MIGA Annual Report 2004 30604 Fiscal 2004 Highlights Table 1 Guarantees Issued Total 2000 2001 2002 2003 2004 FY90-04 HIGHLIGHTS Number of Guarantees Issued 53 66 58 59 55 711 Number of Projects Supported 37 46 33 37 35 453 Amount of New Issuance, Gross ($ B) 1.6 2.0 1.2 1.4 1.1 12.8 Amount of New Issuance, Total ($ B)1 1.9 2.2 1.4 1.4 1.1 13.5 Gross Exposure ($ B)2 4.4 5.2 5.3 5.1 5.2 - Net Exposure ($ B)2 2.8 3.2 3.2 3.2 3.3 - ii 1 Includes amounts leveraged through the Cooperative Underwriting Program (CUP). 2 Gross exposure is the maximum aggregate liability. Net exposure is the gross exposure less reinsurance. Figure 1 Earned Premium, Fee and Figure 2 Number of Technical Assistance Investment Income*, $ M Activities 1SFNJVNBOE *OWFTUNFOU GFFJODPNF JODPNF                                                 * Excludes other income Membership In fiscal 2004, the Islamic Republic of Iran and Suriname joined MIGA, bringing the number of member countries to 164. All dollar amounts used in this Annual Report are current US dollars unless otherwise specified. Coverage for Priority Areas1 q 20 projects and 35 technical assistance activities in IDA-eligible countries2 q 14 projects for small and medium enterprises (SMEs)3 q 8 “South–South” projects4 q 4 projects and 28 technical assistance activities in sub-Saharan Africa Highlights q First guarantee coverage for investors from the Czech Republic and Poland q Three water projects supported—two in China and one in Russia q 16 projects supported in conflict-affected countries q 65 technical assistance activities conducted in 29 countries, along with regional and global initiatives q New technical assistance work initiated in Afghanistan, China, Mali, Paraguay, South Africa and Tajikistan q The European Investor Outreach Program launched with co-funding from the Austrian government iii q FDI Promotion Center launched Partnerships q Five new cooperation agreements signed with: the African Trade Insurance Agency (ATI), Banque de Développement des États de l’Afrique Centrale (BDEAC), Export Guarantee Fund of Iran (EGFI), Jordan Loan Guarantee Corporation (JLGC) and Servizi Assicurativi del Commercio Estero of Italy (SACE) q Facultative reinsurance provided: to MIGA—$238 million for seven projects; and by MIGA—$4.0 million for one project q Training programs held for MIGA’s partners from Europe and Canada. Regional training program held in Iran Cooperation with World Bank Group q Worked with the Foreign Investment Advisory Service in China, Fiji, the Pacific Islands and Tajikistan q Conducted investment promotion activities in Armenia, Honduras, Iraq and Mozambique with the World Bank q Worked with the World Bank to promote private sector business opportunities in Afghanistan q Board approval for joint MIGA-IDA Guarantee Facility, co-guaranteed by the Agence Française de Développement, to support investments in West Africa q Collaborated with the International Finance Corporation (IFC) and the World Bank on the Sasol oil and gas project in Mozambique q Worked with IFC on technical assistance projects in China and Panama Claims q Resolved six disputes involving investors insured by MIGA to the satisfaction of all parties 1 Some projects address more than one priority area. 2 The International Development Association (IDA), a member of the World Bank Group, helps the world’s poorest countries reduce poverty by providing “credits”—which are loans at zero interest—and grants. 3 A small and medium enterprise meets two of the following three conditions: up to 300 employees; total assets of up to $15 million; and total annual sales of up to $15 million. 4 Investments made from one developing country to another developing country. Against the backdrop of falling FDI flows, MIGA was Letter from the President able to support a greater proportion of projects in the poorer countries eligible for financing from the to the Council of Governors International Development Association (IDA) and the small and medium enterprise sector in fiscal 2004. In addition, MIGA provided guarantees for 16 new projects in conflict-affected countries. Recognizing the importance of safe drinking water, the Agency also sub- stantially grew its exposure in the water sub-sector. MIGA’s technical assistance program remained in high demand in fiscal 2004, as governments sought to compete fiercely in attracting and retaining scarce FDI HIGHLIGHTS inflows. Half of the 29 countries assisted in fiscal 2004 are IDA-eligible, and 28 activities took place in sub- Saharan Africa. To help investment promotion inter- mediaries—especially in remote areas—access state- of-the-art tools for attracting FDI, MIGA launched the web-based FDI Promotion Center. Fiscal 2004 has also been notable for a change of lead- James D. Wolfensohn, president of the Multilateral ership at MIGA. I would like to thank Mr. Motomichi iv Investment Guarantee Agency (MIGA) and chairman Ikawa for his dedicated