The Overseas Private Investment Corporation:

The Overseas Private Investment Corporation: Political Risk Insurance, Property Rights and State Sovereignty Marcus Chadwick A thesis submitted in fulfilment of the requirements for a Doctor of Philosophy Discipline of Government and International Relations Faculty of Economics and Business University of Sydney 2006

Abstract: This thesis is concerned with the role of the United States investment insurance agency, the Overseas Private Investment Corporation (OPIC), in enforcing property and contract rights on behalf of United States (U.S.) infrastructure investors, pursuant to the deregulation of infrastructure markets across the developing world. Drawing on evidence from two recent high profile breach of regulatory contract disputes between OPIC insured U.S. energy companies and Indonesia and India respectively, the thesis finds that while legalized modes of dispute settlement have proliferated, the rules of the game their efficacy in delimiting outcomes emerge as a function of state power and interests, as states undertake to enforce or resist legal obligations. Second, and contrary to the image of U.S. foreign economic policymakers as beholden to corporate interests, the thesis finds that the agency s transformation from aid to trade as underpinned the expansion of U.S. infrastructure investors to the developing world during the 1990s was driven by state officials consistent with evolving conceptions of U.S. national interests, central to which was the desire to expand markets for U.S. foreign investors and capital goods exporters. In this regard, the transformation of developing country infrastructure markets and the shift in the modes of resolving investor-state expropriation disputes as but one element of economic globalization and the legalization of dispute settlement respectively are revealed as a function of U.S. material interests and power at the point of enforcement. The thesis contends, however, that the changes observed reflect not only U.S. power and interests but a specifically American conception of private property and contract rights so as to reveal OPIC investment insurance as a conduit for the diffusion of shifting property norms concerning regulatory taking (expropriation) from the United States to the world economy at large. i

Contents Abstract Acknowledgements Glossary of Acronyms and Abbreviations Page i iv v-vi 1 Chapter 1: The Overseas Private Investment Corporation: 1 Underwriting the New Rules of the Game Economic Globalization: OPIC Policy and Practice and 4 Institutional Rule Making in the New Legal Order Realism Revisited: Re-considering the Role of State 23 Power and Interests in the New Legal Order and State Interests in U.S. Anti-Expropriation Policy-Making Methods and Research Techniques 25 Chapter Outline 35 2 Chapter 2: International Relations: State Power and Interests 39 in the New Legal Order and the Role of State Interests in U.S. Anti-Expropriation Policy-Making Evolving Standards of Investor Protection 1960-2000 41 Reconsidering the Role of State Power and Interests 53 In the New Legal Order Reconsidering the Role of State Interests in U.S. 67 Anti-Expropriation Policy-Making Conclusions 76 3 Chapter 3: Indonesia, CalEnergy and OPIC 78 Background: Power Sector Liberalization in Indonesia 80 Background to the Dispute: The Asian Financial Crisis 86 And Growing Political Unrest ECA and Diplomatic Efforts to Mediate and Settle 93 The Dispute(s) OPIC Investment Insurance and the Politics of Dispute 109 Resolution OPIC Governance: State Power Vs. Power of Legal Rules 116 Conclusions 124 4 Chapter 4: India, Dabhol and OPIC 129 Background: Power Sector Liberalization in India 131 (Maharashtra) Dispute Number One: 1995-1996 138 Dispute Number Two: 2000-2005 143 OPIC Investment Insurance and the Politics of Dispute 163 Resolution OPIC Governance: State Power Vs. Power of Legal Rules 171 Conclusions 180 ii

