Chapter 1: Introduction
Background of the Term Paper:
International finance is the branch of finance that studies the dynamics of exchange rates, foreign investment, and how these affect international trade. It also studies international projects, international investments and capital flows, and trade deficits. It includes the study of futures, options and currency swaps.
Some of the theories which are important in international finance include the Mundell-Fleming model, the optimum currency area (OCA) theory, as well as the purchasing power parity (PPP) theory. Moreover, whereas international trade theory makes use of mostly microeconomic methods and theories, international finance theory makes use of predominantly intermediate and advanced macroeconomic methods and concepts.
This term project was prepared for fulfilling the requirement of International Finance (FRL-407) course. The work started as assigned by the honorable Course Instructor. It took about two months to finish the project.
Origin of the Term Paper:
This Term paper entitled “World Bank” is a fundamental requirement for the completion of the course International Finance (FRL-407). The main purpose of this term paper is to relate the issues covered in this course with the activities of World Bank and to extract information of the World Bank using secondary sources of information. Under the instruction and guidance of the course instructor Professor Santi Narayan Ghosh, I have taken the initiative to prepare this term paper with much precision and by being completely unbiased.
The general objective of this term paper is to provide a synopsis of the World Bank’s activities related to international finance. It is also required for the completion of this course. Beside the general objective, the objectives behind this term paper are given below:
The primary objective of the term paper is—
To analyze on the issue International Finance.
To disclose the precise scenario of the ‘World Bank’
To analyze and recommend on the mentioned issues.
The secondary objective to prepare this term paper is—
To fulfill the requirements of my course “International Finance” (FRL-407).
To Relate World Bank activities with the issues covered in my course.
To gather experience and knowledge of preparing a professional term paper.
Scope of the Report:
This research study will cover the topic “World Bank” and its related issues. It also includes recommendations against the selected issues. This term paper can be used as a secondary source for further purposes.
Source of Information:
To fulfill the objective of this term paper collection of relevant, accurate, standardized and needful information was required. To make this term paper reliable I have collected data from secondary sources. The whole term paper is prepared based on secondary sources. That is why there is no primary source. Special consideration was given so that chances of biasness could not arise. The sources used were:
Secondary sources are those, which simplify the process of finding and evaluating the primary literature. Secondary data may be available which is entirely appropriate and wholly adequate to draw conclusions and answer the question or solve the problem.
To know exactly how to prepare the term paper, I have referred different secondary sources. Secondary sources were consulted for an understanding of techniques of writing feasibility studies and for other relevant information. Few publications and web pages were also browsed.
I have also collected my data from the following secondary sources:
newspaper and popular magazine articles
review articles and literature reviews and
dictionaries and encyclopedias
handbooks and data compilations
This term paper covers the different aspects and activities that are required to make a term paper on ‘World Bank’. However, the term paper is prepared based upon the information collected from several books, journals, articles, magazines, annual term papers, the researcher’s own judgments and basically from the Internet. The findings are strictly structured upon information provided by these sources and some secondary sources. The focus here is on presentation of facts as discovered.
The methods that I followed to prepare the term paper are as follows:
At first I took the main issues studied in this course.
I clicked on the website of World Bank.
Related the issues studied with the World Bank activities.
Studied several books, articles, newspapers, and other secondary sources..
Collected information related to this term paper and the topic.
I have discussed with my honorable course instructor.
No study is beyond any limitations. While doing this research study I had to face some difficulties. The limitations of the research activities are as follows—
I did not have so much experience for conducting research and preparing the term paper very frequently, though I am in learning position.
There was lack of precise information;
There was not enough time to analyze the selected issues.
My resources were limited. So, it was hard for me to prepare a professional term paper with my limited resources.
It was very hard to get the real information, which was needed to explore the current situation
I do not have any previous experience of writing this type of Term Paper. That is why I faced some problems to prepare it.
The pressure of other assignments and reports.
Chapter 2: The Bank
The World Bank is a vital source of financial and technical assistance to developing countries around the world. It is not a bank in the common sense. It is made up of two unique development institutions owned by 185 member countries—the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA).
Each institution plays a different but supportive role in its mission of global poverty reduction and the improvement of living standards. The IBRD focuses on middle income and creditworthy poor countries, while IDA focuses on the poorest countries in the world. Together they provide low-interest loans, interest-free credit and grants to developing countries for education, health, infrastructure, communications and many other purposes.