service as executive vice of its Board of Directors, submits to the Council of president of the Agency for six years. Much of MIGA’s Governors on behalf of the Board of Directors and growth and evolution happened during his tenure, with in accordance with MIGA’s bylaws, this report and member countries increasing from 145 to 164 and audited financial statements for the fiscal year ending gross exposure increasing from $2.9 billion to $5.2 June 30, 2004. billion. In addition, Mr. Ikawa led the successful effort to double MIGA’s capital base. Foreign direct investment (FDI) into developing countries fell for the second consecutive year in 2003, I would also like to warmly welcome Ms. Yukiko Omura, as war, terrorism and economic crises dissuaded who joined MIGA as the new executive vice president in many foreign investors from venturing into difficult or May of this year. Ms. Omura brings to her new position uncertain markets. The decline comes at a time when a unique combination of many years of investment the need for private investment in developing countries banking experience and a commitment to development has never been more urgent. While some progress has issues, including the global fight against HIV/AIDS. Her been made in the global fight against poverty, many dynamic leadership will be crucial in repositioning the countries in Africa, Latin America and the Caribbean Agency to more effectively promote FDI, especially into and Europe and Central Asia have seen the proportion difficult places such as conflict-affected countries, and of poor people growing or falling only slightly in recent to fully utilize the network of partnerships that MIGA years. As two billion more people, mainly in developing has—within the World Bank Group and outside. countries, are added to the global population in the next 25 years, there is a great risk that the world’s poor Ms. Omura’s appointment comes at a time when the will be left further behind. fight against poverty demands that the institutions of the World Bank Group scale up their development The institutions of the World Bank Group have identified impact. I have full confidence that MIGA, under her two strategic pillars that are key to reducing poverty: guidance, will make a positive difference in the lives of building the climate for investment, jobs and sus- poor people by broadening and deepening the flow of tainable growth, and empowering people to participate productive investments into developing countries. in development. By providing political risk insurance for foreign investments and technical assistance to James D. Wolfensohn developing countries, MIGA plays a critical role in sup- June 30, 2004 porting this strategy. (CODE) advises the Board on operations evaluation and Board Activities Highlights development effectiveness with a view to monitoring progress towards the World Bank Group’s mission of poverty reduction. The Personnel Committee advises the Board on compensation and other significant per- sonnel policy issues. In addition, directors serve on the The Multilateral Investment Guarantee Agency’s 164 Committee on Governance and Executive Directors’ member countries, through a Council of Governors and Administrative Matters (COGAM). a Board of Directors, guide its programs and activities. Each country appoints one governor and one alternate. During fiscal 2004, MIGA’s Board of Directors con- MIGA’s corporate powers are vested in the Council curred with or approved 39 individual investment of Governors, which delegates most of its powers guarantee operations. It also oversaw and reviewed to a Board of 24 directors. Voting power is weighted MIGA’s budget and planning process. In addition, the according to the share capital each director represents. Board took note of a report establishing MIGA’s Small The directors meet regularly at the World Bank Group Investment Program (SIP) and approved a waiver of headquarters in Washington, D.C., where they review the requirement to circulate to the Board reports of and decide on investment projects and oversee general guarantees issued under the SIP prior to their approval management policies. by the President. The Board approved MIGA’s contri- bution to the creation of a joint guarantee facility— Directors also serve on one or more of five standing com- involving IDA, the Agence Française de Développement mittees, which help the Board discharge its oversight and MIGA. The facility supports investments in West responsibilities through in-depth examinations of African states that are members of the Banque Ouest- policies and procedures. The Audit Committee advises Africaine de Développement (BOAD). In addition, the v the Board on financial management and other gov- Board approved a waiver of the requirement to circulate ernance issues to facilitate Board decisions on financial to the Board reports of guarantees issued by the facility policy and control. The Budget Committee