Investment Guarantees: Vital Instrument for German Industry

Administration Building Mercedes-Benz do Brasil © Jochen Teufel, Wikimedia Commons, (CC BY-SA 3.0.)

The instrument of investment guarantees is indispensable for German exporters. It secures the global presence of German industry. When investing in emerging economies and developing countries in particular, investors are exposed to political risks that they could not take without investment guarantees.

The German government’s investment guarantees are of great importance for German industry. Especially for small and medium-sized companies it is often impossible to foresee the longer-term political developments in developing countries and emerging economies. This is where government investment guarantees come in. They offer protection against political risks abroad, such as nationalisation, expropriation, breach of commitments, war, revolution, insurrection, and acts of terrorism. Without investment guarantees it would be virtually impossible to invest, especially in developing countries where private insurance against political risks is inadequate. But investment guarantees are not a free ticket to investors. Economic risks are not covered, and are borne entirely by the investor.

In 2015, the scheme provided guarantees for 77 projects with a total investment volume of almost €3 billion. Two-thirds of the companies applying in 2015 were industrial, 38 percent were small or medium-sized. The most common motivation in 2015 was creating production capacity for market expansion (35.5 percent of companies), followed by distribution and customer service in foreign markets (27.3 percent). Most companies applying for investment guarantees in 2015 were able to secure jobs in Germany.

Scope of coverage

According to the Federal Ministry for Economic Affairs and Energy all forms of foreign direct investment (FDI) are covered. These include:

  • Participation in the creation of companies or the purchase of shares;
  • Capital for branches and facilities;
  • Other property rights (for example concessions or mineral rights). .

Preconditions for coverage

  • Company based in Germany.
  • Investment “worthy of support” (positive effects expected both at the investment site and in Germany).
  • Level of risk acceptable: the country receiving the investment must exhibit a certain degree of legal security, for example through an investment promotion and protection agreement.

Cost and duration of coverage

A one-off application fee of at least 0.05 percent (maximum €10,000) is charged for investments exceeding €5 million. For investments under €5 million no application fee is charged. The maximum duration is fifteen years and can be extended by five years before expiry. During the period of cover an annual fee of 0.5 percent of the invested sum is charged. The investor’s deductible in the event of a claim is 5 percent.

Approval process

The Federal Ministry of Economic Affairs and Energy is in charge of the approval procedure. It makes its decision with the approval of the Federal Ministry of Finance and in consultation with the Federal Foreign Office and the Federal Ministry for Economic Cooperation and Development. The auditing firm PricewaterhouseCoopers AG (PwC) and Euler Hermes Kreditversicherungs-AG are responsible for preparing the approval processes in a body under the auspices of the Federal Ministry of Economic Affairs and Energy. The body also advises investors and makes recommendations on approval or rejection of guarantees.

The future of investment guarantees

It is important for globally operating German businesses that the instrument of investment guarantees continues to support and protect them. This applies especially to small and medium-sized companies, which are usually in no position to bear the political risks themselves. The modernisation of investment promotion and protection agreements must not be allowed to lead to a deterioration in the conditions for awarding investment guarantees.