Luis Dodero, Vice President and General Counsel of the Multilateral Investment Guarantee Agency (MIGA), will retire this year after holding that position since the agency’s inception sixteen years ago. He has played a major role in MIGA’s development and its success as a leading provider of political risk insurance. We asked Mr. Dodero to respond to some questions about the agency and his experience there.
Q: MIGA has some interesting experience resolving investor-host government disputes. How would you describe the process – as mediation, suasion, or something else? What have you learned from your experience that might help underwriters and investors?
A: MIGA may be involved in two different type of disputes: those concerning an insured investor and the host country and those arising out of investments not insured by the Agency. In the first case, MIGA gets involved, not only to avoid paying a claim, but also to minimize the adverse consequences that the dispute may have in the ability of the country to attract foreign investment. In the second case, when MIGA is convinced that the dispute is having this adverse effect, we can provide mediation services. We believe that our intervention constitute mediation, since our efforts are addressed primarily to encourage the parties to find a solution that is mutually satisfactory. I must say that I am very proud of what MIGA has achieved in this field during our short life, a little over 15 years. We have helped resolve disputes involving non-insured investors and Argentina, Brazil, Ghana, Guatemala and Ethiopia, and be- tween insured investors and Bolivia, Guatemala, Argentina, Brazil, China, Moldova and Indonesia.
With certain exceptions, the common denominator of these disputes is a deep disagreement between the Government and the investor on regulations and tariffs by the latter for power, water or transportation. In most cases, the projects that trigger the disputes are privatized public services, where there is public discontent with an increase of the tariffs and the discontent could have an important impact on the results of the next presidential/ provincial elections. Even if the investor is abiding by the tariff increase formula agreed upon in the concession agreement with the Government, the latter alleges that (using legalistic terms) the so-called principle rebus sic stantibus, i.e., if the circumstances change, the contract should be amended to be adapted to the new situation, and that this principle prevails over that known as pacta sunt servanda or sanctity of the contract. In my opinion, most of these cases meet internationally recognized definitions of expropriation and, as such, they may become legal expropriations if the government can prove that they were in the public interest and pays appropriate compensation. However, it is not easy to obtain compensation from governments that are usually going through a financial crisis. MIGA’s preferred solution is always to try to find a non-monetary way of compensation by the government and convince the claimant that it is always in its interest to accept a small and temporary reduction in the contractual increase of the tariffs, if they want to continue doing business in the country.
The inference of the above is that coverage of privatized public services constitutes some of the riskiest business a political risk insurer can cover, independently of the country where the investment is made (remember the power crisis in California!). Prices of these services have a very strong political impact, since the public tend to put the blame on the government when they cannot afford water or electricity, even if the reason for the increase is totally independent from the government or the investor, (such as increase in the price of oil). Investors must realize that if they want to stay in the country they have to be flexible in their negotiations and that governments don’t like them using the arbitration provisions in their contracts. Countries, on the other hand, must take into account that the final objective of a private investor is to make a profit, not to provide a concessionary public service.
Q: What are the principal changes of substance in MIGA’s recently revised standard policy forms, and why were they made?
A: MIGA’s policies (“contracts of guarantee”), were drafted 16 years ago. It was time to update them to better fit the changes in the investment environment and to make them more client friendly. We have modified both the form and the substance of the general conditions. We have tried to have very few provisions that apply to all risks, so that by reading the section concerning each risk the investor knows what is covered, most of its rights and obligations and doesn’t need to go to another section to find out what is excluded from coverage or when and how a claim must be filed. We have also included in the contract the provisions concerning corruption and hiring of child or forced labor that before had been included as amendments to the contract.
The main modifications of the substance are the inclusion in the contract of the coverage of breach of contract risk and a better definition of the “stand- by” coverage, i.e., the commitment by MIGA to accept increases in the insured amount during the life of the contract under certain conditions.
Q: MIGA’s guarantee contracts specify a unique set of rules for settling disputes between policyholders and MIGA. Why is this so, and how do MIGA’s rules differ from the mechanisms used by other political risk insurers, such as AAA or the London Court of International Arbitra- tion?
A: MIGA’s Convention (its charter) sets forth that disputes between the guarantee holder and the Agency arising out of a contract of guarantee, must be subject to arbitration. The issue of the applicable law is a little more complex. While the Convention is silent in this respect, the Operational Regulations of the Agency set forth that the applicable law will be the Contract of Guarantee, the Convention and, if these rules cannot be applied to the dispute, general principles of law.
