Groser Tim: International Finance Agreements Amendment Bill — Second Reading 
Groser Tim: International Finance Agreements Amendment Bill — Second Reading 
[Volume:641;Page:11696] 
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.