Bridging the investment gap in Asia

Motomichi Ikawa, Executive Vice President Multilateral Investment Guarantee Agency (MIGA), World Bank Group

For Asia, the last decade has seen its share of drama. An unprecedented boom in flows of foreign direct investment (FDI), an engine of economic growth, quickly spiraled downward during the crisis of the late 1990s.

The region has since recovered to its pre-crisis levels of investment, but the distribution is uneven. China, including Hong Kong, and a handful of other countries account for the lions share of investment, while others in the region have been unable to attract much business.

Another trend has emerged: Asian companies are beginning to invest more and more in other countries, in the region and beyond. This is a very encouraging trend, as global investment is one of the key elements of sustained future growth.

But issues remain. Asia is not immune to worldwide economic and political trends, even if it currently does not seem to face imminent risk.

The global economic downturn and slowdown of FDI flows will inevitably affect the region to some degree. Prospects for the region remain healthy, however, so the questions one could ask are: What is stopping investors from going into more Asian markets, and how can we leverage Asian businesses to invest even more intra-regionally and abroad?

The answer may lie in perceptions of political risk and in better management of these risks. The nature of projects plays a role as well. Privatization in countries with rapidly growing economies, such as China and Vietnam, require enormous amounts of capital. Such projects tend to be very complex and touch sensitive sectors of the economy, increasing foreign investors' perceptions of the potential for government interference.

For investments within the region, while investors may believe that proximity and common historical bonds provide adequate protection against political risks, this is not always the case. transfer restrictions are usually imposed on all investors. And as witnessed by scattered attacks on Chinese investments in Indonesia a few years ago, economic crises can result in bitter and uncontrollable backlashes.

Political risks, real or perceived, deter not only investors but also project financiers and insurers. The insurance market has already taken a blow from the events of the past year, which negatively affected capacity and terms of financing.

In this environment, the Multilateral Investment Guarantee Agency (MIGA), a member of the World Bank Group, plays an important counter-cyclical role, encouraging FDI flows by mitigating perceived political risks and partnering with other insurers to increase the capacity of the industry as a whole.

Over the past 12 years, MIGA has offered $1.2 billion in gross insurance coverage for 69 projects in 11 Asian countries, providing protection against the risks of transfer restriction, breach of contract, expropriation, and war and civil disturbance. These guarantees have facilitated about $8.5 billion in additional FDI. The region currently accounts for 10 percent of MIGA's outstanding portfolio. Projects encompass a range of sectors, with the portfolio concentrated on infrastructure projects.

Projects supported by MIGA have a high developmental impact, creating opportunities in host countries through job creation, export and tax generation, technology transfer, spin-off business development, and enhanced domestic competition. For investors, noncommercial risk insurance not only alleviates country risk, it can also extend the tenor of financing and even lower costs, as well as deter adverse government actions.

One project, the Manila North Tollways Corporation (MNTC), illustrates the particular strengths that MIGA can bring to managing a project's risks. The project entails the expansion and rehabilitation of a toll road in the Philippines, involving $117 million in equity investments and $260 million in loans. MIGA's $87 million in coverage -- against the risks of transfer restriction, expropriation, and war and civil disturbance -- was critical in moving the project to financial close.

The ongoing prospects for FDI flows to Asia are excellent, but investors and lenders must be cognizant not only of potential political risks, but also of key ways to mitigate them. For those of us in the political risk insurance and development business, working to address these issues means closer collaboration with our public and private partners, such as the ADB and International Enterprise Singapore, so that we can leverage our combined strengths and capacity in support of sound developmental projects. It also means that we need to continue to work with the host governments -- our member countries -- to help them attract and retain FDI flows.

The Sept. 17 opening of MIGA's regional office in Singapore is a manifestation of our commitment to strengthen these ties. It is also a clear sign of our resolve to focus on the many investment opportunities that exist in Asia and which are currently not moving forward. With our presence in the region, and in cooperation with our partners, I am confident that we can play a key role in facilitating these investments and improving the quality of life for the region's inhabitants.

MIGA promotes foreign direct investment into emerging economies. Ikawa, a Japanese national, has held positions with the OECD, the Asian Development Bank, and the Japanese government, including a term as the Senior Deputy Director-General of the International Finance Bureau of the Ministry of Finance.