIs at the agency level in the initial stage of establishing a monitoring framework. Once approved by management, development of more targeted KPIs at the unit level will be undertaken as well as preparation of a formal policy and procedure document for KPIs. In the meantime, a one-page “dashboard” has been prepared and maintained by MIGA's budgeting and Resource Management Team containing the KPIs to monitor and report on these proposed indicators.





III. Strengthening development results

10. Make significant progress in implementing initiatives related to development impact assessment and monitoring, recommended in previous evaluations of the Agency by IEG, including the development of self-evaluation. The test of a sounder strategic and implementation framework will be in the accomplishment of development results in supporting inclusive and environmentally sustainable growth. In this respect, to ensure that the projects MIGA supports are economically sound and have positive and sustainable development impact, the consistent application of MIGA’s development impact assessment guidelines is crucial: it will underscore the Agency’s unique role. (IEG-MIGA 2008 Annual Report) (i) MIGA should consistently apply the ex ante project impact analysis for underwriting guarantees, including providing more focused training and incentives, to ensure that the projects it supports are sound and have positive and sustainable development impact. Areas for greater attention and improvement include: (1) explicitly identifying the project cost and its components; (2) consistently identifying potential distortions and externalities, and verifying these items with the project sponsors; (3) undertaking cost-benefit analysis when required sufficient to ascertain that the project is economically viable; and (4) identifying clearly the assumptions used in calculating FRRs and adjusted FRRs. (2004 Review of Development Effectiveness in MIGA)

(i) Management agrees that development impact must be carefully assessed and is confident that the ex ante analysis is being done well, along the lines laid out by IEG. Guidelines have been used, staff trained and there has been increased management oversight which will be further strengthened with the appointment of Sector Leaders in MIGOP. While the amount of detail of the analysis that should explicitly be presented in MIGA Board papers can be debated, what is important is that such analysis be done well, with clearly specified assumptions, whether it be contained in the underwriting paper itself or in the project files. MIGA management is also supportive of rigorous and vigorous self evaluation for guarantees. MIGA has worked closely with IEG this past year to establish procedures, draft guidelines and train staff for this (see #12 below).





(ii) MIGA needs to develop rules of engagement for all projects involving concessions and similar agreements. Considering that MIGA often gets involved in projects as an insurer after such agreements have been negotiated and signed, it needs to satisfy itself that the underlying business model, terms given to the concession holders, and tariffs are sustainable and reflect sound economic policy in order to ensure a positive development impact. (IEG-MIGA 2006 Annual Report)

(ii) Management agrees and for all projects involving concessions and similar agreements, staff are required carefully to ensure: these were awarded through transparent, competitive processes; that risks are properly shared between the Government, investors and other parties; agreements are in line with good practice for that particular industry and with sectoral and institutional reforms the World Bank may be pursuing in that particular country; provide effective mechanisms for resolving potential disputes; and, above all ensure that the agreement provides value for the money for the Government concerned. These and other factors are routinely assessed in analyzing concessions and other instruments for PPPs and are a specific focus of review during the Project Review Committee deliberations.





11. Quality Assurance for Consistent Application of the Guidelines for Development Impact Analysis (i) Quality Assurance. MIGA should strengthen its quality assurance especially before the project decision documents are finalized to ascertain that the analysis of project impacts is consistent with MIGA requirements and guidelines; are well documented; and are adequately reflected in the decision documents. (ii) Quality at Entry Self Assessment. To enhance institutional learning, in FY08 MIGA should carry out, on a pilot basis, a quality at entry self assessment of a sample of new guarantees underwritten in FY07. IEG would provide the methodology, benchmarks and templates and will independently review and validate MIGA’s self-assessments. (iii) Tools. MIGA should adopt practical tools to guide the underwriting teams—such as sector-specific checklists and templates—in implementing its requirements and guidelines for development impact analysis. (IEG-MIGA 2007 Annual Report)

(i) MIGA supports projects which are consistent with sound policies and are developmentally beneficial to a country. Management agrees that it should examine how to strengthen quality assurance in the analysis of project impacts, and will continue to look into ways it can improve its review processes, clarify its guidelines, and in general, strengthen its assessments to improve the review of its project development impact. (ii), (iii) As indicated previously, management believes that there should be a fundamental review of evaluation priorities for MIGA. MIGA is already evaluating a number of aspects of its business including pricing, financial controls, and ex post self evaluation of its guarantee operations among others. Once the ex post self evaluation systems is up and running, Management proposes to examine, together with IEG, what additional evaluation systems might be appropriate. Regarding the recommendation for additional ‘tools’, Management believes that the use of check-lists and templates in the analysis o f development impact runs the risk of over-simplifying the analysis and detracting from a proper understanding of the projects. MIGA ensures that its guidelines for development impact analysis are applied consistently in underwriting guarantees. The guidelines for development impact assessment are detailed, while also providing flexibility in their application to specific sectors and types of project structures. Extensions of these guidance materials may be developed as part of the upgrading of MIGA’s learning programs during FY10.

