WASHINGTON — Tucked away in a corner of the World Bank’s headquarters in Washington, D.C., sits the Multilateral Investment Guarantee Agency, the bank’s youngest, smallest, and least known agency. But with the bank repositioning itself as a “de-risking machine” capable of crowding-in trillions of private finance to development projects, this long-overlooked agency may finally be coming of age.
Celebrating its 30th birthday this year, the agency offers political risk insurance and guarantees to foreign private investors looking to enter emerging markets but worried about the risks. It also does what it calls “pre-claim management,” which effectively brings together private investors and government officials to solve problems before they occur.
As the need to find ways to “maximize” finance for development breathes new life into some of the bank’s historically controversial operating arms — notably the International Finance Corporation, which received its first major capital increase in 26 years last month — MIGA, too, looks set for a renaissance.
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Although it still accounts for a small part of the bank’s overall operations, MIGA has seen impressive growth in the last five years. In fiscal year 2017, it issued a record $4.8 billion in guarantees and upped its gross exposure to $17.8 billion under the leadership of Keiko Honda. That feat was achieved despite consistently declining flows of foreign direct investment into emerging markets during that time.
Honda, who is the former director of McKinsey & Company’s Japan office, attributes this to MIGA’s “exceptional operating model,” which has enabled the agency to turn $366 million in capital from 182 countries into a portfolio worth $20 billion — all with a staff of only 135, and an operating budget of $50 million a year.
“We probably have the highest leverage of the MDBs [multilateral development banks] in the world,” she told Devex.
In the past, however, MIGA has been sidelined at the bank by managers and donors, according to insiders. It has sometimes been left out of high-level meetings for example. The agency’s small staff size, linked to the transactional nature of its work, has also meant that MIGA staff tend not to be considered part of the bank’s day-to-day activities or country teams, and bank staffers often don’t know how MIGA operates.
This appears to be changing, with World Bank President Jim Kim increasingly making a fuss of his institution’s protégé — leading some insiders to joke the agency is having a #MIGAToo moment.
“MIGA will play an increasingly important role as the World Bank deploys a broad range of instruments and partnerships to help crowd in resources and transform sectors …,” Kim said at a MIGA anniversary event last month. “Business is booming and I’m hearing other MDBs are very interested in expanding their work with MIGA.” The president went on to challenge Honda to double MIGA’s portfolio again over the next three to four years, adding “I wouldn’t be surprised if we saw something like that.”
Philippe Le Houérou, head of IFC, has also talked up the importance of MIGA’s risk products, describing them as integral to the bank’s broader role as a “de-risking machine at every level” during last year’s World Bank Annual Meetings.
What is next for the ambitious agency — and can it live up to the hype?
All about MIGA
MIGA’s mandate is to drive foreign direct investment toward projects aimed at alleviating poverty and boosting shared prosperity in emerging economies, in accordance with the bank’s twin goals. It does this by offering political risk insurance to investors, covering equity, loans, and loan guarantees against a host of government-related risks including expropriation and breach of contract, as well as war and civil disturbance. It is geared toward investments in riskier markets. Currently, a third of MIGA guarantees are for projects in the world’s poorest countries; those which qualify for the bank’s concessional lending fund, the International Development Association.
While the institution is closely aligned with IFC, the two agencies are fundamentally different, and MIGA exists as a separate legal and financial entity. As Honda explained, MIGA was set up as part of a realization that while it is crucial to support domestic private enterprises in developing countries — something IFC is mandated to do — foreign direct investment is also needed.
“About 35 years ago, people kind of looked at it and saw that foreign private sector money, as well as expertise, is important to help sometimes … That’s why we were set up … and therefore we can only support cross-border investors,” Honda said.
As an example of MIGA in action, the agency recently played a key role in a major Egyptian energy sector project. In 2018, its risk insurance arm put up $210 million in financial guarantees for international companies planning to build 11 solar fields as part of the world’s largest solar power plant. The project was developed alongside the World Bank and IFC.
Compared with other insurers, MIGA has an impressively low claim rate, having paid out only 10 claims since it was founded. The most recent were in 2015 when the agency paid out three claims to financiers in Burkina Faso, Central African Republic, and Mali “for losses incurred from war and civil disturbance.”
Honda attributes the impressively low record to MIGA’s “pre-claim management,” through which it gets governments and investors to sit down together to hash out disputes before they escalate. The agency says these “proactive facilitation efforts have been pivotal in the resolution of more than 90 disputes related to MIGA-guaranteed projects.”
“We are an insurance company, so we can reinsure some of our portfolio to primarily private insurance companies. We are the only agency able to do this.”— Keiko Honda, chief executive officer of MIGA
Among insurance agencies, it is unique in being able to call on the relationships, leverage, country presence, and expertise of the World Bank and IFC to influence the parties. Investors tend to cooperate because they want to access IFC funds in the future, while governments want to remain on good terms with the bank, insiders told Devex.
“When our clients hit challenges … most insurance companies just say ‘OK, you have a problem, we pay’ … But then [the companies] usually have to get out of the country and stop the investment,” Honda said. “That’s not what we want. We would rather ask private investors and government to sit around the table and discuss the problem,” and that’s something MIGA can help with, she said.
