Keiko Honda, CEO MIGA: Crucial Role for Investment Guarantees

Keiko Honda

The Multilateral Investment Guarantee Agency (MIGA), part of the World Bank Group, is a financial institution exclusively dedicated to political risk insurance and credit guarantees that offer investors a hedge against risk in developing countries. The agency was established in 1988 with the mission to promote direct foreign investment in countries shunned by investors due to perceived non-commercial risk. MIGA particularly focuses on the member countries of the International Development Association – also member of the World Bank Group – and countries ravaged by war.

MIGA CEO and Executive Vice-President Keiko Honda joined the agency in 2013 from McKinsey and Co where she was a director. Mrs Honda has much experience in public and private sector banking with an emphasis on corporate finance and private equity. She served on a number of government committees in her native Japan such as the Council of Regulatory Reform and the Committee on the Promotion of Free Trade Agreements.

In this interview, Mrs Keiko explains the workings of MIGA and its outlook.

What is MIGA’s role in, and contribution to, financing for development?

The big news in recent conversations on Financing for Development is the very high level of recognition of the role of the international private sector. In fact, I believe that a good deal of the success of the Financing for Development push will be up to organisations like ours. By this I mean that our role as a bridge between the private sector’s resources and countries’ development goals is absolutely vital.

In particular, there is a good deal of attention to public-private partnerships, de-risking, and blended finance in the Financing for Development discussions, which I welcome. But I want to emphasise that, at MIGA, we’ve been executing these models on the ground for some time now.

“The big news in recent conversations on Financing for Development is the very high level of recognition of the role of the international private sector.”

Political risk insurance is a very effective, market-tested tool. At MIGA, we hear time and again from clients that they would not have invested in a given country unless they are backed by our guarantees. This is a significant impact that strikes at the heart of the discussions around capital mobilisation that we’re having right now.

What are the benefits of MIGA’s sovereign credit enhancement solutions and which countries and organisations may benefit? What are the charging models?

Our credit enhancement product suite – what we call non-honouring of financial obligations coverage – is used for investments involving sovereign and sub-sovereign entities, as well as state-owned enterprises. Commercial lenders that provide loans to developing-country public sector entities with a satisfactory credit rating are our target clients. The product has become an increasingly important tool, especially for large infrastructure investments.

One of the primary advantages to MIGA’s credit enhancement is that it complies with Basel II, meaning that banks can receive capital relief and, as a result, boost their lending capacity in a given country. This allows them to fund strong projects that cannot be financed in the traditional markets with the needed tenors.

I want to underline that this additional lending capacity is especially critical in a post-global financial crisis world where an unfortunate and unintended by-product of regulation has been tightening of lending for large infrastructure projects in developing countries.

Can you give some examples of MIGA’s financial innovation?

I just mentioned capital relief as it relates to our credit enhancement projects. But we have also deployed our coverage against expropriation to achieve capital relief for global retail banks with significant exposures to central banks in developing markets. With this model, a parent bank obtains coverage against the expropriation of mandatory reserves by the host country. This results in a reduction of the risk weight and frees up capacity that can be used to grow a loan book in these developing countries.

Germany-based ProCredit, which operates an emerging-market network of 21 microfinance subsidiaries, was our first client to use this capital optimisation product. To streamline the process we used a portfolio approach to insure a maximum amount of more than €200 million in guarantees for the bank’s subsidiaries across the globe.

Other innovations involve our work around bond issuances. In Senegal, MIGA’s credit enhancement backs a US dollar cross-currency swap arrangement between Standard Bank Plc and the government. Senegal entered into the swap with Standard Bank as a hedge against currency risk exposure related to a 10-year, $500 million Senegal Eurobond. The proceeds of the Eurobond are being used to finance new infrastructure projects, including an extension of the toll road to the airport and critical energy sector investments.