considers prior to their approval by the President. The Board aspects of business processes, administrative policies, approved and submitted to the Council of Governors standards and budget issues that have a significant a proposal to achieve voting power parity between impact on the cost effectiveness of the Bank Group oper- MIGA’s Category One (developed) and Category Two ations. The Committee on Development Effectiveness (developing) member countries. MIGA’s Board of Executive Directors, as of June 30, 2004 Standing, left to right: Per Kurowski, Terry O’Brien*, Otaviano Canuto, Paulo F. Gomes, Nuno Mota Pinto*, Pierre Duquesne, Thorsteinn Ingolfsson, Tanwir Ali Agha, Tom Scholar, Gino Pierre Alzetta*, Eckhard Karl Deutscher, Alexey G. Kvasov, Louis A. Kasekende, Abdulrahman M. Almofadhi*, Rapee Asumpinpong Seated, left to right: Guangyao Zhu, Pietro Veglio, Carole Brookins, Mahdy Ismail Aljazzaf, Gobind Nauth Ganga*, Tamara Solyanyk*, Alieto A. Guadagni Absent: Chander Mohan Vasudev, Masakazu Ichikawa* * Alternate Message from the Executive Vice President of the most important ways out of poverty. Foreign direct investment plays an important role in pro- viding private capital, creating jobs, bringing technical expertise and managerial know-how, and connecting HIGHLIGHTS developing countries to global markets. In recent years, FDI into developing countries has been declining markedly. From an all-time high of $180 billion in 1999, FDI flows into developing countries have fallen by more than 25 percent. This comes at a time when developing country investment needs— especially in basic infrastructure—are growing. The problem is even more acute than these broad sta- vi tistics indicate, because more than 60 percent of FDI into developing countries goes to just five countries. While East Asia, the EU accession countries, and a few Latin American states have attracted the lion’s share of investment, the vast majority of countries— especially in Africa and in conflict-affected areas—have not been able to attract and retain significant amounts of FDI. I am honored to have been appointed as executive vice president of MIGA in May of this year and to work with This difficult operating environment has led to mixed an organization that supports the World Bank Group’s results for the Agency in fiscal 2004. While the total mission of reducing poverty by catalyzing foreign direct amount of guarantees issued fell slightly, to $1.1 investment into the developing world. billion, a greater proportion of projects supported were in the poorer countries eligible for financing from the As president Wolfensohn frequently emphasizes, the International Development Association (IDA). Indeed, scale of the development challenge is indeed daunting— MIGA’s effectiveness as a development agency lies but not nearly as steep as the price of failure. About 1.2 in the fact that it can play a role in supporting sound billion people still live on less than $1 a day, between 2 private investments in environments which would and 2.5 billion people do not have access to sanitation, otherwise be considered by investors to be excessively 1.5 billion people have no access to clean water, and risky. In such situations, MIGA can manage the risks as many do not have access to electricity. Success can better, particularly in relation to the private insurance only be achieved through a concerted and increased sector, and hence be able to provide coverage where commitment by multilateral organizations and others cannot. This role is particularly relevant when the governments of developing and developed FDI flows are declining or flat. countries alike. MIGA can also provide added value in complex trans- Although a small agency, MIGA has a broad mandate— actions, particularly in infrastructure. We have seen to promote productive foreign direct investment (FDI) continued investor interest and concern about water flows into developing countries. As we have seen in projects in particular. MIGA’s ability to cover sub- many of these countries, economic growth through sovereign risk can mitigate political concerns and the development of a thriving private sector is one encourage investment in this sub-sector. We have been building our base of experience, insuring three contribute to sustainable development even more water projects in the past year, two in China and one effectively. To this end, I have undertaken a number in Russia. We also see opportunities to work with of changes in MIGA’s organization, structure and pri- investors in small infrastructure projects. Specifically, orities that will allow the Agency to be more nimble, we have worked with the World Bank, the Agence efficient and innovative. Française de Développement, and Banque Ouest- Africaine de Développement (BOAD) to establish a The merging of MIGA’s technical assistance and guar- joint guarantee facility in West Africa that will support antees units