A recent article (perhaps in BusinessWeek) talked about people who had been declared legally bankrupt and yet found themselves having to pay debts they believed had been cancelled by the courts. These people faced two different groups looking for money. One group included companies that offered the original credit and that refused to delete the debt from credit reports even after receiving court orders demanding they do so. The result was that people after bankruptcy looking to make purchases on credit, like a house, found they couldn’t get a mortgage unless the old debt was cleared. Rather than fighting for years in the courts, many paid up. Eventually, these companies were taken to court and ordered to pay large fines, but for many consumers the damage was done. The other group looking to collect from people declared bankrupt involved companies that buy bad debt and then try to harass people into paying. Like most debt collection companies, these companies can make life miserable. This latter group has a parallel in the international lending system and these so-called international “vulture funds” were the subject of a New York Times article [“Unlikely Ally Against Congo Republic Graft,” by Lydia Polgreen, 10 December 2007]. Polgreen begins her article by describing the conditions in a Congolese hospital.
“The main teaching hospital [in Brazzaville] is in such disrepair that many patients have to pay freelance porters for piggyback rides up and down the stairs to get X-rays. It costs $2 a flight, each way. But why is the hospital, like so much of the Congo Republic, so tattered when the country sells billions of dollars of oil each year?”
It’s a rhetorical question. The answer, of course, is corruption. The government, however, offers many other excuses for why things aren’t going well.
“The government says it is still recovering from a devastating war and faces a new problem: Western investors, sensing a chance to rake in millions, are suing to recover old debts that they bought for pennies on the dollar. Such investors, running what critics derisively call vulture funds, have been widely denounced by the World Bank and the International Monetary Fund for forcing poor countries to fend off costly lawsuits rather than build classrooms and clinics.”
So why would Polgreen call these vulture funds “allies” in the fight against corruption?
“In the Congo Republic, where a deep-seated culture of graft has squandered so much of the nation’s wealth, those investors have become unexpected allies of anticorruption campaigners, who say such lawsuits may be the only way of holding the country accountable for how it spends its money. ‘We ask ourselves, why is our country like this?’ said Dr. Bebene Bondzouzi-Ndamba, a neurologist at the hospital. ‘Why are we so rich and yet so poor?’ Her questions have come into sharp relief in the fight between the Congo Republic and an affiliate of an American hedge fund, Elliott Associates. For an undisclosed price, the company bought about $31 million in debt that the country took on in the 1980s but later defaulted on. Now it is suing in American, European and Asian courts to collect the principal plus interest and penalties — more than $100 million in all. So far, it has collected $39 million.”
As Polgreen reports, such activities make people — like U2’s Bono — cringe in horror or explode with anger. Activists are often joined by politicians in their revulsion.
“Advocates of canceling third world debt recoil at such cases, with some calling for a code of conduct among lenders to prevent them from selling unpaid debts to investors. ‘I deplore the activities of so-called vulture funds that seek to profit from the debts owed by the poorest countries,’ Gordon Brown said in May, the month before he became prime minister of Britain. ‘I am determined to limit the damage done by such funds.’ … Critics argue that virtually all countries use their debt relief savings to help the poor, and that so-called vulture funds achieve outsize returns from long-forgotten debts at the expense of the world’s poorest people.”
Clearly this is a story with two sides to tell. The reason that those fighting corruption see vulture fund lawsuits in a different light is because lawyers for those funds are able to expose deeply hidden conspiracies of corruption that otherwise may never have seen the light of day.
“Organizations that fight corruption argue that those investors are exposing in court the corrupt networks of government officials, providing a much-needed check on mineral-rich states. Beyond that, anticorruption campaigners, like the groups Global Witness and the Publish What You Pay Coalition, contend that when nations win debt relief without becoming more accountable, they will simply repeat old mistakes and end up deep in debt once again. ‘If it were not for these vulture funds, we would not know any facts about the way our country’s wealth is being taken away,’ said Brice Mackosso, a campaigner for greater transparency in the Congo Republic’s government. ‘We don’t agree with their ultimate aims, but they are the only ones capable of exposing the truth.'”
In other words, anti-corruption fighters have made what they feel is a deal with the devil. In a perfect world, there would be both debt relief and transparency. One of the reasons I keep pushing Enterra Solutions’ Development-in-a-Box™ approach is that it is founded standards and best practices and relies on process automation that provides efficiency, effectiveness, and transparency. The problem with a litigation approach being pursued by the vulture funds is that often the only lesson being learned by corrupt officials is that they have to do a better job of covering their tracks.