The World Bank differs from the World Bank Group in that the former comprises only the International Bank for Reconstruction and Development and the International Development Association, while the latter incorporates these entities in addition to three others. The World Bank was formally established on December 27, 1945, following the ratification of the Bretton Woods agreement. The concept was originally conceived in July 1944 at the United Nations Monetary and Financial Conference. Two years later, the Bank issued its first loan: $250 million to France for post-war reconstruction, the main focus of the Bank’s work in the early post-World War II years. Over time, the “development” side of the Bank’s work has assumed a larger share of its lending, although it is still involved in post-conflict reconstruction, together with reconstruction after natural disasters, response to humanitarian emergencies and post-conflict rehabilitation needs affecting developing and transition economies.
The World Bank Group:
The World Bank group consists of the five closely associated institutions, all owned by member countries that carry ultimate decision-making power. Each institution plays a distinct role in the mission to fight poverty and improve living standards for people in the developing world. The team World Bank Group encompasses all five institutions. The term “World Bank” refers specially to two of the five, IBRD and IDA.
Objectives / Mission:
The Bank’s mission is to aid developing countries and their inhabitants achieve development and the reduction of poverty, including achievement of the MDGs, by helping countries develop an environment for investment, jobs and sustainable growth, thus promoting economic growth through investment and enabling the poor to share the fruits of economic growth. The World Bank sees the five key factors necessary for economic growth and the creation of an enabling business environment as:
- Build capacity – Strengthening governments and educating government officials
- Infrastructure creation – implementation of legal and judicial systems for the encouragement of business, the protection of individual and property rights and the honoring of contracts
- Development of Financial Systems – the establishment of strong systems capable of supporting endeavors from micro credit to the financing of larger corporate ventures
- Combating corruption – Support for countries’ efforts at eradicating corruption
- Research, Consultancy and Training – the World Bank provides platform for research on development issues, consultancy and conduct training programs (web based, on line, video/tele conferencing and class room based) open for those who are interested from academia, students, government and non-governmental organization (NGO) officers etc.
Each autumn, the Boards of Governors of the World Bank Group and International Monetary Fund (IMF) hold their Annual Meetings to discuss a range of issues related to poverty reduction, international economic development and finance. The Annual Meetings provide a forum for international cooperation and enable the Bank and Fund to better serve their member countries.
The Annual Meetings traditionally are held in Washington two years out of three and, in order to reflect the international character of the two institutions, every third year in a different member country. In addition to the meetings of the Boards of Governors, the Development Committee and the International Monetary and Financial Committee are officially convened.
Around these meetings, the Bank and the IMF organize a number of fora to facilitate the interaction of governments and Bank-IMF staff with non-governmental organizations (NGOs), journalists, and the private sector. Indeed, every effort is made to ensure that the Annual Meetings provide an effective forum for explaining to the public – directly and through the media – the tasks, objectives, and outcomes of the work of the Bank and the IMF. In this manner, the Meetings make a major contribution to openness and transparency.
About 10,000 people attend the meetings, including about 3,500 members of delegations from the member countries of the Bank and the IMF, roughly 1,000 representatives of the media, and more than 5,000 visitors and special guests drawn primarily from private business, the banking community and NGOs. In addition, Bank and IMF staff participate in the meetings with officials of government delegations.
The World Bank is one of the two Bretton Woods Institutions which were created in 1944 to rebuild a war-torn Europe after World War II. Later, largely due to the contributions of the Marshall Plan, the World Bank was forced to find a new area in which to focus its efforts. Subsequently, it began attempting to rebuild the infrastructure of Europe’s former colonies. Since then it has made a variety of changes regarding its focus and goals. From 1968-1981 it focused largely on poverty alleviation. From the ’80s and into the 1990s its main focus was both debt management and structural adjustment. Today the focus is on the achievement of the Millennium Development Goals (MDGs), goals calling for the elimination of poverty and the implementation of sustainable development. Of the two constituent parts of the Bank, the IBRD lends primarily to “middle-income countries” at interest rates which reflect a small mark-up over its own (AAA-rated) borrowings from capital markets; while the IDA provides low or no interest loans and grants to low income countries with little or no access to international credit markets. The IBRD is a market based non-profit organization, using its high credit rating to make up for the relatively low interest rate on its loans, while the IDA is funded primarily by periodic “replenishments” (grants) voted to the institution by its more affluent member countries.