Concerning the specific ad hoc arbitration rules under MIGA contract of guarantee, they are drafted, as directed by the Operational Regulations, following very closely the rules of the International Center for the Settlement of Investment Disputes (ICSID), the dispute resolution center of the World Bank Group. However, in order to avoid perceived conflicts of interest, the appointing authority, in case there is no agreements between the parties on the appointment of the third arbitrator, is not the Secretary General of ICSID, but the Secretary General of the Permanent Court of Arbitration of The Hague (my first trip after joining MIGA was to The Hague, where I concluded an agreement in this respect with the Secretary General of the Permanent Court). In addition, the third arbitrator doesn’t have to be selected from the ICSID list of arbitrators.
Q: MIGA’s guarantee contracts state that “all provisions of the Contract shall be presumed and construed to be consistent with the Convention and the Operational Regulations.” What does this mean? Those are two hefty documents. What are the practical implications of this provision that Guarantee Holders should be aware of?
A: This provision was included in the Operational Regulations so that MIGA will follow the principle applicable to multilateral organizations that they cannot invoke their own rules to justify their failure to perform a treaty to which they are parties. An arbitration tribunal can rule that MIGA did not comply with its own Convention and Regulations, but MIGA cannot allege that its own contract does not meet the requirements of these rules. A contract between two private parties is subject normally to a national law. Any of the parties can always argue that the contract does not comply with the law, but, as mentioned above, MIGA’s contract is subject to MIGA’s rules and it wouldn’t make any sense that MIGA could challenge this.
“…coverage of privatized public services constitutes some of the riskiest business a political risk insurer can cover, independently of the country where the investment is made…”
Q: How would you describe MIGA’s preferred creditor status, in theory and in practice?
A: I would state that legally, MIGA has no preferred creditor status. In accordance with Article 18 of the Convention, when MIGA pays a claim, it becomes subrogated to the rights or claims that the guarantee holder may have against the host country, no more, no less. The fact is that a member of the World Bank Group has always more leverage with the government of a member country than a private or even most national insurers. This reality has been verified over the years in a number of countries, which have given better treatment to investors insured by MIGA than that given to other investors. In addition, MIGA has concluded bilateral treaties with the majority of its developing member countries by which it enjoys most favorable treatment.
Q: What do you think will be the new initiatives that MIGA should take over the next (a) five years? (b) ten years?
A: In mid-2004, MIGA experienced a significant turnover in its senior management ranks. A new team headed by Ms. Yukiko Omura, our Executive Vice President, is currently considering a wide range of new initiatives. I would expect that these will be unveiled in early 2005. Among the possibilities are some amendments to our Convention, to allow, for example, the coverage of non-shareholder loans even when they are not related to an investment covered or to be covered by MIGA.
Q: What do you think should be the new initiatives that MIGA should take over the next (a) five years? (b) ten years?
A: Within 5 years, I would like MIGA to create a center for mediation of investment disputes, in cooperation with other members of the World Bank Group (we are working on it). We should also be providing and receiving more reinsurance to and from national investment insurers. Within ten years I would like MIGA to provide some kind of non-commercial coverage to encourage domestic investment in developing countries.
Q: In 2005 you will be retiring from MIGA, where you have been its one and only General Counsel for some sixteen years. What are you most proud of having achieved during your tenure?
A: I am retiring from MIGA in 2005, after nearly 16 years as its only General Counsel. Needless to say, I am proud to have grown with the Agency and helped it overcome hundreds of challenges. The Legal Department played a key role in convincing more than 100 countries to become members of MIGA (even those who applied the “Calvo Clause”, which in principle were totally opposed to ratify an international treaty that subject them to international arbitration), and about a decade later, to effectively double its capitalization.
I am particularly proud of the team I have recruited, including lawyers and non-lawyers, and what we have collectively accomplished through the issuance of more than 700 guarantees to investors. These MIGA guarantees facilitated more than US$50 billion of investment to our developing member countries. These investments, in turn, have generated thousands of stable jobs, brought new technologies to the host countries and brought poor countries closer to international marketplaces.
I am also proud to have worked not only to conceptualize programs like the Guarantee Trust Funds, but to bring them to reality in post-conflict countries such as Bosnia and Afghanistan. On a personal level, I am also proud of the creative role I played in preparing the guidelines that have allowed MIGA to cover sub-sovereign risk and to provide breach of contract coverage. I have taken risks, but it was worth it. I would like to think that I have left my successor a very firm foundation on which to grow the Agency in the next decade.