83388 2013 WIPR World Investment and Political Risk World Investment Trends and Corporate Perspectives The Political Risk Insurance Industry Breach of Contract © 2014 The International Bank for Reconstruction and Development/The World Bank 1818 H Street, NW Washington, DC 20433 t. 202.473.1000 www.worldbank.org feedback@worldbank.org Some rights reserved 1 2 3 4 15 14 13 12 This work is a product of the staff of The World Bank with external contributions. Note that The World Bank does not necessarily own each component of the content included in the work. The World Bank therefore does not warrant that the use of the content contained in the work will not infringe on the rights of third parties. The risk of claims resulting from such infringement rests solely with you. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. 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Jaoude, MIGA/World Bank Group 2013 World Investment and Political Risk World Investment Trends and Corporate Perspectives The Political Risk Insurance Industry Breach of Contract Table of Contents FOREWORD........................................................................................................................................................ 1 ACKNOWLEDGMENTS................................................................................................................................... 3 SELECTED ABBREVIATIONS.........................................................................................................................4 EXECUTIVE SUMMARY................................................................................................................................... 5 CHAPTER ONE World Investment Trends and Corporate Perspectives........................................................................................9 Economic recovery, investor hesitation.........................................................................................11 The bigger FDI picture: waiting, seeing........................................................................................ 12 For developing economies: a glass half-full?................................................................................ 12 Regional FDI into developing economies in 2013........................................................................ 14 New seats at the table?.................................................................................................................. 16 Keeping their powder dry?............................................................................................................. 18 Political risks remain important.................................................................................................... 18 And everyone else?.........................................................................................................................22 A perpetual spring?........................................................................................................................ 23 It’s (still) the economy...................................................................................................................26 CHAPTER TWO The Political Risk Insurance Industry.................................................................................................................. 27 Demand growth for PRI continues................................................................................................30 It’s a riskier world............................................................................................................................31 But don’t forget the supply side.................................................................................................... 32 Pricing grows, but only slowly....................................................................................................... 34 Innovation, both public and private.............................................................................................. 35 No upswing in claims, yet?............................................................................................................36 A complementary product?........................................................................................................... 37 Ever upwards?................................................................................................................................ 38 CHAPTER THREE Breach of Contract................................................................................................................................................39 Investor concerns and trends in disputes.................................................................................... 41 A more comprehensive analysis....................................................................................................44 What we do and what we expect to see........................................................................................ 45 Some early findings........................................................................................................................ 45 Contract-level issues......................................................................................................................46 Country-level issues.......................................................................................................................48 Corporate-level approaches and perception of these risks..........................................................49 Towards a better handle on breach of contract............................................................................ 52 ENDNOTES....................................................................................................................................................... 55 APPENDICES Appendix 1 FDI Inflows, 2004–2012 ................................................................................................................ 58 Appendix 2 MIGA-EIU Political Risk Survey 2013........................................................................................... 60 Appendix 3 Berne Union, Prague Club Members and Lloyd’s Syndicates.....................................................79 BOXES Box 2.1 Overview of the PRI market.................................................................................................................29 Box 3.1 What is meant by breach of contract?................................................................................................ 41 Box 3.2 Potential triggers of contract breach: evidence from MIGA pre-claims............................................ 50 TABLES Table 1 Major constraints to foreign investment over the next three years.................................................... 7 Table 1.1 Global growth assumptions.................................................................................................................11 Table 1.2 Regional FDI..........................................................................................................................................15 Table 1.3 Recent survey findings regarding FDI prospects............................................................................... 19 Table 1.4 Survey findings regarding political risks.............................................................................................20 Table 2.1 Aggregate Berne Union PRI issuance by provider type, 2012............................................................ 32 Table 2.2 Available private market capacity by tenor, total maximum per risk................................................ 34 Table 2.3 Key new and expanded market offerings, 2012...................................................................................35 Table 3.1 Where is the risk? The most consistent determinants of contract breach identified by this analysis..........................................................................................49 Table 3.2 Statistical analysis results....................................................................................................................53 FIGURES Figure 1 Net FDI flows, 2001-2015.................................................................................................................6 Figure 1.1 Net private capital flows to developing economies......................................................................13 Figure 1.2 Composition of FDI flows to developing economies................................................................... 14 Figure 1.3 FDI flows to developing economies by region..............................................................................15 Figure 1.4 FDI flows from developing economies......................................................................................... 16 Figure 1.5 Changes in foreign investment plans for South-based investors.................................................17 Figure 1.6 Ranking of the most important constraints to FDI in developing economies for South-based investors.....................................................................................................................17 Figure 1.7 Ranking of the most important constraints to FDI in developing economies........................... 18 Figure 1.8 Changes in foreign investment plans........................................................................................... 21 Figure 1.9 Types of political risk of most concern to investors in developing economies.......................... 21 Figure 1.10 Impact of political risk on foreign investors................................................................................. 22 Figure 1.11 Financial losses incurred over the past three years on account of political risks...................... 23 Figure 1.12 Withdrawal of existing investments or cancellation of planned investments over the past twelve months due to political risks............................................................................................. 23 Figure 1.13 Impact of developments in MENA on future investment plans..................................................24 Figure 1.14 Ranking of the most important political risks in the MENA region............................................24 Figure 1.15 Perceived changes in the breach of contract risk in MENA......................................................... 25 Figure 2.1 Growth in PRI issuance by Berne Union members and in FDI flows......................................... 30 Figure 2.2 Ratio of PRI to FDI flows: global versus developing economies..................................................31 Figure 2.3 PRI issuance by Berne Union members into developing economies, by type of provider......... 32 Figure 2.4 Available private market PRI capacity, total maximum per risk....................................................33 Figure 2.5 Ratio of premiums to average PRI exposure for Berne Union members.................................... 34 Figure 2.6 Investment claims paid by Berne Union members...................................................................... 36 Figure 2.7 Recoveries by Berne Union members........................................................................................... 37 Figure 2.8 Tools/mechanisms used to mitigate political risk when investing in developing countries...... 37 Figure 3.1 Types of political risk of most concern to investors in developing economies..........................42 Figure 3.2 Volume of private investment in infrastructure in low and middle-income countries............... 43 Figure 3.3 Number of investor-state investment disputes, 1990-2012......................................................... 43 Figure 3.4 Proportion of disputed contracts in sample, by income level.....................................................46 Figure 3.5 Probability of contract breach, by contract maturity....................................................................46 Figure 3.6 Survival estimates, by share of private ownership....................................................................... 47 Figure 3.7 Survival estimates, IFI involvement.............................................................................................. 47 Figure 3.8 Survival estimates, energy sector versus non-energy sector projects.........................................48 Figure 3.9 In which sector(s) have you experienced a breach of contract event?........................................49 Figure 3.10 Which of the following are the five most important risk factors for breach of contract events?..............................................................................................................................51 Figure 3.11 Which of the following methods for addressing breach of contract events do you consider to be the most effective?.................................................................................................51 Figure 3.12 What are the most effective tools/mechanisms available to your firm for alleviating each of the following risks?......................................................................................... 52 1 | WIPR 13 Foreword I am pleased to have this opportunity to Reflection on MIGA’s role is especially fitting this year, as the Agency celebrates its 25th anniversary. Since our highlight MIGA’s mission: to promote foreign inception, we have provided some $30 billion in guar- direct investment (FDI) into developing antees for more than 700 projects in over 100 developing countries to support economic growth, countries. Looking beyond the numbers, I want to emphasize that the investments we insure have positively reduce poverty, and improve people’s lives. affected lives across the globe—creating jobs; providing The report you are now reading plays an water, electricity, and other basic infrastructure; important role in furthering these objectives. strengthening financial systems; generating tax revenues; transfering skills; and helping countries tap natural Through the research and the survey con- resources sustainably. Many of these investments simply ducted for this report, MIGA seeks to would not have been able to go forward without political understand investors’ perceptions of risk insurance that gave the sponsors the confidence they needed to operate in sometimes challenging envi- political risk as they affect FDI, as well as the ronments. role of the political risk insurance industry This year also marks the fifth year that MIGA has in mitigating these risks. We publicize our published World Investment and Political Risk. These findings broadly in order to contribute to years have been heady for both FDI and political risk, and the report series has been an interesting barometer a thriving, informed investor community and during this tumultuous time. political risk insurance industry. WIPR 13 | 2 As in previous reports, this year we examine investors’ This year World Investment and Political Risk also looks perceptions and risk-mitigation strategies as they make at breach of contract risk and its causes. The report’s decisions and plan for the future. We found that original research can help guide investors and insurers investors continue to rank political risk as a key obstacle when they participate in a project that involves a to investing in developing countries, though—for the contract with a developing-country government entity. first time since we launched the survey—investors As private and public sectors continue to increase their classify macroeconomic instability as their top concern cooperation in service of bringing important investments over the medium term. to fruition, this research is particularly timely. The report confirms a continued increase in the use of I hope that you find the report both insightful and political risk insurance as a risk-mitigation tool and helpful for your work. reaffirms the industry’s health and resilience. Providers have met the challenge of these years with new products Keiko Honda and innovative ways to use existing tools as well as Executive Vice President substantial capacity to meet growing demand. 3 | WIPR 13 Acknowledgments T his report was prepared by a team led by Conor Healy, under the overall coordination of Dan Biller and Ravi Vish, comprising Persephone Economou, Bilateral discussions with Toby Heppel (RFIB), Navaid Farooq (Catlin), Murray Ross (Ace Group), Nick Kilhams (Chaucer plc), Rupert Cutler (NMB), and Petal Jean Hackett, and Manabu Nose. Mallory Saleson, Bernie de Haldevang (Aspen Insurance) also provided Rebecca Post, and Cara Santos Pianesi edited; Antoine some background and context for the report. Arthur A. Jaoude was in charge of graphic design. Cara Santos J. Gallagher International and RFIB Group Limited Pianesi was the overall coordinator of the editorial and provided data on the private insurance market. production process. Khalid Alsuhaibani, Saodat Shantayanan Devarajan (Chief Economist, Middle East Ibragimova and Miranda von Reyn provided support. and North Africa, World Bank), Elena Ianchovichina This year’s World Investment and Political Risk report (Lead Economist, Middle East and North Africa, World benefitted from comments by MIGA’s senior man- Bank), Allen Dennis (Senior Economist, Development agement team and we thank Keiko Honda, Michel Prospects Group, World Bank), Michael Gestrin Wormser, Ana-Mita Betancourt, Kevin Lu, Edith (Programme Manager, OECD), Peter M. Jones Quintrell, Lakshmi Shyam-Sunder, Ravi Vish, and (Secretary General, Berne Union), Fabrice Morel Marcus Williams. Within MIGA, Marc Roex, Thomas (Deputy Secretary General, Berne Union), Moritz Mahaffey, and Gero Verheyen also provided feedback. Zander (Vice President, Sustainability & Political Risk, Swiss Re), Theodore H. Moran (Marcus Wallenberg The World Bank’s Development Prospects Group, Chair at Georgetown University’s School of Foreign under the guidance of Andrew Burns, provided the Service), Gerald T. West (also at Georgetown University macroeconomic data presented in the report. Dilek as Adjunct Professor for the School of Foreign Service) Aykut (Senior Economist, Sub-Saharan Africa, World and Nathan Jensen (Associate Professor, Department Bank) and Eung Ju Kim (Financial Analyst, Development of Political Science, Washington University in St. Louis) Prospects Group, World Bank) provided support. provided peer reviews. Daniel Villar of the World Bank’s Credit Risk Department provided useful comments. The investor survey was conducted on behalf of MIGA by the Economist Intelligence Unit. The analysis of the political risk insurance market benefited from the gracious participation of political risk brokers in a roundtable discussion in London organized by Exporta Publishing and Events Ltd. Kevin Godier and Peter Gubbins assisted with transcription. WIPR 13 | 4 Selected Abbreviations AdvReg Adverse regulatory changes ASEAN Association of Southeast Asian Nations BoC Breach of contract BRIC Brazil, Russian Federation, India, and China CD Civil disturbance ECA Export credit agency EIU Economist Intelligence Unit EU European Union Expro Expropriation FDI Foreign direct investment GCC Gulf Cooperation Council GDP Gross domestic product ICC International Chamber of Commerce ICIEC Islamic Corporation for the Insurance of Investment and Export Credit ICSID International Centre for Settlement of Investment Disputes IFI International financial institutions IMF International Monetary Fund MENA Middle East and North Africa MIGA Multilateral Investment Guarantee Agency MNE Multinational enterprise NHFO Non-honoring of financial obligations OECD Organisation for Economic Co-operation and Development OPIC Overseas Private Investment Corporation of the United States PPI Private participation in infrastructure PRI Political risk insurance SCCAM Swiss Chambers’ Court of Arbitration and Mediation SOE State-owned enterprises T&C Transfer and convertibility restrictions Terror Terrorism UNCTAD United Nations Conference on Trade and Development Dollars are current U.S. dollars unless otherwise specified. 