One of the commitments coming out of the Copenhagen conference on climate change was the provision that developed countries make available less polluting technologies to poorer nations. Technology development and transfer envisioned by this pledge includes so-called cleantech ranging from solar power, smart grid, and second-generation biofuel, non-mined coal technologies, to wind energy, micro-hydro power and advanced battery technologies.
Unfortunately, this commitment presents a catch 22. Many developing countries have notoriously weak protections for intellectual property (IP) rights in the transfer of climate-related technologies. Even assuming there is sufficient willingness among governments and international institutions, reform of the legal system is technically complex, politically sensitive and will take years to complete. Climate change cannot wait that long.
But there are creative solutions that can be applied now. The world already possesses a tool that can help address IP concerns over technology transfer: international financial institutions (IFIs) such as the Asian Development Bank and other regional institutions could provide a guarantee to the licensors against the risk of non-payment for or the unauthorized use of clean technology. The instrument would be similar to existing political risk guarantees, which protect investors against the risk that their contracts will not be enforced as written.
Under this new facility, the guarantor would, in effect, provide an insurance policy against default by the licensees in developing countries. Developing country governments participating in the scheme would provide a back-up guarantee to the IFIs and would commit, over a reasonable period to time, to reform their IP laws and enforcement systems.
Such a guarantee would address the reluctance of private companies to license valuable technologies. Two of the biggest risks companies face when dealing with countries with weak legal institutions is the possibility that they will not be paid in accordance with the license contract or that the technology will be used in an unauthorized manner. Nontariff barriers, unfavorable procurement rules and local content regulations also discourage technology transfer but the absence of laws which protect technology or lax enforcement give many companies pause before licensing their technology to companies in developing countries.
With a cleantech guarantee, the involvement of national governments would act as a deterrent against voluntary default or the misappropriation of technology by an approved licensee. The IFI, as an honest broker, can ensure the soundness of the arrangement.
If it turns out that the licensee is not deterred from breaching the license agreement, the licensor will need to seek and obtain an arbitral award in a neutral jurisdiction. If the licensor is unable to enforce the arbitral award in the host country within a reasonable time, the guarantor will pay the licensor for its damages.
This new facility should be attractive to developing countries because it will make it easier for holders of technology in developed countries to make cleantech more widely available. If cutting-edge technology can be transferred more quickly and easily, it is likely that private funds from venture capitalists and private equity firms will flow. Once that happens, debt capital can be provided as well.
The pace and scope of technology transfer can be dramatically improved by creating this type of cleantech guarantee, while better enforcement of IP technology protections takes root over a reasonable period of time. If this product becomes a reality, it will quickly foster more licensing, joint ventures and M&A opportunities and lead the way to better partnerships between the developing and the developed world in the fight against climate change.
Arthur M. Mitchell is senior counselor in the Tokyo office of White & Case LLP and a former general counsel of the Asian Development Bank.