into one operational department, based in smaller infrastructure projects in the sub-region. Washington, D.C., will allow more proactive outreach to our diverse but interrelated clients—host countries and MIGA increased its support for the small and medium foreign investors. With both activities now in one unit, enterprise sector by supporting 14 new projects in MIGA will be better able to serve member countries fiscal 2004. Although this sector accounts for most through unparalleled insight into what investors look private sector activity in developing economies, for when considering an investment and who those vii smaller foreign companies have particular problems investors might be. At the same time, MIGA will be in identifying cross-border risks and opportu- able to provide potential investors with the additional nities, and in finding adequate risk mitigation comfort that MIGA’s staff are working in continuous instruments. MIGA’s activities in fiscal 2004 reflect and close coordination with the relevant host country the continuing efforts that the Agency has made, to ensure that the right conditions exist, not just to and will continue to make, in supporting this under- attract, but also to retain foreign investment. served sector. In addition, a comprehensive risk management MIGA also plays an important role in encouraging framework will support MIGA’s underwriting activities FDI into conflict-affected countries—this is where we by holistically assessing project risks, actively managing are most needed, since the perception of political risk the risk exposure of the Agency’s portfolio and proac- is usually very high, and risk mitigation capacity is tively working to resolve potential claims before they quite limited. Bosnia and Herzegovina and Serbia and arise. We will also be working even more closely with Montenegro now rank among our top ten beneficiary our development partners, both within the World Bank countries. In fiscal 2004, MIGA supported 16 new Group and outside. projects in conflict-affected countries. MIGA’s technical assistance work is a valuable resource Going forward, I am committed to improving our that can benefit the Agency’s guarantees business. This regional distribution, particularly in sub-Saharan is especially relevant for difficult or frontier markets, Africa and the Middle East and North Africa, the two where the Agency has been particularly active. In fiscal regions that have received the least FDI, and where 2004, MIGA undertook 35 technical assistance activities the Agency’s performance has remained below expec- in IDA-eligible countries. The Agency also launched tations, despite extensive outreach efforts. the European Investor Outreach Program, based in Vienna, which aims to increase investor awareness We are operating in a changing environment, where of the Western Balkans, a region whose image suffers the demands from both host countries and the private from past conflicts. MIGA’s online activities support sector are evolving. If MIGA is to continue to play a the Agency’s operations by linking investors with host leading role in promoting and catalyzing foreign direct countries through providing a single reference point investment, the Agency must both adapt to these for investment opportunities. Also, the launch of the changes and ensure that the projects it supports FDI Promotion Center, an online portal that builds on MIGA’s well-known Investment Promotion Toolkit, that MIGA supports projects which contribute to sus- extends the reach of MIGA’s training capabilities and tainable development; and to ensure that the products knowledge sharing. we offer our host countries and investor clients are relevant to the changing market environment. The best way to serve our shareholders is to focus even more closely on our clients and partners. Our goals must be to leverage MIGA’s unique strengths Yukiko Omura in opening up difficult or frontier markets; to ensure June 30, 2004 HIGHLIGHTS viii MIGA’s Management Luis Dodero Yukiko Omura Team General Counsel and Executive Vice President Vice President, (Left to right) Legal Affairs and Claims Tessie San Martin Director, Frank Lysy Operations Chief Economist and Director, Economics and Policy Amédée Prouvost Chief Financial Officer and Moina Varkie Director, Chief, External Outreach and Finance and Risk Management Partners Marcus Williams Special Assistant to the EVP For most developing countries, official development assistance and local private resources are not sufficient to stimulate economic growth and provide the opportunities needed for improved quality of life. With the right regulatory and policy climate, foreign investment is vital for bringing access to what is needed—capital, technology and managerial and environmental best practices—to spur development. MIGA’s mission is to enable developing countries build up their local economies, reduce poverty and improve people’s lives