IFIs in Indonesia
This series of monthly factsheets on International Financial Institutions (IFIs) will include information on the World Bank Group, the International Monetary Fund (IMF) and the Asian Development Bank (ADB), focussing on their involvement in Indonesia.
MIGA is involved in two of Indonesia's most controversial cases. It guaranteed Freeport McMoRan Grasberg mine in West Papua (formerly Irian Jaya) where serious human rights violations, indigenous peoples' rights violations and environmental destruction have taken place. MIGA also provided political risk coverage to the PT Enron Java Power Co. and had to pay a claim to PT Enron when the Indonesian power company, PLN, cancelled its power purchase agreement with PT East Java Power Co. -- a subsidiary of PT Enron Java Power Co. Indonesia incurred a USD15 million penalty. These two cases lead to the underlying question: whose interests is MIGA serving and at what cost?
What does MIGA do?
Founded in 1985 with operations beginning in 1988, MIGA is one of the five agencies under the World Bank Group. It supports private sector investments in developing countries against political risk, provides technical assistance and advisory services to developing countries, and provides information to promote foreign direct investment in developing countries.
Private investors need assurance that their portfolios in politically risky countries are guaranteed. MIGA insures projects against (i) any losses an investor may experience if local currency cannot be converted into foreign currency and taken outside the host country; (ii) losses due to host government actions that reduce or end investors' control over or rights to the insured investment, such as nationalization or confiscation; (iii) losses due to breaches of contracts; and (iv) losses caused by war and civil disturbance.
MIGA's services are not unique. In the political risk insurance industry, more than half of the market is controlled by private insurers, and the rest is divided between government-backed export credit agencies (ECAs). MIGA shares only 4% of the market, and its coverage is issued at rates similar to those offered by private insurers or ECAs. However, MIGA has one advantage over other political risk insurance providers: it has a strong "deterrence" factor. A MIGA guarantee comes with the implicit or explicit backing of the World Bank Group and all of MIGA's member nations. An investor that has a MIGA guarantee can claim a payment to MIGA for the loss covered by the guarantee. In return, MIGA will request that the host country -- which must be a MIGA member – reimburses the amount. If the host country refuses to pay, MIGA will suspend their coverage for projects in that country. With such an arrangement, governments are unlikely to take or promote actions that would require that a claim be paid. Countries are very careful to not damage their reputation with other investors, cause problems with the Bank, or threaten Bank loans to their countries.
Where Does MIGA's Money Come from?
MIGA makes profit from its investment. Its net income in FY2000 was USD 10.9 million, a significant increase from USD 500,000 in the previous year. Its premium and fees income increased by USD 4.6 million in FY 2000 from USD 29.5 million in 1999. MIGA also has investment income on a portfolio of USD 464.5 million that is invested in bank deposits and U.S. Treasury bonds. This amount totalled USD 23.5 million in FY2000, up USD 3 million from its level in FY 1999.
How are MIGA's Guarantees Distributed?
In the past twelve years, the distribution of MIGA guarantees has remained fairly constant across the four major sectors: finance, infrastructure, manufacturing, and mining.
South African-based corporations hold the largest share of MIGA's guarantee portfolio of any developing country member, at 5.4%. Nearly 70% of investors receiving MIGA guarantees are from just five countries: the Netherlands, the United States, the United Kingdom, Canada, and France.
|United Kingdom and Territories||15%||15.58%|
A large majority of MIGA's clients are multinational corporations based in industrialized nations, including some of the largest corporations in the world: Japan-based Mitsubishi and Marubeni, U.S-based Citigroup and tobacco-giant Philip Morris. All of these corporations could buy political risk insurance in the private market and do not need this insurance to be guaranteed by a public multilateral agency.
Problems with MIGA operations
As part of the World Bank Group, MIGA is a publicly funded agency with a remit to promote development and poverty alleviation. It struggles to fulfil this role in its promotion of the private sector. The major problems with MIGA operations, which are summarized below, have been identified by in the recent report by Friends of the Earth "Risky Business: How the World Bank's Insurance Arm Fails the Poor and Harms the Environment".
Firstly, being an arm of the World Bank Group, MIGA poses as a development agent with a special role in meeting development objectives through private sector promotion. MIGA has probably achieved the latter goal in promoting the private sector, but still has to show that the projects it guarantees have demonstrative effects in development, such as poverty reduction and environmental protection. MIGA operates, instead, on the simple belief that private sector promotion will create growth, which automatically leads to poverty reduction.
Scattered achievements in development goals may be found in some MIGA-insured projects. For example, in 1997 MIGA claimed the 70 guarantees it approved catalyzed an additional USD 4.7 billion in foreign investment, directly creating 4,000 jobs. On the other hand, MIGA-guaranteed projects such as the Freeport McMoRan Grasberg gold and copper mine in West Papua have been associated with the loss of livelihoods of thousands of indigenous peoples, conflicts between local indigenous peoples and the Indonesian military protecting the company, and huge environmental and social costs that local people have to bear. In short, MIGA still has to conduct a fully-fledged review on how it has met its development goals since its inception 16 years ago before it claims that its operations promote development goals as intended.
Secondly, MIGA's guarantee portfolio reflects the existing investment pattern rather than promoting foreign direct investment in countries where foreign direct investment is low or official development assistance is falling. 51% of MIGA insurance has supported projects in Latin America and Carribean, the region that already receives the most foreign direct investment. In contrast, only 12% of MIGA funds support investment in Sub-Saharan Africa, the region receiving the lowest amount of foreign direct investment.
