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Chasing the Wind

Cara Santos Pianesi's picture

MIGA recently sponsored its seventh symposium on political risk issues, in tandem with Georgetown University’s School of Foreign Service. We happily note that the symposium has established itself as the world's leading forum for cutting-edge assessments of the international political risk management industry, and this year it did not disappoint. A summary of the event is here. 

I’ll concentrate on one trend that was noted clearly from the political risk insurance (PRI) providers, like MIGA, that were in attendance. All agreed that, since the international financial crisis, new business has mostly taken the form of obligor default products. For the PRI industry, an obligor is a country; this product is used when there is some sort of an agreement by which a government has financial payment obligations or guarantees with an investor.  The product is suitable for certain types of transactions, for example public-private partnerships or power purchase agreements.

  

 For MIGA, that means there are ample opportunities in its relatively new political risk insurance product: coverage of what we call “ non-honoring of sovereign financial obligations” —and this is good for our business.

But let’s analyze what is driving this demand. Certainly the increased use of public-private partnerships is noteworthy and positive. But, going further, why are these deals happening in the first place?

 

At the symposium, several providers noted that they are seeing a greater willingness on the part of countries to take on more contingent liabilities to advance real development. In short, this means that more projects can move forward: more roads, electricity, clean water, and sanitation.

 

At the same time, concern was also expressed that perhaps governments are stepping over the line to attract developmentally-beneficial investment. Participants cited the example of a government that guaranteed wind speed in order to attract investment into its renewable energy sector.

 

Which brings us back to the title of this blog. Can business and government reasonably cooperate to successfully better people’s lives? Are we chasing the wind?

 

Hopefully not. But let’s also not be naïve. Here, there is a heavy responsibility on the part of both governments and investors to deal transparently and smartly, as well as to apply lessons learned through increased South-South cooperation and/or collaboration with international institutions. There are private, non-profit, and multilateral resources to help; for example, the World Bank’s ICAS assists governments in reforming their business environments, with emphasis on regulatory simplification and investment generation. And just this year, the Open Data initiative opened the Bank’s data and analysis to the public.

 

There are more tools than ever to achieve good and sustainable development. At the same time, conscious not to over-reach, let’s each play our role without contortions or chasing the wind. 

Comments

Submitted by Ted Myers on
Interesting summary of the evolving model/culture of risk management. More on South-South partnerships here: http://uk.reuters.com/article/2010/03/24/trade-worldbank-idUKN2418088820100324

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