5 Chapter 5: Establishment and Evolution of OPIC, 1969-1980 184 Background to Congressional Debates Regarding the 187 Transfer of the Program The Establishment of OPIC, 1969-71 191 OPIC s Formative Years: Reauthorization and 195 Amendments, 1974 OPIC Reauthorization and Amendments, 1978 200 OPIC Policy Amendments: State Initiatives versus 204 Corporate Preferences OPIC: State Initiatives and Foreign-aid Program Reform 212 Conclusions 216 6 Chapter 6: Evolution and Transformation of OPIC, 1981-1994 218 OPIC Reauthorization 1981: From Aid to Trade 220 OPIC Reauthorization 1985: Strengthening Labour 224 and Environmental Protection OPIC Reauthorization 1988: Business as Usual 227 OPIC Reauthorization 1992: Growth in Eastern Europe 229 Postscript to 1992: The Jobs Through Export 232 Enhancement Act OPIC Policy Amendments: State Initiatives versus 232 Corporate Preferences OPIC: State Initiatives and Foreign Trade and 239 Investment Promotion Policy Reform Conclusions 249 7 Chapter 7: OPIC: Globalizing the Fifth Amendment 251 Part A : OPIC as an Instrument of State Power and 252 Interests in the New Legal Order Part B : OPIC and United States Foreign Policy-Making 258 U.S. Foreign Policy-Making and Institutional Rule 263 Making in the New Legal Order Conclusions: Public Policy Implications of the 266 Research Findings Postscript: OPIC and the Future of Private 272 Infrastructure in the 21 st Century References 277 Reports, Legal Cases, Media Articles and Interviewees 297 Appendix A: Economies with Private Participation in 310 Infrastructure Appendix B: Build-Own-Operate-Transfer (BOOT) 311 Project Structure Appendix C: OPIC Expropriation Cover 312 iii

Acknowledgements A number of people and institutions have been instrumental in enabling me to undertake the research presented here. In the first instance, thanks must go to Commonwealth scholarships office for their generous financial assistance. In the same vein, thanks are also due to the Faculty of Economics and Business at the University of Sydney for providing me with lecturing opportunities, which greatly sharpened my analytical skills, as well as financial assistance towards my field research in Indonesia and India. On that note, thanks are also due to a number of Indian and Indonesian government officials for their willingness to share their time and experiences with a doctoral student from Australia. Appreciation must also go to my postgraduate colleagues in the faculty and all those who participated in what were often lively seminar sessions and intellectual debates. These debates were crucial in repeatedly forcing me to reconsider my position on critical issues, as well as how to present my ideas. In this regard, I also owe a significant debt of gratitude to my supervisor, Jason Sharman, without whose untiring professionalism, insightful comments and encouragement the current research would not have been possible. Last but not least, to my partner Therese, thankyou for your unstinting support, patience and understanding when things were not going so well. Above all else, however, thankyou for believing in me when my own self-belief wavered, without you none of this would have been possible. iv

Glossary of Acronyms & Abbreviations AAA ADB AFL-CIO BIT BOOT CEA CGI CIL DPC ECA ECGD ESC Ex-Im FTN G.E. ICC ICJ ICSID IDBI IMF IPP JBIC JEXIM KKN LNG MERC MIGA MITI MNCs American Arbitration Association Asian Development Bank American Federation of Labour and Congress of Industrial Organizations (U.S.) Bilateral Investment Treaty Build-Own-Operate-Transfer Central Electricity Authority of India Consultative Group on Indonesia Customary International Law Dabhol Power Company Export Credit Agency Export Credits Guarantee Department (U.K.) Energy Sales Contract United States Export-Import Bank Final Termination Notice General Electric Company (U.S.) International Court of Arbitration International Court of Justice International Centre for the Settlement of Investment Disputes International Development Bank of India International Monetary Fund Independent Power Producer Japan Bank for International Cooperation Japan Export Import Bank Corruption, Collusion and Nepotism Liquid Natural Gas Maharashtra Electricity Regulatory Commission (India) Multilateral Investment Guarantee Agency Ministry of International Trade and Industry (Japan) Multinational Companies v

MSEB Maharashtra State Electricity Board (India) MW Megawatt NSC National Security Council (U.S.) NEXI Nippon Export and Investment Insurance (Japan) OECD Organization for Economic Cooperation and Development OND Office National Ducroire (Belgium) OPIC Overseas Private Investment Corporation (U.S.) PD Presidential Decree (Indonesia) PLN Perusahaan Listruik Negara (Indonesia) PPA Power Purchase Agreement PRI Political Risk Insurance SEB State Electricity Board (India) SPV Special-Purpose-Vehicle TNC Transnational Corporations TRIMs Trade Related Investment Measures TRIPs Trade Related Intellectual Property UNCITRAL United Nations Commission on International Trade Law UNCTAD United Nations Commission on Trade and Development USAID United States Agency for International Development USTR Office of the United States Trade Representative WTO World Trade Organization vi