Thirdly, MIGA's environmental and disclosure policies remain weak. While MIGA's policies are based upon those of the Bank's other private sector arm, the IFC, they are not as strong, and in key areas are qualified, diluted, or made non-binding. MIGA's disclosure policy only requires the agency to make public those documents that will not harm "business and competitive interests of MIGA's applications" and that will not violate confidentiality obligations. Similar to other World Bank arms, MIGA classifies the projects it guarantees into 3 environmental categories: A, B, and C. It only has disclosure requirements and public discourse for Category A projects, not for Categories B and C although these may also have adverse social and environmental impacts. Environmental Impact Assessment (EIA) documents and other project information can also be difficult to access, especially for locally affected communities. These documents and information are available in the Bank's Infoshop in Washington, D.C. and Bank's website in English, and not readily accessible at the local level in local languages.
MIGA allows frequent exceptions to its policies, to the point of rendering them meaningless. For example, the Environmental Policy allows MIGA to waive a requirement for consultations with local stakeholders before and during the EIA process if it feels that host country disclosure laws are adequate and have been followed. It also provides a loophole for avoiding the procedures that require the Agency to follow a host of "safeguard" policies such as policies on indigenous peoples, information disclosure, involuntary resettlement, forestry, etc., and instead apply other "internationally recognized standards of best management practices" if guidelines and host country laws do not exist.
Fourthly, MIGA is weak in its monitoring capacity. Once a project is underway, MIGA is not equipped properly to continue monitoring that the projects it insures adhere to MIGA's standards and policies, especially those in the environmental and social areas. The Evaluations Department has only three staff members: the director, a full-time staff person, and a full-time consultant. It has no regular, ongoing monitoring system in place. While MIGA staff will, from time to time, visit project sites and review a sample of projects, MIGA has to rely heavily upon information provided by its clients to monitor projects.
MIGA guarantees in Indonesia
MIGA's guarantees in Indonesia are limited. Yet, they involve two extremely controversial cases, the Freeport McMoRan Grasberg mine and the PT East Java Power Co.
The Freeport McMoRan/Rio Tinto Grasberg mine in West Papua is the largest gold mine in the world. Despite its substantial annual revenue of USD 1.5 billion for U.S.-based Freeport, the mining project is widely notorious for its environmental and human rights impacts. The mine dumps approximately 200,000 tonnes of toxic waste per day into three river systems, destroying the ecosystem and causing health problems for the communities living in the area. Lawsuits were filed against U.S.-based Freeport in U.S. Federal and district courts by community members charging the company with "eco-terrorism" which involved local communities' arrests, detention, torture of local people and property destruction by Freeport's private security guards. Indonesian citizens groups approached MIGA officials about the abuses because the mine was being guaranteed by MIGA. In 1996, while MIGA was in the process of sending an investigative team, Freeport McMoRan decided to cancel the coverage. By doing so, the company could avoid complying with World Bank environmental standards and evade the MIGA investigation.
The U.S.-based Enron Co. bought a USD 60 million MIGA guarantee in 1997 for its investment in electric power in Indonesia. Its subsidiary, PT East Java Co., signed a power purchase contract with the Indonesia power company, PLN. It is suspected that the contract involved overpricing. The contract also allows the company to sell power to PLN in USD, while PLN normally sells in Rupiah. PLN was later unable to keep the contract due to the price mark-up, in addition to the impacts of the economic crisis which significantly devalued the Rupiah against the dollar. PLN decided to postpone the power plant development, which led Enron Co. to file a claim of USD 15 million to MIGA.
Although MIGA paid USD15 million on the claim plus USD 220,000 in interest, it received USD 10.5 million from re-insurers and USD 880,000 from the Indonesian government. Yet, MIGA is now demanding that Indonesia pay at least USD 15 million as a penalty, despite the alleged price mark-up and other possible corrupt practices that may have been involved. It is fair to ask whose interests have been served and at what cost.
In FY1995-2000, MIGA insured two other projects in Indonesia.
US West International Holdings, Inc. and the Chase Manhattan Bank (acting on behalf of a group of lenders) received a USD 14 million guarantee in 1997 for their equity and loan investments, respectively, in the expansion and operation of a telephone network in West Java.
In 1996 MIGA issued a USD 50 million guarantee to Capital Indonesia Power I C.V., an affiliate of General Electric Capital Co. of the United States. GE Capital sought insurance for its USD 61.2 million equity investment in the construction and operation of two 615 megawatt coal-fired power plants at the Paiton Power Generating Complex in East Java.
The Compliance Advisor Ombudsman (CAO): A Public Accountability Mechanism?
Like other World Bank Group lending agencies, MIGA is only accountable to its own policies. Communities adversely affected by the Bank's operations can only file complaints through the Bank's own accountability mechanisms. For IFC and MIGA, the public accountability mechanism is called the Compliance Advisor and Ombudsman (CAO). Created in 1998, the CAO is by nature an advisory and problem-solving mechanism. It attempts to address the overall performance and accountability of the IFC and its sister organisation, the Multilateral Investment Guarantee Agency (MIGA) in social and environmental areas.
A discussion of the CAO can be found in DTE Factsheet 15, September 2001
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