5 | WIPR 13 Executive Summary Global economic growth has continued its rebound of 2009-10 looks more distant. FDI now weak path in 2013. The crisis in the euro zone appears stable and at high levels, but with persistent economic concerns and stuttering growth, it does not appears to have receded somewhat since last look likely to return to the growth rates of the mid year, with current concerns more focused 2000s anytime soon. on the implications of the end of the monetary cycle in the United States, rising At a sub-regional level, trends are more diverse. Sub- U.S. long-term yields, and a possible slowdown Saharan Africa and South Asia have shown healthy in China. The possibility of monetary policy growth this year, achieving 19 percent and 21 percent increases in FDI inflows, respectively. Other develop- change is posing fresh risks for emerging- ing regions are experiencing declines, particularly market economies, where activity could slow Europe and Central Asia, where FDI flows are expected and asset quality could weaken. Further, any to fall by 16 percent for the year. The other key success slowdown in Chinese growth would affect stories of recent years—increases in FDI from develop- many other economies, notably the com- ing economies and South-South investment—contin- modity exporters among the developing ued. FDI outflows from developing economies reached a record level of $164 billion in 2012, representing a markets. At the same time, old problems––a record share of 12 percent of global FDI outflows. fragmented financial system in the euro area and worrisomely high public debt in all major The mood of investor caution is further captured by advanced economies––remain unresolved and the annual MIGA-EIU Political Risk Survey. For the could trigger new crises. With all of this in first time since the survey was launched, investors mind, it is perhaps no surprise that foreign classify macroeconomic instability as the key con- straint for investing into developing economies over direct investment (FDI) levels for developing the medium term. The persistent global economic economies are seeing only a marginal increase uncertainty appears to have tainted the overall mood, in 2013, and are expected to decline next year. with economic pessimism underpinning the expected stagnant FDI levels. Against this backdrop, the survey For a second straight year, FDI to developing economies continues to find political risk to be a significant remains soft, still below previous peaks (figure 1). After concern for investors operating in developing markets. declining from the 2011 peak of $628 billion to $604 Rather than recede in the face of more dominant billion last year, 2013 is expected to see a 2 percent concerns of the global economy, political concerns increase to an estimated $617 billion—a further in- remain close to the levels of recent years. In both crease is expected only in 2015. While there has been cases, MIGA’s analysis is further underpinned by explosive FDI growth since the turn of the century—FDI other surveys, which also place these two issues at was 337 percent higher in 2011 than in 2000—the the top of the list of investor concerns. WIPR 13 | 6 Figure 1 Net FDI flows to developing countries, 2001-2015 $ billion 700 600 500 400 300 200 100 0 01 02 03 04 05 06 07 08 09 10 11 12 13e 14f 15f Source: World Bank e= estimate; f= forecast The fact that political risk continues to be perceived capacity continues to grow too, with broader insurance as an important constraint to investment into develop- market conditions making the comparatively higher ing countries remains a boon for the political risk insur- premiums available in the PRI niche attractive for new ance (PRI) industry. New issuance by members of the entrants. On the demand side, the important drivers Berne Union—the leading association of public, of new issuance include ongoing instability in the private, and multilateral insurance providers—in- Middle East and North Africa that have raised the creased by 33 percent in 2012, even as FDI fell, and is specter of unanticipated events in seemingly stable on track for similar growth in 2013. To put this in political regimes; high-profile expropriations and in- context, the $100 billion of investment insurance issued vestor-state disputes in Latin America; contract re- in 2012 is at a historic high level and over three times negotiations in resource-rich economies; and capital the volume issued in 2005. The ratio of FDI to PRI now constraints and increased financial sector regulation, stands at 14.2 percent for developing economies, a which make financing with PRI an attractive option. marked increase on the low-water mark of nearly 5 percent in 1997, but still below the historic peak of MIGA’s annual roundtable of private insurers and 1982, when the ratio of PRI to FDI for developing brokers in 2013 highlighted a number of interesting economies exceeded 25 percent. trends in the private market. The growing capacity in the market, including several new entrants, continues The growth in PRI issuance is driven by both supply to push participants to lengthen their tenors and to and demand considerations. On the supply side, public innovate in product offerings. Underwriters are entering providers continue to dominate Berne Union activity, into sizeable deals with tenors of up to 14 years, with with the top two providers accounting for 57 percent even longer private-market tenors now possible. of total Berne Union issuance for the year. Private Discussions with the private insurers highlighted a 7 | WIPR 13 Table 1 Major constraints to foreign investment over the next three years percent 2010 2011 2012 2013 Number of respondents 194 316 438 459 Limited size of the market 9 7 7 5 Lack of investment opportunities 7 - - - Poor infrastructure 9 11 8 7 Lack of qualified staff 10 17 18 18 Lack of financing for investments in these countries 5 11 13 13 Political risk 21 18 22 19 Macroeconomic instability 16 15 20 21 Lack of information on the country’s 2 - - - business environment Weak government institutions/red tape/corruption 19 13 8 10 Other 2 2 1 1 Increased government regulation in the aftermath of the global financial crisis - 5 3 4 Source: MIGA-EIU annual political risk surveys number of new comprehensive and more tailor-made investments, while concerns about stress on public products. A recurrent theme was the potential for wider finances have led public providers to expand coverage market coverage if private and public insurers coop- for non-honoring of financial obligations. While the erated more closely on co-insurance, a mutually ben- Lloyd’s market has been offering this coverage for eficial exercise that could extend tenors for the private some time, the expansion of public cover has permitted participants and increase the scope and size of cover an increase in both capacity and tenors. overall, especially in more challenging markets. The claims picture is often a volatile one, with perhaps This year’s report takes a close look at product offerings understandably lower levels of transparency across across the market. The evolving marketplace has seen some parts of the market. As such, it is generally harder a growing role for public providers, reflected in an to make strong conclusions on the basis of available expansion of their product lines, notably with MIGA information, especially on a single-year basis. offering its non-honoring product to state-owned enter- Notwithstanding this, the low levels of paid-out claims prises, and the Overseas Private Investment in 2012, at $125 million, are far below the highs seen Corporation (OPIC) of the United States now covering in 2010 as a result of the global financial crisis, and investments by private equity funds (with other public considerably lower than the $179 million reported for providers also looking at such cover). As was the case 2011. Additional claims, which might be expected from last year, the elevated political risk perceptions of a substantially expanded market, have not yet arrived. investors have continued the revival of demand for existing products. In light of the elevated political risk Despite elevated perceptions of political and economic in the Middle East and North Africa, there has also risk, the majority of respondents in the MIGA-EIU been ongoing interest in coverage for existing Political Risk Survey 2013 have no plans to withdraw WIPR 13 | 8 or cancel investments in developing markets. Within the range of political risks, breach of contract and regulatory risks once again top respondents’ concerns. Survey results show that these concerns are based on actual experience as well as sentiment, with respondents rating these factors as the key political risks that resulted in actual losses over the past three years. Chapter three of this publication focuses on breach of contract risk and its causes. It combines, for the first time in a statistical analysis, both deal-specific factors (contract design, manner of award, sector) and country-specific factors (economic and political considerations, regime type) associated with this risk. The statistical analysis offers insight into the most significant correlates and triggers of contract breach. The results identify a number of key areas where investors (and insurers) should pay primary attention when they participate in investments that involve a contractual relationship with a public, developing- economy counterparty. Findings suggest that, even when controlling for other factors, risk of contract breach is higher in middle-income countries than low-income countries. Project sector, private own- ership stakes, and the presence of international financial institutions in the deal are important micro- correlates of contract viability. On the macro side, risk of breach is statistically related to economic downturns, dependence on primary commodities, and quality of political institutions. Results support the idea of the “obsolescing bargain,” suggesting that risk of breach of contract increases with years of contract life, before leveling (between the eighth and twelfth year of contract duration) and then rising again, albeit more slowly. An awareness of all of these relationships is a valuable starting point to help investors and insurers best mitigate and manage their risks. The results of chapter three’s analysis are consistent with investor views as reflected in the MIGA-EIU Political Risk Survey 2013, as well as with MIGA’s own empirical pre-claims experience. MIGA’s analysis pre- sented in this report opens the field for further study to explore potential ranking of different risk elements across industries and structures and points investors to the key influencing variables and interactions in different projects. 9 CHAPTER one World Investment Trends and Corporate Perspectives 10 A fter a recovery following the 2008 global financial crisis, foreign direct investment (FDI) levels for developing economies rose marginally in 2013 and are expected to decline next year. Improving growth forecasts hint at better numbers to come, but investors remain cautious, with only tentative signs of a stronger recovery. Private capital flows in these economies are also projected to remain stagnant, having been tempered recently by anticipated monetary consolidation led by the United States. T he regional spread of FDI into developing economies offers a mixed picture, with sub- Saharan Africa and South Asia showing solid growth this year. In contrast, developing economies in Europe and Central Asia continue to be affected by stagnant growth in the region’s high-income economies. F DI from developing economies and South-South investment remain buoyant and increasing, largely reflecting the greater global role played by Brazil, the Russian Federation, India, and China (BRIC). Alongside an increasing role played by sovereign wealth funds and state-owned enterprises, the profile of investors entering into developing economies appears to be undergo- ing a fundamental change. The resulting impact for risk appetites and sectoral preferences will be central to both the FDI and development stories for the foreseeable future. T he cautious mood of investors is captured by MIGA’s annual investor survey, the results of which place macroeconomic instability at the top of investor concerns for the first time. The hesitancy regarding future investment is captured in a somewhat more cautious outlook for investment intentions, especially within the twelve-month horizon. MIGA’s survey results are corroborated by the findings of similar surveys, underlining the still tentative nature of the recovery. W hile economic concerns currently dominate the investor mindset, political risks still rank highly. In particular, breach of contract and regulatory risks once again top survey re- spondents’ political risk concerns. Survey results show that these concerns are based on actual experience as well as sentiment, with respondents rating these factors as the key political risks that resulted in actual losses over the past three years. T he Arab Spring story is becoming more complex as FDI flows declined in 2013. While the second wave of disturbances has kept political violence as the key investor concern, there are hints that investors are ready to reengage fairly quickly once some degree of resolution is achieved. At the same time, breach of contract concerns are on the rise, possibly because of the fear of post-recovery “tail effects.” 11 | world investment Trends and corporate perspectives F ive years on from the global financial crisis, MIGA’s annual review of global investor perceptions of developing economies sees an environment where Economic recovery… investor hesitation caution appears to have increased. While developing Despite more optimistic global growth scenarios, the hesitant nature of that growth and expected monetary economies have generally weathered the crisis better retrenchment in the United States have cast new clouds than their developed counterparts, persistent global over the outlook for developing economies. Investor softness is affecting the investor mood. This softness caution and sluggish FDI also moderate the optimistic is impacting the FDI numbers, with flows hovering outlook. This year’s MIGA-EIU Political Risk Survey, the around the $600 billion mark. At a sub-regional level, fifth such survey commissioned by MIGA (see appendix only the developing economies of sub-Saharan Africa 2),1 reinforces these concerns, with macroeconomic and South Asia have witnessed significant growth in instability for the first time arising as the leading worry these flows. While South-South investment has picked for investors going into developing economies. up some of the slack—marking an interesting trend—it is the story of rising interest rates in the developed Recent months have witnessed strengthening growth economies that could impact the topline number for and an overall improvement in business confidence in FDI into developing economies for the immediate high-income countries (table 1.1), as the euro zone future. The mood of caution is further captured by the slowly emerges from recession. Yet, despite these “green annual MIGA-EIU Political Risk Survey. Macroeconomic shoots,” global economic recovery remains fraught, instability rates at the top of investor concerns for the with persistently weak growth in many high -income first time and this concern has tempered the historically economies in Europe (France, Italy, United Kingdom), bullish investor sentiment. Against this backdrop, the recession in European countries undermined by the survey finds that political risk remains a significant sovereign debt crisis, high unemployment rates, and concern for investors operating in developing markets, ongoing banking sector restructuring. Economic activity something that countries will be under new pressure in the euro zone continues to suffer from the combined to address if the current mood persists. effects of low demand and confidence compared to Table 1.1 Global growth assumptions* Real GDP growth in percent 2012 2013e 2014f 2015f 2016f World 2.5 2.3 3.2 3.4 3.5 High-income countries 1.5 1.2 2.1 2.4 2.5 Developing countries 4.7 4.8 5.5 5.7 5.7 East Asia and Pacific 7.4 7.0 7.2 7.1 7.1 Europe and Central Asia 2.0 3.1 3.7 4.3 4.6 Latin America and Caribbean 2.6 2.5 3.8 3.8 3.3 Middle East and North Africa 1.4 0.9 2.5 3.3 3.7 South Asia 4.1 4.4 5.6 6.3 6.7 Sub-Saharan Africa 3.4 4.8 5.3 5.4 5.5 Source: World Bank Global Economic Prospects Group staff estimates e= estimate; f= forecast * As of October 2013 world investment Trends and corporate perspectives | 12 levels prior to the 2008 global financial crisis, but growth in the second period. At least in part, this upward has strengthened in Japan. trend represents a growing internationalization of production, as companies from high-income and Growth in developing economies2 has moderated, developing economies alike looked overseas for new driven by a slowdown in the largest economies of growth opportunities. The question that surrounds Brazil, China, and India. Developing economies with the flows today is whether the last two years mark a significant domestic imbalances and large current punctuation within a longer-term story of dramatic account deficits have been particularly vulnerable success, or whether global hesitancy will persist. This to currency depreciations and inflationary pressures. is a question that reflects uncertainty within the global As commodity prices have stabilized or eased, com- economy more generally. modity exporting countries (for example, Brazil, Indonesia, Malaysia, and South Africa) have been negatively affected. Although the reverse holds true for commodity-importing countries, an exacerbation For developing economies: of the conflict in Syria and the possibility of oil supply a glass half-full? disruptions are expected to have a negative impact on their economic growth. Additional risks to the The improving performance of high-income growth of developing economies include excessive economies may have some paradoxically negative leveraging in select countries in Asia (Indonesia, consequences for developing ones. Critically, Malaysia, and Thailand) that could give rise to improved growth in high-income economies has domestic banking stress, and if there were a dis- increased the likelihood that their monetary easing orderly unwinding of the current Chinese investment policies will come to an end in the near future. In lending boom. anticipation of that, yields on United States Treasury bills have been rising, increasing their attractiveness to investors and causing a portfolio shift from developing to high-income economies. This has The bigger FDI picture: caused a reduction in private funds moving to waiting, seeing... developing economies, and countries that have relied on foreign private flows are now especially vulnerable. Against the backdrop of little growth in 2013, global The quest for yield had applied both to debt as well FDI flows are estimated to have increased slightly. as to equity flows. Between 2007 and 2013, sub- In 2013, FDI flows worldwide were an estimated Saharan African countries raised $14 billion from $1.5 trillion, slightly above the level reached in 2012. sovereign bond issues. The global low interest rate That level in itself represented an 18 percent decline environment was a boon to these efforts to raise from 2011, mostly due to a strong retrenchment of capital. While such cheaper finance now looks to be FDI flows into high-income economies, especially in waning, evidence indicates that the reduction is Europe, as growth prospects and financial markets temporary and reflects a shorter-term adjustment in these countries were subdued. Global greenfield process to the end of the monetary cycle, following FDI—investment in projects involving a new physical which it could be expected to recover, reflecting the presence in the country—is expected to see a decline ongoing yield potential in developing economies. of around 20 percent in 2013,3 having already come Estimates for 2013 and 2014 indicate that private to a halt in 2012. capital flows have stagnated; a rebound is projected in 2015 (figure 1.1). However, risks arise if the While global FDI flows have yet to reach the record adjustment process in developing economies is too level of $2 trillion of 2007, the picture in 2013 remains rapid, or if it exposes serious vulnerabilities in the dramatically better than that of 2000. On average, countries where it occurs. While some countries may FDI flows in 2006-2012 were nearly double what be more at risk than others, overall developing they were in 2000-2005, despite the global financial economies appear better equipped than previously crisis, resultant economic recession, the Arab Spring, to withstand the effects of private capital outflows, and renewed political uncertainty in many countries should these occur on a larger scale than in the past. 13 | world investment Trends and corporate perspectives Figure 1.1 Net private capital flows to developing economies $ billion 1200 800 400 0 -200 00 01 02 03 04 05 06 07 08 09 10 11 12 13e 14f 15f Net debt flows Net FDI inflows Net portfolio equity inflows Cumulative Source: World Bank e= estimate; f= forecast Net private capital inflows to developing economies significant impact on FDI, which is driven by long-term are already stagnant (figure 1.1). This has mainly business considerations. Over the longer term, been driven by concerns about the anticipated end of sustained growth in the developed world will have a accommodative monetary policy in high-income more positive impact. economies, as mentioned above, coupled with improved economic prospects in these economies The FDI story for developing economies matches that and a less favorable outlook for developing for the global economy (figure 1.2) Developing economies. Net private capital flows to developing economies4 are experiencing a moderate 2 percent economies are projected to remain at an estimated increase in FDI flows in 2013, reaching an estimated $1 trillion in 2014. The current outlook is for these $617 billion. This follows a decline of 6 percent in flows to rebound in 2015, assuming that the 2012. Again, it is possible to see the glass half-full. The adjustment to the winding down of monetary easing levels remain impressive by historical standards. proceeds smoothly. While this is the current expec- Despite recent declines, the past 13 years have wit- tation, should that not be the case, net private capital nessed a steep upward trend of FDI flows into flows into developing economies could decline. developing economies, which reflects, at least in part, attractive investment opportunities in terms of both Under the current composition of net private capital new markets and cost considerations, as well as a flows, FDI continues to be the most important greater openness to such investment. Furthermore, private capital flow to developing economies in since 2000, developing economies have been relation to portfolio investment and private debt. The attracting a larger share of global FDI flows, culmi- anticipated end of monetary easing in high-income nating to a share of an estimated 41 percent reached economies would manifest in a fall in net portfolio in 2013. Also, FDI flows have averaged 2.9 percent of investment and net private debt flows into developing the combined size of developing economies as economies, but would not necessarily have a measured by GDP during 2000-2012.5 world investment Trends and corporate perspectives | 14 Nevertheless, over the past decade a second layer of Figure 1.2 developing economies has experienced accelerated Composition of FDI flows to FDI growth. Significant examples include Ghana, developing economies Indonesia, Kazakhstan, and Nigeria, where the growth $ billion rate of FDI flows has exceeded that for all developing 50 economies. An assessment of the regional variation 400 for 2013 adds some color to this picture. 50 300 50 200 Regional FDI into developing 0 economies in 2013 100 While the overall FDI picture for developing economies 0 shows marginal improvement in 2013, the regional picture 0 has been somewhat mixed (figure 1.3). South Asia stands 00 01 02 03 04 05 06 07 08 09 10 11 12e out with the biggest expected percentage increase in FDI Equity flows, and Europe and Central Asia with the biggest Reinvested earnings decline (table 1. 