Internationally-brokered settlements in the Balkans and the Middle East are just the beginning of the restoration to normal life for the people of those shattered regions. As part of a key element in the process, World Bank Group body the Multilateral Investment Guarantee Agency (MIGA) is administering investment guarantee trust funds for Bosnia-Herzegovina, and the West Bank and Gaza. The funds will provide investment guarantees against the major political risks of expropriation, transfer restriction, war and civil disturbance (and breach of contract currently in the case of Bosnia-Herzegovina) for cross-border investments into these regions. By encouraging the inflow of much-needed foreign capital, the aim of the funds is to create employment, generate exports and help integrate the regions into the world economy.

The West Bank and Gaza Guarantee Investment Trust Fund amounts to $21.5 million and was formed by a contribution from the Palestine Liberation Organization (PLO) through a credit from the International Development Agency (IDA) of the World Bank, the Government of Japan and the European Investment Bank. Irena Tchoukleva, Guarantee Officer, MIGA Guarantees Department, said the establishment of the fund in January 1996 was in accordance with the World Bank Group's September 1993 initiative on the Occupied Territories, prompted by a Joint IDA/ Palestinian study entitled "Developing the Occupied Territories: an Investment in Peace."

"Early in the concept stage, the lack of political risk mitigation was viewed as the overriding constraint to private sector development, and MIGA was perceived as the logical entity to provide guarantees to investors against political risk in the Territories," said Ms. Tchoukleva. "Because private direct investment will be a vital component of the economic and social development of the West Bank and Gaza, not presently a member of MIGA and therefore not eligible to receive investment guarantees under its program, the Agency agreed to establish and administer the fund."

While Bosnia-Herzegovina is a member of MIGA and as such is eligible to receive its guarantees, the Bosnia-Herzegovina Trust Fund originated in a desire by the European Commission to use part of its assistance to the country to support foreign investment. Amounting to 10.5 million euros ($11.86 million), the fund was established in September 1997 following an agreement between the commission and MIGA, and will be administered by MIGA on the commission's behalf. Only investors from EU and certain Eastern European countries are eligible to apply for guarantees from the fund.

The fund was brought into being, said Moniques Koning, MIGA Guarantee Officer and fund task manager, because donor aid flows were previously the driving force behind Bosnia-Herzegovina's reconstruction and economic growth. "In the coming years, however, as donor aid flows decrease, the role of the private sector will become increasingly important in Bosnia-Herzegovina to sustain the recovery and create a economic structure based on private ownership and initiative," said Ms. Koning.

While the fledgling country is striving to create a business environment which promotes private sector activity and facilitates foreign investment, perceived political risks are still high and likely to remain a stumbling block for foreign investors. "MIGA's Investment Guarantee Program and hence the trust fund protects foreign investors against major types of political risk and can therefore act as a catalyst to foreign investment," said Ms. Koning.

Regarding the part the fund plays in the regional peace settlement, Ms. Koning said sustained economic recovery is an important part of the peace process. "People need to be able to return to their normal lives and this is difficult at present due in large part to the lack of employment and other opportunities for income generation," she said.

In the meantime, the availability of political risk insurance has shown that it can be extremely helpful in encouraging inbound flows of foreign capital in both Bosnia-Herzegovina and West Bank and Gaza. At the time of going to press, MIGA had received 18 applications pending for guarantees for investments in Bosnia-Herzegovina in a variety of sectors including tourism, infrastructure industry and financial services. For the West Bank and Gaza Investment Guarantee Fund, some 24 guarantee applications are pending from investors from the United Kingdom, the United States, Canada, Israel, Liberia and Lebanon for projects worth $700 million in power generation, tourism, real estate, finance and telecommunications.

For the peoples of West Bank and Gaza, and Bosnia-Herzegovina, the trustee service rendered by MIGA is proving to be a strong element in their quest for normality and the foundation of a lasting peace.

by Charles Duerden