MIGA: The Little Engine That Should

As shareholders move forward with the World Bank’s Evolution Roadmap, they should take a closer look at the Multilateral Insurance Guarantee Agency (MIGA) and its potential to help advance the private sector agenda which has so far failed to deliver. The current version of the Roadmap includes options for bolstering MIGA’s role, but we see scope for more ambition. In the paper accompanying this blog, we make the case for a bigger MIGA and present options for expanding its reach and impact.

MIGA: A *very* quick primer

MIGA, one of the two private sector arms of the World Bank Group, was launched in 1988 with a $1 billion capital base (of which only $366 million was paid in) and has since grown to support an outstanding portfolio of nearly $28 billion—a 76x multiplier. A key factor behind this growth is MIGA’s policy of reinsuring most of its exposure. Unlike other World Bank Group entities (e.g., IBRD and IDA), MIGA has never received additional capital from donors.

MIGA provides two major products to investors and financiers: (1) political risk insurance (PRI) against expropriation risk, transfer risk (e.g., currency non-convertibility), war and civil disturbance, and breach of contract; and (2) non-honoring (NH) of financial obligations products, which insure against non-payment of sovereigns, sub-sovereigns, and state-owned enterprises. MIGA can provide PRI in all markets, but for NH products there is a sovereign credit threshold of a BB- rating, which significantly limits coverage options. Notably, MIGA increased its credit threshold for NH products in 2015 from B to BB- due to elevated market risks, even though no claims had been filed. NH products are especially appealing to investors because MIGA will automatically pay out claims if payment obligations are not met, while under PRI the parties must go through an arbitration or claims process first.

MIGA gross issuance–by product type (USD billions)

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MIGA’s products enable projects to move forward that would otherwise be too risky for most investors. Private insurers can do this as well—what sets MIGA apart is being a member of the World Bank Group. This conveys the so-called halo effect, which reflects MIGA’s ability to lean on the sovereign lending arms (IBRD/IDA) to help run interference in the event of a potential claim. There is no firm policy on how other World Bank (WB) entities should respond under these circumstances (e.g., by conveying that acting in bad faith on a MIGA guarantee could put other WB financing at risk), but the fact that a IBRD or IDA country director with close ties to a sovereign can intervene on behalf of MIGA no doubt serves as a deterrent. This is evidenced by the large number of potential claims that have been resolved before being filed—155 to date. The number of actual claims is extremely low—only 11 in MIGA’s history, all for PRI and all before 2000. Of these, nine were for war and civil disobedience. There have been no claims for NH products.

Why MIGA deserves more attention

MIGA’s products have never been more relevant: risks to investors are increasing, investment flows to most low- and middle-income countries are stagnant or falling, and the global development agenda has been imperiled by the combination of COVID-related shocks, fallout from the war in Ukraine, and an increase in the number and severity of natural disasters. The war in the Middle East will only serve to exacerbate these negative factors and further dampen investor appetite.

For their part, donors have reduced or rechanneled official development assistance (ODA), leading to a decline in aid for the poorest countries despite growing needs and a significant debt overhang. Largely for domestic political reasons, donors are unable or unwilling to come forward with significant new financial commitments. Due to its exceptional leverage capacity, MIGA should be an attractive option for donors who are looking for high development returns on their scarce ODA dollars.

Our ideas

As part of the World Bank’s reform agenda, we would like to see MIGA double total exposure before 2030 and double exposure in IDA countries over the same period. We know there is an inherent tension between these goals: an ambitious strategy to expand coverage in lower income countries (LICs) implies more staff time, reduced mobilization levels, and more capital usage (as the deals could be harder to reinsure). We take these tradeoffs into account in our recommendations, including by calling for more donor support. We recognize as well that a bigger role for MIGA in LICs depends on the existence of bankable deals- not always a realistic assumption.

MIGA itself has already committed to reaching 40 percent of its overall business in IDA-eligible and fragile and conflict states (FCS) by 2030 and 15-20 percent in low-income IDA and IDA FCS, targets significantly above the shares of foreign direct investment going to these countries. Several of the recommendations listed below would help MIGA reach them. They are:

1. Create a special liquidity facility to increase the value and impact of MIGA’s political risk insurance for breach of contract. As noted earlier, PRI has one notable disadvantage relative to NH products, which is that claims are not paid out automatically. Instead, the parties must go through an arbitration process, which can be lengthy and cumbersome, leaving investors with no recourse in the interim. An effective option to address this gap would be to create a stand-by liquidity facility for investors to draw on in the event of an arbitration, ensuring consistent payment throughout the process. This would also allow for potential ratings uplift from non-investment grade to investment grade, lowering borrowing costs for MIGA clients.

2. Expand the criteria for accessing IDA’s MIGA facility (i.e., the private sector window) and augment or create new risk-sharing initiatives with donors. There is a good case to be made for expanding MIGA’s risk sharing initiatives in the current environment: foreign direct investment and capital flows have yet to recover from their peak in 2010, and in the context of a high interest rate environment combined with increased risks, IDA countries are not a great bet for investors. These are precisely the circumstances during which MIGA should step up to play a countercyclical role, but due to its own risk management practices, is constrained from doing so.

