Market Forces and OPIC’s Institutional Survival Concerns

The public investment insurance industry as such is primarily informed and guided by investor-centered political risk approaches. Conversely, the industry constantly regenerates such approaches to political risk in order to remain in operation. That is, insurers are responsive to investors’ needs and requests as their existence is often justified by investors’ demand for their insurance products. Even the large and important investment insurers, like MIGA and OPIC, whose mandate is limited to supporting projects with positive developmental impacts on the host country economy, are very much dependent on the prioritization of investors as their clients. In general terms, investment insurers’ viability depends on the provision of surveillance and investment protection that is in the interest of investors. A closer look at OPIC’s history helps illustrating the influence of corporate preferences on the investment insurance industry.⁶³

The US Congress about whether to reauthorize OPIC programs, the term of the reauthorization and the conditions thereof.⁶⁴ OPIC’s operative authority was first extended through the end of 1974 by the Foreign Assistance Act of 1973.⁶⁵ As from this date, OPIC was being reauthorized on a three to five-year basis. The last long-term reauthorization was made in 2003, which lasted through the year 2007.⁶⁶ Between April and September 2008, OPIC’s authorization lapsed and, in this period, OPIC refused to accept new business.⁶⁷ Ever since, OPIC has been reauthorized on an annual basis.⁶⁸

Since Congress may or may not extend OPIC’s authorization, it is essential for OPIC to address the concerns of Congress. A disagreement between the House of Representatives and the Senate Committee on Foreign Relations on the purpose and functionality of OPIC resulted in hard-fought debates in the 1973 Congress hearings.⁶⁹ The Senate subcommittee on Multinational Corporations was particularly concerned whether OPIC was able to contribute to the development aid goals of the USA and did not merely compromise the national budget for

62 See Ibid., 173.

63 While there might be other factors that affect the viability of OPIC, the emphasis in this section will be on the influence of corporations -the clientele- and their preferences on the operation of OPIC investment insurance.

64 Akhtar, The Overseas Private Investment Corporation: Background and Legislative Issues, p. 15.

65 Foreign Assistance Act of 1973, Pub L 93-189 (enacted 17 December 1973), s. 240A (b).

66 Akhtar, The Overseas Private Investment Corporation: Background and Legislative Issues, p. 15.

67 Ibid.

68 Ibid.

69 Haendel, West and Meadow, Overseas Investment and Political Risk, p. 20-5.

141

the protection of investors.⁷⁰ In an attempt to address such concerns, legislative changes were made particularly through the OPIC Amendments Acts of 1974, 1978 and 1981. Certain measures were adopted to ensure that OPIC insured projects are environmentally sound and have economic and social development impacts. As to the financial resources, OPIC Amendments Act of 1974 inserted into OPIC’s Charter a provision that OPIC shall conduct its programs on a self-sustaining basis, thereby ending its financial dependence on the US Treasury. That is, OPIC was required to insulate the US Treasury against its operative risks and to conduct financing, insurance, and reinsurance operations on a self-sustaining basis.⁷¹ Furthermore, through the OPIC Amendments Act of 1981, OPIC was required to return to the general fund of the US Treasury, amounts equal to the total amounts which were assigned to it before January 1, 1975. For that purpose, OPIC was required to pay to the Treasury at least 10% of its net income for the preceding fiscal year until the aggregate amount of such payments equaled the amounts to be returned to the Treasury.⁷² In 1982, OPIC repaid to the Treasury the total amounts of its original paid-in capital.⁷³

Officially, the primary rationale behind the establishment of the US investment insurance scheme is the desire to contribute to the economic development of risky areas of the world through promotion of private investment flows to these regions. The developmental role of investment insurance rests mainly upon its impact on the corporate foreign investment decision-making process.⁷⁴ Therefore, it is crucial for OPIC to demonstrate to Congress that its services and products are needed and consistently sought by US firms that have an interest in venturing abroad. In other words, OPIC’s existence inherently depends on the demand for the investment insurance it offers.

This, in turn, creates a competitive situation where OPIC needs to be responsive to the needs and requests of investors -its clientele. From the perspective of investors, there are certain advantages of taking up investment insurance. Investment insurance is generally insulated from the inherent vagaries of international law such as the expense, delay and inconvenience of prosecuting claims against foreign states for investment related losses and potential obstacles represented by such doctrines as sovereign immunity and act of state since the insurance

70 Ibid., 21-2.

71 See Foreign Assistance Act of 1961, s. 231.

72 See Overseas Private Investment Corporation Amendments Act of 1981, Pub L 97-65 (enacted 16 October 1981).

73 OPIC, Congressional Budget Justification-Fiscal Year 2013 (2013), p. 3.

74 Steven Franklin and Gerald T. West, ‘The Overseas Private Investment Corporation Amendments Act of 1978:

A Reaffirmation of the Developmental Role of Investment Insurance’ (1979) 14 Texas International Law Journal 1–35 at 8-9.