through promoting foreign direct investment. MIGA does this in two ways: its political risk insurance makes a difference between a productive foreign investment going DEVELOPMENT IMPACT ahead or not; and its technical assistance activities help equip countries with the tools necessary to attract and retain foreign investments. MIGA-sponsored projects cover a range of sectors that convey many direct benefits to host countries, including local job creation, skills transfer and a general positive impact on the economy through fiscal revenues and export earnings. MAKING A A significant portion of the Agency’s portfolio is in support of financial services and infrastructure, fundamental building blocks of economic 2 DIFFERENCE development. Within the infrastructure sector, MIGA has been increasingly in demand for water projects, because the Agency is able to provide guar- antees at the sub-sovereign level—the level at which the vast majority of water concessions are handled. In fiscal 2004, MIGA supported two water projects in China and one in Russia. These projects ensure the supply of safe and reliable drinking water—a Millennium Development Goal— helping reduce child mortality and the risk of disease. Without this basic service, economic activity cannot thrive. MIGA’s increasing efforts to integrate its activities with the Country Assistance Strategies (CASs) of the World Bank Group will further enhance the Agency’s development impact. As each CAS is prepared in consultation with government officials, civil society organizations, development partners and other stakeholders, MIGA is better able to ensure that its technical assistance activities and guarantee projects are consistent with country priorities and supportive of partner initiatives. During fiscal 2004, MIGA collaborated closely with World Bank Group country teams to develop innovative approaches to facilitate FDI in Indonesia, Kenya, Mozambique and Tanzania. The development themes discussed in this year’s annual report focus on two important areas where MIGA has been active in promoting foreign direct investment. The first describes MIGA’s support for small and medium enterprises. Smaller companies constitute most of the private business sector in developing countries and a thriving SME sector is therefore critical to creating long-term employment and alleviating poverty. The second theme highlights MIGA’s efforts to help countries assess their competitiveness and develop improved strategies to attract and retain appropriate FDI. Reaching out to Small and Medium Enterprises Small and medium enterprises (SMEs) can jump-start economic growth in even the poorest of countries. Indeed, they offer what is often the only hope of a better livelihood for millions of entre- preneurs and workers in developing countries. In Africa, according to the United Nations Industrial Development Organization, SMEs constitute some 90 percent of all private commercial enterprises currently in operation. But SMEs face enormous obstacles, particularly in developing countries where lack of access to finance, insufficient internal resources and management capabilities, and legal and regulatory barriers pose significant challenges. Foreign direct investment (FDI) can play an important rently account for more than 70 percent of RBRO’s role in SME development, either through joint ventures total lending portfolio. 3 with local partners or through the establishment of wholly foreign-owned enterprises. FDI brings access to One of RBRO’s SME clients is Altipo Construction Ltd. finance, new technologies, modern business practices (Altipo), a company involved in importing, assembling and market links for smaller companies. To date, the and installing windows. Altipo started operations in bulk of MIGA’s support for SMEs—more than 70 1997 with three employees. Today the company employs percent—has been through the provision of guarantees some 80 workers and in 2003 had an annual turnover to financial institutions that lend to SMEs. FDI into the of e1.6 million. The company needed fast access to financial sector of developing countries has not only financing in order to maintain its growth and turned helped improve access to capital by SMEs, but has to RBRO for a loan in 2003. “With RBRO we found the introduced new technologies, better services and new flexibility and willingness to offer solutions that would products in the banking systems of these countries. help our company grow,” says Sorin Boureanu, Altipo’s General Manager. Raiffeisen Bank S.A. Romania (RBRO), whose lending operations are supported by long-term loans from its Austrian parent, Raiffeisen Zentralbank Österreich AG (RZB), has been a beneficiary of MIGA’s SME focus. Cumulatively, MIGA has provided guarantees worth around e80 million against the risks of currency transfer restrictions and expropriation of funds for RZB’s loans and interest repayments to its Romanian subsidiary. A site