September 17, 2014
Many developing countries have made progress in political openness and economic management but lag in terms of attracting private sector investments, at least outside of narrow resource-based enclaves.These countries may have recognized potential but have not yet established the reputation needed to sustain investment through the inevitable political and policy shocks that take place in most countries. The concerns that deter investors are many but can be broadly classified into high costs that that prevent global competitiveness and high actual or perceived risks.
Political and credit risk guarantees are often used to encourage investors but they cover only a narrow range of risks and are often issued on a deal-by-deal basis. This paper explores the possibility of expanding the range of guarantee instruments to encompass a wider range of risks and to integrate guarantees more centrally into the reform and investment programs supported by donors. The proposed approach is to offer firms Service Performance Guarantees (SPGs)-- the opportunity to purchase insurance against a wider range of risks and through this to strengthen the accountability of both governments and development partners to their clients – in this case the firms. While it may not be practical to fully cover business losses, firms would receive highly visible payouts if service delivery standards fall short of those expected from the program.
Countries competing globally for investors are much like shopping malls that compete to attract tenants-- they need to offer an attractive “service package”. This draws attention to the range of services the firms will consider when evaluating investment destinations. The proposal considers whether and how the promise of such a package could be made more credible through a guarantee instrument that could be integrated into reform or investment programs, for example to establish special economic zones. The approach may not be attractive to countries with a well-established reputation and may not be feasible for fragile states that lack the capacity to sustain the most basic conditions for business. It also would require a careful and realistic assessment of the authority of the agency issuing the guarantee, to ensure that it covers risks that are potentially under its control. SPGs can be seen as an extension of the results-based approach to make governments directly accountable to investors.
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