International Finance Agreements Amendment Bill — Second Reading 
International Finance Agreements Amendment Bill — Second Reading 
[Volume:641;Page:11695] 
International Finance Agreements Amendment Bill 
Second Reading 
Hon Dr MICHAEL CULLEN (Minister of Finance) 
: 
 I move  
That the International Finance Agreements Amendment Bill be now read a second time 
. Following the first reading the bill was examined by the Foreign Affairs Defence and Trade Committee which recommended that it be passed with no amendments. 
The bill will amend the International Finance Agreements Act 1961. That Act allows the Government of New Zealand to meet its obligations as a member of various financial institutions including the International Monetary Fund and the International Bank for Reconstruction and Development. This bill is the next step towards New Zealand becoming a member of the Multilateral Investment Guarantee Agency which is one of the five institutions that make up the World Bank Group. Currently this is the only arm of the World Bank Group of which New Zealand is not a member. To become a member of the Multilateral Investment Guarantee Agency New Zealand first had to become a party to the Convention Establishing the Multilateral Investment Guarantee Agency which we signed up to in late 2005. 
As a member of the World Bank Group the Multilateral Investment Guarantee Agency contributes to the World Bank’s mission of poverty elimination and achievement of the United Nations Millennium Development Goals. The Multilateral Investment Guarantee Agency provides specifically targeted insurance products that seek to mobilise private sector resources to help in addressing stark development challenges such as the provision of services the building of infrastructure and the creation of new jobs. The Multilateral Investment Guarantee Agency’s products are equity investments targeted at frontier markets such as developing countries or countries affected by civil dispute or war. These products are usually of a longer duration than those offered by private sector providers of similar products. Thus these products aim to support rather than crowd out private sector providers. Indeed in many instances they lead private sector providers into developing countries and particularly countries that are rebuilding after civil dispute or war. 
The convention has been through a national interest analysis which concluded as follows. First New Zealand is fully supportive of the Multilateral Investment Guarantee Agency as its services are well aligned with our broader development interests and to a lesser extent our foreign policy interests. Second the assessment as to whether New Zealand should join the Multilateral Investment Guarantee Agency was based on three broad categories: supporting the New Zealand private sector contributing to development goals and supporting multilateral organisations. Third by ratifying the Multilateral Investment Guarantee Agency convention New Zealand is strengthening its commitment towards international efforts to promote development and is improving its credibility within the total World Bank Group structure. The select committee I think endorsed that national interest analysis and concluded that the bill should proceed. 
Assuming that the International Finance Agreements Amendment Bill is passed New Zealand will be required to deposit a copy of the Act with the World Bank. We will then be required to pay a subscription fee which will involve the purchase of 513 shares at a cost of approximately US$5.5 million. Of that amount 10 percent is in cash 10 percent is via a promissory note and the remaining US$4.4 million will be subject to call by the Multilateral Investment Guarantee Agency. The fund is unlikely to be called upon as a call would require the agreement of all shareholders. Thus for a relatively small investment in terms of our total overseas aid activity we complete in effect our membership of the World Bank Group. 
TIM GROSER (National) 
: 
 National has supported the International Finance Agreements Amendment Bill and we will continue to support it through all stages. 
As the Minister of Finance has just indicated this is the way in which New Zealand can become a member of the Multilateral Investment Guarantee Agency. I guess the only surprising thing is that it has taken so long to get the issue through the system to the political level. I was quite surprised that we were not already a member of this agency given that there are 170 members. I think we are in the good company of Somalia and Djibouti. So it is a little surprising that we are not already a member. 
 Behind the technical issues—and I just want to focus on the development goal one of the goals that the Minister of Finance mentioned to illustrate what this is really about—this is about facilitating development by slightly lowering the risk premia in some of the most vulnerable developing countries. Although I have had no direct experience I have had indirect experience of this but if people have had any experience of investment projects in developing countries they find out very quickly that where say a discount rate of 10 percent might be an appropriate benchmark for an investment banker or a company looking at an equity investment in a developed country such as our own that very sharply increases to typically 25-plus percent. 
That reflects the greater risk premium of a company investing in a country with less-developed institutions and a far higher political risk but the practical effect of that of course is to crowd out development. Certainly very good projects have to attain internal rates of return of 20-plus percent and I think it is not hard for even non-technical people to understand that that crowds out an enormous amount of development. It comes down on useful jobs and new opportunities for people in very vulnerable developing countries. This is a technical matter but I think that lies at the very heart of it. It is the raison d’être for the Multilateral Investment Guarantee Agency and it is the very sensible reason why we should be part of this process. 
The agency clearly does not cover all risk. It covers sovereign default and political risk. The World Bank is uniquely well placed to do that although I note the explicit provision in article 21 of the convention in schedule 7 of the bill reflecting no doubt the Multilateral Investment Guarantee Agency’s practical experience for it to spread the risk through reinsurance and to work with other private insurers in the member countries. The World Bank is uniquely qualified to play this role. This does not mean that if a New Zealand company were to look at an investment in one of these high-risk frontier countries it would not need to address other serious insurance issues. This just addresses a certain set of insurance risks which the private sector is not nearly as well placed to cover. 
This role is not forced on the developing countries. There is explicit provision in the bill—in article 15 for example—for consultation with the host Government so it is being done in a cooperative way with the developing countries concerned. But at the end of the day it rests on the fact that the World Bank has leverage that not even a very large company from a much larger developed country than our own could possibly hope to match in the event of a catastrophic development such as a civil war the abandonment of currency convertibility or any of those other issues. 
The basic concept here is that the World Bank would take responsibility just as an insurance company takes responsibility if we are involved in a motor accident. If it is not considered to be our fault the insurance company pays us out and then takes over the responsibility for pursuing the responsible party because the insurance company is better placed to do so institutionally than a private citizen. The same principle is applied in this legislation. The World Bank has enormous leverage as well as enormous resources to handle the untangling of the issues that would arise in those extremely rare events. So if a New Zealand company were caught up in some catastrophic political risk or default then it would be paid out by the agency and the agency would take over the responsibility for recovering payment from the sovereign Government. Although it operates if you like on a macro scale its essential principle is the same as what ordinary citizens would be familiar with in terms of their own insurance operations. 
Debate interrupted.