In the extreme, this would mean a rate of return enjoyed at a level of about 14 percent, under this particular statute if diminished, to 11 percent which might be attractive to a number of other corporations that diminution would be covered by the type of phraseology in this particular bill.

I hope the committee will pursue further the types of phraseology required and I also hope the committee will seriously consider creating many more incentives for the private insurance to participate in underwriting this risk. That can be done in a number of manners, as I have recommended in the past for a number of reasons, that this be done in connection with OPIC. That invites consideration of the viability of OPIC, and to some extent, avoids that question you might consider creating the type of incentive in this legislation which are existent in OPIC and exists under Price Anderson which would allow the insurance industry to have an arrangement to make this an insurable risk.

Other types of incentives or enabling authority which I think would be desirable would be those which would allow the administering authority of this particular program to allow for reinsurance of commitments undertaken by private sector underwriters, or reinsurance of any aspects of these commitments which might be undertaken by OPIC which leads into another area of research I have undertaken and I will try to make a report available to the committee for the record.

My staff has been reviewing, for the past 9 months, the insurance programs of 11 other industrialwise countries similar to OPIC. Those countries on the list we are covering include the list of every other participant in the consortia in ocean mining.

We are focusing particularly on the programs of West Germany, Britain, the Netherlands, and Japan at this time. Based on the preliminary drafts I have received from my staff, I believe it would not only be possible but extraordinarily desirable to either mandate, or to at least create, an incentive for the pursuit of multilateral insurance arrangements in the private sector or among these particular Government insuring agencies.

That will then allow what I have described in my prepared remarks. The reduction of the political risk through legislative engineering, in traditional political risk insurance you try to propose construction requirements on a particular project to make sure it is not going to play into property damages right away. In political risk insurance, the best way to do it is to legislate features which create incentives and disincentives for cooperative behavior. I believe this is an unprecedented opportunity to do this. I think I have gone beyond my time.

I will volunteer to make available whatever time I can to the staff in the future to support the statements I have made. [The prepared statement of Mr. Kaufman follows:]

STATEMENT OF ALAN H. KAUFMAN

My name is Alan H. Kaufman, and I am engaged in the private practice of law with offices at 205 Mt. Auburn Street, Cambridge, Massachusetts 02138. I am also a principal in International Resources Investment Managers, a partnership specializing in both the financial and regulatory aspects of resource development on a domestic and international basis.

During the past twenty months, my colleagues and I have become increasingly involved in the scientific, legal and economic issues emanating from the proposed plans of a number of consortia to establish viable commercial ocean mining operations in the deep seabed. I have been serving for over a year as a member of the National Academy of Science Panel on Marine Mining Technology and participated in the drafting of that Panel's "Report on Priorities for Research in Marine Mining Technology" (June, 1977). In addition, during the past year I served as outside counsel to the Office of Marine Minerals, National Oceanic and Atmospheric Administration, Department of Commerce, and in that capacity I was called upon to analyze the array of legal and economic issues deriving from both past and pending proposals before the Congress which would establish a domestic licensing and regulatory system for the ocean mining industry. In consummation of the latter effort I filed a Report with NOAA on July 15, 1977 on "Significant Legal and Economic Issues in Legislating Political Risk Protection for Ocean Mining Investments." That Report has been forwarded to your Committees in the event that you may wish to place it in the record of your deliberations on S. 2053.

In my work for the government and for other clients in the general area of the insuring of international political and other unique risks, I have had occasion to examine a number of government programs which relate to the type of legislation being considered today. My staff and I have undertaken a complete examination of the activities and structures of inter alia, the Overseas Private Investment Corporation, the Nuclear Energy Liability Insurance Association, programs of the Federal Insurance Administration (HUD) under the Flood Disaster Protection Act, and programs administered by the Export-Import Bank (export credits) and by the Maritime Administration of the Department of Commerce under Title XI of the Merchant Marine Act of 1936 as amended. We are also in the process of reviewing programs administered by eleven other industrialized countries which provide some form of political risk insurance through export or investment/loan guaranties, and we have examined those programs for compatibility with or distinction from those administered in this country by OPIC. Our work has also included a detailed review of the tax and financing aspects of political risk insurance as it is presently underwritten in international private markets.

