For frontier markets that are affected by conflict, the risk of sabotage and destruction of assets can be acute. Awareness of these risks has resulted in a steady demand for political risk insurance coverage of ICT investments over the past decade.
Frontier markets continue to offer opportunities and higher rates of return for ICT investors as other markets have become saturated. Over the past several years, eager consumers in countries such as Afghanistan, Iraq, and Myanmar have sought to join the connectivity revolution. Yet investors are aware of the significant and unique risks associated with these markets—especially with key sector regulatory instruments such as licensing and frequency allocations.
ICT operators are often concerned about the possibility a host government will impose arbitrary or discriminatory changes to terms and conditions or cancel licenses, concessions, and/or shareholder agreements when these involve the government (as with partial privatizations, or broadband public-private partnerships). Another challenge for telecommunications projects, whose revenues come in local currency, is the ability to convert and transfer earnings outside the country in order to pay dividends or service hard-currency debt. In addition, for frontier markets that are affected by conflict, the risk of sabotage and destruction of assets can be acute.
Risk insurance to the rescue
Awareness of these risks has resulted in a steady demand for political risk insurance coverage of ICT investments over the past decade. The Multilateral Investment Guarantee Agency (MIGA), the political risk insurance arm of the World Bank Group, has supported projects in nearly 30 countries, including Afghanistan, Democratic Republic of Congo, and Iraq. MIGA’s robust pipeline coming from well-established and new operators (both mobile 4G and broadband), primarily in lower-income countries, testifies to an ongoing demand for risk mitigation for telecoms investments.
In MIGA’s experience, operators who approach MIGA to discuss political risk insurance are concerned about issues surrounding telecom licenses and spectrum—their most valuable assets. They are particularly interested in obtaining protection against arbitrary changes made by host governments to terms and conditions of licenses. These risks can be particularly prevalent in countries where a political transition is triggered by events such as a coup d’état.
MIGA’s research on political risk bears out this prevailing concern in the broader investment community: adverse regulatory change is cited as the risk of most concern to investors.
MIGA’s experience in managing potential claims highlights the broad range of political risks in the telecoms sector. In one MIGA-guaranteed investment, the host country government unilaterally closed several private cellphone operators. In this case, the government first attempted to make a retroactive increase of 600 percent in the 10-year licensing fees of the MIGA-insured cellular phone company, and then simply terminated the company’s license.
At the request of its guarantee holder, MIGA met with the government to discuss the suspension and noted the detrimental impact of the government’s actions on the nation’s investment climate, especially given the government’s publicized desire to make the country attractive to investors. Continued negotiations, the assistance of the World Bank, and diplomatic pressure from the investor’s home country resulted in an amicable settlement of the dispute and the issuance of a new license. Immediate intervention and the prospect of reduced foreign direct investment helped to achieve a resolution in only a few months.
In another country, military authorities seized and denied an operator’s access to its cellphone towers. This situation would have warranted a business interruption claim under war and civil disturbance coverage, or possibly even an expropriation claim. Ultimately the assets were returned to the operator because the host country authorities did not want to trigger a claim under a MIGA guarantee.
MIGA also intervened in a case where an operator encountered difficulties in converting locally earned currency in order to repay its loans. Again, MIGA drew on its leverage as part of the World Bank Group to resolve the issue with the central bank of the host country. Transfers were completed in a timely manner, allowing the investor to repay its loans.
More important than ever
MIGA is supporting MTN Afghanistan, one of Afghanistan’s four major mobile operators. The company has been remarkably successful and boasts over 6.2 million subscribers as of June 2014. MIGA first provided coverage to MTN in 2007 when it started its operations in the country. The MIGA guarantees covered MTN’s installation and operation of a mobile GSM network via its Afghan subsidiary. In 2011, MIGA issued an additional guarantee totaling $80.4 million for a period of up to 10 years, covering the expansion of the company’s operations.
It’s worth noting that MIGA’s coverage for war and civil disturbance was not used in this investment, as the operator was able to obtain coverage at a more competitive rate through its corporate political violence insurance program. MIGA is covering the investment against the risks of transfer restriction and expropriation, which were deemed as essential in a relatively untested regulatory environment with limited capacity, a weak public sector, uncertain property rights, and pronounced insecurity.
Despite these grave risks, MTN continues to enjoy high profitability while making significant contributions to the country. The company offers its customers a range of affordable telecommunications services, including cellphone, Internet, satellite, and public pay phones.
Intervention has been key to successfully mitigating political risks in the ICT sector. In Afghanistan, for example, the World Bank supported reform of the telecommunications sector with a comprehensive package of capacity building, support for drafting of legislation and licenses, and rehabilitation of the government’s network. From having a single operator with a barely functioning network in 2002, Afghanistan is now home to a thriving and competitive industry that benefits local consumers and businesses. That’s the definition of turning risk into reward.