Low Limited progress has been made Low Not yet initiated




12. Monitoring Development Effectiveness The Agency should give high priority to continuing the steps it is initiating to implement a monitoring and self-evaluation system that would allow it to gauge, understand, manage, and report the development impact of its interventions. (IEG-MIGA 2008 Annual Report) (ii) Guarantee Closing Reports. MIGA should ensure that closing notes are consistently prepared for all closed projects and summarize the achievement of project objectives, lessons learned, and developmental and other impacts for institutional learning, analysis, and accountability, and to aid strategy formulation. (2003 Report on Operations Evaluation in MIGA)

(i) Management strongly supports the development of a self evaluation system for MIGA guarantees. In close collaboration with IEG-MIGA, MIGA formed a core team to develop/revise guidelines for self-evaluation of its guarantees which fit MIGA’s business model, sponsored workshops and other learning events to increase awareness and skills for applying a comprehensive evaluation frame endorsed by IEG for various kinds of guarantees (non financial sector and SIPs), and began preparations for applying the new guidelines through several pilot evaluations. Based on experience gained in the pilots, the guidelines and templates will be finalized and disseminated to MIGA staff. Going forward, similar guidelines are to be developed for financial sector guarantees and a series of learning events will support their dissemination this next FY. (ii) Guarantee closing reports are prepared for all projects which close before their expiration date. Those reports assess progress in achieving project objectives, the current state of operation of the project enterprise which in turn provides an indication of its financial prospects as well as reasons for early closure. In recent years, more than 90% of all projects close before their expiration date. As such, closing reports capture the vast majority of guarantee operations. As the closing reports are largely administrative in nature, they are not an appropriate instrument for objectively assessing development impacts. It is in part for this reason that MIGA is developing a self evaluation system whereby teams of underwriters, environmental and social specialists and economists jointly assess the performance of individual guarantees. This is in addition to IEG led PERs, sector and thematic evaluation studies. These sorts of in depth exercises are designed to contribute substantively to institutional learning and accountability in ways that guarantee closing reports cannot.

Medium Some progress has been made Medium Some progress has been made




13. MIGA should improve its ability to capture costs associated with underwriting, processing, and monitoring individual guarantees. This information would facilitate IEG's ex-post evaluation of the contribution of individual guarantee projects to profitability. (IEG-MIGA 2006 Annual Report)

MIGA pursued the use of the time recording system (TRS) as a means of extracting accurate data to examine how MIGA’s resources are utilized. As a result of these efforts, MIGA achieved a 100% compliance rate in the use of TRS, which in turn provides data that are analyzed and paves the way for management to make informed decisions on where staff efforts have been concentrated and where they can be redeployed. The quarterly analysis of key performance indicators and cost analysis of data from the time recording system (TRS) have also assisted management in monitoring the Agency's operating effectiveness against strategic direction and priorities.


14. Strengthen environmental and social performance of projects (i) Implementation of the harmonization of MIGA’s environmental and social policies for Category B projects with those of IFC. MIGA should make improvements in environmental and social assessments of Category B and strengthen their supervision to ensure their compliance with environmental and social safeguard policies and guidelines, with attention paid to: (1) MIGA’s Environmental Assessment (EA) policy with appropriate requirements for an EA; (2) MIGA’s public disclosure policies; (3) Regular reporting requirements on EHS performance for sponsors; and (4) Guidance on treatment of projects which are part of large high risk projects with broader implications. (IEG-MIGA 2006 Annual Report)

(i) MIGA’s Policy on Social and Environmental Sustainability, Performance Standards on Social and Environmental Sustainability and Policy on Disclsoure of Information which took effect on October 1st 2007 were fully harmonized with those of IFC, for all projects including Category B projects. Also MIGA’s social and environment specialists are in contact with IFC’s social and environment team with regard to application of these polices.





