By Peter F. Fitzgerald and Ken Hanson

Several recent developments in the area of political risk coverage will help developers, equity participants and lenders in private infrastructure projects.

MIGA — an arm of the World Bank that provides political risk insurance for private-sector projects — said recently that it will begin providing a form of “breach of contract” coverage that should be especially valuable to investors after recent experiences in Pakistan and Indonesia. “MIGA” stands for the Multilateral Investment Guarantee Agency. MIGA has also just significantly increased the capacity it will make available for projects and has improved its coverage for lenders.

At the same time, a number of private insurers have increased their capacity and have indicated they are willing to provide “breach of contract” coverage on a case-by-case basis.

MIGA

MIGA was established in 1988 to provide political risk insurance covering loans and investments for private sector projects in developing countries. MIGA’s effectiveness has been hampered by relatively low amounts of available capacity. Until recently, MIGA could not provide more than $50 million in coverage per project and $250 million per country. However, due to a recent doubling of its capital and recent treaty reinsurance agreements entered into with private insurance companies, MIGA is now able to provide political risk coverage of up to $200 million per project and up to $620 million per host country. MIGA can also supplement these amounts with its cooperative underwriting program (see below) and reinsurance and co-insurance with other private and public insurers. The consequence is that MIGA now has the ability to play a major role in large projects.

In addition to the increased capacity, MIGA has also been developing a “breach of contract” coverage that should be of interest to investors after the recent experience of the independent power industry in Pakistan and Indonesia. MIGA will cover the risk that a host-country government will breach its contract obligations to the project company. In order to make a claim, the project company must first obtain an arbitral award against the host-country government, and the host-country government must fail to pay the award for an agreed period of time — typically 90 days. In order to make this coverage more attractive, MIGA will agree to make a provisional payment to the insured before it has the arbitral award, provided the investor is deemed creditworthy by MIGA or otherwise provides security acceptable to MIGA in the event the award is not obtained. A standard form of contract providing this coverage will be available soon.

There are also new initiatives at MIGA that affect coverage for lenders. MIGA will now cover up to 95% of the principal instead of 90%. In addition, to the extent that lenders obtain political risk coverage from an insurer that covers less than 100% of the principal, MIGA is prepared to cover 95% of the deficiency. Finally, MIGA will now cover solely the debt under certain circumstances, without requiring — as it has traditionally — that an equity investment in the project also be insured with MIGA.

New Private Sector Entrants

Although private-sector insurers can usually issue policies more quickly, and they have more flexibility in structuring coverage than their public-sector counterparts, traditionally the political risk insurance available from private-sector companies, such as Lloyd’s, was considered too short-term to be of much benefit in the context of large infrastructure projects requiring long-term loans and investments. For example, until the last few years, obtaining a political risk insurance contract for inconvertibility of currency for a term greater than one year, or for expropriation for a term greater than three years, invariably required the investor to buy the coverage from MIGA, the Overseas Private Investment Corporation or one of the export credit agencies.

However, this has changed within the past few years as both Lloyd’s and AIG, or American International Group, began providing long-term coverage for infrastructure and other projects. In addition, over the past few years, a number of important new companies have entered the field adding further to the capacity for these types of projects. AIG and Lloyd’s were the first to begin offering coverages for longer terms. AIG, for example, now provides up to $150 million in coverage per project for terms of up to 10 years. Both AIG and Lloyd’s will co-insure projects with OPIC, MIGA and the export credit agencies — typically as an excess insurer — on virtually identical terms.

ACE Bermuda Insurance Ltd. and Zurich U.S. are two additional new entrants that have been particularly active.

ACE has complemented MIGA’s activities by agreeing to reinsure MIGA and by participating in a CUP program run by MIGA (see below). ACE is led by Leigh Hollywood, who was previously MIGA vice president for guarantees and who worked at OPIC before joining MIGA.

Zurich U.S. — led by Dan Riordan, formerly vice president for insurance at OPIC — has also been very active, issuing more than 60 policies in 1998, its first year of operations. Zurich U.S. has been issuing policies for up to $50 million per project and for terms of up to 10 years. As of May 1, 1999, the company will start issuing policies for up to $100 million per project and for terms as long as 15 years.

CUP Program

Public and private insurers share risks through reinsurance or by co-insuring. MIGA has also pioneered a hybrid form of arrangement called the cooperative underwriting program, or “CUP.”

The CUP is a form of co-insurance designed to draw the private sector into the market on the same terms as MIGA. In political risk insurance jargon, the CUP is the functional equivalent of the “B Loan program” run by the International Finance Corporation in the project finance field. In a CUP, a single MIGA contract is issued to the insured investor, but a portion of the risk is participated out to private-sector insurers. MIGA “fronts” for the private sector and is the “insurer of record.” MIGA’s liability to the insured investor is limited to the amount issued for its own account, but the private-sector insurers benefit after claim payment from MIGA’ s claim recovery procedures.

MIGA has entered into CUP arrangements with, among others, ACE, Zurich U.S. and a Lloyd’s syndicate called Brockbank Syndicate Mgt. Ltd.

by Peter F. Fitzgerald, in Washington