Also, MIGA’s credit enhancement support to Hungary’s Export-Import Bank (EXIM) helped it achieve a savings that it will use to directly support Hungarian exporters. MIGA’s backing for a €400 million bond issue by EXIM went so far as to raise the bond issue from non-investment to investment grade.

What is the role for traditional risk insurance for infrastructure investments?

Before we launched our credit enhancement product line in 2010, we had more than twenty years of experience supporting infrastructure investments, so the role of what we call our traditional political risk insurance is certainly significant.

Our coverage protects against the risks of currency inconvertibility and transfer restriction; expropriation; war, terrorism, and civil disturbance; and breach of contract.

The reality is that, while the world looks increasingly to the private sector to take the lead in delivering infrastructure, investors and lenders are often wary of entering these relatively untested markets. The risks that concern them often relate to low confidence in the judiciary system, weak or untested regulatory frameworks, poor governance, lack of enforcement of contracts, and macroeconomic instability. In some countries, the threat of political instability, war, and civil disturbance poses a danger to physical assets and makes financing difficult and expensive.

MIGA’s guarantees help companies overcome this risk aversion, knowing they’ll be compensated in the event of a loss. But our guarantees also carry a very important intangible benefit that comes from our status as an arm of the World Bank Group: once a deal is in place, MIGA guarantees provide an added measure of security that can help keep a project stable and reinforce positive relations with host governments.

While all of our coverages have been used for infrastructure investments, I’d like to highlight that MIGA’s breach of contract coverage can be designed to cover selected contract clauses that are of particular concern to infrastructure investors, including performance-related clauses and payment obligations of the government related to output-based assistance and termination amounts.

Can you please elaborate on the impact of Programmes that are designed to promote foreign direct investment in small and medium-sized enterprises?

Cheese production in the West Bank, cashmere-scouring in Afghanistan, bottle manufacturing in Libya, tilapia farming in Zambia – these are all very recent examples of the productive investments MIGA has supported through our Small Investment Programme.

We established this programme more than ten years ago to fill an unmet demand for political risk coverage for small investment projects that was largely unavailable from commercial insurers. With this programme, we offer a streamlined approval process and aim to get MIGA coverage in place for investors quickly. The projects we insure under the Small Investment Programme are highly relevant for MIGA’s mission, as they are often located in markets where small investments have the potential for a much larger impact on private sector development through upstream and downstream economic linkages – as well as demonstration effects.

Myanmar was one of the most recent countries to join MIGA (2014). As a case study, how does MIGA fit into Myanmar’s development policy framework and how may the country benefit from its MIGA membership?

Myanmar is a country at a crossroads and we are eager to support investments that help the country succeed in its transformation. I was in the country a year ago and met with government officials, members of parliament, and the private sector to emphasise that MIGA is ready to assist Myanmar in meeting its urgent need for electricity, other infrastructure, and a thriving finance sector. These are critical elements of the country’s development policy framework.

While the government is promoting an ambitious economic reform agenda to drive stronger growth, challenges remain. Here the involvement and attention of the international community is key. MIGA-supported investments into the country will have an important signalling effect for other investors that are watching conditions and opportunities in the country very closely. Our involvement will also ensure that investments meet social and environmental standards that are considered global best practice.

I’m very excited that we’re on the verge of announcing the first use of MIGA guarantees in the country. We may have already announced it by the time this interview is published.

What will the future hold for MIGA – i.e. are there any new / novel policy initiatives underway?

We are looking very closely for ways in which we can work with institutional investors to get more capital into developing countries. As we’ve been discussing in Financing for Development circles, this is an important frontier with huge resources that we need to explore more deeply. This past year, MIGA insured our first investment in the pension-funds sector, so we have some momentum here.

We also want to use our guarantees to support investments that have a positive impact on climate change. For this, we need investors who have feasible projects in renewable energy, mass transit, sustainable agriculture, and much more. We urge more of these investors to bring their projects for MIGA’s consideration, as we need all hands on deck to shift the climate change trajectory.