2). Prospects remain broadly favorable as Intracompany loans opportunities for market-seeking investors, favorable cost Source: World Bank considerations, and still-elevated commodity prices are e= estimate expected to continue to drive investment. A rebound is Note: Only those developing economies that report projected in 2015 to $659 billion. a breakdown of FDI flows by these components are included in this figure. They accounted for 94 percent of In 2013, South Asia’s FDI flows are forecast to rise to an FDI flows into developing economies in 2012 estimated $33 billion and that level is expected to continue rising in 2014 and 2015. India is by far the largest recipient Before looking at a regional breakdown, an emerging of FDI in South Asia and changes in its flows influence the trend of the FDI data is apparent (figure 1.2). While picture for the entire region. No estimates for 2013 are equity investments by parent firms into new or available at the country level, but judging from the level of existing foreign affiliates continue to account for the actual FDI flows received by India in January through bulk of FDI flows, the share of reinvested earnings in March 2013,6 that increase likely reflects a rebound of total FDI flows has increased steadily since 2000— investment in response to new investment policies for accounting for about a quarter of these investments select sectors, such as telecoms and insurance. Estimates in 2012. The countercyclical nature of these flows for 2013 show a comeback for Pakistan, whose flows fell a now becomes an important consideration: remarkable 35 percent in 2012, but the extent to which significantly, they rose at the onset and aftermath of investor confidence will be improved following successful the financial crisis when both equity investment and elections and a finally agreed IMF program remains intra-company loans declined. The countercyclical uncertain. nature has already proved to be an important backstop for investment into these countries in FDI flows into developing Europe and Central Asia challenging times. The numbers would have been (excluding the Russian Federation from the region’s FDI even more worrying for developing economies if it data because of its reclassification as a high-income had not been so. economy) are declining to an estimated $47 billion in 2013. In 2012, FDI flows also declined because of weak The growth of FDI flows into developing economies growth in Europe and the negative impact of the euro- has been dominated by Brazil, China, and India. zone recession on FDI flows into Southeast Europe. A Together these countries have accounted for just rebound is forecast for 2015 as economic performance in over half of all FDI flows received by developing the euro zone is expected to improve and resource-rich economies during 2000-2012. This concentration is countries remain attractive to investors in light of still- still evident. elevated commodity prices. 15 | world investment Trends and corporate perspectives FDI flows in Latin America and the Caribbean (excluding Figure 1.3 Chile and Uruguay from the region’s FDI data because FDI flows to developing of their reclassification as high-income economies) have economies by region increased to a new record level of an estimated $156 $ billion billion in 2013. The region has fared well despite moderate growth, as economic conditions overall continue to be 700 favorable for FDI. Flows had also increased in 2012, 600 including in Brazil, the largest recipient in the region. Mexico experienced a 34 percent decline in FDI flows, 500 with the topline FDI number reduced in net terms partly by the sale through an initial public offering of a 25 percent 400 stake in the Mexican subsidiary of Spain’s Banco Santander.7 Despite divestments by Spain, the European 300 Union and the United States continue to be the largest 200 investors in the region. FDI flows in the Caribbean were influenced by sovereign debt concerns in some island 100 states, limited investments in the tourism sector despite the recovery of tourism in the aftermath of the financial 0 crisis, and renewed interest in mining investments. 00 01 02 03 04 05 06 07 08 09 10 11 12 13e 14f 15f East Asia and Pacific Latin America and Caribbean Europe and Central Asia Table 1.2 South Asia Sub-Saharan Africa Regional FDI Middle East and North Africa All developing countries Region 2013e Report card Source: World Bank e= estimate; f= forecast East Asia and Pacific ↑2% In 2013, East Asia and the Pacific continues to be the South Asia ↑21% largest FDI-receiving region in the developing world, Europe and ↓16% accepting an estimated $320 billion. However, this Central Asia figure represents only a 2 percent increase over 2012 as growth in many of the top recipient countries Latin America and ↑4% moderated. In 2012, China, with $253 billion in Caribbean 2012, was again the top FDI destination among Middle East and ↓15% developing countries, though that figure represented North Africa a 9 percent decline over the previous year. China will remain the top destination in 2013, but a slowdown Sub-Saharan Africa ↑19% in its economy could dampen prospects for FDI for 2014. Improved economic performances in high- income economies—including Japan, a traditional Source: World Bank investor in the region—are projected to contribute e= estimate to an estimated rebound to $345 billion into East Asia and the Pacific in 2015. While not likely to affect For sub-Saharan Africa, the story has been one of the topline FDI number, better growth prospects in growth in FDI, with flows jumping by an estimated 19 the members of the Association of Southeast Asian percent in 2013, having stagnated in 2012. The 2013 Nations (ASEAN) and new investment opportunities figure represents a more than six-fold increase from emerging in Myanmar and Lao PDR also bode well the level of 2000. More vigorous growth, improved for the region. business environments, and more investment world investment Trends and corporate perspectives | 16 opportunities have all played an important role. Within the region, there were some noteworthy fluctuations Figure 1.4 in 2012. Nigeria, the largest FDI recipient, registered FDI flows from developing a 20 percent decline in FDI flows, perhaps reflecting economies concerns about heightened political risk. In contrast, $ billion FDI flows into the Democratic Republic of the Congo increased by 81 percent to $2.9 billion, driven by 180 ongoing natural resource-based investment. Angola 160 continued to register a net divestment for the third consecutive year, while FDI flows into South Africa 140 declined by 21 percent, to around $4.6 billion. The 120 need for continuing FDI to sustain the growth levels 100 of recent years means that the 2013 breakdowns at a 80 country level will be awaited with interest. 60 40 Persisting political and economic uncertainty affected inflows into the developing economies 20 of the Middle East and North Africa (MENA). 0 The region has been adversely affected by dete- 00 01 02 03 04 05 06 07 08 09 10 11 12 riorating trade, tourism, real estate, finance, and Developing countries banking prospects, in addition to the war in Syria Brazil, China, India (especially for Jordan and Lebanon), increased sec- tarian violence (for example, in Iraq and Lebanon), Source: World Bank security concerns, political polarization (such as in Egypt), and a generally bumpy transition process. based in developing economies continued to expand The region has seen FDI flows decline by 15 percent overseas in search of investment opportunities. With to an estimated $17 billion in 2013. However, recent outflows of $68 billion in 2012, Brazil, China, and history shows that a quick and strong rebound in India continued to account for the bulk of FDI from FDI is possible. After plummeting in 2011 from an developing economies and their firms continued to earlier peak in 2008, flows into the MENA region extend their global reach. (The Russian Federation’s rebounded by 43 percent in 2012 to reach $19 billion, outward FDI flow of $51 billion is not included in the reflecting underlying investor durability even in the data reported here due to the country’s reclassifi- face of political risk. The rebound was particularly cation as a high-income economy.) For example, strong in Egypt, which had been adversely affected China has emerged as one of the largest investors in by a deteriorating economy, an uncertain political Latin America in recent years, despite having limited outlook, and significant downside risks. FDI flows investments in that region a few years ago. Other there reached nearly $3 billion in 2012, having reg- developing economies are also emerging as sizeable istered net divestments in the previous year. outward investors, notably Indonesia, Hungary, Malaysia, and Mexico. This next tier of upper-middle income economies accounts for another 36 percent New seats at the table? of outflows from developing economies. With more than $5 trillion in assets, sovereign wealth funds— The profile of FDI continues to change, with many of which are based in developing countries— developing economies now a recognized presence have also become more important actors in the global at the head table of investors. While global FDI FDI landscape, having invested $127 billion to date. outflows declined in 2012, there was much going on State-owned enterprises (SOEs) based in developing underneath this, with FDI outflows from developing economies are also venturing overseas. It is no longer economies reaching both a new record level of $164 possible to ignore the role played by these newcomers. billion in 2012 and a new record share of 17 percent Indeed, understanding the different nature of their of global FDI outflows (figure 1.4). Despite mod- approach will be critical to better anticipating their erating economic growth, more and more firms investment and risk appetite. 17 | world investment Trends and corporate perspectives It may not be possible to expect developing economies In the medium term, FDI outflows from developing to fill the FDI gaps left in the wake of the global economies are expected to continue on an upward financial crisis. Indeed, over the next year, the pace of path. A jump in the number of South-based growth in developing-country FDI outflows could slow respondents intending to increase investments in down. According to the MIGA-EIU Political Risk developing economies over the next three years Survey 2013, the majority of South-based responding corroborates this expectation. This should also have firms reported that they have no intention of changing positive impacts for South-South FDI more generally, their investments in developing economies over the as FDI from developing economies continues next 12 months, a share that is similar to the one for to be more heavily weighted to other developing all investors (figure 1.5). These investors are not economies. Already about half of the outward FDI immune to the overall picture of hesitancy observed. stock of BRICs is located in developing economies.8 Concerns about macroeconomic stability and access to finance are clearly influencing their investment plans, with both ranked high in both the short and Figure 1.6 medium term (figure 1.6). Political risk is important Ranking of the most important for South-based firms, given that many of them have constraints to FDI in developing now been running foreign operations for a while, but economies for South-based it appears to be of less concern than economic considerations or financing constraints. This may be investors explained by a high political risk appetite, but also by percent different awareness of the impact of political risks and different first-hand experience. Macroeconomic 28 instability 24 20 Figure 1.5 Access to financing 19 Changes in foreign investment 17 Political risk 19 plans for South-based investors percent Access to 15 qualified staff 13 Increase substantially 26 Limited market 7 (20% or more) 16 opportunities 9 Increase moderately 42 5 Infrastructure capacity 7 (1% to 20%) 30 Corruption 5 Stay unchanged 15 7 36 Increased government Decrease moderately 8 regulation in the 3 (1% to 20%) 6 aftermath of the 2 global financial crisis Decrease substantially 3 (20% or more) 9 next 3 years next 12 months 6 Don’t know 2 Source: MIGA-EIU Political Risk Survey 2013 next 3 years next 12 months Source: MIGA-EIU Political Risk Survey 2013 world investment Trends and corporate perspectives | 18 Keeping their powder dry? also supportive of the medium-term outlook findings of the MIGA-EIU Political Risk Survey 2013, with half The World Bank projects that FDI flows to developing of the respondents forecasting an increase in each of economies will decline in 2014 and increase by 12 the subsequent three years over the 2012 levels of percent in 2015.9 Despite uncertainties in the short FDI expenditure. term, developing countries continue to offer favorable medium-term growth prospects, a large Figure 1.7 and growing consumer base, natural resources, and relatively low labor costs, all of which make them Ranking of the most important potentially attractive destinations to foreign constraints to FDI in developing investors. These factors favor a rebound, especially if economies macroeconomic conditions strengthen and political percent challenges are addressed. Increased investor hesitation regarding expanding Macroeconomic 21 investments in developing countries is evident in the instability 20 findings of the MIGA-EIU Political Risk Survey 2013. For the first time since the survey was launched, Political risk 19 19 concerns about macroeconomic stability were con- Access to 18 sidered as the most important constraint to qualified staff 18 investment over both the short and medium terms Access to financing 16 (figure 1.7). These results support the World Bank 13 projections of FDI flows over the next couple of Corruption 10 9 years. While the majority of respondents (47 percent) Infrastructure 7 planned an increase in FDI, a significant share (37 capacity 9 percent) intended to neither increase nor decrease investments over the next 12 months(figure 1.8), Limited market 7 opportunities 5 somewhat higher levels than in the past couple of years for this survey. That picture changes consid- Increased government erably over the next three years, when the over- regulation in the 4 whelming majority of investors (70 percent) aftermath of the 2 global financial crisis expressed the intention of increasing investments 1 and the share of respondents that do not plan to Other 1 increase or decrease their investments is more than next 3 years halved (15 percent). next 12 months These findings are corroborated by external surveys carried out in the course of this year (table 1.3). The Source: MIGA-EIU Political Risk Survey 2013 consensus is that, while FDI flows will likely remain subdued this year and next, they are poised for an increase, especially if economic recovery strengthens Political risks remain important in key source and recipient countries. What also bodes well for FDI prospects, ultimately, is the record As mentioned, economic concerns lead the list of the level of cash held by companies.10 An A.T. Kearney most important constraints investors believe they face survey found that only one third of respondents cited in developing economies. This does not mean that lack of funds as the reason for holding back political risks do not occupy investors’ minds. investments. Firms from Canada, Japan, and the According to this year’s survey, political risk still ranks United States are currently holding large levels of second place among possible impediments to FDI cash, which could be deployed to fuel a new surge in (figure 1.7). Other corporate surveys—and the thriving FDI flows once confidence resumes. UNCTAD’s political risk insurance sector, more generally—also World Investment Prospects Survey 2013–2015 is corroborate its ongoing importance (table 1.4). 19 | world investment Trends and corporate perspectives Table 1.3 Recent survey findings regarding FDI prospects Survey Main findings A.T. Kearney Foreign Direct rr Caution over the next three years, with investors holding back. Investment Confidence Index 201311 rr Concerns about the fiscal situation of the United States, the euro zone, and China’s economic slowdown. rr Only a third of the investors surveyed said that their com- pany’s FDI has returned to its pre-financial crisis level. rr Another quarter expected the return to occur within the year. UNCTAD World Investment rr Half of all respondents remain neutral about the 2013 Prospects Survey 2013–201512 global investment outlook. rr Picture improved sharply for 2014 and 2015. Half of the respondents forecast an increase in intended FDI expenditures over the 2012 level in each of the next three years. rr Concerns about the economy in BRICs and the United States. MIGA-EIU Political Risk Survey 2013 rr While 34 percent of the 459 surveyed firms intend to increase (appendix 2) their investments moderately and 13 percent substantially over the next 12 months, 37 percent intend not to undertake any new investments or decrease existing ones. rr Over the next three years, 44 percent of the surveyed firms intend to increase their investments moderately and 26 percent substantially, while 15 percent intend not to undertake any new investments or decrease existing ones. Foreign investor perceptions of political risk remain this publication. The breach of contract risk has also influenced by a continuation of existing trends and consistently appeared as an important investor concern some new economic and political developments. and is linked to adverse regulatory changes, which can Disaggregating political risks,17 the respondents to the lead to contract breaches. Worries about economic per- MIGA-EIU Political Risk Survey 2013 once again iden- formance and financial crises have also raised concerns tified the risks of adverse regulatory changes and breach about restrictions on the convertibility and transfer of of contract to be of most concern (figure 1.9). The profits and other funds. former has ranked persistently as a top investor concern, yet it remains largely uncovered by the political Adverse regulatory changes and breach of contract are risk insurance industry. Analyzing this risk—and under- two risks that are especially relevant for the extractive standing both the contract and country-level factors industries. While not a new phenomenon, resource that determine it—forms the basis for chapter three of nationalism continues to gain in prominence as world investment Trends and corporate perspectives | 20 Table 1.4 Survey findings regarding political risks Survey Objective Main findings Aon, Global Risk Management Assess the top rr Political risk ranked in tenth place out of 49 risks. Survey 201313 risks facing rr The first time that political risk entered the list organizations of the top 10 risks. today rr Projects that political risk will move to sixth place three years from now. Ernst &Young, Business risks Assess the top rr Resource nationalism moved to first place in facing mining and metals business risks the list of the top 10 business risks facing 2012 – 201314 for mining and the mining and metals sector in 2012, up metals from eighth place in 2008. Protiviti and North Carolina Obtain views rr Risk that uncertainty surrounding political State University’s through ratings leadership in national and international ERM Initiative15 as to what risks markets will limit growth was third out of are expected to 20 risks. affect business organizations rr Regulatory changes and heightened regulatory over the next 12 scrutiny and its effect on product and service months production and delivery were in first place. Association for Financial Assess the rr Political risk ranked in fourth place among 20 Professionals and Oliver factors expected factors expected to have the greatest impact on Wyman Risk Survey 201316 to have the organizations’ earnings over the next greatest impact on three years. organizations’ rr Political risk also ranked in fourth place in earnings over the terms of its difficulty to forecast. next three years governments around the world seek a greater share Resource nationalism, together with contract renego- of returns in the extractive industries. Commodity tiations, has exacerbated political risk perceptions in prices remain elevated and fluctuating, and developing economies. This trend also supports a competition for critical resources is acute. Recent more general pendulum swing towards greater pro- examples include regulatory changes in the mining tectionism, attested by the increased restrictiveness sector in several emerging Asian economies in an of national FDI policies introduced over the past few effort to protect mineral wealth and create benefits years.18 One positive development is the increased for local populations. As the survey by Ernst & Young transparency permeating the sector as contract dis- found (table 1.4), resource nationalism has become closures by some resource-rich countries (such as the top business risk in the mining and metals Ghana, Guinea, and Sierra Leone) are gaining prom- sector, as host governments are keen to retain inence. The Extractive Industries Transparency ownership of their natural resources (chapter three). Initiative now claims 23 countries that meet all of its 21 | world investment Trends and corporate perspectives requirements, another 16 candidate countries that was illustrated recently by heightened tensions have not yet become compliant, and over $1 trillion in between Egypt and Ethiopia regarding the threat to revenues reported.19 Transparency is becoming a key the former’s water supply stemming from the plank of reform: for example, in February 2013 Guinea hydropower dam in the latter. made the decision to publish details of all of its mining contracts as a step to improve overall gov- Civil disturbance ranks in fourth place as an investor ernance in the sector. concern, perhaps reflecting the recognition that— while the risk generally causes severe losses—it is often localized in a narrow group of countries. Figure 1.8 Territorial disputes, elevated political tensions, Changes in foreign investment religious or political polarization (as manifested for plans example in the ongoing turmoil in the MENA region), percent Figure 1.9 Types of political risk of most Increase substantially 26 (20% or more) 13 concern to investors in developing economies Increase moderately 44 percent (1% to 20%) 34 Stay unchanged 15 37 Decrease moderately 8 Adverse regulatory 58 (1% to 20%) 7 changes 56 45 Decrease substantially 4 Breach of contract 45 (20% or more) 7 43 T&C restrictions 37 Don’t know 4 1 Civil disturbance 33 30 next 3 years next 12 months NHFO 31 27 Source: MIGA-EIU Political Risk Survey 2013 Expropriation 24 19 Terrorism 13 The scramble for resources extends outside the 11 extractive industries, notably to such basic neces- 7 War 6 sities as food and water. Demand for farmland is increasing in response to population growth, rising incomes, high agricultural prices, and the growing next 3 years use of biofuels. There is strong foreign investor next 12 months interest in agriculture, emanating from a mixed group of organizations that includes SOEs, sov- ereign wealth funds, and the private sector. Although Source: MIGA-EIU Political Risk Survey 2013 FDI in farming is a small proportion of the total FDI in agricultural value chains, it is particularly sen- can all lead to an increased risk of civil disturbance. sitive, especially in countries with poor land gov- Even in developing economies with legitimate gov- ernance, tenuous property rights, and weak institu- ernments, popular discontent can be expressed tional capacity. Access to water for consumption, through protests against economic mismanagement irrigation, and power generation is also important, or a wasteful state. Although of less concern to the and competition for water can trigger conflict. This survey respondents, the conflict in Syria and impli- world investment Trends and corporate perspectives | 22 cations for neighboring countries; territorial disputes and nationalistic tensions toward investors in Figure 1.10 several Asian economies; and competition for hydro- Impact of political risk on carbons, minerals, and other extractives have impli- cations for conflict-related losses to investments. foreign investors The risks of war and civil disturbance are strongest percent in very weak or failing countries, such as those ranked either as being in a critical state or in danger of failing according to the Failed States Index.20 In 2013, the number of countries in those two cate- gories reached 16, the second highest since the inception of the index in 2005. Some of these 6 countries have been listed in these two categories 7 14 6 17 20 for several years in a row, suggesting a persistent 19 political violence risk. T&C 29 BoC 25 32 31 32 And everyone else 14 14 18 13 15 18 NHFO 27 Expro Political risk is important not only because of its 26 impact on foreign investment intentions based on 31 26 investor perceptions, but also because of its effects on the companies that have actually invested abroad. 