The Bank obtains funding for its operations primarily through the IBRD’s sale of AAA-rated bonds in the world’s financial markets. The IBRD’s income is generated from its lending activities, with its borrowings leveraging its own paid-in capital, plus the investment of its “float”. The IDA obtains the majority of its funds from forty donor countries who replenish the bank’s funds every three years, and from loan repayments, which then become available for re-lending.
The Bank offers two basic types of loans: investment loans and development policy loans. The former are made for the support of economic and social development projects, whereas the latter provide quick disbursing finance to support countries’ policy and institutional reforms. While the IBRD provides loans with a relatively low interest rate, the IDA’s “credits” are interest free. The project proposals of borrowers are evaluated for their economical, financial, social and environmental aspects prior to their approval.
The Bank also distributes grants for the facilitation of development projects through the encouragement of innovation, cooperation between organizations and the participation of local stakeholders in projects. IDA grants are predominantly used for:
- Debt burden relief in the most indebted and poverty struck countries
- Amelioration of sanitation and water supply
- Support of vaccination and immunization programs for the reduction of communicable diseases such as malaria
- Combating the HIV/AIDS pandemic
- Support civil society organizations
- Creating initiatives for the reduction of greenhouse gases
The Bank not only provides financial support to its member states, but also analytical and advisory services to facilitate the implementation of the lasting economic and social improvements that are needed in many under-developed countries, as well as educating members with the knowledge necessary to resolve their development problems while promoting economic growth.
The President of the Bank, currently Robert B. Zoellick, is responsible for chairing the meetings of the Boards of Directors and for overall management of the Bank. The Executive Directors make up the Board of Directors, usually meeting twice a week to oversee activities such as the approval of loans and guarantees, new policies, the administrative budget, country assistance strategies and borrowing and financing decisions. The Vice Presidents of the Bank are its principal managers, in charge of regions, sectors, networks and functions. There are 24 Vice-Presidents, 3 Senior Vice Presidents and 2 Executive Vice Presidents.
Robert B. Zoellick, President, World Bank
Areas of Operation:
The World Bank is active in the following areas
|Agriculture and Rural Development||Law and Justice|
|Conflict and Development||Macroeconomic and Economic Growth|
|Development Operations and Activities||Mining|
|Economic Policy||Poverty Reduction|
|Environment||Public Sector Governance|
|Financial Sector||Rural Development|
|Health, Nutrition and Population||Trade|
|Information and Communication Technologies||Urban Development|
|Information, Computing and Telecommunications||Water Resources|
|International Economics and Trade||Water Supply and Sanitation|
|Labor and Social Protections|
Total Member Countries in Each Institution:
|Institution||No. of Member Countries|
|International Bank for reconstruction and development (IBRD)|
|International development Association (IDA)|
|International Finance Corporation (IFC)|
|Multilateral Investment Guarantee Agency (MIGA)|
|International Center for Settlement of Investment Disputes (ICSID)|
Chapter 3: International Bank for Reconstruction and Development (IBRD)
Founded in 1944 to help Europe recover from World War II, the International Bank for Reconstruction and Development (IBRD) is one of five institutions that make up the World Bank Group. IBRD is the part of the World Bank (IBRD/IDA) that works with middle-income and creditworthy poorer countries to promote sustainable, equitable and job-creating growth, reduce poverty and address issues of regional and global importance.
Structured something like a cooperative, IBRD is owned and operated for the benefit of its 185 member countries. Delivering flexible, timely and tailored financial products, knowledge and technical services, and strategic advice helps its members achieve results. Through the World Bank Treasury, IBRD clients also have access to capital on favorable terms in larger volumes, with longer maturities, and in a more sustainable manner than world financial markets typically provide.
Specifically, the IBRD:
- supports long-term human and social development needs that private creditors do not finance;
- preserves borrowers’ financial strength by providing support in crisis periods, which is when poor people are most adversely affected;
- uses the leverage of financing to promote key policy and institutional reforms (such as safety net or anticorruption reforms);
- creates a favorable investment climate in order to catalyze the provision of private capital;
- provides financial support (in the form of grants made available from the IBRD’s net income) in areas that are critical to the well-being of poor people in all countries.