1. The Feasibility of a Government-Private Sector Partnership for Purposes of Providing Investment Security

A number of distinguished persons from the domestic and international insurance community have addressed numerous House committees on the feasibility of providing purely private sector coverage for the risks of a Law of the Sea Treaty (the "treaty risk"). They have suggested that the private sector, acting alone, lacks the underwriting capacity, knowledge of the scope of risk, experience with the assessment of the treaty risk, and the mechanisms for dispersion of the risk, all of which would be the traditional factors to be considered for purposes of determining the insurability of a risk.

Based on their analysis of these factors, they have pessimistically inferred that the private market will not be able to provide the type of coverage which appears to be needed by the ocean mining industry prior to the commencement of mature commercial operations.

Although there can be no doubt that other witnesses have properly identified the significant issues and potential barriers which, in their view, would stand in the way of private sector coverage, my research indicates that a vast number of issues have yet to be either identified or fully explored. Moreover, to the extent that I have had the opportunity to investigate such issues, I have emerged with a much more optimistic view about the potential for the protection of investments against the risks of a treaty.

Accordingly, I wish to take issue with the implicit assumption of Sec. 202 of S. 2053 that the government must provide an in toto up-front guaranty of ocean mining investments.

Without representing that privately underwritten investment security is "at hand," I would like to describe the types of factors which should be seriously assessed prior to reaching a conclusion as to the viability of private sector investment protection against a treaty, and I would also like to suggest some considerations which this committee may wish to take into account in formulating legisla

'Programs under review include those of West Germany, Great Britain, Denmark, the Netherlands, Japan, Norway, Sweden, France, Canada, Australia and Switzerland. My staff is preparing a report focusing on political risk insurance coverage in Canada, Great Britain, West Germany and the Netherlands which we hope to complete in time for inclusion in the hearing record.

tion which would allow such coverage to be obtained through private underwriting or through a hybrid of public/private sector cooperation.

It seems appropriate to reverse my normal method of analyzing such problems by initially setting forth a series of conclusions:

(1) I do not believe, by any means, that the array of potential solutions to the investment security problem have been exhausted in Congressional deliberations to this point;

(2) I am not convinced that the private sector alone has the capacity or the experience to insure against the full exposure of investments to the risks of a treaty, but I am, at the same time, certain that the possibilities of exclusive private sector coverage have been inadequately pursued;

(3) I am convinced that a hybrid partnership could be formed between a United States government entity and private sector underwriters (and, desirably, with other insurance programs of other governments similar to those administered by OPIC) which will allow for the protection of the investments of the ocean mining industry;

(4) The hybrid investment security program could reduce contingent government liability by hundreds of millions of dollars and have the attendant advantage of reducing restraints on our Law of the Sea delegation as it moves forward with its negotiations;

(5) I am certain that, if Congress transfers the S. 2053, sec. 202 guaranty from a position of first-option to a fallback of last-resort, the private insurance underwriting community will be able to create a means of privately absorbing substantial portions of the political risk attendant to ocean mining investments;

(6) The full guaranty approach of S. 2053 creates incentives to incur unnecessary and major cost to the government;

(7) The full guaranty approach of S. 2053 creates disincentives to a transfer of risk from the government to the private sector; and

(8) I believe that the focus of Congressional efforts to devise a solution to this highly complex problem should evolve into a hybrid approach to the primary question of how to assist in enabling the private market to "finance" industry's risk, rather than adhering to the structural limits of focusing on an exclusively "insurance" or exclusively "guaranty" approach.

I would now like to move from my conclusions to the types of considerations which have led me to express them.

A. DEFINING AND ASSESSING THE RISK OF A TREATY

As prior witnesses have most properly suggested, among the first concerns of an insurance underwriter or broker are (1) whether there is a risk which can be defined, and (2) whether the scope of that risk may be properly assessed in a manner which allows for the provision of insurance based (a) on a premium or (b) on a premium combined with a retroactive assessment.