10 3 12 24 For example, the 2013 Association for Financial 24 16 Professionals Risk Survey found that political risk 26 AdvReg War ranked fourth among 20 factors expected to have 27 22 37 the greatest impact on organizations’ earnings over the next three years (table 1.4). 10 10 15 17 The MIGA-EIU Political Risk Survey 2013 found that, 22 20 among the eight political risks listed, adverse regu- Terror CD 26 25 latory changes and breach of contract carried the 30 26 biggest impact on companies engaged in FDI into developing economies (figure 1.10). However, respondents might have also factored in the like- 1 (Very high impact) 2 lihood of these risks in their responses to this 3 question, which might explain why a significant 4 share of respondents indicated no or little impact 5 (No impact) arising from the risk of expropriation, even though 30 expropriation might be generally expected to rank high as having a significantly negative effect on investments. Adverse regulatory changes and breach of contract were also found to be the most important risks causing financial losses for investors in developing economies over the last three years (figure 1.11). Finally, of all eight political risks, most respondents singled out adverse regulatory changes and breach of contract as the risks that have caused cancellations, withdrawals of investments, or both, over the past 12 months (figure 1.12). Source: MIGA-EIU Political Risk Survey 2013 23 | world investment Trends and corporate perspectives Jordan, which are also faced with a large influx of Figure 1.11 refugees, imposing additional burdens on their Financial losses incurred over economies. Importantly, the conflict itself is spilling over into neighboring countries, worsening an the past three years on already-frail security situation. account of political risks percent For the most part, investors in the MENA region continue to hold back, following a “wait and see” approach. Dim growth forecasts, coupled with Adverse regulatory 40 concerns about security, political violence, and changes government instability have clearly affected their Breach of contract 34 willingness to boost investments. In response to the developments in this region over the past year, T&C restrictions 25 the majority of respondents in the MIGA-EIU Civil disturbance 20 Political Risk Survey 2013 expect to make no changes to planned investments across all NHFO 16 countries (figure 1.13). Other evidence suggests a Expropriation 6 Terrorism 6 Figure 1.12 War 5 Withdrawal of existing investments or cancelation of Source: MIGA-EIU Political Risk Survey 2013 planned investments over the past twelve months due to political risks A perpetual spring? percent The MIGA-EIU Political Risk Survey 2013 again asked investors a series of questions concerning Adverse regulatory 49 41 the ongoing turmoil and uncertainty facing several changes 10 developing economies in the MENA region. Despite 59 Breach of contract 27 a rebound in 2012, the evolving political landscape 14 again took a toll on regional economic growth in 61 2013. The underlying economic conditions that Civil disturbance 24 14 brought about the Arab Spring events have failed to 51 improve appreciably. The macroeconomic picture NHFO 35 14 in most of these countries has deteriorated with 58 high fiscal and trade deficits, increasing T&C restrictions 26 15 indebtedness, persistently high unemployment rates (especially among young people), deteriorating Expropriation 66 19 trade and tourism, and spiking inflation rates. This 15 picture has been accentuated by high oil prices that War 68 17 until recently have pushed up bills for both energy 16 and government subsidies. With more than two 66 years since the onset of the Arab Spring, the Terrorism 17 16 countries undergoing transitions continue to be in varying phases of the democratic process, some Neither withdraw nor cancel facing setbacks and delays, and all struggling to Withdraw, cancel or both stabilize or boost their economies. The Syrian crisis Don’t know has affected neighboring countries like Lebanon and Source: MIGA-EIU Political Risk Survey 2013 world investment Trends and corporate perspectives | 24 diversity of appetite, with resource-seeking investors Figure 1.14 less risk averse, perhaps because of geographically- Ranking of the most important tied opportunities.21 political risks in MENA Planned investments may remain quite sizeable for percent the member countries of the Gulf Cooperation Council (GCC), mostly high-income economies, but not so for the rest of the countries in the region. Furthermore, a significant minority of investors Expropriation 47 planned to withdraw investments (14 percent and 10 9 percent, respectively). Although the GCC members 14 currently seem to have escaped the perceived risks Terrorism 11 10 associated with the region, the survey shows that a significant minority of investors remain uncertain 5 NHFO 6 even there. Nonetheless, a significant minority of 10 investors was also less concerned about the sit- 51 uation in GCC members and planned to increase War 55 investments there. 13 4 T&C restrictions 10 Figure 1.13 15 Impact of developments in MENA 13 Breach of contract 10 on investment plans 17 percent Adverse regulatory 6 changes 9 27 North Africa Middle East 4 GCC 46 Middle East 10 27 5 53 North Africa 14 28 13 GCC 58 5 25 Increase planned investments No change to planned investments Withdraw planned investments Don’t know Source: MIGA-EIU Political Risk Survey 2013 Source: MIGA-EIU Political Risk Survey 2013 Note: Syria was excluded from this year’s survey 25 | world investment Trends and corporate perspectives Not surprisingly, political violence (war, civil dis- turbance, and terrorism) was the risk of most Figure 1.15 concern in the Middle East and North Africa, with Perceived changes in the breach Significantly increased two thirds of the survey’s respondents citing it as the of contract risk in MENA Moderately increased most important constraint (figure 1.14). Interestingly, percent Unchanged breach of contract also ranked high. Changes in gov- Moderately decreased ernments as electoral processes unfold, the Significantly decreased emergence of new political actors and the shake-up of the status quo—coupled with rising public 4 1 41 spending, fiscal deficits, and economic concerns— 22 appear to have shaken confidence in governments’ NA willingness to honor their contractual obligations with foreign investors. As discussed above, the 32 region as a whole saw a rebound of 43 percent in inward investment in 2012, especially into Egypt, North Africa before declining by 15 percent this year amidst renewed uncertainty. Despite stated concerns, it seems that investors were willing to return quickly to this anchor market. This raises questions as to whether such behavior could be repeated once the 3 7 dust settles in the region as a whole. Do these 5 29 surveys understate the preparedness of investors to return? With the resurgence of uncertainty in Egypt, 5 GCC are investors likely to jump back again so suddenly a 56 second time? GCC Breach of contract and adverse regulatory changes were also cited as the most important risks in the GCC countries by survey respondents. Given that these countries are not undergoing political tran- sitions in the same manner or magnitude as other countries in the MENA region, this finding suggests 41 that such perceptions have not been triggered by 22 recent events. The majority of survey respondents did not see an increase in the breach of contract risk ME 32 41 for this group of countries, which suggests that it may have been present for some time (figure 1.15). Middle East The perception that breach of contract risk in developing economies in the MENA region has been Significantly increased increasing is noteworthy since most of the focus Moderately increased to-date has been on the risk of political violence. Unchanged Foreign investors are clearly watching how transition Moderately decreased governments are treating new and existing con- Significantly decreased tractual obligations and are concerned that this risk may be on the rise. This is especially evident in North 4 1 41 22 African countries, where the majority of respondents indicated a significant increase in this risk, although NA this is likely in reference to select countries. Source: MIGA-EIU Political Risk Survey 2013 32 North Africa 3 7 5 world investment Trends and corporate perspectives | 26 It’s (still) the economy... Five years since the financial crisis, the recovery of the global economy is proceeding on shaky grounds and with downside risks. Like other private capital flows, FDI was affected by the financial crisis, and is struggling to rebound. Developing economies have fared better than high-income economies in terms of a rapid return to growth and a recovery in FDI inflows, but the picture is moderating on both fronts. Despite the economic downturn, developing economies have continued to pursue their overseas expansion plans, registering record levels of FDI outflows. Corporate foreign investment intentions are hesitant for the near future, but remain more optimistic in the medium term. Also reflecting a pre- occupation with economic developments, corpo- rations have expressed a somewhat greater concern over macroeconomic instability as a constraint to foreign investment plans than political risk. However, they continued to recognize the importance of political risk not only in their investment intentions, but also in terms of its impact on their businesses, such as incurring financial losses. Investors were also concerned about the risks of adverse regulatory changes and breach of contract, with the latter becoming a growing apprehension in the Middle East and North Africa. 27 CHAPTER TWO The Political Risk Insurance Industry 28 T he dramatic increase in political risk insurance (PRI) issuance of recent years has continued, rising 33 percent in 2012 and on track for similar growth in 2013. PRI issuance has once again exceeded the pace of increase in foreign direct investment (FDI) flows into developing economies over the same period. M arket trends – demand side: Demand for PRI continues to be driven by concerns related to general market turbulence, including the still-unfolding Arab Spring, high-profile expropriations, persistent resource nationalism, capital constraints, and regulation. The expansion of FDI (and more generally, the “quest for yield”) in frontier markets has also been accompanied by greater demand for PRI products. M arket trends – supply side: Increased product lines, longer tenors, and new entrants formed the basis of the increase in capacity on the supply side, keeping premiums soft, though the relative higher yields of PRI premiums still look attractive compared to the broader insurance business. Concerns have been raised about the durability and experience of the new private entrants. On the public side, activity has also increased, responding to greater demand from traditional clientele. M arket offerings – changing role of public providers: export credit agencies (ECAs) and multilaterals have expanded their product lines, notably with MIGA offering its non-honoring product to state-owned enterprises, and the Overseas Private Investment Corporation of the United States (OPIC) now covering investments by private equity funds (with other public providers also looking at such cover). The Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC) has developed a dedicated sukuk insurance product. Across the market, ECAs are looking to develop new tools to provide liquidity to the export credit business and to reassure domestic businesses investing overseas. M arket offerings – product innovation by private providers: Like the public providers, private insurers are facing greater pressures to offer comprehensive covers. They have also expanded their tenors across several markets. Product innovations include a new PRI cover for senior secured project finance debt by AIG. C laims – Notwithstanding the Arab Spring and other high-profile events, claims only inched up in 2012. The substantial expansion of PRI cover does not yet appear to have any substantial impact on claims. 29 | the political risk insurance industry Box 2.1 Overview of the PRI market T he PRI market includes three broad categories of providers and covers both export or trade credit and investment insurance. For the purposes of this report, PRI refers to investment insurance. The public PRI market comprises both national and multilateral PRI providers. The private market’s PRI falls into two main categories: (i) political risk activities similar to those of public and multilateral insurers, such as coverage for investments in developing countries against expropriation, political violence, and other such risks; and (ii) developing-country non-payment insurance covering contract frustration and default by governments. Public PRI Providers: They comprise national export credit agencies and investment insurance entities. They focus on cross-border trade and investment, generally for constituents in their own countries. Multilaterals: These include the African Trade Insurance Agency, the Asian Development Bank, the Inter-American Development Bank, the Inter-Arab Investment Guarantee Corporation, the Islamic Corporation for the Insurance of Investments and Export Credit, and MIGA. The World Bank, the Asian Development Bank, and the Inter-American Development Bank also provide risk-mitigation instruments, such as partial risk guarantees.a Private PRI Providers: The majority of private insurers are based in three insurance centers—London, Bermuda, and the United States (primarily New York City)—and several of the larger insurers have offices in Singapore; Hong Kong SAR, China; and Australia (Sydney), among other places. In addition to traditional PRI for equity investment, the private market offers protection for a wide variety of payment risks in developing countries, either for political perils alone, or comprehensive non-payment cover. Brokers play an important role in promoting and sourcing PRI for the private market. This market segment is dynamic: over the past year, some players have exited the PRI market, while new entrants have appeared. The Reinsurers: Reinsurance companies write PRI-related coverage for both trade and investment. Reinsurance is an underlying factor driving both pricing and capacity in the private market. Some of the top reinsurers include Munich Re and Hannover Re of Germany, Swiss Re of Switzerland, and Berkshire Hathaway/General Re of the United States. Export credit agencies and multilaterals also participate as reinsurers of PRI, although on a smaller scale. The Berne Union: The Berne Union was founded in 1934 in order to promote international acceptance of sound principles in export credit and investment insurance and to exchange information relating to these activities. Today, the Berne Union has 86 members, including Prague Clubb members, comprising mainly export credit agencies, multilateral organizations, and private insurers.The Berne Union plays an important role in bringing together the public and private insurers to enhance cooperation and information sharing. Members meet on a regular basis to discuss industry trends and challenges. In recent years, there has been a concerted effort on the part of the Berne Union Secretariat to promote transparency and disclosure in the industry and to represent member interests in order to promote global trade and investment. Lloyd’s: An insurance “marketplace” where members join together to insure political risks for cross-border investment, such as confiscation of property, inconvertibility of currency, and political violence. Only a small number of Lloyd’s syndicates offer investment insurance. Source: Berne Union; Lloyd’s a A partial risk guarantee covers private lenders against the risk of government failure to honor contractual obligations relating to private projects. b The Berne Union’s Prague Club was started in 1993 with funding from the European Bank for Reconstruction and Development. It is an information exchange network for new and maturing insurers of export credit and investment. The Prague Club supports members’ efforts to develop their export credit and investment insurance facilities by hosting technical discussions at twice-yearly meetings, as well as ad hoc information exchanges. A number of Prague Club members have gone on to meet the requirement for full Berne Union membership. the political risk insurance industry | 30 Figure 2.1 Growth in PRI issuance by Berne Union members and in FDI flows index (2005=1000) 350 Total PRI cover FDI inflows into developing economies 250 Global FDI inflows 150 100 05 06 07 08 09 10 11 12 Source: Berne Union Secretariat and World Bank As in previous years, this chapter explores the 2012), such growth is impressive. PRI coverage dynamics of the expanding PRI business, assessing reached $54.3 billion in the first half of 2013, both demand and supply trends and exploring both suggesting that 2012 levels of issuance could well be the private and public market. A greater focus is reached again in 2013. offered this year on new product lines. The chapter will conclude with a look at the future, assessing Developing economies dominate cover: In 2012, the current corporate approaches to risk management, vast majority of PRI cover, $85 billion of total as reflected in the MIGA-EIU Political Risk Survey issuance, was for investment into developing 2013, and examining the most recent claims data. economies. In percentage terms, this was stable over the year and up slightly from 2010 (85 percent and 82 percent of total PRI issuance was into developing economies in 2011 and 2010, respectively). Demand growth for PRI continues... PRI increases as FDI stutters : In contrast to the The PRI industry experienced another year of significant increase in PRI issuance, global FDI flows dramatic growth in 2012. Berne Union members declined in 2012, as mentioned earlier. As has been issued $100 billion in investment insurance over the the case since the global financial crisis, FDI into year, an increase of 33 percent over the previous year, developing economies held up better than that into and more than double the 13 percent increase in higher-income economies. Notwithstanding this, issuance observed for 2010-11. 22 Private PRI FDI into developing economies still declined by 6 members outside the Berne Union reported similar percent in 2012 from the 2011 level (figure 2.1). As a trends. To put this in an even longer context, the result, FDI flows into developing countries were a volume of new PRI issued by Berne Union members larger component of overall FDI in 2012 (43 percent in 2012 is over three times the volume issued in versus 36 percent in 2011). Moreover, FDI inflows 2005. In the context of the decline in international into developing economies continue to be covered investment (total recorded FDI fell by 18 percent in by PRI to a much greater extent than global FDI, the 31 | the political risk insurance industry bulk of which remains uncovered. During the last rr War and civil disturbance: The ongoing civil war in year, however, there was a sharp uptick in the ratio of Syria has had devastating consequences internally global PRI to global FDI, as PRI issuance increased and has increased uncertainty in neighboring even while FDI declined (figure 2.2). countries. At the same time, turmoil in Egypt produced a second regime change within 12 The ongoing growth in PRI issuance is impressive, months and Kenya was rocked by the Westgate but a longer historic perspective is perhaps relevant Mall attacks. The year was also marked by a series also here. While levels of PRI issuance are of uprisings in Western and Central Africa, with the unprecedentedly high and the share of FDI has Central African Republic, Guinea-Bissau, and Mali grown in recent years, at 14.2 percent this latter experiencing forced regime changes. number does not (yet?) come close to previous peaks. For example, it remains below the proportion rr Resource nationalism: Governments of select seen in 1982, when the ratio of PRI to FDI exceeded resource-rich economies in Asia and Africa have 25 percent. sought to secure larger local shares in existing or proposed agreements with foreign firms in extractive industries. Figure 2.2 rr Expropriation and investor-state disputes: High- Ratio of PRI to FDI flows: global profile expropriations coupled with ongoing versus developing economies arbitrations in Latin America have impacted investor confidence in those economies. On a percent broader, related note, 2012 also saw a record 58 investor-state disputes filed in arbitration courts under international investment agreements. 23 16 Most of these treaty-based cases have been brought by entities headquartered in developed 16 countries and name developing or transition 12 countries as respondents. The increase in 12 investor-state dispute settlement cases serves not only as a sign of fractures in existing relationships, 8 but as a caution to investors considering new 8 projects in developing economies. 