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p. 20 of 21 BACK | NEXT I. Introduction II. An Overview of the Political Risk Insurance (PRI) Market III. Review of ADB's Partial Risk Guarantee (PRG) Program IV. Recommendation for Changes to ADB's PRG V. Potential Benefits of the Proposed PRJ Program VI. Conclusion

Review of the Partial Risk Guarantee of the Asian Development Bank

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V. Potential Benefits of the Proposed PRJ Program

73. ADB should offer an effective and well-structured political risk guarantee product and be actively involved in this market for many reasons.

1. Support for Poverty Reduction. The PRG can contribute to economic and social development by helping catalyze long-term foreign investment in the DMCs. Promoting capital flows and long-term investment by foreign investors contributes to technology transfer, economic development, and expansion of growth in the industry and services sectors. These are necessary conditions (albeit not sufficient—direct poverty alleviation measures are also required) to create employment, improve social living standards, and thus reduce the incidence of poverty in the DMCs. The poorest DMCs often have the highest perceived political risks. The PRG can be an ADB additional product to foster investment, growth, and poverty alleviation.

2. Promotion of Long-Term Investments in DMCs. Foreign direct investment often involves long-term contracts between the project sponsor and a government-owned entity, e.g., in infrastructure projects. However, while foreign investors are often prepared to take certain commercial risks, they are not prepared to enter into long-term commitments in countries with significant perceived political uncertainty. Thus, a PRG is often perceived as a critical ingredient in a long-term investment decision.³⁷

3. Contribution to Meeting Increased Demand for PRI. Demand for PRI has expanded dramatically over the past decade. The Berne Union, the umbrella organization of PRI insurers, has reported more than a sixfold increase in annual PRI coverage (from $2 billion in 1989 to $15 billion in 1997). With the onset of the Asian financial crisis, demand in Asia has risen as private investors perceive that political uncertainties have increased. Thus, ADB’s PRG product would be offered into an expanding market.

4. Have a Catalytic Role. As the only regional multilateral development bank in Asia, ADB is uniquely qualified to catalyze foreign investment and capital flows to its DMCs, as stipulated under its Charter. As ADB is closely involved with the DMCs and has a stable long-term lending and advisory relationship with their governments, it is able to assess and mitigate political risks. ADB is perceived as an honest broker by governments and foreign investors, and is able to act as an intermediary between host governments and foreign investors and thereby maximize values to all parties.³⁸

5. Provide a Unique Product. ADB has a potentially unique role to play in the PRI market. Unlike the bilateral agencies, ADB’s assistance is not linked to the nationality and domicile of the foreign investor, as long as such investors come from ADB member countries. Compared with private sector PRI operators, ADB has the advantage of decades-long involvement with its DMCs; a close working relationship with their governments, not least through the DMCs’ shareholding in ADB; and thus a reinforced ability to provide effective intermediation and assistance in cases of dispute. ADB’s PRG product also differs from that of MIGA in that it focuses on backing long-term commercial debt financing, while MIGA is unable to insure debt unless it concurrently insures equity. In addition, MIGA has focused its underwriting activities on areas outside the Asian and Pacific Region.³⁹ ADB is, therefore, the only multilateral institution that focuses PRG instruments exclusively for the Asian and Pacific Region and, therefore, has a substantial potential comparative advantage compared to MIGA due to its significant presence and operations in the region.

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Back J. Summary of Proposed Changes to the PRG	Next VI. Conclusion