| World Bank Establishes Guarantee Facility For Investors In Afghanistan The World Bank
07/30/2004
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Availability of Political Risk Insurance Expected to Kick-Start Private Sector Interest WASHINGTON — The World Bank today approved a credit to Afghanistan for the financing of a political risk insurance program. The Afghanistan Investment Guarantee Facility (AIGF) will significantly encourage foreign investment in Afghanistan by providing political risk insurance with coverage capacity of up to US$60 million. The World Bank’s Multilateral Investment Guarantee Agency (MIGA) will administer the facility. Three years into the rebuilding of Afghanistan, modern private investment is still weak, largely informal and unable to compete in the world marketplace. Perceptions of risk by investors and bankers have been a major obstacle to investment. The facility is designed to encourage foreign direct investment (FDI) particularly in smaller projects critical right now to the country’s economic development. “The reconstruction efforts in Afghanistan will only succeed if there is a vibrant private sector capable of transforming the peace dividend into employment for its citizens and sustainable long term economic growth,” says Praful Patel, World Bank Vice President for the South Asia Region. “This guarantee facility will help catalyze the much needed international and domestic investment.” MIGA is one of the few providers of political risk insurance operating in Afghanistan, meaning that the opportunities for standard risk-sharing with other private and public insurers are limited. The IDA credit of US$5 million will be supplemented by a US$5 million soft loan from the Asia Development Bank (ADB) and US$10 million in insurance capacity from MIGA. This will be co-insured by the ADB in the equivalent amount of US$10 million. Together with support to be raised from private insurance, the total size of the facility is expected to be US$60 million, a significant amount for Afghanistan. The structure allows leveraging of the initial financing by six times. Germany is providing financing for technical assistance. ADB’s contribution to this facility will be discussed at a board meeting to be held during the month of August. MIGA, with 164 members, is the only global multilateral organization insuring investors against political risks. These risks include currency transfer restriction and inconvertibility, expropriation, breach of contract, and war and civil disturbance. The use of MIGA’s underwriting policies and methodologies will ensure that only those projects that are financially viable and have a positive development impact in Afghanistan will be underwritten under the facility. Afghanistan became a member of MIGA in July 2003. “MIGA’s added value lies in opening up difficult or frontier markets to clients and partners and facilitating investments in high risk countries,” says Yukiko Omura, MIGA’s Executive Vice President. “This facility is unique in that it leverages the IDA funds and the ADB soft loans by up to six times, which allows more FDI into the country by bringing in investors that would otherwise be wary and so assist Afghanistan in its recovery from decades of conflict.” The facility is innovative also in enabling MIGA to extend its reach. AIGF will not only insure “traditional” FDI projects, but will extend coverage to loans and credits provided to local business by newly established foreign banks in Afghanistan. Additionally, AIGF will provide coverage to foreign loans to be used to finance local equity investment or the importation of critical capital goods for reconstruction. This facility is similar to MIGA’s Investment Guarantee Trust Funds in Bosnia and Herzegovina, and the West Bank and Gaza. The credit for the Investment Guarantee Facility is provided by the International Development Association (IDA), with the standard commitment fee of 0.5 percent and a service charge of 0.75 percent. It carries no interest and has a 40-year maturity with a 10-year grace period.
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