4 4 rr Financial regulation: Challenges in the banking markets persisted into 2012, as institutions in the 0 0 advanced economies dealt with the ongoing effects 05 07 08 06 07 06 08 09 0910 1011 11 12 12 of the economic slowdown and the sovereign debt crises, including difficulties in securing long term, PRI PRI FDI, toto developing FDI, economies developing economies dollar-denominated funding. European banks were PRI to FDI, global particularly motivated to increase capital ratios in PRI to FDI, global preparation for the Capital Requirements Directive, given its restrictions on leverage. Instruments Source: Berne Union Secretariat and World Bank offering capital relief, including PRI for investments, attracted increased attention during the year. It’s a riskier world Demand for PRI from Berne Union members continued to be particularly strong for investments in Asia and the New investment insurance issued by members of Middle East and North Africa (MENA) region. However the Berne Union reached another record in 2012, the interest in cover for developed-country political risk against the backdrop of a series of global political has also continued, reflecting the protracted nature of events, driving demand-side considerations. the global financial and sovereign debt crises. the political risk insurance industry | 32 In the immediate aftermath of the global financial governments. Table 2.1 presents the aggregate PRI crisis, the growth in cover by public providers and issuance according to the Berne Union for the top multilaterals significantly outpaced that of private five public providers, the top five private providers, as providers. However, 2012 saw a reversal of this trend, well as the active multilaterals in the sector during as issuance by private providers outpaced the other 2012. Among them, these 12 entities accounted for 95 provider classes (figure 2.3; see appendix 3 for a percent of PRI issuance over the year. listing of Berne Union members by type). However this analysis excludes Lloyd’s market participation, so the difference in relative shares of public and private Table 2.1 issuance across the entire PRI provider market may Aggregate Berne Union PRI not be as marked as the Berne Union data suggest. issuance by provider type, 2012 Cover Provided 2012 Figure 2.3 Type of Provider ($ million) PRI Issuance by Berne Union members into developing Top 5 17,821.4 Private providers economies, by type of provider Top 5 73,855.3 $ million Public providers 90,000 Top 2 2,916.7 Multilateral providers Source: Berne Union Secretariat 70,000 Overall, public providers dominate Berne Union activity. These entities have the benefit of enormous backing from their sovereign sponsors and as a 50,000 result have access to large amounts of funding. The top two public providers account for 77 percent of total Berne Union public issuance, equivalent to an 30,000 impressive 57 percent of overall Berne Union issuance for the year. While shares of private ownership are similarly skewed, these providers account for a much lower absolute amount of 10,000 issuance—the top two private providers account for 71 percent of private Berne Union issuance, 05 06 07 08 09 10 11 12 13 h1 equivalent to approximately 13 percent of overall Multilateral Berne Union PRI issuance in 2012. Public Private Given the position of PRI as a specialty line within the space of general insurance, private capacity in Source: Berne Union Secretariat this market is heavily influenced by conditions in the wider insurance market. Broadly, insurers remain well-capitalized, and largely untroubled by requirements under the Solvency II and Basel III But don’t forget the supply side regulations. Low interest rates continued throughout 2012, depressing investment returns The PRI market is served by a mix of public providers, and keeping the attractiveness of higher-yielding private providers, and multilaterals, where public insurance segments like PRI at elevated levels. providers are typically ECAs and other specialist Generally stable premiums (more on this below) investment promotion agencies funded by have also attracted interest from insurers. 33 | the political risk insurance industry According to the July 2013 market update prepared In the three years ending July 2013, increases in by London broker Arthur J. Gallagher & Co.,24 PRI capacity were observed across all tenors, though the capacity in the private market, including the private longest tenors have seen the lowest expansion while Lloyd’s market, increased by just over 7 percent to the major increases occurred in the medium tenors. $1.7 trillion between July 2012 and July 2013. Indeed, capacities for seven and 10-year cover have Remarkably, this represents capacity growth of over expanded by 59 percent (to $970 million) and 67.8 30 percent since January 2012 (figure 2.4). PRI percent (to $1,376 million) respectively, while capacity in the Lloyd’s market alone increased at a capacity for 15-year cover has increased by 18.9 similar rate, by almost 5 percent from July 2012 to percent (to $440 million). July 2013, and almost 25 percent since January 2012. The surge in market supply is coming largely from At a recent roundtable hosted by the Exporta Group individual providers increasing available line sizes on behalf of MIGA, private insurers and brokers and tenors, though—as has been the case over the noted that growing capacity has already resulted in past few years—the number of suppliers also con- sizeable deals with tenors of up to 14 years—and tinues to expand. New PRI market entrants are even longer private-market tenors are considered mostly reinsurers based in Europe and the United possible. Notwithstanding this, the bigger picture States and potentially others from Japan and China. suggests that the risk appetite in the private market Within the Lloyd’s market, ANV Syndicate com- remains skewed toward medium tenors and away menced underwriting in the PRI class in March 2013, from longer ones. Representatives from the private with the BRIT Insurance Group recently announcing market suggested that significant new business the appointment of heads of a dedicated PRI could be generated by co-insuring with ECAs and business unit. According to one source, there are at multilateral agencies, thereby extending tenors and least three other new entrants in development that increasing business in more difficult markets. For are expected to come on-stream before the end of the time being though, the multilaterals and ECAs 2013. The resulting new capacity is expected to look likely to continue to dominate the longest-tenor maintain a softening pressure on premium rates. covers. In general, market participants welcomed the new Figure 2.4 PRI capacity, despite the presence of 40 or so PRI Available private market PRI underwriters currently in the market. The downside capacity, total maximum per risk was seen to be the inexperienced and possibly even $ million fickle nature of some of this capacity, and its potential softening of market rates. The relatively 1,400 higher yields of PRI over other forms of insurance 1,200 make the sector currently more attractive, but the more unpredictable nature of the losses has in the 1,000 past resulted in newer entrants being frightened 800 away in the face of unexpected claim events. It was noted that the relatively recent exits from the market 600 and the management of the runoffs of Chubb and 400 QBE (who announced cessation of PRI cover in 2010 and 2011, respectively) were handled well, with all 200 obligations paid. Nevertheless, participants 0 questioned how durable the new capacity would 03 04 05 06 07 08 09 10 11 12 13 h1 prove to be and agreed that only the advent of a Private companies contestable claim would show the mettle and Lloyd’s commitment of new players. Source: Arthur J. Gallagher & Co. London: Credit and Political Risk PRI Report & Market Up-Date, July 2013 the political risk insurance industry | 34 Table 2.2 Available private market capacity by tenor, total maximum per risk July 2010 – July 2013, $ million Maximum Jul-10 Jan-12 Jul-13 3-year growth Tenor (Years) 15 370 440 440 18.9% 10 610 705 970 59.0% 7* 820 915 1,376 67.8% 5*** 1,180 1,350 1,694 43.6% 3 1,223 1,383 1,742 42.4% Source: Arthur J. Gallagher & Co. London: Credit and Political Risk PRI Report & MarketUp-Date, July 2013 * Some providers offering this tenor will extend to 7.75 years ** Some providers offering this tenor will extend to 5.5 years Figure 2.5 Pricing grows, but only slowly… Ratio of premiums to average Capacity in the general insurance market is still PRI exposure for Berne Union plentiful. However an increase in demand for general members insurance resulting from a return to growth in the 1.0 industrialized economies, as well as increased underwriting discipline, have led to a modest growth 0.9 in general insurance premiums even under such conditions. According to the World Insurance in 2012 0.8 report prepared by Swiss Re,25 2012 saw modest 0.7 premium growth of 2.6 percent in the non-life segment. As has been the case over recent years, 0.6 this is primarily driven by emerging markets, where premiums grew by 8.6 percent. Within this broad 0.5 economic class, emerging Asia (13 percent premium 0.4 growth) and Latin America and the Caribbean (7.8 00 01 02 03 04 05 06 07 08 09 10 11 12 percent growth) were key drivers. Source: Berne Union Secretariat and World Bank Within the PRI niche, premium income to Berne Union members increased by approximately 5 Prospects for the wider market are mixed. Softening percent over the year. However, consistent with the economic growth in emerging markets and continued record increases in issuance, total exposure among capacity expansion could weigh on premiums such entities rose by almost double this amount, moving forward. However, a return to growth in the with the result that the premium-exposure ratio advanced economies may see a return to premium again declined in 2012 (figure 2.5). growth in larger markets. 35 | the political risk insurance industry Innovation, both public and private cover for financing provided to private special purpose vehicles. Subject to certain terms and conditions, this Well-publicized political events such as those described product covers failure by a borrower to pay a earlier have reinforced the high profile that PRI has commercial lender for any reason, commercial or attained since the onset of the Arab Spring. This, political, and is available for tenors up to 15 years. coupled with the challenges in the banking market, has Various other providers are also expanding portfolio sparked a range of product innovations from both products, covering multiple investments (by investors public and private providers over the past year. as well as funds) both in a single country as well as across multiple countries. A key sticking point remains ECAs and other public providers are finding themselves that pricing for such deals is often on the basis of first- playing new roles. Over the last year, ECAs have stepped to-default structures, whereas clients are often seeking up to supplement the banking market in an effort to something closer to a (lowest risk) last-to-default support local firms, with many now offering working price. Finally, there is discussion once again within the capital cover to banks and introducing or expanding Lloyd’s market concerning the regulations relating to securitization guarantee products. OPIC has launched trade that constrain the PRI business. Traditional PRI PRI coverage for private equity funds, expanding the is linked to trade, with the investment insured typically options available to these investment vehicles. entailing the import of capital goods. This is one reason that national ECAs have such prominence in In response to increased investor interest in non- the market. Given this history, transactions that have payment insurance on financial obligations from no linkage to trade and are used to improve the rating sovereign obligors, MIGA has now expanded its non- of a capital market transaction, such as cover for non- honoring of financial obligations product to cover honoring of financial obligations, are typically not financing provided directly to state-owned enterprises eligible for Lloyd’s PRI support. These developments and sub-sovereign borrowers. This product is Basel II are summarized in table 2.3 below. compliant, allows for tenors of up to 15 (in some cases 20) years, and claims—while subject to defined Table 2.3 waiting periods—do not require investors to have Key new and expanded market received an arbitral award. The market reacted positively to this extension of MIGA’s product line, offerings, 2012 and hopes are that MIGA can use its market position Public and MIGA: Non-honoring of financial to extend the cover into more difficult markets and Multilateral obligations product to SOEs expand tenors in the existing market space. The Providers product also opens new avenues for collaboration ICIEC: Sukuk insurance policy between MIGA and ECAs, as was demonstrated when MIGA made use of the non-honoring product to OPIC: PRI facilities for private guarantee up to €380 million in payments to be made equity funds in connection with medium-term notes issued by Magyar Export-Import Bank, the Hungarian export Various ECAs: Working capital credit agency. cover to banks; expanded securitization/refinancing cover In the private provider space, insurers have continued to develop products that incorporate PRI alongside Private Zurich: PRI-inclusive other types of coverage, providing a greater variety of Providers comprehensive supply chain cover; cyber risk cover comprehensive offerings and offering solutions to banks looking for different varieties of capital relief. AIG: PRI cover for senior Zurich has recently launched a comprehensive (PRI- secured project finance debt inclusive) supply-chain protection product, as well as coverage for cyber risks, which may be linked to Various: expanded forced political events. AIG has introduced a comprehensive abandonment; political evacuation; PRI-inclusive product for senior debt tranches of project finance comprehensive products and infrastructure credit arrangements, opening up to the political risk insurance industry | 36 No upswing in claims…yet? Figure 2.6 Political risk claims paid by Berne Union members Investment claims paid by Berne totaled $125 million in 2012, far below the highs seen Union members in 2010 as a result of the global financial crisis and considerably lower than the $179 million reported for $ million 2011. While in 2011 about half of the claims ($91 million) were for the risk of political violence, mainly 350 due to turmoil in the MENA region, in 2012 political violence claims dropped to $43 million—about 34 300 percent of total claims (figure 2.6). This suggests that while the events that continue to unfold in the 250 MENA region are distressing and serious, the majority of the devastation is not being felt, or perhaps not yet being felt, in the form of losses to 200 insurers. Such a sentiment was shared by insurers at the MIGA roundtable, though with the reservation 150 that there may be a “longer tail” on such claims. The subsequent resurgence of instability in Egypt, and concerns about contractual relations with any new 100 regimes, add credence to this caution. Overall, while there are no data available for claims and recoveries 50 in the Lloyd’s market, the impression from the roundtable event was that the claims experience over the past couple of years has mirrored that of the 0 Berne Union. 05 06 07 08 09 10 11 12 13 h1 Unspecified Transfer restriction In terms of geographical distribution of claims, most Political violence were paid out for investments in Libya (a total of $27 Expropriation million, or just under 22 percent of 2012 claims), Breach of contract with Vietnam, Brazil, Myanmar, and the Netherlands rounding out the top five. In 2012, the majority of Source: Berne Union Secretariat and World Bank claims were in fact for unspecified covers. Claims of $64 million have so far been reported for the first million in 2012), though recoveries of unspecified half of 2013, suggesting that claims levels may match covers also increased substantially, tripling to $54 the pace of last year. Also mirroring 2012, these million in 2012. Almost half of the recoveries in claims are mostly for political violence and 2012 ($50 million) related to earlier investment unspecified covers ($29.3 million, or 46 percent, in claims in Venezuela, with the United Arab Emirates, each case) with a smaller amount ($5 million or 8 Kazakhstan, Ukraine, and Mexico accounting for percent of the total) registered for expropriation. The the rest of the top five. big potential claims story of the past couple of years has been the trade-related payment arrears for The available claims and recoveries data suggest petroleum imports for a Nigerian public entity. A that, even though PRI issuance has expanded over plan to resolve this has now been put into effect, the last few years, there has been no discernible however, and is understood to be working. uptick in claims. Even market turbulence post- 2008, rising resource nationalism, and political Recoveries increased to $107 million in 2012 from turmoil in the MENA region do not yet appear to $25 million in 2011, an increase of 324 percent (figure have brought a significant increase in claims events 2.7). This was partially driven by recoveries on expro- or recoveries. Additional claims, which might be priation claims, which increased by a factor of 10 expected from a substantially expanded market, over the year (rising from $5 million in 2011 to $51 have not arrived yet. 37 | the political risk insurance industry percent), but comes nowhere close to similar share Figure 2.7 numbers for the early 1980s. It appears, moreover, Recoveries by that PRI represents a complement to other risk-miti- Berne Union members gation mechanisms for investors, rather than as a primary risk mitigant (see figure 2.8). Survey partic- $ million ipants also suggested that PRI was most effective in 150 relation to political violence and expropriation risks, and less so in cases of breach of contract and adverse regulatory changes. 125 Figure 2.8 Tools/mechanisms used to 100 mitigate political risk when investing in developing countries 75 percent Invested gradually while 50 developing familiarity with 54 the local environment Use of joint venture or 25 alliance with 46 local company Political/economic 44 risk analysis 0 Engagement with 05 06 07 08 09 10 11 12 13 h1 government 44 Unspecified in host country Transfer restriction Engagement with Political violence local communities 40 Expropriation Breach of contract Scenario planning 37 Develop close relationships with 26 Source: Berne Union Secretariat and World Bank political leaders Use of third-party 25 consultants A complementary product? Engagement with non-governmental 25 organizations To add one final dimension, looking at the sector from a corporate perspective, the choice of risk-miti- Operational hedging (e.g., setting up 16 gation tools again does not seem to have changed multiple plants to radically from recent years, with the proportion of spread risk) investors interested in PRI only changing marginally. Political risk insurance 15 Notwithstanding the increased issuance over the Credit default swaps 12 last few years, according to MIGA’s annual survey, Provide support to a only 15 percent of respondents identify it as their key well-connected 6 political figure strategy, compared to market-testing smaller investments (54 percent), joint ventures (46 We don’t use any tools or products 4 percent), risk analysis (44 percent), or engagement to mitigate with the local government (between 40 and 44 political risk percent, depending on the level of government). Don’t know 2 This echoes the share of issuance of PRI as a pro- Other 1 portion of FDI into developing economies (14.2 Source: MIGA-EIU Political Risk Survey 2013 the political risk insurance industry | 38 In the current market environment, economic concerns appear to dominate over political ones for investors into developing economies. However, the two sets of issues remain closely linked, as investors identify breach of contract and regulatory risk most closely with economic deterioration. This is a perception borne of experience, as can be seen from the relatively higher costs incurred by such political risks according to the survey. Moreover, it is an intuition supported by the statistical analysis described in the final chapter of this publication. Once again, this appears to be the key area where risks now lie. If the PRI industry is to continue its expansion, this could also represent opportunity. Ever upwards? In conclusion, the high growth of the PRI sector, both public and private, appears resistant even to lulls in FDI growth. The market continues to be dynamic and, while premiums remain somewhat soft, this is largely because of the internal market supply considerations as existing entrants expand and new entrants rush to meet demand in novel, flexible ways. Issuance levels seem to be expanding ever further, while claims remain stable and recoveries are good, despite a few significant scares and possibly more inexperienced players. These remain heady times still for the PRI sector. The question remains: how long can it last? 39 CHAPTER THREE Breach of Contract 40 B reach of contract and regulatory concerns remain the most important political risks for foreign investors according to the MIGA-EIU Political Risk Survey 2013. T his chapter focuses on the risk and causes of breach of contract. It combines for the first time in a statistical analysis both deal-specific factors (contract design, manner of award, sector) and country-specific factors (for example, economic and political considerations, regime type) that affect this risk. T his marks a departure from traditional deal-specific and country-specific analysis and sets a benchmark for a more comprehensive understanding of breach of contract triggers for both insurers and investors. A ssessed together, both deal and country-specific factors are found to be important determinants of contract breach, some of them less critical than traditionally regarded. T he importance of an “obsolescing bargain” in contractual agreements is confirmed. All other things being equal, public contractual agreements will face an increasing risk of breach in their early years, leveling out over the middle (8-12 years) period before rising again (but more slowly) after that. In assessing contract vulnerability, age should therefore remain a consideration. S ector, private ownership