Additional problems which inhibit the assessment of the treaty risk emanate from a difficulty in distinguishing (a) whether the "risk" will fall upon the industry or individual consortia at the moment of ratification by the United States; (b) whether that risk may be further subdivided into risks deriving from (i) provisional participation by the United States government and (ii) a long-term formal ratification; (c) whether there is any risk at all (whether provisional or long-term) which may ensue from ratification of the treaty; (d) whether the risk may actually be spread out over an uncertain period of time during which other principal parties may be undertaking the process of ratification; or (e) whether, in fact, the risk is fully delayed to the point at which the proposed Enterprise first issues and implements its regulations in a loss-inducing manner. My examination of CNT, United Nations procedures and American treaty adoption procedures suggests that the spectrum of risk occurrence and impact is decidedly broader than has been envisaged in prior consideration of this issue.

The maze of issues introduced above must, for purposes of analysis, fit within the umbrage of what we may generically refer to as a "treaty risk." Focusing on that risk, the Committees should inquire as to whether the insurance industry can make any assessment of the treaty risk which might be similar to the type of risk assessment which would be applied to land-based (territorial) political risk insurance coverage. In the latter case, a limited number of experienced private brokers

2 Some parties have gone so far as to suggest that the risk posed by the treaty cannot be defined because of the absence of any predictable procedure which might be followed in the enactment or implementation of what is presently known as the Composite Negotiating Text ("CNT").

and underwriters share the belief that they may make a determination as to the likelihood of such "traditional" political risks as war, expropriation and inconvertibility of currency based on experience with a number of countries over a number of years. A number of factors are taken into account in reaching such an assessment, one of which is the capacity of the underwriter or the company to obtain some salvage or subrogation rights. Another aspect involves a subjective analysis of a given country and a review of that country's record in honoring its contractual obligations subsequent to expropriative acts.

Although some persons have attempted to reduce the assessment of these types of risk to an acturial base, our review of industry practice suggests that a "crystal ball" approach may well be the prevailing standard. It is only in the area of life insurance that pure actuarially-based decisions can be made, and industry practice in evaluating traditional casualty and property risks is quite variable and lacking in full mathematical support. Under either standard, however, insurers lacking experience in the political risk field would contend that the treaty risk eludes analysis because of the apparent absence of even a semblance of an "actuarial" context. This inevitably leads us to the principal question of whether the absence of traditional indicia of insurance decision-making factors renders the treaty risk categorically "uninsurable." Although I would agree that the treaty risk eludes traditional insurance analysis, I suggest unequivocally that such elusiveness should not terminate the Committees' inquiry.

In fact, the more relevant issue is whether the treaty risk may be analyzed in terms of untraditional but nevertheless insurable forms of political risk.

An interesting if moderately distinguishable example was revealed by our study of the enactment of the Price-Anderson Act, which was designed to provide coverage for the potentially unlimited liability which was faced by the nuclear utility industry many years ago. At that time, because of what was perceived as a "compelling interest" by the Congress in allowing that industry to move forward, the PriceAnderson Act was passed with a limitation on liability of $500,000,000.

The most relevant aspects of that particular insurance problem are that (1) it was universally agreed that private sector coverage would be "unavailable" because of the uniqueness of the risk, (2) there was no actuarial base to allow the insurance industry to make a traditional assessment of the risk, and (3) although the probability of an accident was considered to be very small, there was agreement that, on the occasion of the first catastrophic event, liability limits would be exhausted and the capacity to further insure would be reduced if not destroyed. Extensive testimony and findings of a number of studies suggested that "there would be virtually no spread of risk and initial premium volume would be very small" for any company attempting to underwrite the risk. By way of further analogy to the ocean mining industry, there were limited numbers of participants in the nuclear industry, so it was equally unrealistic in that fact situation to expect the industry to pool together on its own for a reciprocal sharing of risk.

In summary, the nuclear risk and the extent of potential liability was intially interpreted as being completely "unprecedented" and "uninsurable" by the insurance industry. However, a subsequent detailed analysis of the problem undertaken through a cooperative arrangement among the insurance industry, academic groups and the Congress itself, resulted in studies which revealed that "although insurance could not be provided to cover the entire risk, the industry would be able, through a special pooling arrangement, to write policies substantially in excess of the coverage then provided on conventional industrial risks."

