Overcoming challenges in the Multilateral Investment Guarantee Agency's risk insurance coverage to private water investors: corruption and consumer risks.

• Author: Okaru-Bisant, Valentina

1. SUMMARY

   This paper discusses the ongoing controversial problems about how to make the World Bank Group more responsive to corruption in its financed investments and how to reduce corruption and consumer conflicts resulting in failed water supply privatization investments in developing countries. The negative health and economic impacts of such failed investments on poor consumers in developing nations increases the urgency for resolving the problems. There are no accurate statistics on the financial losses to private investors from corruption and consumer conflicts in global water projects. But it is undisputed that the amount (however great or small), threatens the economic existence of private investors and are sufficient to deter them from participating in the delivery of such services in Africa. (1) The World Bank estimates that corporations pay $1 trillion in bribes to foreign officials, annually. (2) According to Transparency International, in Africa alone, $148 billion is paid annually in bribes. (3) The existence of such corruption and consumer conflicts as demonstrated in three high profile water investment dispute cases (The Kingdom of Lesotho v. Acres International and Masupha Ephraim Sole, Aguas del Tunari v. Bolivia and Biwater v. Tanzania) increase the urgency for reforming the World Bank's Multilateral Investment Guarantee Agency's ("MIGA" or "the agency") risk insurance and mediatory role and its Center for Settlement of Investment Disputes' mediatory function.

   Accordingly, this paper proposes innovative ways to overcome deficiencies in the scope and contents of MIGA's guarantee program, particularly: 1) absence of corruption and consumer conflicts risk insurance and 2) absence of development based due diligence and risk assessment ("DDRA") strategies. These deficiencies stifle the agency's ability to encourage private participation in the African water supply services sector because honest, but risk averse corporations, are reluctant to invest in those countries that are bedeviled with corruption and consumer conflicts. But the proposal comes with opposition from some experts. Contrary to opponents of corruption risk insurance who assert that providing such insurance coverage will promote the vice and sanction bad behavior, MIGA providing the coverage will reduce corruption and consumer conflict. But as a precondition to providing risk insurance coverage to investors, MIGA must develop and implement DDRA strategies. Similarly, MIGA should also require that investors seeking its risk insurance guarantee for water supply investments, develop and implement such strategies as a precondition to receiving insurance coverage. MIGA should also develop an accountability and punitive system, including increasing insurance premiums and maintaining a database of blacklisted corporate guarantee holders that are found guilty of corruption and disregarding consumer participation. Consequently, the threats of incurring social and economic costs of engaging in corrupt practices and disregarding consumer voices will incentivize the companies to avoid corruption and respect consumer interests. Similarly, MIGA will also have an incentive to avoid providing risk insurance coverage to corrupt companies. The aforementioned requirements are critical to creating a level playing field that companies desire, including encouraging sound corporate governance, government accountability, and due regard to poor consumer voices/needs in water investments.

2. BACKGROUND AND INTRODUCTION

   1. GLOBAL CRISIS, REDUCE TAX BURDENS, AND THE WORLD BANK GROUP LEADING ROLE

      Given the current global financial crisis, both economic aid suppliers (4) and aid recipients are facing internal financial crisis and pressures in their respective nations. Therefore these economic aid suppliers and recipients are seeking ways to best deal with foreign aid and private investment promotion concerns. Particularly, they seek ways that reduce tax burdens on taxpayers in aid supplier nations while producing real positive results on the ground in recipient nations. Experts are also questioning and debating the effectiveness of World Bank aid financing, including ways to ensure that development yields positive results for the intended consumers and beneficiaries. The World Bank is the leading development aid organization and in the last fifty years has loaned more than half a trillion dollars for economic development including yearly development loans averaging twenty billion dollars to its borrower nations. (5)