142

coverage is determined by an insurance contract that is subject to US law.⁷⁵ In practice, the effectiveness of OPIC investment insurance is mainly evaluated with respect to the usefulness of the investment insurance after an unfavorable event actually occurred.⁷⁶ Therefore, OPIC could gain the confidence of investors mainly through prompt claim payments: “it is doubtful that OPIC will ever be fully accepted by its users until it promptly pays a major claim”.⁷⁷ From 1966 to 1970, USAID paid US$3.5 million in settlement of eight insurance claims.⁷⁸ It denied eight other claims in the same period, one of which was submitted to arbitration by the insured investor.⁷⁹ From 1971 to September 2015, OPIC settled 298 insurance claims by paying out US$977.2 million in total while denying 30 insurance claims, of which 15 have been submitted to arbitration by the insured investors.⁸⁰

The fact that OPIC is responsive not only to investors but also to Congress raised concerns on the part of investors in the first years of OPIC.⁸¹ As aforementioned, the main concern of investors was the scope of insurance coverage. Indeed, OPIC cannot pay out insurance claims on the same basis as a private insurance company.⁸² Being a government agency, it is subject to audits by the US Government Accountability Office and bound not to make a payment that is not mandated by US law.⁸³

It may be argued that self-sustainability of OPIC facilitates determination of insurance claims favorable to insured investors even when there are legal suggestions that the claim should be denied. OPIC’s self-sustainability enhances its corporate identity and likens it to a private insurance company that pays out insurance claims on a different basis than a public insurer.⁸⁴ OPIC has actually become a profit-making agency that contributes to the US Treasury.⁸⁵ OPIC’s contribution to the Federal budget totaled US$434 million in fiscal year

75 Koven, ‘Expropriation and the "Jurisprudence" of OPIC’, 270; For a recent study that compares political risk insurance with investment treaty arbitration, see Kantor, Comparing Political Risk Insurance and Investment Treaty Arbitration.

76 J. Heller, ‘Political Risk Insurance’ (1978) 12 Journal of International Law and Economics 231–4 at 231.

77 Ibid., 232.

78 OPIC, Insurance Claims Experience to Date <https://www.opic.gov/sites/default/files/files/2015-Annual-Claims-Report.pdf> (last visited 20 March 2017).

79 Ibid.

80 Ibid. As will be discussed in Section 2.4, disputes between OPIC and insured investors are settled through arbitration.

81 Heller, ‘Political Risk Insurance’, 232; see also Bruce E. Clubb and Verne W. Vance, ‘Incentives to Private U. S.

Investment Abroad under the Foreign Assistance Program’ (1963) 72 The Yale Law Journal 475 at 476.

82 Heller, ‘Political Risk Insurance’, 232.

83 Ibid.

84 A private insurance firm may not violate the law, but it may go beyond what is required by law to satisfy its customers.

85 OPIC, Congressional Budget Justification - Fiscal Year 2017 (2017), p. 1

<https://www.opic.gov/content/congressional-budget-justification> (last visited 23 March 2017).

143

2015 – the 38^th consecutive year that OPIC has had a positive effect on the budget.⁸⁶ OPIC covers its administrative and program expenses up to the maximum spending level set by Congress each year⁸⁷ and the surplus is transferred to the US Treasury. By the fiscal year 2015, OPIC’s reserves have totaled US$5.4 billion invested in Treasury securities, thereby insulating the US Treasury from the risk of losses in excess of those already budgeted.⁸⁸

It is likely that it is the self-sustainability of OPIC and its contributions to the US Treasury that allow it to make claim payments based on expansive interpretations of the scope of coverage, thus going beyond international investment law guarantees. The expropriation risk insurance provided by OPIC has been quite often compared to investment protection standards concerning expropriation under international investment law. In his study of OPIC’s first standard contract, Koven concludes that the contract’s definition of expropriation is substantially broader than the definition likely to be employed by an arbitral tribunal applying current principles of international investment law.⁸⁹ The first standard contract contained restrictive clauses that signaled that the scope of OPIC expropriation coverage might not go beyond the expropriation protection in international law. One of the clauses suggested denial of coverage for governmental regulation where international law did not require compensation, and another one made clear that breach of contract was not a basis for recovery unless it also constituted an expropriation. Nevertheless, OPIC itself and arbitral tribunals deciding on insurance claims (those set up to settle disputes between insured investors and OPIC) have often resolved tensions between the definition of expropriation and these restrictive clauses in a manner favorable to investors.⁹⁰ Over time then the standard contract’s definition of expropriation has been redrafted in an expansionary manner. Zylberglait notes that OPIC is eager to pay claims so much that it is ready to go to great lengths to reinterpret or even waive contractual terms in order to help an investor’s claim.⁹¹

There appears, therefore, to be a causal link between on the one hand the incentives to gain the confidence of investors and the financial sector so as to justify further reauthorizations and on the other hand the flexible interpretation of insurance contracts as to the extent of compensation payment even in case of inconclusive expropriation decisions. Some argue that

86 Ibid.

87 Akhtar, The Overseas Private Investment Corporation: Background and Legislative Issues, p. 5.

88 OPIC, Congressional Budget Justification-Fiscal Year 2015 (2015), p. 7

<https://www.opic.gov/content/congressional-budget-justification> (last visited 23 March 2017).

89 Koven, ‘Expropriation and the "Jurisprudence" of OPIC’, 280.

90 Steven R. Ratner, ‘Regulatory Takings in Institutional Context: Beyond the Fear of Fragmented International Law’ (2008) 102 American Journal of International Law 475–528 at 490.

91 Zylberglait, ‘OPIC's Investment Insurance’, 367.

144

OPIC is free to interpret the insurance contracts flexibly to protect policy holders beyond policy coverage.⁹² This is, however, only convincing when OPIC is not dependent on tax-money and finances its activities through risk premiums similar to a private insurance company.