stakes, and the presence of international financial institutions (IFIs) in the deal are significant factors influencing breach of contract risk. B reach of contract risk is significantly correlated with downturns (such as economic cycles and the terms of trade during the contractual period), even when controlling for contract design, sector, and other variables. This result backs up the views of investors, who place breach of contract among the most important risks. B reach of contract risk appears to be higher in middle-income countries than in low-income countries. Investors are likely to face higher breach of contract risk in public utilities than in other sectors. W hile there is an overlap in the determinants of expropriation and breach of contract, deal-specific factors play an independently important role in breach of contract risk. 41 | breach of contract Box 3.1 What is meant by breach of contract? T his term is interpreted in slightly different ways across providers. For MIGA, breach of contract cover protects against losses arising from a government (including, in certain cases, state-owned enterprises) breach or repudiation of a contract with an investor, but requires that the investor invoke the dispute-resolution mechanism (for example, an arbitration) set out in the underlying contract. Coverage is also extended to cases where, after a specified period of time, the investor has been unable to obtain an award due to the government’s interference with the dispute-resolution mechanism (denial of recourse), or has obtained an award but the investor has not received payment under the award (non-payment of an award). For other providers, particularly in the private market, some elements of this type of risk are captured by contract frustration cover, which is typically offered separately from cover against failure to honor an arbitral award. In the analysis that follows, project data samples are broad and breach events include instances of contract cancellation (with termination of operation or construction following revocation of the license or repudiation of the contract, or with removal of management from project enterprises), as well as cases where the government or the operator has either requested contract termination or they are in international arbitration. Investor concerns and trends This is the fourth consecutive year that this survey in disputes has identified these as the top political risks facing investors in developing economies. Moreover, the This chapter offers an empirical analysis of the survey again identified these reasons as the top causes of breach of contract by a public counterparty. causes of actual losses related to political risk over Employing a combination of databases, the analysis the past three years. Forty percent of the survey looks at both deal and country-specific triggers of respondents mentioned that they experienced breach. As such, it marks a departure from most of financial losses through adverse regulatory changes, the existing literature, which until now has treated and 34 percent through breach of contract over the these approaches separately, and provides a new past three years. framework to understand this key political risk. The chapter outlines the most important factors at each Since the early 1980s, there has been a shift in level and draws a stronger distinction between the the roles of the public and private sectors in the factors that affect expropriatory versus regulatory provision of infrastructure (electricity, water and and breach actions. sanitation, telecommunications, roads, railroads, ports, and airports), first resulting from the wave of Once again, in 2013, breach of contract and privatizations seen in that decade, and subsequently regulatory issues remain the most important political changing to reflect the various forms of public-private risk concerns for investors into developing collaborations that emerged in the following decade. economies, according to the annual MIGA-EIU Such collaborations, which include public-private Political Risk Survey. Forty-five percent of respondents partnerships, public finance initiatives, and others, named breach of contract and 58 percent named came to the fore as they facilitated substantial public adverse regulatory changes as the most important participation while allowing for risk-sharing between the political risks they face in the next three years. public and private sectors and relieving fiscal balances. breach of contract | 42 Figure 3.1 Types of political risk of most concern to investors in developing economies percent Adverse regulatory 58 changes 56 45 Breach of contract 45 43 T&C restrictions 37 33 Civil disturbance 30 NHFO 31 27 24 Expropriation 19 Terrorism 13 11 War 7 next 3 years 6 next 12 months Source: MIGA-EIU Political Risk Survey 2013 In the power sector, these types of projects have Alongside growth in public-private collaborations included independent power producers using in infrastructure, investments in natural various contract structures (build-operate-transfer, resources have also kept pace, generally involving build-own-operate, etc.), but with core similarities, some concession or other similar contractual relationship with governments. In 2012, 9 percent generally including, for example, a government or of foreign direct investment was into projects public off-taker. In other public services such as relating to mining, quarrying, and petroleum. transport and water and sewage, private Booming commodity and oil prices have been a participation has included construction and boon to economies such as Angola, Gabon, and operation of roads and/or other facilities. As with Zambia (to name but three), with investors keen power projects, the key concern for the private to exploit the potential of developing-market investors involved in such projects has been the reserves. The prominence of the BRIC (Brazil, payment reliability of the public counterpart. Russia, India, China) countries, especially China, Overall, commitments for private participation in has driven this higher. The role of the host infrastructure (PPI) totaled $182 billion in 2012 government has therefore evolved alongside that (figure 3.2). of the investor, with greater awareness on the part of governments of the importance of participation, sharing of upstream and downstream benefits, While the majority of these projects have involved and “balanced” contracts—as well as of the role advanced-economy firms and developing-economy to be played by regulation. In natural resources, public entities, there is an increasingly important transparency too has increasingly become a “South-South” investment trend. Chinese and theme. Brazilian companies, notably, are increasingly present in infrastructure projects across the developing world. 43 | breach of contract Just as expropriations have declined overall Figure 3.2 (notwithstanding some dramatic recent Volume of private investment in occurrences), there is evidence of an increase in the infrastructure in low and incidence of breach of contract events. The most striking evidence has been the steady rise in middle-income countries international arbitration during the past 20 years $ billions (adjusted by U.S. CPI) with the current climate marking a spike in new cases, sparked by the prolonged global economic crisis (figure 3.3). While this increase is partially 200 450 driven by greater levels of foreign direct investment, 400 this phenomenon is also driven by the fact that more investment treaties are binding on investor-state 350 relationships and that investor-state contracts now 150 tend to specify dispute resolution procedures. At the 300 London Court of International Arbitration, filings of 250 100 Figure 3.3 200 Number of investor-state 150 investment disputes, 1990-2012 60 600 50 100 60 600 50 50 500 0 0 50 500 90 93 91 94 92 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Water and sewage 40 400 Transport 40 400 Telecommunications Energy Number of projects (right axis) 30 300 30 300 Source: World Bank and PPIAF, PPI Project Database 20 200 It is not surprising over this long time period that 20 200 investors, with more at stake in contractual arrangements directly or indirectly involving sovereigns, have become more interested in 10 10 100 100 understanding political risk, especially its impact upon contractual or regulatory matters. With government in some cases subcontracting its 0 0 0 0 traditional functions to private players and in others 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 explicitly accepting private participation in project Non-ICSID* Non-ICSID* ICSID companies, it is also not surprising that political risk ICSID All cases cumulative concerns might begin to shift from pure or even axis) cumulative All cases (right “creeping” expropriation to contractual and regulatory (right axis) risk. Once again, the facts back up the story, with a reduction in outright expropriations from the 1990s Source: UNCTAD, World Investment Report 2013 onwards, falling from their peak in the previous two * Non-ICSID cases do not include data from all of decades (see WIPR 2011 for a fuller discussion of this). the arbitral bodies breach of contract | 44 new cases for breach of contract increased by 55 percent at the forefront of analysis. Under this approach, the between 2007 and 2008, and again by another 14 framework for understanding contractual, and percent in 2009, to 243 cases. Statistics from the regulatory risk generally, closely resembles Paris-based International Chamber of Commerce (ICC) approaches to understanding pure and “creeping” and the Swiss Chambers’ Court of Arbitration and expropriation risk. The implication may be that the Mediation (SCCAM) tell the same story. ICC’s new form of government intervention has changed, but cases involving breach of contract increased 11 percent the underlying motivations of government and its in 2008 and a further 23 percent in 2009, to 817 new incentive structures remain broadly the same for claims. New SCCAM cases rose 15 percent in 2008, both kinds of risk. before leaping 53 percent in 2009, to 104 requests for arbitration (the majority of which involved non-Swiss There has been little overlap in applying these two parties). The Dubai International Arbitration Centre approaches to understanding breach of contract risk. reported a doubling of cases in 2009 compared with In part, this has been a function of the nature of the 2008, as the economic crisis finally caught up with the information available. For pure contract-level analysis, Middle East. Similar trends have also been observed in the lack of large-scale contract data and the hetero- Asia. Investor concerns about breach of contract appear geneity of the contracts themselves has perhaps to be grounded in hard experience. shaped an approach that has generally been more qualitative and has entailed looking at specific kinds of contracts and their consequences. For these reasons, aggregation of data was considered prohibitively dif- A more comprehensive analysis26 ficult and it was not altogether clear what it could yield. A review of the research into breach of contract risk Conversely, for country-level data, the economic and indicates two distinct schools: political information available lent itself precisely to “large-n” quantitative analysis, often evolving quite rr A first set of investigations looks at deal-specific naturally from earlier expropriation risk models. issues relating to the contracts themselves.27 Such Macroeconomic variables were easily available and considerations might be whether the contract was widely accepted measures of regime type, ideology, awarded on a bid or a no-bid basis, the contract and governance could be applied to the problem. As design, the level of public ownership in the project, both sets of analysis ultimately relate to the same risk, participation of international financial institutions however, viewing these alongside each other and (IFIs), or the sector-specific risks associated with merging them, to the extent possible, to get a sense of the deal. Finally, a separate and slightly distinct line relative and absolute importance permits a clearer of analysis looks at deal-specific considerations overall picture of the determinants of this risk. more in terms of what has been termed in the literature “obsolescing bargain.” As the contract In order to look at contract and country-level cases ages, the investor faces a larger risk of being forced together, contractual dispute information from several to change contractual terms as the original bargain datasets has been gathered to form a universe of becomes obsolete. In essence, this means that the dispute cases. Two main datasets are merged to “state of the world” will change, but the contract establish the baseline sample. The core dataset is the stays the same, increasing its vulnerability over World Bank’s Private Participation in Infrastructure time. Database, 29 which has details on contractual arrangements for 5,302 public-private infrastructure rr A second approach to understanding breach of projects from 1984 to 2011. This is merged with data contract has been to look at country-specific from the UNCTAD Database of Treaty-based factors.28 Here political and economic considerations Investor-State Dispute Settlement Cases30 adding an seem to dominate. Politically, ideology, regime additional 394 observations covering disputed cases change, and quality of governance have an impact from 1987-2010. This rich set of project-level data is upon a government’s reliability as a contractual then combined with cross-country panel data that counterpart. From an economic perspective, the contains various macroeconomic variables and wealth of the country and the role played by various country-level political and institutional indicators from economic shocks (positive as well as negative) are various sources. 45 | breach of contract What we do and what we rr International financial institution (IFI) involvement, expect to see by raising the reputational costs of breach, should be associated with lower probability of breach of The approach taken is to identify the most important contract. triggers so that investors going into a country would be in a better place to know what risks would be most rr A high share of private involvement in the project relevant for them. To this end, the basic potential is likely to be associated with higher probability of relationships have been identified and incorporated breach of contract events, as the intuition into a benchmark regression that includes both generally is that a government stake in a project project-level and country-level concerns. (that is, a claim to earnings in the project enterprise, or “skin in the game”) incentivizes the The statistical approach taken is called “hazard public partner to honor the contractual terms. analysis,” a form of analysis that uses as its dependent variable the likelihood of contract dispute in the next period (given that the contract has operated without dispute up to the present) as it is Some early findings affected probabilistically by each of the explanatory variables. 31 Contract-level variables in the estimation Before undertaking the statistical analysis, the of the “hazard function” include age, procurement correlation between the observed proportion of type, share of private investment, involvement of contracts in dispute and host country income levels international finance institutions, and sector is examined (see figure 3.4). A provocative takeaway controls. Country-level factors include income level, is that, contrary to prior expectations, as income changes in income, changes in terms of trade, levels in the project country rise, up to the upper previous year input costs, previous year windfall middle-income level, the incidence of contract prices, and region controls. breach seems to rise. Expectations about the nature of the relationship To examine whether this result is a reflection of the between these variables and the probability of a dataset itself, we examine the characteristics of the breach event are clearer in some cases than in others: dataset more closely. Firstly, in PPI data collection, there is an explicit, concerted effort to obtain data rr More breach events are expected among projects on all developing countries individually, so that no in low-income countries, as these countries might country remains uncovered. Secondly, while PPI face issues of both ability and willingness in their data collection depends on publicly available reliability as contractual counterparts. Capacity to information by country, which may introduce pay, greater vulnerability to shocks, as well as fragility and governance issues in the lower-income underrepresentation of cases in countries that have bracket, might be expected to be the key drivers of a less-developed media sector and limited public breach. outreach or transparency, typically projects with disputes are reported upon more prominently than rr Breach events are expected to be more common others in a constrained information environment. among projects in countries with high-income As a result, any net underrepresentation is expected inequality. Societies where the “haves” are to be limited—and the dataset is expected to be significantly outnumbered by the “have-nots” may broadly representative of the nature of investor-state be more subject to social tensions, which could infrastructure investment relations. create pressures on the state to extract more value by renegotiating contracts across the contract This correlation therefore implies that the willingness, life-cycle. rather than ability, of the public counterparty must be the driving factor, with middle-income governments rr Competitively bid projects are expected to be less likely to suffer breach of contract, as competition being more demanding, or having more resources and should result in lower prices—or a higher income opportunities to enforce changes or make demands share—to the public counterparts, reducing the on existing contractual arrangements. attractiveness of breach of contract. breach of contract | 46 Contract-level issues Figure 3.4 The evidence appears to support the obsolescing Proportion of disputed contracts bargain hypothesis. The “hazard curve” is shown in in sample, by income level figure 3.5 below. This curve describes the estimated likelihood of a breach of contract event given that no Share of disputes such event has occurred to the current period. In this case, it is sloped upwards, meaning that the risk of 0.5 contract failure exponentially increases as the project 0.4 matures. As discussed above, the “state of the game” changes as economic and political cycles or 0.3 shocks erode the viability of the original contract, Avg income per capita−PPP $ making it more vulnerable to breach. Figure 3.5 also 0.2 shows that the rate of this erosion increases substantially in the first few years, flattening out over 0.1 the middle years of a generic contract (approximately in year eight) before rising again in the later years. As 0 0 10000 20000 30000 40000 will be seen below, the probability of breach differs across sectors and according to different conditions. Note: Avg income per capita is calculated for all available years between 1984-2011 Figure 3.5 Interestingly, expectations about the effect of income Probability of contract breach, inequality are not similarly supported by the analysis. by contract maturity Instead, there appears to be no statistically significant relationship between income inequality, measured by the Gini coefficient, and the probability of a 0.3 Hazard rate contract breach. The richness of the dataset adds power even to this non-parametric observation, and is worth examining more closely, beyond the terms 0.2 of this research. Results of the statistical analysis are shown in table 0.1 3.2 at the end of this chapter. Right from the start and across a number of specifications, it is clear that both Duration in years 0 project and country-level explanatory variables are 0 10 20 30 significant. In both cases, when controlling for the effects of that level of analysis, the other level yields significant variables. It is clear that important understanding would be lost if project and country determinants were looked at in isolation. Applying a purely macro-variable approach evolving out of traditional expropriation models would be inadequate. 