Multilateral Investment Insurance and Private Investment in the Third World

Manfred Holthus, Dietrich Kebschull, Karl Wolfgang Menck

• Publisher: Routledge
• Year: 2020
• eBook ISBN: 9781000678246
• Topic: Business
• Subtopic: International Business
• Index: Business

The flow of capital to Third World countries in recent years has been less than expected for realizing their growth objectives. As a consequence, efforts have been redoubled to attract capital in the form of direct investment. The World Bank has proposed the establishment of a multilateral guarantee scheme, encompassing as many investing and host countries as possible, to reduce the risks associated with overseas investment.

The authors analyze and comment on the necessity and suitability of the World Bank proposal. They examine earlier proposals for setting up multi­ lateral guarantee schemes and the reasons for their failure, develop an eco­ nomic frame of reference for analyzing the new proposal, describe and examine the World Bank plan, and present alternatives to it. They pay particular attention to two major assumptions of the plan: that additional foreign investment capital for developing countries could be mobilized on a large scale if the investment risks were reduced, and that existing national insurance schemes display shortcomings that could be avoided in a multilateral system.

Chapter I: EARLIER PROPOSALS FOR MULTILATERAL INVESTMENT INSURANCE AND THE REASONS FOR THEIR FAILURE

§ 1. Basis of the proposals

The earlier plans and proposals for the creation of multilateral investment insurance schemes can be traced back primarily to the discrepancy between the ability to export capital in the form of private investment and the scope for protecting it against risks, for the most part those of a political nature. Until 1962 there were only three national schemes operating in the United States of America, Japan and the Federal Republic of Germany. Understandably, a multilateral scheme was seen as a possible vehicle of promotion by all those states that did not have the necessary insurance arrangements.

All the proposals without exception are based on the hypothesis that capital transfers in the form of direct investment abroad are essential if the international division of labour is to be intensified and to yield benefits for all those involved. The need for guarantees is perceived primarily in connection with investment in developing countries. Over the years there has been a growing tendency to link development policy considerations and objectives with the notion of expanding investment in order to encourage private-sector co-operation.

The alleged shortcomings of guarantees granted by national institutions provided another important justification for the proposals. Apart from the schemes’ limited applicability to a few host countries, the following shortcomings are mentioned in this connection:

– inadequate coverage of risks;

– failure to provide for newer forms of co-operation that go beyond the traditional direct investment through direct participation in risk capital;

– inability to insure the investments of several investors of different nationalities in a single project (consortium contingency);

– restrictive practices in the granting of guarantees owing in some cases to regional resource ceilings, which affect large projects in particular (geographical coverage).

In addition, national systems were criticised for their administrative cost. Capital exporters also criticised certain technical details of the national insurance schemes, such as the duration of coverage the level of annual premium rates, the administrative procedures for calculating and setting losses and the apparently better facilities available in other systems.

§ 2. Earlier proposals for multilateral investment insurance

As early as 1962 a World Bank study on a possible multilateral insurance scheme commissioned by the predecessor to the present-day OECD listed twelve plans.¹ The feature common to them all was that they provided worldwide coverage and were not designed as instruments of regional promotion. This line was further pursued in the World Bank’s subsequent proposal to set up an International Investment Insurance Agency (IIIA), which was submitted to the Executive Directors of the Bank for discussion in 1973.¹ The same applies in principle to a paper by the Club de Dakar, which was presented two years ago at the instigation of African academics and politicians.² Similar remarks hold good for UNIDO’s proposals to set up an industrial insurance system.³

The US plan for an International Resources Bank provided for (sectoral) limitation to activities in the commodities field, the main emphasis being laid on the promotion of energy and raw material projects. After discussion in the UN General Assembly (1975), at the Fourth General Conference of UNCTAD in Nairobi (1976) and at the Paris Conference on In-ternational Economic Co-operation, the World Bank was asked to study the plan and make proposals for implementation within the framework of the World Bank Group.

Regional proposals for a multilateral scheme have been discussed within the European Communities⁴ and the Inter-Amer-ican Development Bank (IDB). The IDB initiative also envisaged some degree of sectoral limitation to projects in the fields of energy and minerals.

The Inter-Arab Investment Guarantee Corporation is a regional scheme with a small circle of investing and host countries. It was established in 1966 in accordance with a decision by Arab Ministers of Industry to insure Arab investment in Arab countries against non-commercial risks. This narrow orientation does not accord with the aims upon which multilateral systems are generally founded. Hence the Guarantee Corporation cannot serve as a model for the intended multilateral facility.¹

All the proposals, including those that operate a fund, are based on the establishment of an insurance scheme to cover risks; actuarial and commercial considerations underlie their design, so that from the technical point of view they present a number of parallels with existing national schemes and a relatively high degree of homogeneity one with another. The differences between these proposals and the national facilities consist mainly in the manner of financing, institutional arrangements and legal safeguards.

The large number of proposals and the discussions about them contrast markedly with the record of implementation. Apart from the Arab scheme, which adopts a different approach, no proposal has yet progressed beyond the drawing board. This is particularly true of the plans of the sixties, but also applies to the global approaches of the IIIA and the Inter-national Resources Bank. Work on the IIIA was suspended in 1973 owing to lack of interest among member countries of the World Bank. The difficulties preventing realisation of the proposals also beset the planned granting of guarantees by the International Resources Bank. As a consequence, it was decided to expand World Bank lending in the raw materials and energy sectors rather than set up an insurance facility.

