An x-ray of the World Bank Group’s investment guarantee agency which helps SMEs in emerging economies attract foreign private investment. This piece, sourced from Archives Siaka-Momoh, was first published in BusinessDay in September 2006.
SIAKA MOMOH
Ask any small business operator or one aspiring to be one what his problem is, he will tell you “it is finance”. This issue of finance being the problem of SMEs is a recurring one at seminars and conferences on the subject of small business. It is not a problem peculiar to Nigeria because it is the issue at international conferences too.
Of late, governments and concerned agencies have been addressing this vital issue. World Bank Group Multilateral Investment Agency (MIGA) is one of such agencies. Hal Bosher, Investment Officer, MIGA Small Investment Programme sold the MIGA project to participants, at the Africa Small Business Summit 2006, which held recently in Abuja. MIGA and all it stands for, as advanced at the summit is reported as follows:
MIGA’s purpose is to promote foreign direct investment by providing political risk insurance, that it guarantees to lenders, and by helping emerging economies attract private investment. Its unique strengths derive from its structure as an international organization whose shareholders include most countries in the world. This enables the agency to provide an umbrella of deterrence against government actions that could disrupt investments, and allows it to influence the resolution of potential disputes and ultimately enhance investor confidence.
MIGA operates by actively cooperating with public and private political risk insurers through coinsurance and reinsurance arrangements for joint coverage of eligible investment projects. These collaborative efforts significantly increase available insurance capacity for applicants seeking to expand their businesses in developing countries. MIGA acts as the arranger for a project’s total insurance.
Small Investment Programme (SIP)
Of more importance to us here is the Small Investment Programme which MIGA has developed. This is one programme that our SMEs can key into. If banks would not touch SMEs because they are high risks, MIGA has come in as the problem solver – it guarantees such risk. MIGA’s SIP is specifically designed for small and medium-sized investors (SMIs) investing in Small and Medium Enterprises (SMEs).
The World Bank agency helps SMEs in emerging economies directly, by providing political risk insurance to foreign investors who wish to invest in SMEs, and indirectly, by providing political risk insurance to financial institutions that will lend to small and medium size businesses through local affiliates. MIGA offers a standardized package of risk coverage, which includes currency inconvertibility and transfer restriction, as well as expropriation, war and civil disturbance.
The programme is said to be tailored small and medium-sized investors offering the following:
- A quick and efficient underwriting process;
- A single application form;
- No application fee;
- Discounted premiums.
Eligibility
Eligible are new investments destined for developing countries as well as investment associated with the expansion, modernization, or financial restructuring of existing projects. Acquisitions relating to state-owned enterprises are eligible too, and other investments may be eligible on a case-by-case basis. Types of foreign investments that can be covered include equity, shareholder loan guaranties, provided the loans have a minimum maturity of three years.
Commercial bank loans can also be insured, provided that an equity investment in the project is insured concurrently or has already been insured. Technical assistance, management contracts, franchising and licensing agreements are investments that are also eligible for coverage by MIGA.
Understandably, SMEs will want to know what size of investment MIGA will be looking at. MIGA has an answer for this. To qualify, as an SME, the project enterprise must fulfill two of the following criteria:
- No more than 300 employees;
- Total assets should not be more than US$15 million;
- Total annual sales should not be more than US$15 million.
Investments in the financial sector are eligible under this programme if they are geared towards providing financial services for SMEs, and at least 50 per cent of clients related to the investment are SMEs as defined above. The MIGA programme has no restrictions with respect to the size of the investor.
Terms
The SIP guarantees have a term that range between three and 10 years and an extension option of up to five years after the original term, at MIGA’s discretion. The maximum amount of guarantee offered is US$5 million. The actual size of the investment may however be bigger. There is no minimum required amount of guarantee, and SIP covers up to 90 per cent of the investment for equity and up to 95 per cent for debt.
MIGA projects in Africa
MIGA is currently guaranteeing some projects in Africa. A few of these projects are listed below:
Project Name: Barclays Bank Ghana Ltd.
Guarantee Holder: Société de Promotion et de Participation pour la Coopération Economique
Investor Country: France
Host Country: Ghana
Fiscal Year: 2006
MIGA has issued $3.5 million in guarantees to Société de Promotion et de Participation pour la Coopération Economique of France, covering its nonshareholder loan to Barclays Bank Ghana Ltd. to enable the local bank to provide long-term financing to a company in the tourism industry. The funding will finance the construction of a new hotel (Atlantic Holiday Resort) in Accra. The guarantee is for a period of seven years and covers against the risk of currency transfer restriction.
The hotel is expected to have a number of direct and indirect benefits for the local economy. These include providing higher-quality accommodations at a reasonable price, thereby leading other hotels in the city to improve their standards to remain competitive and attracting more tourists. In addition, the hotel will create an estimated 50 new jobs over the next three years, and is expected to fuel the growth of local businesses involved in transportation, food and hospitality, and tour operation. The tourism industry is the third highest foreign exchange earner in Ghana, with average earnings of over $400 million per year.
Ghana is an IDA-eligible country. MIGA’s participation in the project is aligned with several agency priorities, including supporting the poorest in Africa. MIGA’s guarantee also complements the World Bank Group’s Country Assistance Strategy for Ghana, which aims to eliminate poverty by stimulating private sector development.
Project Name: SGS Scanning Nigeria Ltd.
Guarantee Holder: SGS Société Générale de Surveillance S.A.
Investor Country: Switzerland
Host Country: Nigeria
Fiscal Year: 2006
MIGA has issued a $26 million guarantee to SGS Société Générale de Surveillance S.A. covering its equity investment in SGS Scanning Nigeria Ltd. in Nigeria. The guarantee is for a period of up to 15 years and covers against the risks of breach of contract, currency transfer restriction, and war and civil disturbance.
Source: World Bank Group Multilateral Investment Guarantee Agency