Middle-income countries, where 70 percent of the world’s poor live, have made profound improvements in economic management and governance over the past two decades and are rapidly increasing their demand for the strategic, intellectual and financial resources the World Bank has to offer. The challenge facing the IBRD is to better manage and deliver its resources to best meet the needs of these countries.
To increase its impact in middle-income countries, IBRD is working closely with the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), the International Monetary Fund (IMF) and other multilateral development banks. In the course of its work, IBRD is also striving to capitalize on middle-income countries’ own accumulated knowledge and development experiences and collaborates with foundations, civil society partners and donors in the development community.
The International Bank for Reconstruction and Development (IBRD) aims to reduce poverty in middle-income and creditworthy poorer countries by promoting sustainable development through loans, guarantees, risk management products, and analytical and advisory services. Established in 1944 as the original institution of the World Bank Group, IBRD is structured like a cooperative that is owned and operated for the benefit of its 185 member countries.
IBRD raises most of its funds on the world’s financial markets and has become one of the most established borrowers since issuing its first bond in 1947. The income that IBRD has generated over the years has allowed it to fund development activities and to ensure its financial strength, which enables it to borrow at low cost and offer clients good borrowing terms.
At its Annual Meeting in September 2006, the World Bank — with the encouragement of its shareholder governments — committed to make further improvements to the services it provides its members. To meet the increasingly sophisticated demands of middle-income countries, IBRD is overhauling financial and risk management products, broadening the provision of free-standing knowledge services and making it easier for clients to deal with the Bank.
Chapter 4: International Development Association (IDA)
What is IDA?
The International Development Association (IDA) is the part of the World Bank that helps the world’s poorest countries. Established in 1960, IDA aims to reduce poverty by providing interest-free credits and grants for programs that boost economic growth, reduce inequalities and improve people’s living conditions.
IDA complements the World Bank’s other lending arm–the International Bank for Reconstruction and Development (IBRD)–which serves middle-income countries with capital investment and advisory services. IBRD and IDA share the same staff and headquarters and evaluate projects with the same rigorous standards.
IDA is one of the largest sources of assistance for the world’s 78 poorest countries, 39 of which are in Africa. It is the single largest source of donor funds for basic social services in the poorest countries.
IDA lends money (known as credits) on concessional terms. This means that IDA credits have no interest charge and repayments are stretched over 35 to 40 years, including a 10-year grace period. IDA also provides grants to countries at risk of debt distress.
Since its inception, IDA credits and grants have totaled US$182 billion, averaging US$10 billion a year in recent years and directing the largest share, about 50 percent, to Africa.
IDA at Work:
In Bangladesh, the number of girls in secondary schools has more than tripled in 15 years thanks to tuition stipends. IDA helped take forward a government program on a major scale and introduced a transparent and innovative direct funding mechanism, replicated elsewhere since.
In Armenia, IDA’s judicial reform program helped put in place the building blocks for a modern judiciary. Twelve new or renovated courthouses, case management software, a revamped judicial training program and a TV show popularizing legal rights helped restore a measure of trust in the judiciary. A follow-up project aims to tackle remaining corruption.
In Nicaragua, IDA flexibility made it possible to quickly restructure an ongoing road project to tackle urgent needs following the devastation of Hurricane Mitch. A section of the Pan American highway, the country’s main route for exports, was restored, as well as over 3,000 km of roads reconnecting rural communities and rekindling a stalled economy.
In Tanzania, credit to the private sector increased by 250 percent in 6 years. IDA financed the transformation of the largest state-owned savings bank into a private microfinance bank, improving access by small and micro entrepreneurs to the fomal financial system.
In Vietnam, bringing electricity to 2.7 million people has transformed rural communities. A six-year IDA-supported rural energy project helped extend the national grid. Its long-term involvement in the power sector supports the government’s broader electrification program.
Fighting Poverty across Sectors:
Community Driven Development
Disaster Risk Management
Health and HIV/AIDS
Institutional Reform and Economic Policy
Microfinance and Private Sector Development
Post-Conflict and Fragile States
Chapter 5: International Finance Corporation (IFC)
Reducing Poverty, Improving Lives
IFC is in the business of creating opportunity and improving lives in developing countries. This brochure summarizes IFC’s vision, values, and what sets it apart. It highlights IFC’s financial products and advisory services, which offer businesses and entrepreneurs in the developing world the tools they need to meet the challenges of the global marketplace.