(ii) Beyond safeguard compliance to doing good. MIGA should proactively promote with its clients the potential benefits it brings to extractive industries and other complex projects through its internationally recognized and comprehensive set of safeguard policies and its environmental and social impact mitigation services. MIGA’s engagement with these projects should move beyond compliance with its environmental and social safeguard policies toward the promotion of sustainable development, by providing advice on environmental and social issues to bring projects closer to best practices in the industry. (Extractive Industries and Sustainable Development, World Bank 2005) (iii) Setting up of Environmental Management Systems prior to Board approval. MIGA should make sustained efforts in working with clients to improve projects’ safeguards compliance prior to their approval by the Board. In particular, the information required for EA should be adequate and special attention should be paid to applying the resettlement and natural habitat policies, when required. MIGA should also require sponsors to set up environmental and social project management systems at a sufficiently early stage to effectively monitor impacts, including during the construction stage. (2004 Review of Development Effectiveness in MIGA)

(ii) A Trust Fund (TF) supported program has been established to provide such advice to investors into Africa. This is a pilot test of the demand for such assistance, as well as whether it can be provided in the context of insurance, as opposed to from a lender or equity investor. If successful and there is a need, it is hoped that funds will be available to allow this to expand to all Regions. The first TF support project started implementation in May 2007. So far, five TF support projects/studies have been completed; four are being implemented and two are in preparation. Positive client feedback has been received on all projects executed by the Trust Fund. TF supports initiated at project levels were then developed into guidelines/roadmaps for use of other players in various sectors, as such benefits were called-up. The Toolkit on Implementing the Voluntary Principles and a workshop on health and safety (attended by several other local and foreign investors operating in Uganda) are the outcomes. (iii) Social and Environmental Management Systems (SEMSs) are not prepared just once (before financing for a project has even been arranged), but rather are prepared and then updated in the course of the project cycle, from project preparation, through construction, to operation, and then closure. Hence MIGA requires, in the same way as IFC does, that a SEMS system be prepared and updated over the course of the project cycle, as warranted by the project. By nature, it is rarely even possible, and even more rarely desirable, to have an SEMS prepared before financing is secured (and MIGA guarantees are part of what is required for financing to be secured). Thus, while MIGA Management fully agrees that SEMS should be established (and then kept up to date) at the appropriate and early enough time to ensure compliance with safeguard policies, it is rare that this time is prior to MIGA Board approval. Consistent with Performance

Medium Progress has been made Completed To be retired




(iv) Reporting requirements on environmental and social issues included in Contracts of Guarantee. MIGA’s contract of guarantee should consistently incorporate provisions, as appropriate, for regular reporting of safeguard performance during project implementation. (2004 Review of Development Effectiveness in MIGA)

Standard 1 all projects are required to establish, maintain and update a SEMS appropriate to the nature and scale of the project and commensurate with the level of social and environmental risks and impacts. (iv) MIGA Management agrees that Contracts of Guarantee should include provisions for regular reporting of safeguard implementation, as well as other environmental and social conditions, when this is specifically warranted due to the nature of the project. And the MIGA Contracts do. But this should not be a blanket requirement for all projects. And separately, standard Contract language does allow MIGA to obtain monitoring information as required. Imposing a regular reporting requirement on investors in projects where such regular reporting is not warranted would be an unnecessary cost on such investors and therefore a deterrent to working with MIGA.


15. Small Investment Program (SIP) (i) Objectives and Eligibility Criteria. To better serve the objectives of the program: MIGA should tighten the SIP eligibility criteria to ensure that the program is fully focused on its intended clients—small investors and small and medium sized enterprises. The program should explicitly exclude infrastructure, oil, gas and mining sectors; it should also exclude projects with concession arrangements, as these are more appropriate for MIGA’s regular guarantee instrument, in line with MIGA guidelines for assessing project impacts. (IEG-MIGA 2007 Annual Report)

(i) Most of IEG’s initial recommendations have been adopted in the review process for SIP. Mainly, MIGA has agreed with IEG to limit the assistance to the Agribusiness, Manufacturing, and Services (AMS), and to the Finance sectors while processing Oil, Gas, and Mining (OGMC) and Infrastructure projects under the regular guarantee program. The Board has approved the above changes in FY08. In addition it has approved an increase in the coverage capacity up to $10 million (vs. $5 million initially). The SIP process has also been adopted as a full program (vs. a pilot project). Finally, while the SIP projects have been mainly to the benefits of Small and Medium Investors (SMI), MIGA remains of the view that the SIP should not be restricted to small investors, as the principal aim of the program is to assist the development o f SME’s. Investors are not being subsidized as SIP prices are set to cover the full marginal cost to MIGA of the SIP. MIGA should use the same streamlined





(ii) Development Impact Analysis. MIGA should strengthen and improve the quality and the documentation of the development impact analysis of SIP projects that underpin MIGA’s support for them. (IEG–MIGA 2007 Annual Report)

process for sound investments into qualifying SME projects, whether or not the foreign investor is classified as SMI. (ii) MIGA agrees with IEG’s recommendations and have been working on having the same due diligence review process as the regular program. However, this has adversely impacted the processing of projects as more information is usually required and SMIs in general do not have the capacity of responding to all requirements. Nonetheless, we follow up to the greatest extent that is practical without compromising the quality of the review process and assistance to the investors.


