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Political Risk Management
As a practitioner in many jurisdictions world-wide, IAF offers advice on the political risk structure appropriate to the equity and debt components of projects. This includes:
Typical clients in this area include junior development companies as well as multinational or major companies packaging a multilayered development financing. Do you know of other Political Risk categories? We're out to make this page the best with regard to definitions of political risk on the www. Please email additions/comments to iaf@compuserve.com
The classic three:
and these: 1.
Terrorism and Sabotage may
also be insured by some agencies, most notably MIGA.
The most difficult categories are, of course, racial and religious
terrorism. 2.
Willful Breach/Frustration where
the government refuses to honour a contract/pledge/guarantee. 3.
Unions such
as was recently organised by ex-Australian prime minister, Bob Hawke, against
RTZ plc, the world’s largest mining company. 4.
NGOs/Environmental Activists like
Greenpeace who attacks various project in rubber duckies. 5.
Change of Government where
the incoming group rejects the prior arrangement of the last government. 6.
Corruption Corrupt
payment usually increase political risk. 7.
Approvals/Bureaucratic Risk where
the government fails to approve or withdraws an approval which in ordinary
circumstances would be granted. Australia
is a very bad risk in this context.
This includes interdepartmental rivalries among different government
ministries/ministers. 8.
Change of Law where
legislative changes affect a Project Financing, sometimes retrospectively. 9.
Increased Taxation/Royalties especially
when a tax increase is discriminatory. NB:
This excludes changes in the national corporate income tax rate. 10.
Conflict of Jurisdiction where
the local municipal/provincial-state/regional/central governments all claim
final authority. 11.
The USA which
has the highest amount of embargoes/restrictions plus the endemic
litigation/court ‘risks.’ 12.
Partisanship where
the project is seen as ‘owned/promoted’ by one political party. 13.
Xenophobia where
resentment of foreigners/foreign direct investment or ‘control’ is a
national aspect of politics. May
also apply to racial differences/jealousies within a country. 14.
Courts where
a judgment can be ‘steered’ or the court process frustrated by the prime
minister/president. 15.
Emergency Powers of
the respective minister if invoked ‘politically’
The 11 main ways political risks are handled in Project Finance can be summarised by this list:
IAF and the Project Finance community is accustomed to being a tool for political risk coverage and has a wide appreciation of the nature, structuring, and realities of political risks. Perhaps half of project financing are undertaken to shed some/all measures of Political risk. |
© IAF 2006 email: iaf AT iaf.biz |
Here is the list (so far):