IFC’s Vision, Values, & Purpose:
IFC’s vision is that people should have the opportunity to escape poverty and improve their lives.
IFC’s values are excellence, commitment, integrity, and teamwork.
IFC’s purpose is to:
- Promote open and competitive markets in developing countries
- Support companies and other private sector partners
- Generate productive jobs and deliver basic services
- Create opportunity for people to escape poverty and improve their lives Their Shared
IFC, as the private sector arm of the World Bank Group, shares its mission:
“To fight poverty with passion and professionalism for lasting results. To help people help themselves and their environment by providing resources, sharing knowledge, building capacity, and forging partnerships in the public and private sectors.”
IFC coordinates its activities with the other institutions of the World Bank Group but is legally and financially independent.
Ownership & Governance:
IFC’s 179 member countries provide its authorized share capital of $2.4 billion, collectively determine its policies, and approve investments.
IFC’s member countries, through a Board of Governors and a Board of Directors, guide IFC’s programs and activities. Each country appoints one governor and one alternate.
IFC corporate powers are vested in the Board of Governors, which delegates most powers to a board of 24 directors. Voting power on issues brought before them is weighted according to the share capital each director represents.
The directors meet regularly at World Bank Group headquarters in Washington, DC, where they review and decide on investment projects and provide overall strategic guidance to IFC management.
Directors also serve on one or more standing committees, which help the Board discharge its oversight responsibilities by examining policies and procedures in depth. The Audit Committee advises on financial and risk management, corporate governance, and oversight issues. The Budget Committee considers business processes, administrative policies, standards, and budget issues that have a significant impact on the cost-effectiveness of Bank Group operations.
The Committee on Development Effectiveness focuses on operations and policy evaluation and development effectiveness with a view to monitoring progress on poverty reduction. The Personnel Committee advises on compensation and other significant personnel policies. Directors also serve on the Committee on Governance and Executive Directors’ Administrative Matters.
Doing Business with IFC:
IFC, a member of the World Bank Group, fosters sustainable economic growth in developing countries by financing private sector investment, mobilizing private capital in local and international financial markets, and providing advisory and risk mitigation services to businesses and governments. IFC’s vision is that poor people have the opportunity to escape poverty and improve their lives. In fiscal 2007, IFC committed $8.2 billion and mobilized an additional $3.9 billion through loan participations and structured
finance for 299 investments in 69 developing countries. IFC also provided advisory services in 97 countries.
How to Apply for IFC Financing and Services:
A company or entrepreneur seeking to establish a new venture or expand an existing enterprise can approach IFC directly. The investment proposal can be submitted to the IFC field office that is closest to the location of the proposed project. IFC operates on a commercial basis. It invests exclusively in for-profit projects, fully shares risks with its partners, and charges market rates for its products and services. These cover three broad areas:
Financial products. IFC’s traditional and largest activity is to finance private sector projects in developing countries. IFC provides loans, equity finance, and quasi-equity. It also offers financial risk management products and intermediary finance.
Advisory services. IFC provides advisory services to private businesses and governments in developing countries. Areas include privatization, business-related public policy, and industry-specific issues.
Resource mobilization. IFC helps companies in developing countries tap into international capital markets. This effort includes the loan participation program, which arranges syndicated loans from banks, as well as structured finance transactions.
IFC’s Added Value:
A unique role. Although IFC lends on market terms, it does not compete with, but complements, private capital. IFC is a long-term partner for good and bad times. IFC invests in projects that meet its investment criteria, but that cannot get financing or technical expertise elsewhere on reasonable terms.
Relationships and experience. IFC has extensive knowledge of how to do business in developing countries and excellent relationships with developing country governments. As an independent international organization, IFC can help companies and sponsors negotiate with host governments.
Expertise on sustainability. By working with IFC, companies draw on the expertise and reputation of a partner recognized for its strong social and environmental safeguards. Companies worldwide are recognizing that long-term profitability is best enhanced when investments are made in a sustainable way.
The project must be located in a developing country that is a member of IFC.
- It must be in the private sector.
- It must be technically sound.
- It must have good prospects of being profitable.
- It must benefit the local economy.
- It must be environmentally and socially sound, satisfying IFC standards and those of the host country.