B. COMPLEXITY DOES NOT FORECLOSE INSURABILITY

I believe that a number of myths have arisen with respect to the alleged uninsurability of the treaty risk. Concerns have focused upon (1) the difficulty of having a specific mining site which would be similar to prevailing systems for land-based natural resource extraction, (2) the difficulty of predicting the actions of an international body with potentially conflicting purposes and motivations, (3) the difficulty and the policy ambiguity of having the United States government insure its nationals against the consequences of its own deliberated political judgments and (4) the uncertainties arising from the conflict between the traditional international principle that resources of the ocean are res nullius (belonging to no one and able to be claimed by anyone) and the emerging concept, endorsed by this country's delegation and the U.N. General Assembly, that at some point in the future the resources of the ocean will, as a matter of law, be the "common heritage of mankind."

The example as used here is not altered by the recent federal district court decision that Price-Anderson liability limits are unconstitutional.

I agree that the application of traditional insurance principles, and an emphasize upon the factors itemized above, may lead some to the conclusion that the private sector is justifiably timid in undertaking to cover the risks posed. I would like to emphasize, however, that these factors do not compel a conclusion that a program cannot be devised to establish a viable structure for the provision of investment security with private sector risk-bearing as a feature. Nor do these factors make the case for the necessity of an investment guaranty such as found in the proposed sec. 202 of S. 2053.

C. INVESTMENT SECURITY DOES NOT REQUIRE EITHER TRADITIONAL INSURANCE OR
TRAIDITIONAL GUARANTIES

My review of the substantial amount of literature which has accumulated through five years of Congressional hearings suggests that a number of semantic choices have served to inhibit the texture and breadth of discussion on the possibilities of securing mining investments.

As some of the consortia members have repeatedly indicated, they want investment security. Security does not necessarily require insurance, nor does it necessarily require a guaranty. Consequently, I recommend that your Committees shift their attention from straight "insurance" concepts and straight "guaranty" concepts, and redirect emphasis to the issue of how to finance the treaty risk problem. When that is done, the Congress will be able to consider a much wider array of possibilities and focus on the capital transaction aspects of the investment security problem.

The Committees may find it valuable to look separately to (1) the needs of bankers who may write loans for these ventures; (2) the needs and potential costreducing functions of insurance companies which may underwrite various aspects of the risk; (3) the possibility of utilizing other participants as sources of security for both parties; and (4) the possibility of providing other forms of collateral, subrogation rights and salvage opportunities for all parties interested in participating in the investment.

It is likely that a number of the opinions which have been offered by various sources, all of which have been negative on the insurance issue, may have been pessimistic because traditional premises were being utilized as a basis for traditional solutions to an untraditional problem.

D. DISPERSION OF RISK

A number of other parties testifying before other Congressional committees have suggested that there is an "all-at-once" nature to the risk faced by the consortia. They have further suggested that the alleged concentration of risk undermines the fundamental insurance principle of risk dispersion, and that it diminishes the likelihood of attracting any private underwriting.

I disagree. As I have indicated earlier, a focus on defining the risk, aided by a more detailed assessment of the risk, suggests that the types of variables faced by the ocean mining consortia under a regime such as that posed by the CNT is not markedly different than a number of expropriation and "creeping expropriation" risks which have been faced in the past by the operations of multinational corporations in various nations. To the extent that our research suggests that the "treaty risk" may actually be defined and assessed more precisely than has been suggested by others, the question becomes one of whether there is any potential for a scheme under which risk may be dispersed, if and when the risk has been more carefully identified.

On this point, it is interesting to review the House testimony offered April 26, 1977 by Mr. Cecil Hunt, Acting General Counsel for OPIC. He observed that the growing reserves and capacity of OPIC had created an incentive for private underwriters to join, for the first time, in multilateral insurance for political risk. As he noted, one of the fundamental attractions of the governmental insurance scheme was that it created a larger pool through which a given risk could be dispersed and diluted. It is not necessary to conclude that OPIC should be the vehicle for pooling the risks of the ocean mining industry in order to be able to say the pooling principle itself should be much more vigorously pursued as it applies to this particular type of risk.

I have pointed out in my Report to NOAA, and it was also noted by Mr. Hunt, that one of the unique and hazardous phenomena of the ocean mining situation is the perception of the possibility that the risk of loss will be incurred by all insured or protected parties at the same time. It is interesting to note that this "all-at-once" phenomenon did not deter the Congress from constructing a very creative mechanism under which nuclear risks could be insured. In that particular fact situation, the contemplated hazards and liabilities were vastly greater than those presently