Financial Times

Political risk insurance in Sri Lanka

Sri Lanka has the best potential for logistics and infrastructure capable of providing services to investors according to the Multilateral Investment Guarantee Agency (MIGA), a member of the World Bank Group.
Chief Counsel and Advisor to MIGA Srilal Perera, addressing the Board of Investment (BOI) this week in Colombo said MIGA’s top priority is to assist post conflict countries such as Sri Lanka in promoting foreign direct investment (FDI) in developing countries by providing guarantees or political risk insurance to investors and lenders. In 21 years of existence, MIGA has facilitated US$21 billion of investments in 90 developing countries. Dr. Perera said MIGA wants to start a partnership with the BOI order to build up investments in the conflict areas as well as develop infrastructure.

Sri Lanka was one of the original 11 member countries when MIGA began operations in 1988. Dr. Perera said MIGA mitigates political risk in the following categories; expropriation and nationalization risk, transfer and conversion risk, war and civil disturbance risk as well as breaches of contractual obligations. MIGA covers only new investments as the Agency wants the flow of fresh capital to go into developing sectors.

Investors must submit applications for MIGA to ascertain their eligibility criteria. Each country is scaled for each type of risk cover and is evaluated for the possibility of future risk in all four categories. Although country ratings remain confidential, Dr. Perera said he is certain that Sri Lanka’s risk in terms of war and civil disturbance has improved. Only five claims have been paid out over that time with three of those claims coming in the war and civil disturbance risk category in Nepal, Kenya and Madagascar.

Dr. Perera explained that the financial and telecommunications sectors are popular when going into post conflict areas. Even prior to the end of the conflict, there had been several inquiries made by investors in the manufacturing and tourism sectors.

Prior to April 2009, MIGA’s premium rates were between 0.3% and 1.5%. Currently, the premium rates are not specified. Dr. Perera said breach of contract risk insurance is very much in demand due to the numerous legal agreements which engage governments or government entities. Although MIGA has never provided cover for hedging agreements with the exception of interest rate hedging in two power projects, Dr. Perera said there might have been some way for the banks involved in the hedging agreements to have gotten some cover.

MIGA is required to inform governments that investors have taken political risk insurance. So far, two applications have been made for investors in Sri Lanka, one by Societe Generale, the French Bank and the other by a Japanese investor in the power sector. However, they were both terminated. Dr. Perera pointed out that no applications so far in Sri Lanka have been rejected.

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