How the World Bank helps food companies protect their foreign operations
Sourcing food ingredients sometimes means doing business in a country where your assets might be unsafe due to political or economic instability. Private insurers are reluctant to offer protection, but food companies can turn to the World Bank's MIGA to guarantee them against risk from looters or corrupt government officials, as Keith Nuthall reports.
Economic growth, especially in emerging markets, is forcing international food businesses to take a closer look at opportunities in potentially unstable countries, and the global aid community is keen to help. One international institution is well positioned, especially given the increasing demand for development projects to be largely private financed: the Multilateral Investment Guarantee Agency, or MIGA, of the World Bank.
MIGA is the international organisation that companies turn to when they want to invest in a jurisdiction where their assets might not be that safe. After all, it makes no sense to invest in a sugar processing plant, if there is a risk it might be seized by a corrupt government or ransacked by rioters, and private insurers have refused to issue policies against such misfortunes.
Food companies, notably those involved in agribusiness and commodities, have long used MIGA to cover these kinds of risks - the agency has issued 38 guarantees for the food sector since it was formed in 1988. These guarantees have totalled US$213.2m, and its food industry portfolio currently stands at US$68.9m, with a standard leverage of five-to-one, so investments covered are actually five times larger.
Speaking to just-food.com, Nabil Fawaz, head of MIGA's agribusiness underwriting team, said: "The agribusiness projects we support, for example sugar, coffee and flour processing, play an important role in generating much-needed export income in the developing countries where we operate. These projects are also important from a developmental perspective because they create job opportunities for farmers who otherwise wouldn't have access to export markets, and for others, who typically suffer from high unemployment rates in many of the areas we serve."
An explanatory note from MIGA added: "Worldwide demand for staples such as flour and rice is on the rise. But investors also know the risks associated with locating in nations emerging from economic and political instability. But with appropriate risk mitigation, projects in these sub sectors can safely go ahead."
A good example of MIGA's work is its US$65m in political risk insurance paid to the Sena Group and the Industrial Development Corporation of South Africa to cover equity investments and loans in a Mozambique sugar refinery and plantation left abandoned at the end of the country's long 1970s and 1980s civil war. Given the risks of conflict re-erupting, private insurers would not cover this project, but MIGA did and since 2001 Sena has produced 750,000 tonnes of sugar annually, for domestic markets and export.
Another recent initiative was a US$3.1m guarantee to UK-based Afriproduce Ltd to cover equity investment in Uganda's coffee-based Ugacof Ltd. The guarantee will last for five years and covers Ugacof's fixed assets, including a new warehouse, against expropriation, war and civil disturbance, enabling it to increase capacity and improve production flexibility.
To help guide potential applicants for assistance, MIGA has developed advice on how it will cover risks to which food businesses are especially vulnerable. These include:
- Expropriation coverage, where MIGA will protect against 'creeping expropriation', a series of acts that eventually results in outright nationalisation or confiscation.
- Earnings repatriation coverage, where MIGA protects against governments which decide to prevent capital leaving the country, or refuse to allow local currency exchanges.
- War and civil disturbance - here MIGA is not only covering against the risk of violence and destruction of facilities, but against the risk of spoilage should borders be closed and exports halted. Also, government orders preventing fields being worked should an agribusiness be located in a conflict zone are also covered.
- Breach of contract with governments. Although public institutions are rarely involved in food ventures, where they are, MIGA will cover against bad faith by government partners.
As regards application procedures, MIGA initially requires small one-page preliminary application forms, with basic information about the planned investment and the investor. It then takes a basic decision on whether, in principle, it wants to get involved, and asks for a wealth of information about a project before it finally commits to a project.
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