Products & Services:
IFC is a dynamic organization, constantly adjusting to the evolving needs of their clients in emerging markets. They are no longer defined predominantly by their role in providing project finance to companies in developing countries. They have also:
- Developed innovative financial products
- Broadened their capacity to provide advisory services
- Deepened their corporate governance, environmental and social expertise
IFC Project Cycle:
IFC offers a wide variety of financial products to private sector projects in developing countries. The project cycle illustrates the stages a business idea goes through as it becomes an IFC-financed project.
Stages of the Project Cycle:
Application for IFC Financing
- There is no standard application form for IFC financing. A company or entrepreneur, foreign or domestic, seeking to establish a new venture or expand an existing enterprise can approach IFC directly. This is best done by reading how to apply for financing and by submitting an investment proposal.
- After these initial contacts and a preliminary review, IFC may proceed by requesting a detailed feasibility study or business plan to determine whether or not to appraise the project.
- Typically, an appraisal team consists of an investment officer with financial expertise and knowledge of the country in which the project is located, an engineer with the relevant technical expertise, and an environmental specialist.
- The team is responsible for evaluating the technical, financial, economic and environmental aspects of the project. This process entails visits to the proposed site of the project and extensive discussions with the project sponsors.
- After returning to headquarters, the team submits its recommendations to senior management of the relevant IFC department.
- If financing of the project is approved at the department level, IFC’s legal department, with assistance from outside counsel as appropriate, drafts appropriate documents.
- Outstanding issues are negotiated with the company and other involved parties such as governments or financial institutions.
- Before the proposed investment is submitted to the IFC Board for review, the public is notified of the main elements of the project. Environmental review documents are also made available to the public.
Board Review and Approval
- The project is submitted to IFC’s Board of Directors, which reviews the proposed investment.
- IFC seeks to mobilize additional finance by encouraging other institutions to make investments in the project.
- If the investment is approved by the Board, and if stipulations from earlier negotiations are fulfilled, IFC and the company will sign the deal, making a legal commitment.
Disbursement of Funds
- Funds are disbursed under the terms of the legal commitment signed by all parties.
- Once funds have been disbursed, IFC monitors its investments closely. It consults periodically with management, and it sends field missions to visit the enterprise. It also requires quarterly progress reports together with information on factors that might materially affect the enterprise in which it has invested, including annual financial statements audited by independent public accountants.
- When an investment is repaid in full, or when IFC exits an investment by selling its equity stake, IFC closes its books on the project.
IFC continues to develop new financial tools that enable companies to manage risk and broaden their access to foreign and domestic capital markets.
Loans for IFC’s Account
- Syndicated Loans
- Equity Finance
- Quasi-Equity Finance
- Equity & Debt Funds
- Structured Finance
- Risk Management Products
- Local Currency Financing
- Sub-national Finance
- Trade Finance
Chapter 6: Multilateral Investment Guarantee Agency (MIGA)
Acting Executive Vice President: James Bond
As a member of the World Bank Group, MIGA’s mission is to promote foreign direct investment (FDI) into developing countries to help support economic growth, reduce poverty, and improve people’s lives.
MIGA and FDI:
Concerns about investment environments and perceptions of political risk often inhibit foreign direct investment, with the majority of flows going to just a handful of countries and leaving the world’s poorest economies largely ignored. MIGA addresses these concerns by providing three key services: political risk insurance for foreign investments in developing countries, technical assistance to improve investment climates and promote investment opportunities in developing countries, and dispute mediation services, to remove possible obstacles to future investment.
MIGA’s operational strategy plays to their foremost strength in the marketplace attracting investors and private insurers into difficult operating environments. The agency’s strategy focuses on specific areas where they can make the greatest difference:
Infrastructure development is an important priority for MIGA, given the estimated need for $230 billion a year solely for new investment to deal with the rapidly growing urban centers and underserved rural populations in developing countries.
Frontier markets—high-risk and/or low-income countries and markets—represent both a challenge and an opportunity for the agency. These markets typically have the most need and stand to benefit the most from foreign investment, but are not well served by the private market.
Investment into conflict-affected countries is another operational priority for the agency. While these countries tend to attract considerable donor goodwill once conflict ends, aid flows eventually start to decline, making private investment critical for reconstruction and growth. With many investors wary of potential risks, political risk insurance becomes essential to moving investments forward.
