Enforcement: the Chad pipeline, Part 1
Scarcely were the pixels of my finished three-part post on enforcement theory glowing on the monitors of global leaders throughout the world …
… than what should appear but precisely a geopolitical example of the dilemmas of pay-before-performance (PBP) enforcement. Ladies and gentlemen, I give you this, courtesy of the Washington Post:
Six months after assuming the presidency of the World Bank, Paul D. Wolfowitz is facing his first big test in his new job. An avowed hard-liner on corruption, he must decide whether the bank should wash its hands of one of its most controversial projects, in a country with a notoriously corrupt regime.
World Bank President Paul D. Wolfowitz has to wrestle with shift by
At issue is a 650-mile pipeline that the World Bank helped finance for Chad, a landlocked central African nation of about 10 million, to transport oil from the country’s interior to a coastal port.
Clearly this is a case of Pay-Before-Performance (PBP). As I wrote in a previous post:
In PBP situations, capital surrenders its inherent pay-later leverage. Why might it do this? Mainly in two cases:
· Auction marketplaces, where the object or service is rare. Hence Vegas signs performers for long-term deals just as football clubs do.
· Commodity creation investments. In many cases the entrepreneur lacks the vast capital sums necessary to create the property, enterprise, or business (what did it cost to start up Google?). The result is that capital exposes itself to extra risk, for which it demands extra compensation.
But even in a PBP oil pipeline, what need we the World Bank? A pipeline to pump oil sounds like a paying proposition, doesn’t it? Why could it not have been a purely commercial proposition (like, say, the Alaska pipeline)?
This is the first clue, although the condition is so pervasive the clue is often overlooked. Whenever government is involved in a venture, it by definition goes beyond commercial boundaries: either in affordability, or in risk. Affordability’s not an issue, so World Bank presence = non-commercial risk. What kind of non-commercial risk? Government risk. Indeed, the World Bank stepped in only when private concerns stepped out in 2003:
Pulling out
Shell and Elf, two of the members of the original pipeline consortium, pulled out of the project three years ago [2000. — Ed.] over fears that they would face problems to those experienced in
Uh-oh, I don’t like the sound of this …
Despite objections by critics that oil money in such countries is almost invariably squandered or stolen, the bank backed the pipeline in the hope of showing that
The World Bank, one should clarify, is not a government — rather, it is a multilateral funded by governments. So it stands in the place of a government sponsored enterprise (GSE):
“I pray you’re not talking about Fannie Mae.”
The World Bank acts for governments, as a private participant, with a double bottom line objective: economics and impact. An entirely valid use of government power is expand the bankability frontier by extending credit to absorb non-commercial risk. When it did so, the Bank entered the transaction alert to many of the risks of PBP funding, including the funds being absconded with:
It secured an agreement with Chadian leaders that most of the government’s oil proceeds would go into a closely supervised escrow fund in
Good move. Good solution?
[Part 2 continues tomorrow]