visit and review of RBRO’s oper- ations in fiscal 2004 confirmed that the bank is having a positive development impact. Its operations have helped improve the access of the Romanian SME sector to term financing and has provided a wide range of financial products and services to clients throughout the country through an extensive branch network. The bank has also introduced new products—such as leasing—along with modern methods of cash man- agement to the Romanian financial sector. SMEs cur- PHOTO | Altipo Construction Ltd., Romania Box 1 SME Support in Conflict-Affected Countries There are unique challenges involved in investing in SMEs in conflict-affected countries, and MIGA’s expe- rience demonstrates that insurance can play a critical role in easing investors’ concerns about the threat of renewed violence, lack of foreign exchange and the potential that laws will not be enforced. To date, MIGA has promoted FDI into several conflict- affected countries, including Azerbaijan, Bosnia and Herzegovina, Nigeria and Serbia and Montenegro. In fiscal 2004, the Agency supported 16 new projects in conflict-affected countries. One of these involves a e1.3 million guarantee to the International Dialysis Centers B.V. (IDC) of the Netherlands for its investment in a new renal dialysis facility in the Republika Srpska area of Bosnia and Herzegovina. This was the third guarantee to IDC. The 4 previous two, totaling $1.3 million, were provided in fiscal 2001 for the creation and management of a renal dialysis facility in the city of Banja Luka. The new facility will provide high-quality dialysis services for up to a quarter of all dialysis patients living in the Republika Srpska area. Using state-of-the-art medical equipment, the facility will help to improve patients’ life expectancy and quality of life. The hospital that houses the new treatment center is also expected to benefit from refurbishments associated with the new facility. PHOTO | Banja Luka Dialysis Center, Bosnia and In addition, the project will supply a medical waste Herzegovinia and water treatment unit and is already providing extensive technical, medical and managerial training to facility staff. IDC’s experience in Bosnia and Herzegovina is com- pelling—both for the impact the project has already made on a country ravaged by war and poverty, and for the power of a small investor to make a significant difference to a community. The new clinic replaced an existing dilap- idated facility, where services were poor and dangerous for patients. Today, the quality of treatment has undergone a complete turnaround. As the first private investor in the health care sector in the Balkans, IDC is paving the way for others, developing successful models that can be replicated elsewhere. “This is a story about change,” says Dr. Vlastimir Vlatkovic, the clinic’s medial director. “We have a rush here, not just to cure patients but also to educate them and change their way of thinking. This is very important in a post-war country, where many people have the impression that no one cares about them.” To date, MIGA has supported 117 projects that directly benefit SMEs—14 projects in fiscal 2004 alone. One such project is in Uganda, where the SME sector has played a key role in the country’s remarkable turn- around. In fiscal 1999, MIGA issued two guarantees worth $6.5 million in coverage, for an investment by Afriproduce Ltd. (a UK-based company) in Ugacof Ltd., a Ugandan coffee processing facility. The insurance covers the company against the risks of transfer restriction, expropriation, and war and civil disturbance. This support was critical at a time when Uganda was still facing economic difficulties. A site visit to the country in fiscal 2004 showed the project’s significant impact on the local economy. The company has introduced cost-effective processing techniques to produce coffee for export, and buys the bulk of its coffee beans from small-scale farmers, paying cash on delivery. The company has made regular contributions to local schools and installed a facility to give the local community better access to water. With more than 200 PHOTO | Ugacof Ltd., Uganda employees on its payroll, the enterprise has been suc- cessful in encouraging knowledge transfer, training and a merit-based system of employment. A significant 5 number of management and supervisory positions are held by women. ventures involving mainland Chinese businesses and Hong Kong-based SMIs. In Europe, a large number The development of SMEs requires more than just of cross-border partnerships have emerged involving investment in the form of FDI or local financial support. German and Austrian SMIs that outsource to SMEs Technical assistance is critically needed, not just for in eastern European nations such as the Czech small businesses, but for the intermediaries that serve Republic, Hungary and Poland. And in Africa, smaller them, and the government authorities