47 | breach of contract However, for investors assessing the risk of their consistent with the intuition explained above. Not contractual agreements, further analysis of this basic only is there a positive relationship between contract relationship might offer a better sense of where and success and government participation, using dif- when they are at risk. ferent specifications, it seems to become more pro- nounced the larger the government share. Figure 3.6 looks at the relationship between own- ership-sharing and contract success and shows the “survival curve” for contracts. This shows the prob- Figure 3.7 ability that a contract remains unaffected by a breach event (that is, “survives”) in each time period. This Survival estimates, is calculated by dividing the number of contracts sur- IFI involvement viving in a period (the number of contracts in force at the start of the period—those surviving to the 1 current time—minus those that suffer a breach event during the period) divided by the number of contracts in force at the start of the period.32 For each value of the explanatory variable, the higher the 0.75 curve, the greater the overall chances of contract survival. In this case, lower levels of private own- ership are associated with higher survival curves, 0.50 Figure 3.6 Survival rate Survival estimates, by share of private ownership 0.25 1 Duration 0 0.75 0 10 20 30 IFI not involved IFI involved 0.50 Survival rate Equally, IFI participation in the deal, which in this 0.25 analysis is defined as any participation by an IFI in the project (including credit provision, equity participation, or project guarantees, as in the case of Duration 0 MIGA) is likely to enhance the chances of contract success, adding to the durability across the life-cycle 0 10 20 30 of the deal (figure 3.7). Private share less than 50% From a sectoral viewpoint, energy-sector deals Private share between 50% (such as power purchase agreements and and 80% independent power production) prove to be more Private share less than 90% at risk of contract failure than projects outside of Private share more than 90% the sector (figure 3.8). Introducing variables to measure sectoral success, only in this sector is the breach of contract | 48 negative effect consistently significant. In some Country-level issues respects, this result is also notable for what is not there: there appears to be no significant, negative Looked at together with the contract-level explanatory risk of increased breach events for oil, gas, and variables, a number of core variables remain significant mining sector projects. Resource nationalism may in determining contract durability. These include both economic and political variables. Also notable is the different impact that non-structural shocks or changes Figure 3.8 can have depending on the structural backdrop, espe- Survival estimates, cially the effects of positive or negative terms-of-trade energy sector versus non-energy and commodity shocks. sector projects Backing up the intuition from figure 3.4, the rela- 1 tionship between income per capita and contract risk is not linear. Instead, the most statistically significant specifications suggest that the strongest relationship between income per capita and contract durability is likely to be an inverse U-shape, with risk actually rising 0.75 as income levels increase and then falling away again at higher income levels. Once again, this unexpected rela- tionship merits further examination and is useful knowledge for investors as they enter into contract 0.50 arrangements in an unfamiliar country. Survival rate Alongside income, GDP growth is another variable that the analysis finds to be consistently related to contract 0.25 success. Once again the intuition here is straight- forward, with contracts under more stress when the public counterparty is faced with slow growth and is Duration looking for additional sources of revenue. The rela- 0 tionship is most heightened during economic crises, as large reductions in GDP put the greatest pressure 0 10 20 30 on government balances. Even controlling for com- Energy sector modity shocks, basic wealth, and institutional structure, Not energy sector the relationship holds and remains robust. Both the level of democracy and the ideology of the once again be on the rise, but for this sample at least, government have statistically significant impacts on there appears to be no additional incremental risk in contract durability. WIPR 2011 found that the type of the sector. This may imply that this recent phenomenon political regime is a major driver of expropriation risk, is not fully captured in this series. with democratic regimes being more investor friendly, likely due to institutional characteristics such as rule of In the current specifications, there is no consistent law, checks and balances of power, multiple players positive or negative relationship between likelihood with veto power, and the importance of reputation to of contract success and whether a project was policymakers. Another study commissioned by MIGA competitively bid. As already mentioned, the (and cited in WIPR 2012) similarly found a higher risk of outcome one might generally expect is that such expropriatory behavior in countries under the control of projects would be more robust over the life cycle. political parties conventionally described as “left wing.” This analysis does not offer any support for or The analysis here supports an extension of these prop- against such a proposition, which is most likely an ositions beyond expropriation, and finds that even con- artifact of the limited available data, but this question trolling for contract-level and other variables, such rela- is worthy of further study. tionships hold up for pure contract risk as well. 49 | breach of contract A terms-of-trade shock, such as an unexpected Corporate-level approaches and increase in fuel price volatility, might create a higher perception of these risks risk of project cost overrun–increasing the contract risk, especially for fuel-importing countries. Conversely, a commodity price boom could increase Risk Perception and Experience profit margins in resource-based sectors, putting pressure on existing contracts and raising the risk of Against this backdrop, it is interesting to revisit some breach of contract. Under different specifications, of the questions on the MIGA-EIU Political Risk Survey the input shock is indeed positively related with the 2013 that relate to breach of contract and regulatory greater risk of contract failure. In the original specifi- risks. As discussed above, more survey respondents cation of the model used here the windfall story does had experienced losses through these two events than not hold up as a significant relationship. Most any of the other political risk events. Across a sample notable, though, are the results when the change in of 203 respondents, those that had experienced a the terms-of-trade variable is interacted with institu- breach or renegotiation had been operating for an tional considerations. The positive commodity shock average of nine years before experiencing the breach becomes statistically significant in non-democratic event. Moreover, the spread of the data in this answer and in conflict-affected and fragile countries with an underlines an increasing attrition rate—that of an increase in breach of contract risk in those circum- obsolescing bargain—beyond the early contract years. stances. Therefore closer examination suggests that Unlike the statistical analysis, the surveys suggest that the impact of a commodity boom is very much projects in the extractive industries and the power context-specific, with investors needing to be partic- sector experience the highest likelihood of breach of ularly conscious of the structural backdrop to contract (figure 3.9). determine the level of risk at contract signing. This last point holds across the analysis more gen- Figure 3.9 erally, with a deeper use of this approach potentially In which sector(s) have you reaping other results across different structures and experienced a breach contexts. Ultimately, this approach can bring a better of contract event? understanding of the risks investors might face at a percent country and project level, the extent of those risks, and—by implication—how these might be managed. Oil, gas, and mining 24 Electricity and power 19 Table 3.1 Telecommunications 16 Where is the risk? Transportation 12 the most consistent We have not experienced 8 a breach of contract event determinants of contract breach Water and sanitation 6 identified by this analysis Other* 34 Contract-level risks Project sector, lower share of public ownership, absence of IFI Source: MIGA-EIU Political Risk Survey 2013 * None of the remaining categories are above 5 percent. Country-level risks The most prominent “other” categories are financial Economic downturns, country dependence services, real estate/construction, and IT/technology on primary commodities, quality of political institutions Other forms of risks Importance of age of contract breach of contract | 50 Box 3.2 Potential triggers of contract breach: evidence from MIGA pre-claims Since the establishment of MIGA just over 25 years ago, over 100 guaranteed projects have experienced some difficulty that had potential to result in a loss and claim by the investor (these are referred to as “pre-claim” events). Of the recorded total, 32 have occurred within the last seven years. Focusing on the more recent cases, the largest share of disputed projects was in the services and manufacturing sector, with transportation/infrastructure, telecommunications, and financial services also featuring. The majority of the events relate to projects in sub-Saharan and Sahel African countries. Narrowing further to recent pre-claims events involving potential breach of contract, these are dominated by government services, energy (specifically power), and infrastructure projects, consistent with the results of the statistical model. Interestingly, these were more likely to relate to projects in Latin America than the total population of events, though sub-Saharan Africa rated second in number of events. A deeper examination of the events suggests that three major factors are associated with reduced contract viability: rr Financing difficulties rr Inconsistent public policy rr Tariff disputes These factors are broadly in line with the empirical findings presented in this chapter. Financing difficulties and the attendant contracting challenges often arise in the context of shrinking GDP, which again reflects our findings that GDP growth is related to contract success. Weaker institutions and poor policy coordination are correlated with non-democratic structures, while our findings show that contracts have a greater likelihood of being sustained in countries characterized by democratic regimes. Tariff adjustments appear on the list as a result of the high number of power-related breach of contract pre- claims events. This appears to be the most contentious contracting issue in power projects, despite the flexibility for price changes being clearly embedded in many contracts. It is a useful illustration of the obsolescing bargain principle, as in this sector volatility in international fuel prices and inflation levels can quickly move the agreed contract out of line with financially and politically acceptable levels. 51 | breach of contract Looking at the most important perceived triggers for Risk Mitigation breach of contract, the traditional macro factors dominate, with economic crisis—cited by 29 percent The risk mitigation strategies undertaken by investors of respondents—being by far the most important in the face of these risks are also interesting to review factor (figure 3.10). Notable in this survey are the in this context (figure 3.12). It is notable that for small roles considered to be played by contract- breach of contract risk, a “joint venture with local specific factors, government ownership stakes, and enterprises” is considered by 24 percent of product output prices, all of which were significant respondents—more than for any other option—to be and important in the MIGA model. The difference the most effective risk-mitigation tool. While the between this perception and the empirical evidence survey questions do not permit this level of clarity, the presented earlier could prove useful for further response could also encompass the public-private analysis. joint ventures that figure so strongly in the contract- level results. Other forms of engagement and rela- tionship are not considered as relevant, with only Figure 3.10 “risk analysis” coming close (21 percent) as a which of the following are the mechanism for alleviating risk. Notable for breach of five most important risk factors contract, just as for the other political risks, political for breach of contract events? risk insurance (PRI) remains a somewhat niche product, with only 10 percent of respondents nomi- percent nating it as the most effective risk alleviator. A follow- up question on the impact of breach itself reinforces this impression, with contract renegotiation being Economic crisis 29 suggested by a full 47 percent of respondents as the Political regime change most effective response to a contractual dispute and in the destination country 14 only 21 percent suggesting arbitration and 13 percent Corruption/red tape 11 selecting PRI (figure 3.11). The high costs of bringing Sovereign default 10 disputes to arbitration and the lengthy process might Political instability/war 9 also weigh in the responses. Non-discriminatory regulatory or policy change (e.g., increase in tax rate, subsidy cut, 6 Figure 3.11 deprival of license) 5 Which of the following methods Change in input prices (e.g., fuel cost) Lack of transparency in for addressing breach of contract 5 contract award process events do you consider to be the Other contract-specific disputes (due to longer contract period, most effective? 3 fixed price contract, currency mismatch, etc.) percent Sovereign credit rating downgrade 3 Change in end-product output prices (e.g., oil/gas/mineral price) 2 Poor business relationship with 1 the host government in the past Contract renegotiation 47 International arbitration 21 Contract for which government Local arbitration 19 owns a large profit share 1 (e.g., contract with a Political risk insurance 13 state-owned enterprise) Relation of host country to your 0 firm’s country of origin Source: MIGA-EIU Political Risk Survey 2013 Source: MIGA-EIU Political Risk Survey 2013 breach of contract | 52 Towards a better handle on Figure 3.12 breach of contract what are the most effective tools/ mechanisms available to your In conclusion, this statistical analysis, useful in its firm for alleviating each of the combination of deal and country-specific factors, offers insight into the most significant correlates and following risks? triggers of contract breach. The results identify a percent number of key areas where investors (and insurers) should pay primary attention when becoming involved in an investment that features a contractual rela- tionship with a public, developing-economy coun- terparty. Findings suggest that, even controlling for 15 6 13 7 other factors, risk of contract breach is higher in 24 10 24 middle-income countries rather than lower-income 16 T&C 10 BoC countries. Project sector, private ownership stakes, 10 21 15 21 and IFI presence in the deal are important micro-cor- 8 relates of contract viability. On the macro side, risk of 16 7 6 breach is statistically related to economic downturns, 11 21 12 dependence on primary commodities, and quality of 17 NHFO 12 9 political institutions. Expro 19 10 26 20 12 Results support the idea of the obsolescing bargain, suggesting that risk of breach of contract increases 14 11 32 14 with years of contract life, before leveling (around the 5 13 4 eighth to twelfth years of contract duration) and then 46 10 AdvReg War 11 rising again, albeit more slowly. An awareness of all of 21 25 19 these relationships is a valuable starting point to help investors and insurers best mitigate and manage their 3 3 risks. The results are consistent with investor views as 8 16 5 reflected in the MIGA-EIU Political Risk Survey 2013 as 36 45 4 21 well as with MIGA’s own empirical pre-claims expe- Terror CD 13 rience. Further study in this area will explore potential 4 17 14 12 ranking of these different risk elements across 4 10 industries and structures, which would point investors 38 16 to the key influencing variables and interactions in Other 10 particular projects. 21 2 Engage with local public entities Joint venture with local enterprises Risk analysis/monitor Relationship with key poliltical leaders Political risk insurance Risk is not significant for my projects No existing tool can alleviate this risk Source: MIGA-EIU Political Risk Survey 2013 53 | breach of contract Table 3.2 Statistical analysis results (1) (2) (3) (4) (5) (6) (7) (8) Variables Total Sample Excl. Government-Guaranteed Contracts Micro Factors -0.234*** 0.136 -0.0666 -0.0518 -0.558*** 0.0422 -0.125 -0.0265 IFI involved (0.0453) (0.1030) (0.1090) (0.1110) (0.1870) (0.1260) (0.1140) (0.1140) Priv.Share>50% 0.115* (0.0620) 0.433*** 0.523*** 0.475*** 0.481*** 0.321*** 0.494*** 0.343*** 0.474*** Priv.Share>80% = x (0.0457) (0.0410) (0.0423) (0.0432) (0.0731) (0.0496) (0.0444) (0.0447) -0.437*** -0.301** -0.295** 0.193 -0.383*** -0.183 -0.352*** x * IFI involved (0.1140) (0.1200) (0.1220) (0.2070) (0.1400) (0.1260) (0.1260) -0.0997 Competitive bidding (0.0622) OGM sector 0.038 0.0319 -0.00218 0.035 -0.171 0.125* -0.150** 0.111* (0.0618) (0.0618) (0.0626) (0.0633) (0.1280) (0.0683) (0.0645) (0.0635) Energy sector 0.235*** 0.235*** 0.190*** 0.211*** 0.173*** -0.0248 0.203*** 0.129*** (0.0321) (0.0321) (0.0329) (0.0341) (0.0580) (0.0405) (0.0359) (0.0358) Macro Factors Democracy -0.561*** -0.575*** -0.502*** -0.551*** -0.134 -0.762*** -0.144** -0.452*** (0.0466) (0.0466) (0.0533) (0.0543) (0.0955) (0.0715) (0.0593) (0.0593) Log Income pc in 4.136*** 4.191*** 2.761** 5.619*** 4.806*** 4.994*** 2000 = y (0.6140) (0.6350) (1.2100) (0.8550) (0.7270) (0.6850) -0.263*** -0.265*** -0.178** -0.356*** -0.314*** -0.321*** y2 (0.0365) (0.0378) (0.0726) (0.0510) (0.0430) (0.0405) -3.482*** -3.369*** -1.154* -4.749*** -3.261*** -3.705*** Change in real pc GDP growth (0.3160) (0.3240) (0.6090) (0.4250) (0.3300) (0.3250) -0.075 -0.069 -0.652*** 0.212*** Change in TOT (0.0509) (0.0520) (0.1540) (0.0656) -0.393*** Right wing gov’t (last year) (0.0595) 13.55*** Increase in input cost (avg) (0.5710) 3.601*** Commodity windfall revenue (avg) (0.5710) 0.843*** Increase in input cost (last year) 0.3000 -0.126 Commodity windfall revenue (last year) (0.2130) breach of contract | 54 Table 3.2 (cont’d) Statistical analysis results (1) (2) (3) (4) (5) (6) (7) (8) Variables Total Sample Excl. Government-Guaranteed Contracts Region Dummy -0.0895 -0.0826 -0.129 -0.145 0.161 -0.0247 -0.437*** -0.232** EAP (0.0626) (0.0626) (0.0909) (0.0931) (0.1790) (0.1270) (0.0937) (0.0947) 0.0668 0.0702 0.376*** 0.383*** 0.489*** 0.298** 0.347*** 0.406*** ECA (0.0682) (0.0681) (0.0946) (0.0965) (0.1810) (0.1270) (0.0957) (0.0981) -0.195*** -0.185*** 0.143 0.121 0.128 0.391*** 0.289*** 0.128 LAC (0.0613) (0.0614) (0.0885) (0.0908) (0.1780) (0.1170) (0.0900) (0.0953) -0.00765 0.007 -0.127 -0.208 -0.22 0.679*** -0.338** -0.113 MENA (0.1100) (0.1100) (0.1310) (0.1360) (0.2200) (0.2260) (0.1330) (0.1350) South Asia 0.554*** 0.566*** 0.432*** 0.398*** 0.735*** 0.378*** -0.234*** 0.138 (0.0664) (0.0665) (0.0842) (0.0878) (0.1560) (0.1150) (0.0902) (0.0922) Constant -4.135*** -4.102*** -20.34*** -20.68*** -14.19*** -28.40*** -25.17*** -24.46*** (0.0937) (0.0855) (2.5450) (2.6330) (4.9680) (3.5390) (3.0380) (2.8610) Observations 4,923 4,923 4,695 4,382 1,570 3,291 4,102 4,102 0.529*** 0.530*** 0.560*** 0.575*** 0.553*** 0.951*** 0.868*** 0.736*** Ln(α) (0.0120) (0.0120) (0.0123) (0.0128) (0.0201) (0.0142) (0.0135) (0.0130) Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 55 | WIPR 13 END NOTES 9 1 The MIGA-EIU Political Risk Survey 2013 contains the The IMF’s World Economic Outlook (April 2013) esti- responses of 459 foreign investors with investments mated a small increase in net FDI inflows in emerging in developing economies. The region or origin and economies to $507 billion in 2014 from $477 billion sector breakdown of those investors reflects the dis- in 2013. The Institute of International Finance’s tribution of FDI stock. The bulk of respondents were Capital Flows to Emerging Market Economies (June from the services sector (including financial services), 2013) forecasted a small decline to $523 billion in 2014 followed by manufacturing and the primary sector. compared with $541 billion in 2013 for 30 major 2 Every year the World Bank revises its classification of emerging economies. 10 the world’s economies based on estimates of gross According to S&P Capital IQ, 202 members of national income per capita for the previous year. In Standard and Poor’s 500-stock index have $1 billion the 2013 revision, Chile, Lithuania, the Russian or more in cash. “Companies awash in cash, when Federation, and Uruguay were reclassified as high- will they spend it?” USA Today, May 30, 2013. 11 income countries, while Hungary was reclassified as Ranks countries according to how political, econom- an upper-middle income country. The growth as- ic, and regulatory changes affect FDI. Based on a sumptions reported here reflect these changes. survey of 302 executives from 28 high-income and 3 fDi Intelligence. The fDi Report 2013: Global Greenfield developing economies. Available online at http:// Investment Trends. www.atkearney.com/research-studies/foreign-direct- 4 FDI data for developing economies reported in this investment-confidence-index. 12 publication exclude Chile, Lithuania, the Russian Ascertains investment intentions and provides in- Federation, and Uruguay, reclassified as high- income sights into the medium-term prospects for FDI flows. countries, and include Hungary, reclassified as an Based on a survey of executives among the largest upper-middle income country, following the reclas- 5,000 non-financial multinational enterprises and sifications specified in endnote 2, unless otherwise professionals working in 245 national and subna- specified. tional investment promotion agencies. Available 5 The ratio of FDI to GDP has fluctuated between 2.3% online at http://unctad.org/en/PublicationsLibrary/ and 3.7% during that period. For individual countries, webdiaeia2012d21_en.pdf. 13 especially low-income economies, that figure may be Aon. Global Risk Management Survey 2013 (http:// higher. www.aon.com/2013GlobalRisk/2013-Global-Risk- 6 FDI flows quadrupled between FY2012-13 Q4 (Jan-Mar Management-Survey-updated-05-01-2013.pdf ). 2013) over the FY2011-12 Q4 to $5.7 billion, according Universe: 1,415 respondents. 14 to Reserve Bank of India Monthly Bulletin, September Ernst &Young. Business risks facing mining and 2013. metals 2012 – 2013 (http://www.ey.com/GL/en/ 7 ECLAC. Foreign Direct Investment in Latin America and Industries/Mining---Metals/Business-risks-facing- the Caribbean. May 2013. mining-and-metals-2012---2013). 15 8 UNCTAD. World Investment Report 2013. Chapter one. Available online at http://poole.ncsu.edu/vol2/erm/ p. 5. ee/i/weblogs/research-documents/NC-State- Protiviti-Survey-Top-Risks-2013.pdf. Universe: More than 200 business executives (primarily board members and C-suite). WIPR 13 | 56 28 16 Available online at http://www.afponline.org/risksur- See, for example: Jensen, N. and Johnston, N. (2011) vey/ “Political Risk, Reputation and the Resource Curse.” 17 The political risks listed here are those typically Comparative Political Studies. 44(6). pp. 662-688; covered by the political risk insurance industry (see Frankel, J. (2012) “The Natural Resource Curse: A chapter three). Universe: 547 respondents, compris- Survey of Diagnoses and Some Prescriptions,” in ing senior financial professionals from a range of Chapter 2, “Commodity Price Volatility and Inclusive organizations across North America. Growth in Low-Income Countries.” IMF; Besley, T. 18 UNCTAD. World Investment Report 2013. op. cit. and Persson, T. (2009) “The Origins of State 19 EITI website (http://eiti.org/countries). Capacity: Property Rights, Taxation, and Politics.” 20 Failed States Index 2013 (http://www.foreignpolicy. American Economic Review, 99(4). pp. 1218-1244; and com/articles/2013/06/24/2013_failed_states_interac- Besley, T. and Persson, T. (2010) “State Capacity, tive_map). Conflict, and Development.” Econometrica, 78(1). pp. 21 World Bank. Investing in Turbulent Times, Middle East 1-34. 