Yet while its siblings, the International Bank for Reconstruction and Development and IFC, are set to share a capital increase worth $13 billion, MIGA was left out of the capital boost announced at last month’s World Bank Spring Meetings.
Honda said she does not see this as worrying. Her agency had not asked shareholders for a boost, she told Devex, instead opting to go to the reinsurance market where it has successfully secured an additional $9 billion over the past five years.
“We are an insurance company, so we can reinsure some of our portfolio to primarily private insurance companies,” she explained. “We are the only agency able to do this.”
A new strategy
Last year the organization launched a new strategy for 2018-2020, which includes working in more IDA countries, deepening its work in fragile and conflict-affected states — which currently account for about 10 percent of its portfolio — and making almost a third of new guarantees for projects related to climate change mitigation or adaptation by 2020.
In order to get there, MIGA has four strategies. The first involves doing more of what it already does, and growing its core business. The second involves developing more “innovative applications of our existing products,” Honda said. For example, in 2016, MIGA and the European Bank for Reconstruction and Development collaborated to offer the first liquidity-backed political risk guarantee supporting a greenfield project bond to help finance a new hospital in Turkey, which was given a relatively high bond rating by ratings agency Moody’s.
Deepening its exposure to fragile and conflict-affected countries will be the biggest challenge here, Honda said, and will require MIGA to develop “creative projects” that can “convert the needs of each country to investable projects.”
Often, “what is missing is not the money; what is missing is investable projects,” she said. For example, private investors will be put off investing in infrastructure such as water utilities, if they think the government won’t charge tariffs at the level needed to recover costs and make profit. So for the third pillar of its strategy, MIGA, as part of the bank group, is working to develop “schemes” that can help manage things like tariff setting and insure against the risk of low demand for services.
“It’s about getting the balance right” between what the government can support and what kind of commercial risk the private sector can take, while also recommending “slicing” the risk, Honda said.
The fourth element of the strategy involves working more closely with the other MDBs — something MIGA is already doing, Honda said — as part of the bank’s agenda of maximizing finance for development. While some MDBs have their own MIGA equivalent, many do not; or what they do have may be smaller or regionally focused.
“For some complicated or bigger projects, I would say my team probably has a bit more creative deal-structuring capability given the number and volume of transactions they have experienced,” she said.
Becoming greener is another key focus area for MIGA under its new strategy. In the past, the agency’s track record has been questioned, with NGO Oil Change International claiming that nearly $1 billion of MIGA’s guarantees to energy went to fossil fuel projects in 2016, while another $1 billion went to projects classified as “other,” including large hydropower, which campaigners do not classify as clean energy.
However, Honda said that more than 20 percent of MIGA’s current portfolio is in “climate finance,” and said it is an “area we’ve been really focusing on and would like to do more in.”
“We try to be green and … climate conscious,” she said.
Oil Change International’s report also states that none of MIGA’s 2016 projects were in solar, wind or geothermal energy. It can be hard for the agency to support some of these kinds of projects, Honda said, since they tend to be smaller and decentralized operations, which are less likely to need MIGA’s support. But she also stressed that the situation has improved in the past year, pointing to the MIGA-supported solar project in Egypt as well as other renewable projects in Jordan, Namibia, and South Africa, plus more in the pipeline.
While MIGA is still a small part of the bank, it has seen its profile raised under Kim’s leadership as part of his push for a more joined up institution, or “one World Bank Group.”
This is playing out at a management level: Honda said she meets with the heads of the World Bank and IFC every week, and “sometimes two or three times per week.” The various World Bank Group vice-presidents have also been meeting more regularly, she said, which “has been working very well;” and World Bank staff have been learning more about each other’s products, including MIGA’s.
But while Honda seems happy MIGA now has more of a seat at the World Bank Group table, she is more prudent about expanding the agency, and has no immediate plans to break away. Part of MIGA’s success lies in its ability to piggy-back off World Bank and IFC resources, she suggested.
“MIGA’s operational model is leveraging [the] IFC and World Bank models,” she said, explaining that “their country offices help us to talk with government and also IFC sometimes bring us a deal and we do joint due diligence … so we don’t really need to have staff in every single corner of the world.”
For Honda, the future of development lies in raising more private sector investment — as part of this, MDBs like MIGA need to “think about how to leverage ourselves most.” This means “not only our capital but also our expertise and knowledge,” she said.
Considering the agency’s lean operating model and its leveraging ability, including through access to reinsurance markets, Honda is confident it will continue to grow in size and relevance. She predicts the numbers for fiscal year 2018 will show MIGA’s portfolio hitting $20 billion, in line with its target to increase issuance by 40 percent between 2016 and 2020.
“Infrastructure is getting bigger and bigger,” she said. While some of this will be partly funded by domestic investors, a lot will have to come from abroad, “so I feel like we have a lot more space to play,” she said.
“I’m really strongly hoping this operating model continues to work … [and] we can do a lot more in challenging markets.”
Update, May 17: This story was updated to clarify the possibility of MIGA’s expansion, and to update the number of claims paid out by the agency in line with new information