that have the South African businesses are beginning to invest in power to remove bureaucratic hurdles and enact laws attractive SME opportunities in neighboring countries. to create small business-friendly environments. But evidence suggests that many SMIs are unable to invest in developing countries because they are unable MIGA’s capacity building activities help strengthen the to access the right types of financial products from facilitation, servicing and policy advocacy functions of financial institutions and are underserved by insurers. investment intermediaries. As a result, SMEs benefit Many are also simply unaware that political risk from more relevant and effective services and from insurance products exist. improvements in the investment climate. In addition, MIGA’s online information dissemination services, To support a potentially growing source of FDI, MIGA such as FDI Xchange and IPAnet, provide a cost- developed a Small Investment Program (SIP) in fiscal effective mechanism to channel up-to-date information 2004. The SIP offers a simplified guarantees product, to and from SMEs. involving a standardized package of risk coverages and a quicker and more efficient underwriting process. It addresses many of the problems relating to under- Scaling up to Support Small and Medium-Sized writing processes and information requests that SMIs Investors (SMIs) have encountered in working with MIGA in the past. The pilot program will be implemented in close coop- Recent experience shows that smaller companies eration with external partner institutions such as com- with an eye toward expansion overseas can power mercial banks and export credit agencies. The program the economic development of a region through their aims to encourage more South-South investments, support of SMEs. The economic success of the southern as well as increase SMI investments in countries and provinces of China came about largely because of the regions that have not yet benefited significantly from highly efficient cross-border SMI alliances and joint FDI flows. Benchmarking Country Competitiveness As companies emerge from the belt-tightening and downsizing trends of the past few years, new investments in developing DEVELOPMENT IMPACT countries will be cautious and carefully considered. A company will seek to mitigate risks by gathering as much quality information as possible on a country’s business climate and government policies, specific industry factors, investment promotion services, infra- structure and labor. Site selection teams typically consider hundreds of studies will help them make more informed decisions 6 factors as part of an increasingly rigorous due diligence about their investments and how to mitigate any asso- process designed to secure new locations that offer the ciated risks. MIGA developed a new methodology optimal mix of least cost and best value. As they evaluatefor the studies, incorporating factors that companies and compare investment options, some factors will be consider when they conduct their own location com- easily quantifiable, such as expenses that fall directly to parative analyses. Benchmarks were established against the bottom line, including labor costs, taxes and build- which quantitative comparisons can be made across a out or leasing costs. Others require more qualitative range of critical factors, such as political and social sta- judgment, such as an assessment of the condition of bility, labor costs and availability, and regulatory envi- roads and the efficiency of government services. ronment. The analyses are designed to supplement the vast amount of diagnostic With competition for FDI as work already undertaken by the intense as ever, investment pro- World Bank Group and to offer motion agencies in developing MIGA’s study enables insight into investor priorities, countries must have a firm fine-tuned, targeted such as which infrastructure grasp on what investors are improvement and reforms are seeking. They must work marketing programs that most important. harder to understand what position a country’s strategic sets them apart, what they can advantages from the perspective A business that relies on its offer and what might make interface with customers in them the location of choice for of the investor. another country, for instance, firms evaluating a variety of will value information investment options. regarding availability of an ample pool of trained local MIGA has launched a series of regional analyses to managers, reliable electricity for phone and computer benefit both investors and host countries by bench- systems, a labor supply with strong language skills and marking the critical factors foreign investors evaluate safe commuter transportation for night shift workers. when considering locations for their offshore projects. The studies provide a benefit to government officials The benchmarking studies provide investors with a in host