29 and North Africa Economic Developments and This database is publicly available at: http://ppi. Prospects. October 2013. worldbank.org/explore/Report.aspx 30 22 Berne Union figures presented throughout the chapter This database is publicly available at: http://iiadb- reflect those for total INV (investment insurance) per cases.unctad.org/ 31 the Berne Union Secretariat, as of September 2013. In this analysis, the probability density function of 23 UNCTAD. World Investment Report 2013. p.110. contract duration is assumed to follow a Weibull 24 Gallagher London. Credit and Political Risk – PRI distribution. This distribution has several attractive Report and Market Update. July 2013. Accessed at: properties, and is widely used in survival analysis http://www.ajginternational.com/media-and-in- across multiple fields. For more information, see sights/publications/2013/credit-and-political-risks- Cox, D.R. and Oakes, D. 1984. Analysis of Survival market-update-july-2013/ Data. London: Chapman and Hall. 32 25 Swiss Re. World Insurance in 2012. Accessed at: Contracts that conclude are censored, meaning they http://media.swissre.com/documents/ are not taken into account in the analysis. The overall sigma3_2013_en.pdf probability of a contract surviving to a given age is 26 The analysis undertaken is presented in full in: calculated by multiplying the successive probabilities Nose, M. 2013. Triggers of Contract Breach: estimated for each year up to that age (for example, Contract Design, Shocks or Institutions? (Working the estimated probability of a contract surviving into paper.) year two is calculated by multiplying the probability 27 Theoretical models of contracting tend to focus on optimal of contract survival in year one by the probability of contracting designs, as in Tirole, J. (1999) “Incomplete contract survival in year two given that there was no Contracts: Where Do We Stand?” Econometrica. 67(4). pp. breach in year one). 741-781. Empirical studies include: Woodhouse, E. (2006) “The Obsolescing Bargain Redux? Foreign Investment in the Electric Power Sector in Developing Countries.” International Law and Politics, 38, pp. 121-220; and Vernon, R. (1971). Sovereignty at Bay. New York: Basic Books. 57 Appendices Appendices | 58 Appendix 1 FDI Inflows, 2004–2012 $ billion 2004 2005 2006 2007 2008 2009 2010 2011 2012e World 713.6 1,027.3 1,521.5 2,041.1 1,829.3 1,209.6 1,499.6 1,751.8 1,417.3 Developed countries 518.2 738.5 1,168.4 1,573.7 1,280.9 826.3 967.4 1,108.4 813.7 Developing countries 195.4 288.8 353.1 467.3 548.4 383.3 532.2 643.4 603.6 Latin America and the Caribbean 59.3 66.6 63.4 100.2 121.5 71.2 110.9 145.0 150.3 Argentina 4.1 5.3 5.5 6.5 9.7 4.0 7.8 10.7 12.1 Brazil 18.2 15.5 19.4 44.6 50.7 31.5 53.3 71.5 76.1 Colombia 3.0 10.3 6.7 9.5 10.2 7.1 6.8 13.4 15.6 Costa Rica 0.8 0.9 1.5 1.9 2.1 1.3 1.5 2.2 2.6 Dominican Republic 0.9 1.1 1.5 2.3 2.7 1.7 2.1 2.2 3.9 Mexico 24.8 24.5 20.2 31.6 27.9 16.6 22.6 23.6 15.5 Nicaragua 0.3 0.2 0.3 0.4 0.6 0.4 0.5 1.0 0.8 Panama 1.0 1.1 2.9 2.0 2.5 1.1 2.2 3.2 3.4 Peru 1.6 2.6 3.5 5.5 6.9 6.4 8.5 8.2 12.2 Venezuela, R.B. de 1.5 2.7 0.2 2.5 1.3 (2.6) 1.9 3.9 2.2 East Asia and the Pacific 77.6 129.3 151.7 195.6 211.2 154.5 291.1 339.9 313.7 China 62.1 104.1 124.1 156.2 171.5 131.1 243.7 280.1 253.5 Indonesia 1.9 8.3 4.9 6.9 9.3 4.9 13.8 19.2 19.6 Malaysia 4.6 3.9 7.7 9.1 7.6 0.1 10.9 15.1 9.7 Philippines 0.7 1.7 2.7 3.2 1.4 2.7 1.6 1.8 2.8 Thailand 5.9 8.1 9.5 11.3 8.5 4.9 9.1 9.0 10.7 Vietnam 1.6 2.0 2.4 6.7 9.6 7.6 8.0 7.4 8.4 South Asia 7.8 11.2 26.2 32.7 50.9 39.5 31.2 40.4 27.4 Bangladesh 0.4 0.8 0.7 0.7 1.0 0.7 0.9 1.1 1.2 India 5.8 7.3 20.0 25.2 43.4 35.6 27.4 36.5 24.0 Pakistan 1.1 2.2 4.3 5.6 5.4 2.3 2.0 1.3 0.9 Sri Lanka 0.2 0.3 0.5 0.6 0.8 0.4 0.5 1.0 0.9 Europe and Central Asia 30.0 45.1 67.9 80.7 91.0 54.1 44.5 64.5 55.8 Azerbaijan 3.6 4.5 4.5 4.6 4.0 2.9 3.4 4.5 5.3 Belarus 0.2 0.3 0.4 1.8 2.2 1.9 1.4 4.0 1.5 Bulgaria 2.7 4.1 7.9 13.9 10.3 3.9 1.9 2.1 2.1 Georgia 1.9 1.6 0.7 0.5 0.5 1.2 0.9 1.1 0.8 59 | appendices Appendix 1 (cont’d) FDI Inflows, 2004–2012 $ billion 2004 2005 2006 2007 2008 2009 2010 2011 2012e Kazakhstan 4.2 2.5 7.6 12.0 16.8 14.3 7.5 14.3 15.1 Romania 6.4 6.9 11.5 10.3 13.8 4.9 3.2 2.6 2.0 Serbia 1.0 2.1 5.0 3.4 3.0 1.9 1.3 2.7 0.4 Turkey 2.8 10.0 20.2 22.0 19.8 8.7 9.0 16.0 12.5 Turkmenistan 0.4 0.4 0.7 0.9 1.3 4.6 3.6 3.4 3.2 Ukraine 1.7 7.8 5.6 10.2 10.7 4.8 6.5 7.2 7.8 Uzbekistan 0.2 0.2 0.2 0.7 0.7 0.8 1.6 1.5 1.1 Middle East and North Africa 9.7 16.8 27.2 27.9 29.6 26.3 22.3 13.7 19.3 Algeria 0.9 1.2 1.8 1.8 2.7 3.1 2.3 2.7 1.6 Egypt, Arab Rep. 1.3 5.4 10.0 11.6 9.5 6.7 6.4 (0.5) 2.8 Iran, Islamic Rep. 2.9 3.1 1.6 2.0 1.9 3.0 3.6 4.2 4.9 Jordan 0.9 2.0 3.5 2.6 2.8 2.4 1.7 1.5 1.5 Lebanon 1.9 2.6 2.7 3.4 4.3 4.8 4.3 3.5 3.7 Morocco 0.8 1.7 2.5 2.8 2.5 2.0 1.2 2.5 2.8 Syrian Arab Republic 0.3 0.5 0.7 1.2 1.5 2.6 1.5 .. .. Tunisia 0.6 0.7 3.2 1.5 2.6 1.5 1.3 0.4 1.6 Sub-Saharan Africa 11.0 19.9 16.7 30.3 44.3 37.7 32.2 40.0 37.0 Angola 1.4 (1.3) (0.0) (0.9) 1.7 2.2 (3.2) (3.0) (6.9) Botswana 0.7 0.3 0.5 0.5 0.5 0.1 (0.0) 0.4 0.3 Chad 0.5 (0.1) (0.3) (0.3) 0.5 0.4 0.3 0.3 0.3 Congo, Dem. Rep. 0.4 0.2 0.2 1.8 1.7 (0.3) 2.7 1.6 2.9 Congo, Rep. (0.0) 0.8 1.5 2.6 2.5 1.9 2.2 3.1 2.8 Ghana 0.1 0.1 0.6 1.4 2.7 2.4 2.5 3.2 3.3 Liberia 0.1 0.1 0.1 0.1 0.3 0.1 0.5 1.3 1.4 Madagascar 0.1 0.1 0.3 0.8 1.2 1.1 0.8 0.8 0.9 Mozambique 0.2 0.1 0.2 0.4 0.6 0.9 1.3 2.8 5.2 Niger 0.0 0.0 0.0 0.1 0.3 0.6 0.8 1.1 0.8 Nigeria 1.9 5.0 4.9 6.0 8.2 8.6 6.0 8.8 7.1 Seychelles 0.0 0.1 0.1 0.0 0.0 0.0 0.0 0.1 0.0 South Africa 0.7 6.5 0.6 6.6 9.9 7.6 3.7 5.9 4.6 Sudan 1.5 3.3 4.1 4.2 6.7 5.6 6.1 2.6 2.5 Tanzania 0.2 0.9 0.4 0.6 1.4 1.0 1.8 1.2 1.7 Uganda 0.3 0.4 0.6 0.8 0.7 0.8 0.5 0.9 1.7 Zambia 0.4 0.4 0.6 1.3 0.9 0.7 1.7 1.1 1.1 Source: World Bank e= estimate. Note: Figures in parentheses represent negative numbers Appendices | 60 Appendix 2 MIGA-EIU Political Risk Survey 2013 T he data provided herein are based on a survey conducted on behalf of MIGA by the Economist Intelligence Unit (EIU). The survey, which was carried out in July and August of 2013, contains the responses of 459 senior executives from multi- national enterprises investing in developing countries. Quota sampling was used to ensure that the industry and geographic composition of the survey sample approximates the composition of actual FDI outflows to developing countries. Following a first round of responses to the questionnaire, additional email campaigns targeting respondents in specific industries or geographic locations were conducted until all demographic quotas were met. For some questions, percentages add up to more than 100 percent because of multiple selections. 61 | appendices Question 1A. In which country are you personally located? percent United States of America 16 India 10 United Kingdom 7 Canada 5 Singapore 4 Australia 3 Germany 3 Italy 3 Spain 3 Hong Kong SAR, China 3 China 2 Switzerland 2 Greece 2 Portugal 2 Indonesia 2 Malaysia 2 Nigeria 2 Philippines 1 Poland 1 Russia 1 Thailand 1 United Arab Emirates 1 Austria 1 France 1 Argentina 1 Others: Brazil, Bulgaria, South Africa, Turkey, Belgium, Chile, Croatia, Finland, Kazakhstan, Netherlands, Peru, Colombia, Denmark, Ecuador, Ethiopia, Gibraltar, Kenya, Norway, Romania, Slovenia, Sri Lanka, Sweden, Taiwan, Rep. of China, Uruguay, Venezuela Question 1B. In which region are you personally located? percent Asia-Pacific 31 Western Europe 30 North America 22 Middle East and Africa 6 Latin America 6 Eastern Europe 5 Appendices | 62 Question 2A. What is your primary industry? percent Financial sector 27 Other services 10 Business activities 10 Mining, quarrying, and petroleum 7 Utilities, transport, storage, and communications 7 Trade 4 Food, beverages, and tobacco 4 Other manufacturing 3 Electrical and electronic equipment 3 Electricity, gas, and water 3 Health and social services 2 Education 2 Chemicals and chemical products 2 Construction 2 Motor vehicles and other transport equipment 2 Metals and metal products 2 Machinery and equipment 2 Agriculture, hunting, forestry, and fishing 2 Hotels and restaurants 1 Textiles, clothing, and leather 1 Rubber and plastic products 1 Publishing, printing, and reproduction of recorded media 1 Public administration and defense 1 Coke, petroleum products, and nuclear fuel 1 Non-metallic mineral products 0 Community, social, and personal service activities 0 Wood and wood products 0 Precision instruments 0 Question 2B. What is your primary (sector) industry? percent Services 36 Finance sector 27 Manufacturing 22 Primary 8 Utilities, transport, 7 storage, and communications 63 | appendices Question 3. What are your organization’s global annual revenues in US dollars? percent $500m or less 41 $500m to $1bn 15 $1bn to $5bn 18 $5bn to $10bn 7 $10bn or more 19 Question 4A. In which country is your company headquarters located? percent United States of America 26 United Kingdom 7 India 7 Canada 6 Australia 3 Italy 3 Germany 3 Singapore 3 Hong Kong, SAR China 2 Switzerland 2 Spain 2 Greece 2 Netherlands 2 Denmark 2 France 2 Malaysia 2 Portugal 2 Austria 1 China 1 Nigeria 1 Sweden 1 Belgium 1 Chile 1 Indonesia 1 Poland 1 Others: Russia, Thailand, Argentina, Croatia, Japan, Norway, Philippines, Turkey, United Arab Emirates, Bulgaria, Colombia, Ecuador, Ethiopia, Finland, Islamic Republic of Iran, Kazakhstan, Kenya, Peru, Sri Lanka, Ukraine, Venezuela, Albania, Bahrain, Belarus, Bolivia, British Virgin Islands, Brunei Darussalam, Cayman Islands, Dominican Republic, Isle of Man, Israel, Kiribati, Kuwait, Malta, New Zealand, Oman, Pakistan, Panama, Seychelles, Slovakia, Slovenia, Solomon Islands, South Africa, Uruguay Appendices | 64 Question 4B. In which region is your company headquarters located? percent Western Europe 33 North America 31 Asia-Pacific 24 Latin America 5 Middle East and Africa 4 Eastern Europe 3 Question 5. Q5 of the WhichWhich offollowing best the following describes your describes best percent jobtitle? your job title? CEO/President/Managing Director 25 SVP/VP/Director 19 Manager 12 CFO/Treasurer/Comptroller 10 Other C-level executive 9 Head of business unit 7 Board member 7 Head of department 6 Other, please specify 3 CIO/Technology Director 2 65 | appendices Question 6A. In which developing countries is your firm presently investing? percent China 41 India 40 Brazil 29 Indonesia 21 Russian Federation 20 Malaysia 20 Mexico 19 Thailand 18 Turkey 17 South Africa 17 Vietnam 15 Philippines 15 Saudi Arabia 11 Argentina 11 Chile 10 Nigeria 9 Ukraine 9 Colombia 8 Romania 8 Peru 7 Egypt, Arab Rep. 7 Kazakhstan 6 Cambodia 6 Pakistan 6 Bulgaria 6 Ghana 5 Bangladesh 5 Morocco 5 Serbia 5 Angola 5 Algeria 4 Uruguay 4 Albania 3 Bahrain 3 Belarus 3 Tunisia 3 Kuwait 3 Others: Bosnia and Herzegovina, Democratic Republic of Congo, Dominican Jordan 3 Republic, Panama, Uzbekistan, Iraq, Lebanon, Zambia, Georgia, Lithuania, Oman, Turkmenistan, Republic of the Congo, Guatemala, Montenegro, Uganda, Armenia, Costa Rica 3 El Salvador, Jamaica, Madagascar, Sudan, Honduras, Islamic Republic of Iran, Tanzania 3 Republic of Yemen, Syrian Arab Republic Appendices | 66 Question 6B. In which developing regions is your firm presently investing? percent East Asia and Pacific 56 South Asia 41 Latin America and Carribean 41 East Europe and Central Asia 38 Sub-Saharan Africa 27 Middle East and North Africa 25 Question 7A. which of the following factors in the next twelve months will pose the greatest constraint on investments by your company in developing countries? percent Macroeconomic instability 20 Access to qualified staff 19 Political risk 18 Access to financing 16 Infrastructure capacity 9 Corruption 9 Limited market opportunities 7 Increased government regulation in the 2 aftermath of the global financial crisis Other 1 67 | appendices Question 7B. which of the following factors in the next three years will pose the greatest constraint on investments by your company in developing countries? percent Macroeconomic instability 21 Political risk 19 Access to qualified staff 18 Access to financing 13 Corruption 10 Infrastructure capacity 7 Limited market opportunities 5 Increased government regulation in the 4 aftermath of the global financial crisis Other 1 Question 8A. How do you expect your company’s planned investments in emerging markets to change this year compared with last year? percent Stay unchanged 37 Increase moderately (e.g., increase more than 1% but less than 20%) 34 Increase substantially (e.g., increase 20% or more) 13 Decrease moderately (e.g., decrease more than 1% but less than 20%) 7 Decrease substantially (e.g., decrease 20% or more) 7 Don’t know 1 Question 8B. How do you expect your company’s planned investments in emerging markets to change over the next three years compared with the previous three years? percent Increase moderately (e.g., increase more than 1% but less than 20%) 44 Increase substantially (e.g., increase 20% or more) 26 Stay unchanged 15 Decrease moderately (e.g., decrease more than 1% but less than 20%) 8 Decrease substantially (e.g., decrease 20% or more) 4 Don’t know 4 Appendices | 68 Question 9A. In your opinion, which types of political risk are of most concern to your company when investing in emerging markets in the next twelve months? percent Adverse regulatory changes 56 Breach of contract 45 Transfer and convertibility restrictions 37 Civil disturbance 30 Non-honoring of government guarantees 27 Expropriation/nationalization 19 Terrorism 11 War 6 Question 9B. In your opinion, which types of political risk are of most concern to your company when investing in emerging markets in the next three years? percent Adverse regulatory changes 58 Breach of contract 45 Transfer and convertibility restrictions 43 Civil disturbance 33 Non-honoring of government guarantees 31 Expropriation/nationalization 24 Terrorism 13 War 7 69 | appendices Question 10. In your opinion, in the developing countries where your firm invests presently, how do each of the risks listed below affect your company? percent 6 14 6 7 20 17 19 T&C 29 BoC 25 32 31 32 14 14 13 18 15 18 NHFO 27 Expro 1 (Very high impact) 26 2 31 26 3 4 5 (No impact) 10 3 12 24 24 16 AdvReg War 26 37 27 22 10 17 10 15 20 22 Terror CD 25 26 26 30 Question 11. In the past three years has your company experienced financial losses due to any of the following risks? percent Adverse regulatory changes 40 Breach of contract 34 30 Transfer and convertibility restrictions 25 Civil disturbance 20 Non-honoring of government guarantees 16 Terrorism 6 Expropriation/nationalization 6 War 5 Appendices | 70 Question 12. To your knowledge, have any of the following risks caused your company to withdraw an existing investment or cancel planned investments over the past 12 months? percent 14 4 14 7 15 15 6 BoC T&C 12 61 51 3 15 3 15 7 14 9 9 NHFO Expro Withdraw existing investment 58 66 Cancel planned investments Both withdraw and cancel Neither withdraw nor cancel Don’t know 10 4 16 3 6 26 9 AdvReg War 66 11 49 2 14 3 16 8 16 7 Terror 68 CD 8 59 71 | appendices Question 13. What tools/mechanisms does your company use to mitigate political risk when investing in developing countries? percent Invested gradually while developing familiarity with 54 the local environment Use of joint venture or alliance with local company 46 Political/economic risk analysis 44 Engagement with government in host country 44 Engagement with local communities 40 Scenario planning 37 Develop close relationships with political leaders 26 Use of third-party consultants 25 Engagement with non-governmental organizations 25 Operational hedging (e.g., setting up multiple plants to spread risk) 16 Political risk insurance 15 Credit default swaps 12 Provide support to a well-connected political figure 6 We don’t use any tools or products to mitigate political risk 4 Don’t know 2 Other 1 Appendices | 72 Question 14. In your opinion, in the countries where your company invests, what are the most effective tools/mechanisms available to your firm for alleviating each of the following risks? percent 15 6 13 7 24 10 24 16 T&C 10 BoC 10 21 15 21 8 16 7 6 11 21 12 17 12 9 NHFO Expro Engage with local public entities 19 20 Joint venture with local enterprises 10 26 12 Risk analysis/monitor Relationship with key poliltical leaders Political risk insurance 11 32 14 14 Risk is not significant for my projects 5 13 4 No existing tool can alleviate this risk 10 AdvReg 46 War 11 25 21 19 3 3 8 5 16 45 36 4 21 Terror CD 13 4 17 14 12 4 10 38 16 Other 10 21 2 73 | appendices Question 15. Have you ever experienced a breach of contract event or had to renegotiate a contract with a host government? percent NO NO 60 69 Contract renegotiation Breach of contract Breach of contract yes 31% NO 69% yes 40 yes 31 Question 16. Approximately how many years had you been doing business in the host country prior to the latest breach of contract or contract renegotiation event? AVG YEARS 9 Appendices | 74 Question 17. In which sector(s) have you experienced a breach of contract event? percent Oil, gas, and mining 24 Electricity and power 19 Telecommunications 16 Transportation 12 We have not experienced a breach of contract event 8 Water and sanitation 6 Other 34 Question 18. In your view/experience, which of the following are the five most important risk factors for breach of contract events? percent Economic crisis 29 Political regime change in the destination country 14 Corruption/red tape 11 Sovereign default 10 Political instability/war 9 Non-discriminatory regulatory or policy change 6 (eg, increase in tax rate, subsidy cut, deprival of license) Change in input prices (e.g., fuel cost) 5 Lack of transparency in contract award process 5 Other contract-specific disputes 3 (due to longer contract period, fixed price contract, currency mismatch, etc.) Sovereign credit rating downgrade 3 Change in end-product output prices (e.g., oil/gas/mineral price) 2 Poor business relationship with the host government in the past 1 Contract for which government owns a large profit share 1 (e.g., contract with a state-owned enterprise) Relation of host country to your firm’s country of origin 0 75 | appendices Question 19. Which of the following methods for addressing breach of contract events do you consider to be the most effective? percent Contract renegotiation 47 International arbitration 21 Local arbitration 19 Political risk insurance 13 Question 20. In your view, what are the key limiting factors that might make contract renegotiation preferable to other dispute resolution methods? percent Easier to keep good business relationship with the host country (e.g., your company already has investment outlays in the 48 host country and leaving would be difficult) Long wait time expected until arbitration will be awarded 15 Lack of trust in the arbitration process 13 No bilateral investment treaty or other international agreement embedded in the contract 13 Established market position and good business relationship with the host country in the past will help renegotiation process 12 Appendices | 76 Question 21A. How have the developments in the Middle East and North Africa region over the past year affected your organization’s current plans for investment? percent 27 3 5 54 16 28 26 Increase current investments No change to current investments 55 ME NA GCC Withdrew current investments 7 13 2 Don’t know 63 Middle East North Africa GCC Question 21B. How have the developments in the Middle East and North Africa region over the past year affected your organization’s future plans for investment? percent 27 4 28 5 25 13 59 53 58 Increase current investments ME NA 5 GCC 10 No change to current investments 14 Withdrew current investments Don’t know Middle East North Africa GCC 77 | appendices Question 22A. What are the five most important political risks for the Middle East region? percent War and civil disturbance 55 Terrorism 11 Breach of contract 10 Adverse regulatory changes 9 Non-honoring of financial obligations 6 Transfer and convertibility restrictions 5 Expropriation 4 Question 22B. What are the five most important political risks for the North Africa region? percent War and civil disturbance 51 Terrorism 14 Breach of contract 13 Expropriation 7 Adverse regulatory changes 6 Non-honoring of financial obligations 5 Transfer and convertibility restrictions 4 Appendices | 78 Question 22C. What are the five most important political risks for the GCC region? percent Adverse regulatory changes 27 Breach of contract 17 Transfer and convertibility restrictions 15 War and civil disturbance 13 Non-honoring of financial obligations 10 Terrorism 10 Expropriation 9 Question 23. How do you think the risk of breach of contract has changed in the Middle East and North Africa region since the onset of the “Arab Spring”? percent 41 3 7 4 1 41 5 22 22 29 Significantly increased ME NA 5 GCC 32 41 Moderately increased 56 Unchanged 32 Moderately decreased Significantly decreased Middle East North Africa GCC 79 | appendices Appendix 3 Berne Union Members Company Country Company Country Public Private ASEI Indonesia AIG United States ASHRA Israel ATRADIUS Netherlands CESCE Spain ECICS Singapore COFACE France EH GERMANY Germany COSEC Portugal FCIA United States ECGC India HISCOX Bermuda ECIC SA South Africa SOVEREIGN Bermuda EDC Canada ZURICH United States EFIC Australia EGAP Czech Republic EKF Denmark Multilateral EKN Sweden EXIM HUNGARY Hungary ATI Multilateral EXIM J Jamaica ICIEC Multilateral EXIMBANKA SR Slovak Republic MIGA Multilateral FINNVERA Finland GIEK Norway HKEC Hong Kong SAR, China KSURE Korea, Rep. of KUKE Poland MEXIM Malaysia NEXI Japan ODL Luxembourg OeKB Austria ONDD Belgium OPIC United States PwC Germany SACE Italy SBCE Brazil SERV Switzerland SID Slovenia SINOSURE China SLECIC Sri Lanka TEBC Taiwan, China THAI EXIMBANK Thailand TURK EXIMBANK Turkey UK EXPORT FINANCE United Kingdom US EXIMBANK United States Appendices | 80 Appendix 3 (cont’d) Prague Club Members Company Country Company Country Public Private AOFI Serbia LCI Lebanon BAEZ Bulgaria BECI Botswana Multilateral ECGA Oman ECGE Egypt, Arab Rep. ATI Multilateral ECIC SA South Africa DHAMAN Multilateral ECIE United Arab Emirates ICIEC Multilateral ECIO Greece EGAP Czech Republic EGFI Iran, Islamic Rep. of EXIAR Russian Federation EXIM HUNGARY Hungary EXIM R Romania EXIMBANKA SR Slovak Republic EXIMGARANT Belarus HBOR Croatia IGA Bosnia and Herzegovina JLGC Jordan KECIC Kazakhstan KREDEX Estonia KUKE Poland LGA Latvia MBDP Macedonia, FYR NAIFE Sudan NZECO New Zealand PHILEXIM Philippines SEP Saudi Arabia SID Slovenia TASDEER Qatar THAI EXIMBANK Thailand UKREXIMBANK Ukraine UZBEKINVEST Uzbekistan 81 | appendices Appendix 3 (cont’d) Lloyd’s Underwriting Syndicates Company ACE Amlin ANV Ark Ascot Aspen Beazley Canopius Catlin Chaucer CV Starr Hiscox Jubilee Kiln Liberty MAP Marketform Markel Novae O'Farrell Pembroke Talbot XL Insuring investments r Ensuring opportunities 1818 H Street, NW Washington, DC 20433 USA t. 202.458.2538 f. 202.522.0316 www.miga.org/wipr