‘Can commit $2 bn in guarantees for India’ 

‘Can commit $2 bn in guarantees for India’ 

Context

The Multilateral Investment Guarantee Agency — an arm of the World Bank group — which provides non-commercial guarantees, has supported 110 countries with $19 billion in guarantees across 850 projects.

MIGA’s guarantees can trigger about five times as much in FDI, says its CEO

MIGA’s CEO and executive VP, Keiko Honda, explains how foreign direct investment receives a fillip due to the guarantees, and the agency’s plan for India.

Entering in India to provide guarantees

• The G20, including India, has strongly encouraged multilateral development banks (MDBs) to help bring in more private investment to developing countries
• By doing this, we can increase the money coming to countries — like India — that have strong potential

To draw private investors

The ADB or the World Bank Group can be used to even draw private investors to sectors they generally don’t approach, such as basic healthcare and education.

Change in behavior

With India now having graduated from being low income to a lower middle-income country, this change in behaviour means more opportunities for private companies to finance projects in India.

Countries now careful on sovereign guarantees

Some central governments used to give a lot of sovereign guarantees for their projects. But now, central governments in countries like Indonesia are more careful on how much sovereign guarantees they can extend.

India needs to protect its credit rating

The Indian government is also smart, and heading in the same direction. The country needs to protect its credit rating and manage its balance sheet, which means municipalities and state governments have to take risk on to their own balance sheets. This is a global trend, and India is probably ahead of others in this regard.

Sectors in which MIGA is looking to provide guarantees

Power generation, including hydro and renewables, transportation, including subways, ports, airports and toll roads.

Flexible

Focus on sectors where we can create higher development impact, and support the government’s development strategy

How much?

Honda: If there is a good opportunity, and we can find the right projects, we are ready to commit $2 billion in guarantees in India. With a multiplier effect, the $2 billion that we provide in coverage can often draw in $10 billion or more in private investment.

Feedback from private investors about the investment climate in India

• The same foreign investors we work with closely in Turkey, Vietnam, Bangladesh, South, Africa, Brazil and Mexico are also willing to come to India
• Some of them that are equity investors not only have money, but also expertise in areas like water treatment, building subways and metros and renewable energy.
• Private investors we work with are interested in financing projects in India, and are asking us to join them
• Our involvement in projects gives them a lot of comfort, and as they get more comfortable with the projects and local context, they may even cancel our guarantees after 3-4 years, which is perfectly fine with us.
• Overall, FDI to developing countries has declined every year in the last six years. On the other hand, FDI has been increasing for India.

MIGA Performance Standards

• These are environmental and social standards which help to structure and implement sustainable projects
• Our experience is that once we structure projects, taking all the relevant risks into account, the chances of projects getting stuck later are much lower.

India a low risk country

• We perceive India to be a low-risk country as compared to our overall portfolio
• Close to 25% of our portfolio is in sub-Saharan Africa
• We operate in far riskier environments, and help reduce the risk perception as well as actual risk for investors in those countries.

FDI generated for the guarantees in recent years

Honda: In financial year 2016-17 (July 2016 – June 2017), our direct guarantees totalled $4.7 billion. This had generated $16 billion of FDI. The year before, our direct guarantees amounted to $4.3 billion, and enabled FDI of $27 billion.

MIGA has been criticised by climate activists for promoting fossil fuels.

Climate finance is one of our top three focus areas. We are targeting that 28% of the annual guarantees we issue by 2020, as compared to 24% now, will be in climate finance. At the same time, 1.3 billion people in the world do not have access to power.