   2. NATURE AND SCOPE OF WORLD BANK, MIGA's RISK INSURANCE COVERAGE

      The MIGA, an affiliate of the World Bank Group, consists of 175 member nations, 150 of which are developing nations. (6) Its overarching mission is to alleviate poverty in developing nations (host nations) who are its member states and shareholders by providing non-commercial risk (political) insurance guarantee to encourage private investors (guarantee holders) to invest in those nations. (7) MIGA provides such insurance to private investors against five risks, including: 1) expropriation; 2) breach of contract; 3) currency inconvertibility and transfer restrictions; 4) war, civil disturbance, terrorism, and sabotage; and 5) non-honoring of sovereign financial obligations. (8)

      The expropriation risks insurance coverage protects against institutional and legislative acts of sovereign governments that are confiscatory, as well as against creeping expropriation (a series of acts that gradually lead to expropriation. The coverage also covers unsound regulatory decisions such as revoking or modifying licenses and decisions concerning water supply tariffs and user fees. Further, the coverage against breach of contract protects against a government's breach or repudiation of a contract of state-owned enterprises in certain circumstances. For example, it safeguards against a government's failure to pay an arbitration award granted to an investor following a breach of contract by the government. MIGA may design its breach of contract coverage to include selected contract clauses that concern water investors, including performance-related clauses and government payment obligations related to termination amounts. The agency's coverage against war and civil disturbance provides protection against war, terrorism, or other politically induced violence. (9) This coverage protects against physical harm and prolonged business interruption resulting from the above risks. The transfer restriction coverage protects against losses stemming from inability to convert local currency into foreign exchange or to transfer funds outside the host country. (10) Finally, the non-honoring of sovereign financial duties protects against losses resulting from a government's failure to meet an unconditional financial payment obligation or guarantee given in favor of a project that otherwise meets all of MIGA's requirements. This does not require the investor to obtain an arbitral award.

   3. ADVANTAGES OF MIGA's RISK INSURANCE PROGRAM

      MIGA's risk insurance program has several advantages to private investors with respect to the following: 1) its relationship with its shareholder governments; 2) private investor lending; 3) duration of its risk insurance coverage; 4) its country experiences; and 5) technical expertise. Given the agency's relationship with shareholder governments that provide leverage in protecting investments, MIGA has the ability to deter some harmful actions to private investors. MIGA also has the ability to help investors access and obtain project financing and its guaranteed loans may help reduce risk-capital ratings of projects. MIGA can provide risk insurance coverage to investors for up to 15 years (and in some instances 20). This increases the tenor of loans available to investors. (11) MIGA's extensive country experiences coupled with its environmental and social expertise helps investors and lenders ensure that projects comply with social and environmental standards. MIGA recognizes that risks are impediments to private investment potential as it states that, "Africa, it seems, is the victim of a self-fulfilling prophecy, where the all-pervasive perception of risk obscures legitimate investment potential." (12) To this end, MIGA agrees that its goal is to provide the aforementioned non-commercial risk insurance to private investors to enable participation in various sectors of a country thereby enhancing the positive developmental impacts in its member countries. But most experts agree that the agency has fallen short of achieving its goal of using insurance policies to promote such positive impacts in the countries.

      Despite the enumerated advantages of MIGA's guarantee services, the scope and contents of its risk insurance guarantee program are bedeviled with deficiencies that stifle its ability to enable private water investments in African nations. Such deficiencies include 1) absence of corruption and consumer conflicts (13) risk insurance and 2) absence of development based due diligence and risk assessment ("DDRA") strategies.

   4. DEFINING AND QUANTIFYING COST OF CORRUPTION AND CONSUMER CONFLICTS RISKS

      A starting point is defining what constitutes corruption and consumer conflicts. The anti-bribery provisions of the 1977 United States Foreign Corrupt Practices Act (14) prohibit:

      1) issuers, domestic concerns, and any person

      2) from making use of interstate commerce

      3) corruptly

      4) in furtherance of an offer or payment of anything of value

      5) to a foreign official, foreign political party, or candidate for political office

      6) for the purpose of influencing any act of that foreign official in violation of the duty of that official or to secure any improper advantage in order to obtain or retain business. (15)

      The World Bank's simplified definition is that corruption is an aspect of poor governance, which involves the abuse of public office for private gain. (16) A public official...