IV. MIGA Information Services

16. MIGA should adopt a more robust performance monitoring approach for the information dissemination services that integrates and analyzes user insights, site performance metrics, and content to refine and improve the services. This involves tracking regularly how well content provided by its services matches what user segments demand. (IEG–MIGA 2006 Annual Report)

A refined monitoring and evaluation (M&E) framework was further developed in FY09 for both FDI.net and the PRI-Center consisting of over 90 specific quantitative indicators, implementation schedules and reporting strategies for the various stakeholders. The M&E strategy emphasizes ongoing evaluation of the performance of MIGA’s information dissemination services (IDS) in order to verify the suitability, relevance and timeliness of the information provided to users thereby helping to refine web strategy and operations. The M&E framework includes monitoring of input measures (e.g. content objects) through the IDS Administration Tool, and monitoring of output measures through a web statistical package. Additionally, the framework captures the qualitative impact of the measures through annual web surveys and instant polling (for detailed FY09 results see #17 below). Implementation of the main performance indicator set is expected to be completed by the end of FY09.





17. MIGA should undertake a strategic review of its information dissemination services, involving users and target users, strategic partners (including other World Bank Group sites), and comparators, in order to ensure its future relevance, and to better align them with its guarantee business. This involves assessing the relevance of its current and future planned services with respect to offerings of comparators and possible gaps in information services and audiences served. This strategic review should also anticipate the impact of evolving technologies on the information dissemination services and their aggregation service model in the long term, and include a client segmentation analysis to determine how to target user communities, build relationships with strategic partners, and serve MIGA's strategic priorities. It should also facilitate a consistent identity across the currently separate MIGA brands. (IEG- MIGA 2006 Annual Report)

Starting in FY07, the IDS team undertook a major repositioning of its services to contribute to the agency’s new strategic direction, support proactive marketing of the guarantees program and disseminate knowledge on PRI and FDI issues. The process, which was informed by extensive analysis of comparators as well as user surveys, resulted in a consolidation of MIGA’s former online services (IPAnet, PrivatizationLink and FDI Xchange) into a single online portal (FDI.net), and the subsequent launch of MIGA’s online portal dedicated to political risk (PRI-Center).

Results of a FY09 IDS client survey validate the strategic direction undertaken by MIGA from a consumer perspective, indicationg an overall agreement on the timeliness and benefit of the consolidatred FDI.net, as well as the launch of the PRI-Center. Overall survey results indicate a high level of satisfaction with MIGA’s information dissemination services (IDS) which appear to be achieving their desired outcomes in terms of reliability, timeliness, relevance and reduction of transaction costs. They also support the long-term objectives of facilitating specific investment transactions in MIGA member countries. In addition, the IDS have delivered an important benefit to MIGA in terms of greater awareness of the agency and, more specifically, of its products and services. The services have also contributed to the growing perception of MIGA as a thought leader in political risk issues and FDI.

During FY09, the IDS team took on an expanded mandate to focus its activities on research and knowledge creation, in line with the overall Bank-wide KM strategy, while tailored to MIGA's substantive and client needs. The subsequent shift from a pure aggregation model to a more complex business model driven by knowledge-creation, research and information dissemination has allowed MIGA’s IDS to further streamline and refocus its online activities to better serve users, while





ramping up its knowledge creation efforts through new research-oriented initiatives that highlight MIGA’s value added in the areas of FDI and political risk insurance.

IEG–MIGA Reports

Annual Reports2003 Report on Operations Evaluation in MIGA2004 Review of Development Effectiveness in MIGAOperations Evaluation Unit—2005 Annual ReportIndependent Evaluation Group—MIGA 2006 Annual ReportIndependent Evaluation Group—MIGA 2007 Annual ReportIndependent Evaluation Group—MIGA 2008 Annual Report: Evaluating MIGA’s FY05–08 Strategic Directions

EvaluationsExtractive Industries and Sustainable Development: An Evaluation of World Bank Group ExperienceImproving Investment Climate: An Evaluation of World Bank Group AssistanceEnvironmental Sustainability: An Evaluation of World Bank Group SupportThe World Bank Group Guarantee Instruments 1990–2007

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