Bridging the investment gap in Asia

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.