The World Bank's political risk insurance arm wants to bring in more private equity investors, particularly those who focus on companies that can bring skills and create jobs in the developing world, the new head of the agency said.
The Multilateral Investment Guarantee Agency, or MIGA, is at the forefront of changes happening at the World Bank as a whole, as the bank seeks to leverage more private capital to fight poverty amid falling government budgets.
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MIGA, was founded 25 years ago to promote foreign direct investment into emerging markets by protecting private investors from various forms of political risk, such as war and sovereign default. Its traditional clients have been big banks focused on project finance, like large infrastructure and industrial projects.
Keiko Honda, who became MIGA's executive vice president two months ago, sees untapped potential among equity investors that want to expand into frontier markets but may be wary of political risk issues. MIGA's own surveys point to political risk as the biggest medium-term constraint for investment into the developing world.
"Equity investors are more fragmented," Honda said in an interview, adding such companies may not have heard of MIGA.
"A lot of companies are considering going into developing countries, and those are the companies that actually can transfer skills or create jobs, and also provide goods that can upgrade the life of the people living there."
Honda said consumer goods companies, retailers and manufacturing firms would be most welcome for the expertise they can bring.
"One thing I aspire to do is (ensure) MIGA is going to be well-known," she said.
With only 130 employees, MIGA is one of the smallest institutions within the World Bank, in contrast to more than 10,000 people working for the main World Bank unit and over 3,000 people at the International Finance Corporation, the bank's private sector lending arm.
MIGA's bid for expansion may be coming at a particularly good time. Capital flows data show investors in search of higher yields are turning to risky frontier markets like Ivory Coast and Pakistan. With their relative isolation, these markets are also less correlated to the volatile flows that have hit emerging markets due to fears of tighter U.S. monetary policy.
Frontier equity funds pulled in a net $1.4 billion in the six months to June, more than a third of total assets under management, according to data from Lipper.
FROM LEHMAN TO WORLD
Honda came to the bank after working for 24 years for the consulting firm McKinsey, where she was the first woman to be a senior partner in Asia. Prior to that, she worked at Lehman Brothers, the financial firm whose bankruptcy almost exactly five years ago helped precipitate the global financial crisis.
Honda said she welcomed the change to move away from a pure profit focus to work on improving people's lives.
"I don't miss it," she said. "I was really happy (on a recent visit to) Cote D'Ivoire and Kenya looking at the power plants or bridges or roads MIGA supported over the last several years. That's definitely creating impacts and making those countries a different place."
Like the rest of the World Bank, MIGA's ultimate aim is to combat global poverty. Part of its focus in recent years has been encouraging more investment into low-income and conflict-affected countries. It also aims to promote more flows from one developing country to another, known as "South-South" investment, and fund complex infrastructure or oil and gas projects that governments may struggle to complete on their own.
Of the $2.8 billion in new investment guarantees MIGA issued in the last fiscal year, almost three quarters went to low-income or conflict states, especially in sub-Saharan Africa.
The challenge is measuring how insurance guarantees help lift people out of poverty. For the past three years, MIGA has used an index called the Development Effectiveness Indicator System, which combines several sets of measures, like the number of jobs created and investment supported from each project.
Starting from this year, MIGA will also report projects' actual development outcomes three years from the time a contract is signed. But many of these measures only look at indirect effects. It is hard to exactly measure the benefit of a built bridge or a new electricity plant, Honda said.
"We're trying to identify what is the best way to look at developmental impact at this moment," Honda said. "It's almost like assessing real happiness; the number of minutes that you're smiling could be one indicator. But maybe (there are) more."
The World Bank's internal auditor, the Independent Evaluation Group, said MIGA also needs to find more cost-effective ways of measuring impact.
The agency's particular strength is its ability to solve investors' problems in order to avoid losses, an area known as pre-claim management, Honda said. What helps are MIGA's direct connections to senior government officials -- several of whom Honda met on her recent trip to Africa.
While MIGA is generally reluctant to share specific names of projects that were at risk, it describes a few cases when its intervention helped a client, such as stopping a West African country from shutting down several private cell phone operators.
MIGA has paid six claims in its 25-year history: due to war, civil disturbance or expropriation.
"The best thing for private investors is not get paid by us; it's actually to solve the problem so they can continue their investment and get a good return out of it," Honda said.
(Reporting by Anna Yukhananov; editing by Andrew Hay)