countries as well with insight into where their “snapshot” of the business operating environment countries lag behind in the competition for foreign that they would have difficulty finding elsewhere. The investment and will help build better-targeted national marketing campaigns. The first in the series, Benchmarking FDI China, for example, boasts the best-developed supply Competitiveness in Asia, looks at the electronics and base among the countries surveyed, offering low-cost shared services industries in six Asian countries— labor and low real estate and construction costs. There China, Indonesia, Malaysia, the Philippines, Thailand are challenges, however, including onerous labor regu- and Vietnam—and offers recommendations to help lations that burden employers with heavy costs, and these countries attract more foreign investment in perceived differences in business culture. Meanwhile, these sectors. Vietnam’s relatively well-educated workforce and ample supply of low-cost unskilled labor have helped attract a For the study, researchers drew from multiple data base of major Japanese and Korean electronics manu- sources, including publicly available sources of infor- facturers. However, underdeveloped infrastructure, mation about labor and real a shortage of management-level estate costs, utilities, market employees, and an inadequate access, taxes, transportation base of supporting industries were and shipping infrastructure, as identified as challenges. 7 well as business and living con- ditions. They also interviewed 64 Benchmarking analysis Benchmarking FDI companies operating in the par- captures the dynamics of the Competitiveness in Asia was ticipating countries and asked funded by the Miyazawa Initiative, respondents to rate various competitve environment, and a special program under the aspects of these factors based brings insight into the Japanese foreign assistance on their own experiences. complex site selection program intended to promote economic recovery in the The study reveals a com- decision of investors countries most affected by the petitive landscape in which the Asian financial crisis of the late six countries can differentiate 1990s. The study serves as the their locations as distinctive pilot for a broader competitive “products” for potential investors. No one country benchmarking program which will include analyses of emerged as the clear leader in all factors and both industry sectors in Africa, Southeast Europe and the sectors, nor did any country appear to be in a position Middle East. Already, demand for the studies is strong. not to be able to compete for FDI. The study suggests, At the request of provincial officials in China’s Sichuan however, that there is ample opportunity for individual province, MIGA will undertake a comparative study countries to focus on their comparative strengths in of 12 municipalities using the benchmarking meth- both sectors and develop niche markets. Strengths odology. The work will involve close collaboration with commonly identified were large pools of available International Finance Corporation (IFC) and its China skilled or unskilled workers, relatively low labor Project Development Facility, which builds the capacity costs, and a proficiency in the English language—all of local small businesses through technical assistance important factors for “back office” trades. Weaknesses and training. included challenges relating to power and transpor- tation infrastructure, government transparency and procedures, lack of language or technical skills, and underdeveloped supplier networks. Benchmarking Methodology MIGA’s benchmarking process is comprised of three phases: desktop research, field interviews and interpretation of results. %FTLUPQ-FWFM3FTFBSDIo1IBTF* %FUFSNJOF$PTUT %FUFSNJOF$POEJUJPOT *EFOUJGZ4PVSDFT $PNQJMF%BUB &OUFS%BUBJOUP.PEFM 8 'JFMEXPSL*OUFSWJFXTo1IBTF** *OUFSWJFXTXJUI'PSFJHO*OWFTUPST 'JOFUVOF$PTUTBOE$POEJUJPOT $PNQJMF3FTVMUT &OUFS%BUBJOUP.PEFM Foreign Direct Investment Costs and Conditions for the Electronics and Shared Services Industries in Six Countries *OUFSQSFUBUJPOPG3FTVMUTo'JOEJOHT This study of foreign direct investment costs and con- /PSNBMJ[F%BUB ditions in China, Indonesia, Malaysia, the Philippines, #FODINBSLJOH"OBMZTJT Thailand, and Vietnam was funded under the Miyazawa $PNQFUJUJWF"OBMZTJT Initiative, a special component of the Japanese foreign 3FQPSU3FTVMUT assistance program intended to promote economic recovery in the countries most affected by 1997 Asian financial crisis. The efforts of the Multilateral Investment Guarantee Agency (MIGA) under this ini- tiative also supported capacity building in the national investment promotion intermediaries of Korea, Thailand and the Philippines, and raised awareness of the importance of non-commercial risk insurance in fostering the flow of foreign direct investment. A copy of this publication is available at www.ipanet.net/snapshotasia.