South-South investments (investments between developing countries) are contributing a greater proportion of FDI flows. But the private insurance market in these countries is not always sufficiently developed and national export credit agencies often lack the ability and capacity to offer political risk insurance.
MIGA offers comparative advantages in all of these areas—from their unique package of products and ability to restore the business community’s confidence, to their ongoing collaboration with the public and private insurance market to increase the amount of insurance available to investors.
Their Added Value
Confidence, security, and credibility. MIGA gives private investors the confidence and comfort they need to make sustainable investments in developing countries. As part of the World Bank Group, and having as their shareholders both host countries and investor countries, MIGA brings security and credibility to an investment that is unmatched. Their presence in a potential investment can literally transform a “no-go” into a “go.” They act as a potent deterrent against government actions that may adversely affect investments. And even if disputes do arise, their leverage with host governments frequently enables us to resolve differences to the mutual satisfaction of all parties.
MIGA is a leader when it comes to assessing and managing political risks, developing new products and services, and finding innovative ways to meet client needs. But they don’t stop there. They also provide expert advice to help countries attract and retain quality foreign investment, and a host of online services to make sure investors know about business opportunities in their developing member countries.
MIGA can be the difference between make or break, by providing that all-critical lynchpin that enables a complex transaction to go ahead. MIGA offers innovative coverage of the nontraditional sub-sovereign risks that often accompany water and other infrastructure projects. They can also cover interest rate hedging instruments, as they did for a power project in Vietnam, as well as provide capital markets guarantees, which they recently did for residential mortgage-backed securities in Latvia.
MIGA complements the activities of other investment insurers and works with partners through its coinsurance and reinsurance programs. By doing so, they are able to expand the capacity of the political risk insurance industry to insure investments, as well as to encourage private sector insurers into transactions they would not have otherwise undertaken.
Their Development Impact and Priorities:
Since its inception in 1988, MIGA has issued nearly 900 guarantees worth more than $17.4 billion for projects in 96 developing countries. MIGA is committed to promoting socially, economically, and environmentally sustainable projects that are above all, developmentally responsible. They have widespread benefits, for example, generating jobs and taxes, and transferring skills and know-how. Local communities often receive significant secondary benefits through improved infrastructure. Projects encourage similar local investments and spur the growth of local businesses. They ensure that projects are aligned with World Bank Group country assistance strategies, and integrate the best environmental, social, and governance practices into their work.
MIGA specializes in facilitating investments in high-risk, low-income countries—such as in Africa and conflict-affected areas. By partnering with the World Bank and others, MIGA is able to leverage finance for guarantee trust funds in these difficult or frontier markets. The agency also focuses on supporting complex infrastructure projects and promoting investments between developing countries.
MIGA’s technical assistance services also play an integral role in catalyzing foreign direct investment by helping developing countries define and implement strategies to promote investment. MIGA develops and deploys tools and technologies to support the spread of information on investment opportunities. Thousands of users take advantage of their suite of online investment information services, which complement country-based capacity-building work.
The agency uses its legal services to further smooth possible impediments to investment. Through its dispute mediation program, MIGA helps governments and investors resolve their differences, and ultimately improve the country’s investment climate.
Chapter 7: International Centre for Settlement of Investment Disputes (ICSID)
ICSID is an autonomous international institution established under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID or the Washington Convention) with over one hundred and forty member States. The Convention sets forth ICSID’s mandate, organization and core functions. The primary purpose of ICSID is to provide facilities for conciliation and arbitration of international investment disputes.
The ICSID Convention is a multilateral treaty formulated by the Executive Directors of the International Bank for Reconstruction and Development (the World Bank). It was opened for signature on March 18, 1965 and entered into force on October 14, 1966.
The Convention sought to remove major impediments to the free international flows of private investment posed by non-commercial risks and the absence of specialized international methods for investment dispute settlement. ICSID was created by the Convention as an impartial international forum providing facilities for the resolution of legal disputes between eligible parties, through conciliation or arbitration procedures. Recourse to the ICSID facilities is always subject to the parties’ consent.
As evidenced by its large membership, considerable caseload, and by the numerous references to its arbitration facilities in investment treaties and laws, ICSID plays an important role in the field of international investment and economic development.
