Fundamentals of the Investment Guarantees
Each year German companies invest significant amounts on international markets especially in developing, emerging and transition countries. Thereby the reasons to invest in a local presence are diverse like proximity to customers, potential for additional sales, attractive location conditions and direct access to natural resources are only a few to name. The economic opportunities of foreign direct investments, however, are often faced by political insecurities in many regions of the world. These range from war, revolution and armed conflicts as well as expropriation or expropriation-like acts as far as inconvertibility and transfer limitations. At this stage the investment guarantees of the Federal Republic of Germany come into play, that since 1960 provide support to German companies. The objective of the guarantee scheme is to protect German investors and companies from the unpredictable occurrence of a political crisis.
The policyholder can benefit in many ways under an investment guarantee e.g. the compensation of losses (caused by political events) by the Federal German Government. In a case of project disruption the Federal Government will furthermore provide effective political support to prevent losses. In doing so the investment guarantees help to stabilise German projects abroad and they support German companies to proceed with their investments even under difficult conditions.
Overview of benefits under an investment guarantee
- Long-term protection against political risks in challenging countries at reliable conditions.
- The German Federal Government intervenes and mediates, inter alia, through its diplomatic representations abroad on behalf of the German investor. Furthermore, the Federal Government will contribute – where applicable – towards the costs for the prevention of losses.
- The Federal Republic of Germany is liable for losses caused by political events and measures in the host country.
An investment guarantee can be used as a bank security and will have positive effects on the (re-)financing costs and conditions.
Main features of Investment Guarantees
The subject of the guarantee is primarily the capital invested in cash or in kind (capital cover). Additionally and depending on the individual project, earnings due can also be included in the guarantee, for example in the form of dividends or interest (earnings cover). The duration of the investment guarantee is generally 15 years.
The following foreign direct investments may be covered:
- Shares in a project company acquired upon its formation, during a capital increase or purchased from a withdrawing shareholder (in return for a capital contribution in cash, in kind or in the form of other benefits – combined with voting and controlling rights and the right to share in liquidation proceeds)
- Shareholder or bank loans which in their purpose and conditions resemble equity
Participations through holding companies
- For foreign branches or plant locations of German companies
Rights qualifying as assets (in the form of long-term Investments)
- E.g. concessions (production sharing agreements for oil and gas) and bonds
Industry diversity of the Investment Guarantees
Preconditions for an Investment Guarantee
1. Character of the investment
- The Federal Government requires the investment to be a new or a follow-up investment respectively which has to be conducted by a company based in Germany on a long-term basis against the background of an apparent German national interest. Furthermore, the planned investment project has to be entrepreneurial and economically viable.
2. Eligibility for cover
- The investment project needs to have positive effects on the host country as well as on the Federal Republic of Germany. With respect to the host country these can be manifested by, for example, the substitution of imports, the creation of jobs with high social standards or the implementation of modern environmentally friendly technologies. Positive effects on employment are of particular interest to Germany. Another essential aspect of the eligibility of cover is the legal impact of environmental, social and human rights regulations on the project. All things considered, the investment should lead to an intensification of the bilateral relationship with the host country.
3. Legal protection
A further essential prerequisite is the sufficient legal protection of the investment in the host country. This is generally ensured through the large number of bilateral investment protection treaties (BIT). The European Union (EU) and the EU member states intend to replace the country-specific bilateral BIT – which Germany concluded with developing, emerging and transition countries – in the medium-term with treaties contracted at the level of the EU and its member states. These new BIT principally provide German investments with a similarly profound and comprehensive legal protection. Furthermore, the host country's national legal system can be considered as sufficient enough legal protection in exceptional cases. Lastly, the current economic and political environment as well as the development of the host country are taken into consideration.