   MIGA’s constraints could be loosened by expanding its risk-sharing platforms: IDA’s Private Sector Window (PSW) and MIGA’s Strategic Priorities (MSP) program (which houses five donor-financed facilities). The PSW supports MIGA coverage in IDA countries through first loss exposure or reinsurance and the MSP manages trust funds with contributions from donor partners. The MSP funds support high risk projects for renewable energy as well as MIGA coverage in conflict-affected and fragile states, Ukraine, and the West Bank and Gaza.

   The PSW could help increase MIGA’s footprint and impact by adding additional criteria for its use, for example to support MIGA’s new trade finance cover and enable the use of NH products in more IDA countries, only four of which are currently eligible for coverage. The MSP program is flexible and could be used to increase product, sector, and/or country coverage.

3. Lower the credit threshold for country eligibility for MIGA’s credit enhancement products (e.g., from BB- to B). MIGA’s NH products insure bankers and lenders against non-payment of sovereign, sub-sovereigns and SOEs regardless of cause. Since 2015, access to these products has been limited to countries rated BB- or above, essentially ensuring that most NH operations are limited to middle-income countries. (Among IDA-eligible countries, only Bangladesh, Honduras, Côte d’Ivoire and Uzbekistan meet the threshold.) In an effort to go down the credit curve, MIGA could offer a set of guidelines detailing when coverage could include countries rated B or above, such as assessments of debt sustainability and contract enforcement. Looking at countries rated between B and BB- (i.e., the proposed and current thresholds), we found that only two countries out of 33 are at high risk of debt distress (Kenya and Mongolia).

4. Strengthen coordination across the World Bank Group, including by harmonizing the guarantee functions of IDA, IBRD, IFC, and MIGA. Collaboration within the World Bank offers important benefits in terms of size, impact, and efficiency. IBRD/IDA can mitigate non-financial risks, including governance and poor regulatory environments (e.g., insolvent public utilities) that combined with MIGA products can move the needle on project viability. A report by the Independent Evaluation Group on joint projects found that co-financing provided several benefits including (1) reduced investment risk across a range of high-risk countries; (2) successful capital mobilization for risky projects that required long-term financing and guarantees; (3) first time cross-border investments in some client countries; and (4) facilitation of complex and complicated transnational projects.

   These findings suggest that to expand their operations in LICs and/or fragile states, MIGA would do well to collaborate more closely with IDA/IBRD and IFC. But despite the potential advantages of joint World Bank Group operations, there is no database on the number and type of World Bank Group co-financing arrangements, making it difficult to track trends or assess relative effectiveness. In addition, the multiple instruments on offer present clients with a complicated menu to choose from (e.g., IFC offers partial and full credit guarantees while IBRD and IDA offer policy-based guarantees and two types of project-based guarantees). To streamline and encourage more joint financing, the World Bank should start incentivizing and tracking joint projects and create a harmonized guarantee facility to encourage their uptake and simplify options for clients.

5. Expand collaboration with other development banks, especially for transformational projects. No other development bank has a dedicated insurance entity like MIGA, and there are clear benefits to giving MIGA a bigger role in the multilateral development bank (MDB) system, especially in places where private insurers do not operate or are scarce. MIGA itself has issued a handbook committing to a “new approach” for working with partners focused on increasing the use of its PRI products (NH products are excluded) and generating more global investment. It has also concluded MOUs with EBRD and IDB Invest. Going forward, MIGA should expand its collaboration ambitions to include NH products, not just PRI. MIGA should also consider a more strategic approach to its outreach, focusing, for example, on major transformational projects and green energy transitions.

   Some of these recommendations are reflected in the World Bank’s evolution roadmap. For example, the paper proposes using MIGA PRI in combination with contingent liquidity facilities to crowd in institutional investors (recommendation #1) and setting up a coordination and innovation center to develop joint guarantee products (recommendation #4). But we see scope for doing much more.

Caveats and conclusions

The menu of recommendations we offer is intended to enable MIGA’s robust growth, especially in LICs, while keeping the overall risk profile relatively stable, including with additional donor resources. That said, MIGA’s internal culture would likely need to adjust. A development-focused institution needs to balance risk and impact, but for private sector-oriented development institutions in particular, risk factors often prevail. This is reflected in MIGA’s track record (only 11 claims, all of them before 2000) and its limited coverage in IDA countries. A quarter century without a single claim is a sign of strong risk management but suggests that risk appetite is in fact too low for a development organization.

Changing corporate culture is hard—it would require explicit direction from shareholders and management and a shift in staff incentives. There would need to be a recognition that higher risk tolerance could result in more investment disputes and/or claims filed. Given the importance of IBRD/IDA relationships in helping MIGA manage dispute resolution, buy in from World Bank country directors and vice presidents would be key. Finally, any expansion strategy would need to take account of the fact that MIGA’s major advantages are implicit and hard to quantify.

Despite these organizational challenges, we see a strong case to prioritize MIGA in the World Bank reform agenda. It has long been overlooked by shareholders in favor of the larger, higher profile WB members (IBRD/IDA and IFC), but as they aim to improve private sector outcomes, MIGA should be top of mind. And if there was ever a time for MDBs to fully employ their private sector mobilization toolkits, this is it.