Today, ICSID is considered to be the leading international arbitration institution devoted to investor-State dispute settlement.
ICSID Dispute Settlement Facilities:
ICSID does not conciliate or arbitrate disputes; it provides the institutional and procedural framework for independent conciliation commissions and arbitral tribunals constituted in each case to resolve the dispute.
ICSID has two sets of procedural rules that may govern the initiation and conduct of proceedings under its auspices. These are: (i) the ICSID Convention, Regulations and Rules; and (ii) the ICSID Additional Facility Rules.
ICSID Convention, Regulations and Rules:
The ICSID Convention provides the basic procedural framework for conciliation and arbitration of investment disputes arising between member countries and investors that qualify as nationals of other member countries. This framework is supplemented by detailed Regulations and Rules adopted by the ICSID Administrative Council pursuant to the Convention.
A principal feature of conciliation and arbitration under the ICSID Convention is that they are based on a treaty establishing an autonomous and self-contained system for the institution, conduct and conclusion of such proceedings.
Arbitration and conciliation under the Convention are entirely voluntary, but once the parties have given their consent, neither may unilaterally withdraw it. A further distinctive feature is that an arbitral award rendered pursuant to the Convention may not be set aside by the courts of any ContractingState, and is only subject to the post-award remedies provided for in the Convention. The Convention also requires that all Contracting States, whether or not parties to the dispute, recognize and enforce ICSID Convention arbitral awards.
There are several essential jurisdictional conditions for access to arbitration or conciliation under the ICSID Convention:
- The dispute must be between an ICSIDContractingState and an individual or company that qualifies as a national of another ICSIDContractingState. (ICSID Contracting States may designate constituent subdivisions and agencies to become parties to ICSID proceedings).
- The dispute must qualify as a legal dispute arising directly out of an investment.
- The disputing parties must have consented in writing to the submission of their dispute to ICSID arbitration or conciliation.
Under the ICSID Convention, the Secretary-General is vested with the limited power to “screen” requests for institution of ICSID conciliation and arbitration proceedings, and to refuse registration, if on the basis of the information provided in request, the Secretary-General finds that the disputes is manifestly outside the jurisdiction of the Centre.
ICSID Additional Facility Rules:
Besides providing facilities for conciliation and arbitration under the ICSID Convention, the Centre has since 1978 had a set of Additional Facility Rules authorizing the ICSID Secretariat to administer certain types of proceedings between States and foreign nationals which fall outside the scope of the Convention.
- Conciliation and arbitration proceedings for the settlement of disputes arising directly out of an investment where either the State party or the home State of the foreign national is not an ICSIDContractingState.
- Conciliation and arbitration proceedings between parties at least one of which is a Contracting State or a national of a Contracting State for the settlement of disputes that do not directly arise out of an investment.
- Fact-finding proceedings.
\Other Dispute Settlement Activities of the Centre:
Additional activities of ICSID in the field of the settlement of disputes have included the Secretary-General of ICSID accepting to act as the appointing authority of arbitrators in ad hoc (i.e., non-institutional) arbitration proceedings. This is most commonly done in the context of arrangements for arbitration under the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL), which are specially designed for ad hoc proceedings. At the request of the parties and the tribunal concerned, ICSID may also agree to provide administrative services for proceedings handled under the UNCITRAL Arbitration Rules. The services rendered by the Centre in such proceedings may range from limited assistance with the organization of hearings and fund-holding to full secretariat services in the administration of the case concerned.
Chapter 8: Issues Covered
The International Financial Environment
- Multinational Financial Management
- International Flow of Funds
- International Financial Markets
- Exchange Rate Determination
- Currency Derivatives
Exchange Rate Behavior
- Government Influence on Exchange Rates
- International Arbitrage and Interest rate parity
- Relationships among Inflation, Interest Rate, and Exchange Rates
Exchange Rate Risk Management
- Forecasting Exchange Rates
- Measuring Exposure to Exchange Rates
- Managing Transaction Exposure
- Managing Economic Exposure and Translation Exposure
Asset and Liability Management: Long Term and Short Term
- Direct Foreign Investment
- Multinational Capital Budgeting
- Multinational Restructuring
- Country Risk Analysis
- Multinational Cost of Capital and Capital Structure
- Long Term Financing
- Financing International Trade
- Short Term Financing
- International Cash management
Some are parts: