While not suitable for all, countries with stable governments could find that SPGs give foreign investors more confidence where governments are held more accountable. Previous posts featured on the Ashay Mervyn blog and the attached PDF document both report on the recommendations from the Centre for Global Development think tank that certain Sub-Saharan countries could well benefit from the introduction of Service Performance Guarantees. SPGs are essentially a form of insurance which can be used to protect investors from various risks. These could be risks such as loss of output due to power supply failure or they could be guaranteeing service such as VAT rebates will be performed within a pre-decided timescale. Where specified targets were not met, the country’s government would be required to step in and provide compensation for the firm or investor who had purchased the insurance.
Variants of SPGs have been used effectively among many developed nations for some decades. Authors of the suggestion to introduce SPGs argue that the system could be self-sustaining as with other forms of insurance, with the premiums paid by investors funding any compensation pay-outs. There is also the possibility that certain aid agencies could be brought on board to help bring down the cost of premiums or even to bail out corporations in cases where things have gone wrong. However, aid agencies would need to be very careful about the extent of their involvement. At present there is virtually no SPG take-up by governments of developing countries or by multilateral aid agencies.