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ADB Cofinances Investment Guarantee Facility to Catalyze Investments in Afghanistan

MANILA, PHILIPPINES (24 SEPTEMBER 2004) - The Asian Development Bank (ADB) will help stimulate private sector activity and attract foreign direct investment in Afghanistan by cofinancing an investment guarantee facility to provide political risk guarantees to eligible investors and financiers, through a loan approved today for US$5 million and a $10 million guarantee.

The Afghanistan Investment Guarantee Facility (AIGF), to be administered by the World Bank's Multilateral Investment Guarantee Agency (MIGA), targets investments in the small and medium enterprises sector.

"We are very pleased with this cooperative effort among different partners to create an innovative solution to the needs of Afghanistan, leveraging each other's strength and making use of ADB's political risk guarantee instruments in a catalytic and innovative way," says Werner Liepach, ADB's Director of Cofinancing Operations.

A MIGA analysis showed an encouraging potential level of foreign direct investment in Afghanistan, with demand coming from sectors such as energy, telecommunications, Internet services, banking, hotels, housing, food and agribusiness, textile, steel, oil and gas, and mining.

However, while the international community is exerting considerable efforts to support Afghanistan's rebuilding and development, available official flows are not enough to sustain the reconstruction effort.

"A vibrant and active private sector is needed to generate jobs and support long-term economic growth for poverty reduction in Afghanistan. But without insurance against selected political or noncommercial risks for investment projects, many potential investors are reluctant to do business in the country and are taking a wait-and-see attitude," says Veronica John, an ADB Senior Structured Finance Specialist.

Limited amounts of political risk insurance are currently available worldwide for Afghanistan. Under AIGF, investors may choose any combination of four types of risk coverage - transfer restriction, expropriation, war and civil disturbance, and breach of contract - with the guarantees running up to seven years.

A $5 million loan from ADB's concessional Asian Development Fund, carrying a 40-year term with a grace period of 10 years, will help finance the AIGF. A further $10 million from ADB's ordinary capital resources will support the supplemental political risk guarantee component of the facility.

Other sources of cofinancing for the project include up to $10 million from MIGA and a $5 million credit from the International Development Association. About $30 million is expected from other public or private insurers.

Private sector development is a key ingredient of ADB's strategy in Afghanistan. ADB projects in support of a private sector-led growth in the country are expected to amount to $53 million by the end of the year.

At an international conference in Berlin earlier this year, ADB President Tadao Chino pledged up to $1 billion in assistance to Afghanistan for 2005-2008.

ADB is dedicated to reducing poverty in the Asia and Pacific region through pro-poor sustainable economic growth, social development, and good governance. Established in 1966, it is owned by 63 members - 45 from the region. In 2003, it approved loans and technical assistance amounting to US$6.1 billion and US$177 million, respectively.

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