The EC also suspended its activities in this regard, while those of the IDB were reduced to a very low level. In 1980 the IDB did discuss the results of about five year’s preparatory work on the creation of an Inter-American guarantee fund to insure foreign investors in the energy and mineral fields against political risks, but the proposals were not approved at the Annual Meeting of that year; instead, it was decided to carry out further studies.

Meanwhile, the number of national systems for granting guarantees has been rising continuously. At present there are twenty-one national investment insurance schemes.¹ All the industrial countries now have facilities of this kind, apart from Ireland and Greece, which are of little significance as exporters of capital, and the European mini-states. Portugal and South Africa are in the process of setting up guarantee facilities. Developing countries such as Korea (1972) and India (1978) have already established national schemes of the own. Hence the only potential capital-exporting countries not covered are the OPEC states with balance of payments surpluses and a few of the newly industrialising countries.

§ 3. Reasons for non-implementation

If one looks into the reasons why a multilateral insurance scheme has not yet come into being even though it seems eminently sensible from the point of view of potential capital exporters and might also have advantages for major projects, especially those undertaken by consortia, one finds the same problems time and again. In the eyes of the industrial countries as the main capital exporters, they are chiefly as follows:

– The countries have insurance schemes of their own. They may not fully meet the demands made of them in every case, but there is always a degree of interpretive latitude and it is comparatively easy to make applications as the language is the same, personal contacts can be made and so forth. Hence a firm seeking a guarantee sees relatively little need for a multilateral facility. Even if it is a member of a consortium it can insure its own share.

– Measures to promote exports and investment (including the granting of investment guarantees) played an important role in the pursuit of national aims in the foreign trade field after the establishment of a liberal world economic order, for the progressive removal of import restrictions and the prohibition of their reintroduction shifted the scope for influencing foreign trade from import restrictions to the area of export promotion. Investment was seen to be very important in this because of its repercussions on trade. This trend towards incentives for exports of goods and capital was further strengthened by the founding of the EC and the restrictions it placed on member countrie’s scope for national economic policies. In the eyes of the industrial countries the transfer of part of their investment promotion activities to a multilateral agency would thus have amounted to forgoing one of their few remaining instruments of influence, which they would have been inclined to do only if the benefit to their own economies could be demonstrated convincingly.

– The legal agreements concerning investment abroad are an important point for both the governments and the firms involved. Under the German scheme, for example, investment promotion treaties made it possible to set high standards that accorded with economic policy objectives and created a yardstick for other countries. In the final analysis such agreements have a decisive impact on the • long-term settlement of claims and hence on the financial basis and operational viability of the scheme. By comparison with this, the legal agreements were a weak spot in the proposals for multilateral facilities. The reasons for this probably lie in an underestimation of this aspect and partly in the intention of potential multilateral umbrella organisations to demand only relatively modest concessions from host countries (in particular developing countries) in view of possible charges of external interference (or even imperialism). This is particularly true of the calculation of compensation and the reference of cases to internationally recognised arbitration bodies.

– Aversion to a multilateral system also sprang from the judgement that the governing body was bound to lead to excessive bureaucracy because of its special design. Furthermore, some investors felt that there was some danger of the confidentiality of applications being breached if they were no longer processed by a national institution but by representatives of other countries.

For the host countries – in particular the developing countries - the proposals for multilateral schemes should have been beneficial, because they should have not only permitted an inflow of capital but also given them access to more modern processes and other know how. However, in practice the proposals met with anything but sustained support. Doubts were concentrated chiefly on the following points:

– In the sixties and seventies direct investment and other forms of participation by foreign enterprises were not generally approved by developing countries. Arguments raged about the harmful effects on the economies and policies of host countries. They feared the use of inappropriate technologies, the destruction of indigenous small and medium-sized firms, dominance by foreign firms and hence the infringement of their sovereignty. In many countries this debate was reflected in the introduction of extensive controls and constraints and also led to rejection of the idea of an international court of arbitration. Moreover, many states clearly considered that it was simpler to handle direct investment by means of bilateral agreements with the main capital-exporting countries than to establish arrangements through a multilateral agency.

– During the discussions about the IIIA and the Interna-tional Resources Bank it became apparent that a large number of developing countries regard the institutionally induced link between traditional multilateral development assistance and private investment as undesirable. In particular, they fear that the creation of a multilateral insurance scheme by the World Bank might affect their general credit standing, as confidential information supplied to the World Bank by individual governments could find its way into the insurance agency’s files. Conversely, they suspected that isolated losses on foreign investments could adversely affect the climate for other co-operation projects. Problems were also foreseen in the event that a World Bank organisation lodged claims again...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Preface
• Table of Contents
• Introduction
• Chapter I: Earlier Proposals for Multilateral Investment Insurance and the Reasons for Their Failure
• Chapter II: Aims and Frame of Rerence of a Multilateral Investment Insurance Scheme
• Chapter III: The World Bank Proposal for the Creation of a Multilateral Investment Insurance Agency
• Chapter IV: Assessment of the Essential Premisses
• Chapter V: Analysis of Important Characteristics from the Point of View of Implementation
• Chapter VI: Compatibility of the Multilateral Scheme with the Interests of Various Country Groups
• Conclusion: Results of the Analysis and the Prospects for Possible Alternatives
• Bibliography