With civil war and political manoeuvring giving way to economic reconstruction, Bosnia and Herzegovina is facing up to the need to attract foreign investment and trade finance. An innovative World Bank political risks guarantee facility announced in March should prove a useful element in this process.
The guarantees are available to foreign companies providing credit and are designed to foster projects that will enable local industries to resume operation, and to provide foreign exchange for the purchase of critical imports. Supporting self-liquidating, short-term transactions, the guarantees will not burden Bosnian companies with long-term debt.
The assistance is a new step for the World Bank since it will not actually lend the money but will instead provide a guarantee against political risk for commercial creditors involved in short-term deals. The Investment Guarantee Agency (IGA), an independent corporation established by the Bosnia and Herzegovina government and headquartered in Sarajevo, will issue guarantees for the foreign firms and banks providing credit.
“The risks are so great that the choice of instrument was extremely logical,” says Onno Rühl, guarantee specialist at the World Bank. “Short-term deals are an important way to get things going. As an external party we were the only ones capable of taking the risk on.”
The programme’s real strength is a built-in incentive mechanism to increase compliance. By accepting the terms of the facility, the government is signalling a serious intention to create a secure environment. The World Bank is also empowered to suspend the IGA’s authorization to issue new guarantees in the event of policy reverses or excessive claims. The calculation is that the opportunity to attract much-needed capital will help to cement the peace and prevent renewed hostilities.
“This type of programme is an important way forward for the World Bank,” says a London-based political risk analyst. “It removes the institution out of the commercial lending equation. But it also permits the bank to use its political powers to take out the political risk factor – the main obstacle to investment in war-torn countries.”
“There has been nothing like this before but it [will] work,” says Rühl. “It’s intellectually very simple but it addresses the most important problem. A traditional line of credit operation would not eliminate political and war risks, and so would not catalyze private foreign financing. Basically we are trying to take politics away.”
Since the signing of the Dayton-Paris peace agreements in December 1995, significant progress has been made in Bosnia and Herzegovina.
The IMF reports an annual growth rate of about 35%. Wages are up threefold and unemployment has declined from its post-war high of 90%. Trains are running and Sarajevo airport is open to commercial flights. Roads, bridges, electric power and water have been restored in many areas. Tax administration structures are in place and customs and payments systems have been unified. There is a semblance of normality.
But economic activity still falls far short of its pre-war levels. Industrial production is at only 10% to 15% of previous levels and the 50% to 60% unemployment rate is still painfully high and a major cause for concern.
“An emergency reconstruction programme has been in place now for three years,” says Rühl. “But the time has come for Bosnia to stand on its own two feet.”
A large number of companies in Bosnia and Herzegovina are seeking funds yet are unable to find local sources. Local banks are reluctant to provide long-term finance, preferring to offer short-term funds involving stiff collateral.
International companies show a strong interest in restarting commercial operations and are held back only by lack of confidence in the political situation. With little information available, foreign investors are faced with a minefield of potential difficulties.
“We surveyed 150 companies last summer – each had sent representatives to Bosnia since the signing of the peace agreement, ” says Tim Cullen, senior adviser of external affairs at the World Bank. “And the answer was consistent: there was a clear interest but there were also worries about political stability. We could see that the possibility of a project was there.”
The IGA will sell guarantees to foreign parties such as input suppliers, trading companies and institutions that finance Bosnian enterprises. The maximum period of the guarantee is three years and the minimum amount covered is $59,000 and the maximum $1.8 million.
Operating money will come from user fees, set at 3% a year on the amount covered. The interest will be held in trust and used later to increase the available guarantee facility. The IGA has hired Dutch bank ING to provide a letter of credit to accompany the guarantees.
If a guarantee holder suffers a loss on a covered risk, it lodges a claim with the IGA. If the IGA does not approve the claim, the guarantee holder may seek arbitration in The Hague, using an independent arbitrator and applying Dutch law. Should the arbitrator find in favour of the guarantee holder, the agent bank will pay the claim so payment can occur independent of IGA or government influence.
The Netherlands, Sweden, Switzerland and the US have so far come forward to act as donors to finance the guarantees and start-up costs, but a large financing gap of $32 million still exists. “The World Bank is counting on the fact that other donors will come forward to enable the programme to be extended,” says Rühl. “While the guarantee facility is an open-ended programme, the Bosnian government’s target is to increase its total size to $50 million to meet the expected high demand for coverage.”
Already more than eight applications have been made from companies that include refrigeration equipment manufacturers, mini hydroelectric plant suppliers, an asphalt mixing plant, solar-power equipment makers as well as bus-leasing companies.
“Finding investors was certainly not difficult,” says Rühl. “We just provide the spark that gets them going.” Catherine Garner