“While investor lawsuits may expose nefarious dealings, they may also make governments more secretive to avoid asset seizures. ‘It can cut both ways,’ said Mark Thomas, a senior economist at the World Bank. ‘It can be a cause of revealing nontransparent practices, but it can also be a cause of those nontransparent practices in the first place.'”
Polgreen points out that debts are bought and sold all the time. The reason that vulture funds are willing to buy bad debt for pennies on the dollar is because the upside profits can be very large making the risks worth taking.
“Peru is the best-known example: In 2000, Elliott Associates …won a $58 million judgment on debt it had bought in 1996 for $20 million.”
That’s a pretty good return on investment which makes bad debt an opportunity that someone is going to exploit. The big question is what kind of damage will such debt collection activities wreak among the world’s poorest nations, especially those in Africa.
“Now African countries are in the sights of debt investors. In 1979, Zambia borrowed $15 million from Romania to buy agricultural equipment. Twenty years later, the two governments agreed to settle the old debt for about $3 million. But a hedge fund, Donegal International, bought it first and sued for about $55 million. This year, a British court ruled that Zambia must pay Donegal $15 million. The plight of Zambia, a poor country stricken by AIDS, raised awareness of so-called vulture investing in Africa, and debt relief campaigners, celebrities and some members of the Bush administration have taken up the issue.”
I have written a couple of posts this year describing the halting progress that is being made in Africa. Even in the Congo, there has been some progress — but not nearly enough.
“Government officials here point to a slew of new projects under construction, like a hydroelectric dam, hundreds of miles of new roads and an emergency power plant as evidence that they are rebuilding the country. A June report from the I.M.F. noted that at least some progress has been made to address ‘corruption and weak governance.’ Still, half the nation’s population lacks access to clean water, according to Unicef. The lifetime risk of dying in childbirth for women in the Congo Republic is 1 in 26, one of the world’s highest rates. Life expectancy is just 53 years, down from 55 in 1990. That deprivation exists despite the significant amount of oil the country produces relative to its 3.8 million people — 250,000 barrels a day. The litigation surrounding the country has unearthed a complex web of questionable practices that may have stripped untold millions of that oil money from the nation’s treasury since 1997. In interviews, officials here said the purpose of their complex transactions — which, according to court documents, included discounted prices for well-connected companies — was to avoid what it viewed as overzealous creditors. ‘We are in a war, and we have to defend ourselves,’ said Alain Akouala, the Congo Republic’s information minister. But the group Global Witness has seized on court records to tease out these connections between government officials, private companies and a French bank that set up oil transactions. The litigation has also exposed the free-spending habits of government officials. According to hotel bills, the country’s president, Denis Sassou-Nguesso, paid $8,500 a night for a triplex suite at the New York Palace Hotel during a visit to the United Nations in 2005. His hotel bills in the United States in 2005 and 2006 added up to hundreds of thousands of dollars. Officials here said that Mr. Sassou-Nguesso was simply staying in the same type of hotels as other heads of state. Another embarrassing find was the credit card bills of one of the president’s sons, Denis Christel Sassou-Nguesso, who runs the marketing arm of the Congo Republic’s state oil business, Cotrade. They showed large purchases from shops like Christian Dior, Louis Vuitton and Gucci, and a paper trail suggesting that companies receiving state oil business had paid for the purchases, Global Witness said. The world of luxury implied by those credit card bills is emblematic of the vast gap between the country’s elite and its impoverished masses.”
Caught between the Congo’s corrupt leaders and the vulture funds pursuit of bad debts are poverty-stricken masses who are negatively affected by the fight over money because they never benefit from it. As Polgreen reports:
“Caught in the middle of this fight are schoolchildren, like 10-year-old Laurent Mbemba in Pointe-Noire. His school has 3,583 students. Its three latrines are broken. Many teachers have not been paid in years — they get by on donations from parents. Rain pours in thundering sheets onto the tin roof, dribbling through rust holes onto the children beneath. The classrooms are so packed — as many as 200 a class — that many children sit on the cement floor, notebooks perched on their narrow thighs.”
The struggle between corrupt leaders and vulture funds is one in which there is no good side to which one can happily lend support. The development community is on the side good governance, transparent processes, and wise investment. Those are not goals being sought by either corrupt leaders or vulture funds.