Enron gets World Bank's 1st-ever insurance payout

Enron gets World Bank's 1st-ever insurance payout

WASHINGTON (Bloomberg): Enron Corp. received the first-ever payout from the World Bank's political risk insurance arm this year, as Indonesia broke a taboo that has surrounded bank guarantees offered for investments in 75 developing countries.

Prior to the $15 million payout for the Enron power plant project, the Multilateral Investment Guarantee Agency of the World Bank had used its clout with developing countries to compel them to honor all contracts and avoid tapping the insurance, said Motomichi Ikawa, head of the agency.

"Companies are aware that there's a certain halo benefit of our involvement," Ikawa said.

If a country doesn't live up to the contract, the World Bank intervenes on the company's behalf, trying to reach a "reasonable" solution, he said.

In a presidential decree, Indonesia canceled Enron's East Java 500-megawatt power plant project before construction even began, in September 1997. As a recession hit the Southeast Asian country, the government said the project and others like it were no longer viable.

It took a year of discussions among the government, the World Bank and Enron before the insurance agency agreed to pay to cover what the company had spent setting up a local company and preparing to build the plant.

Six months after the decree, Enron gave up on the project, even though the World Bank tried initially to get Indonesia to resurrect it, said company spokesman John Ambler.

"This shows that the system really works," said Ambler of Enron. "It's precisely the reason we purchased the policy in the first place, to protect our shareholders."

The World Bank is not the only insurer hurt by Indonesia's economic problems. The U.S. Overseas Private Investment Corporation, which provides similar political risk insurance, paid $217.5 million to MidAmerican Energy Holdings Co. for a similar power project, and is still negotiating with the Indonesian government to get back that money.

So far, the pay outs haven't had much effect on Indonesia, as the World Bank says it wants to give the country time to pay it back.

The bank's agency didn't provide any new guarantees in Indonesia during the fiscal year ended June 30. Yet, the bank hasn't cut its lending to the world's fourth most populous nation, either. Almost $7 billion in World Bank projects for Indonesia are in the works.

The investment guarantee agency, established at the bank 12 years ago, offers companies insurance in developing countries as a way to boost foreign direct investments. In fiscal year 2000, the agency offered $1.6 billion in insurance, allowing for $5.4 billion in investments.

For example, the agency provided $30 million in insurance for the South African mining company Anglovaal Mining Limited to invest in copper mines the government of Zambia sold. It also provided Rabobank Nederland insurance to expand its Russian operations.

The agency's insurance covers the projects in cases of war, civil disturbance, outright expropriation or other non-commercial risks. Confiscation is almost nonexistent, said Ikawa, yet governments have tried to rework contracts after the fact in what he labeled "creeping expropriation."