Protecting your investment from political risk: A conversation with John Moran, OPIC’s Vice President of Insurance
OPIC’s political risk insurance allows U.S. businesses to take advantage of commercially attractive opportunities in emerging markets while mitigating risk and helping them to compete in a global marketplace. In this interview, John Moran, Vice President of Insurance, explains the work that he and his colleagues do to provide innovative, comprehensive and cost-effective risk-mitigation products.
What types of companies come to OPIC for political risk insurance?
We see all types of companies, investors, lenders and operators looking for political risk insurance from OPIC. We serve small- and medium-enterprises (SMEs) as well as large institutions. Our clients include everyone from new and solo investors, many of whom are from the diaspora community, who are looking to do something in their home country to large established corporations such as Citibank and GE.
How can SMEs benefit from political risk insurance?
Our clients can be concerned about a variety of different factors, including political unrest and the inability to obtain their invested money back out of a foreign nation. They may be a waste management company who agrees to provide services for a government, or a wind turbine manufacturer who sells power to a certain country, but their fears are often the same: what if the government stops paying because they can’t or won’t?
OPIC’s role is to provide the protection from a variety of political risks beyond an investor’s control including:
- War, civil strife, coups and other acts of politically-motivated violence including terrorism
- Expropriation, including abrogation, repudiation and/or impairment of contract and other improper host government interference
- Restrictions on the conversion and transfer of local-currency earnings
Because we are able to provide these protections, we can often offer the assurances that give our clients the peace of mind to make an investment they are passionate about.
What are some scenarios in which an investor would need political risk insurance?
There are many different reasons why an investor would need political risk insurance. One reason we often provide insurance is to assuage the fear of changing governments. Our investors want to know that if they invest time, effort and money into a project, the country’s government won’t suddenly change and keep the profits. What we do in these cases is provide the advocacy they need to deal with the governments. We deal with the government, or municipality, often through our U.S. Embassies. In every country where OPIC operates we have a bilateral agreement between the U.S. and the host government that allows us to intervene.
Often it is also used as a tool to secure financing for projects. For instance, if a U.S. client wants to invest in a dairy farm in Indonesia, because they know the area and believe it would be a good investment, we can make that client’s local U.S. bank more willing to lend money to support a commercially attractive overseas investment, which it might otherwised never consider.
Tell us more about the advocacy services you provide your client companies and how those can benefit companies?
We often partner with the embassies in the countries we operate in. In addition, we work with the U.S Department of Commerce and/or our U.S. ambassadors to get involved where needed. For instance, if one of our clients is manufacturing widgets and their host country imposes a rail or road tax that is tenfold what it used to be and only applies to this company, that can do major damage to the economics and the flow of business.
OPIC would then work with our partners at the U.S. Embassy or U.S. Department of Commerce on the ground in that country to advocate with the host country against the imposed so the investor is able to continue to do business and eliminate difficulties on the ground. That is a service that we provide that avoids or resolves investment disputes before our insured investor has to walk away; before we have to pay a claim and seek recovery against the host government; and before a host country suffers damage to its reputation as an attractive destination for foreign investment.
OPIC prioritizes some key sectors – including renewable resources. Tell us about insurance tailored for this area.
We have developed new insurance products to address these issues. In 2011, OPIC developed a new insurance product to protect investors against political risk in Reducing Emissions from Deforestation and Forest Degradation (REDD) projects, which uses market incentives to promote sustainable forest management. The first deal for this product provided $900,000 in political risk insurance to Terra Global Capital, an investor in a project that will protect large swaths of forest in Cambodia through the sale of offset credits in international carbon markets. Terra Global said it purchased the political risk insurance in order to reduce its exposure to future changes in national and local governments and laws over the life of the project. It also said it expects that insurance against political risk in REDD projects will encourage more private-sector investment in this emerging sector. The project, which OPIC recently won an Environmental Finance award for, is expected to generate a 30-year income stream to help the government of Cambodia and local community groups fund activities – such as community forest patrols and water resource development projects – that reduce deforestation.
Are there other innovative coverage options that OPIC has created based on evolving needs in emerging markets?
In Ghana we recently approved $119.5 million in political risk insurance to help modernize Ghana’s agricultural sector, bringing much-needed food security to the country and supporting its effort to become a regional food exporter. The project involves the installation of modern silos, grain mills, cold storage and livestock breeding facilities, and computers and other technical equipment to assist in statistical research and agricultural monitoring throughout Ghana. The OPIC insurance is covering loan financing for the project being raised in the U.S. bond markets by U.S.-owned company Belstar Capital Ltd. The project will reduce post-harvest losses and increase agricultural productivity, leading to greater food surpluses for local populations and reducing reliance on imported products. It will also strengthen Ghana’s market infrastructure and agricultural production standards, both of which are necessary for Ghana to increase agricultural production and exports.
Can you give an example of political risk insurance in action?
Another great example of political risk insurance in action includes the insurance of $150 million to support the rehabilitation of nearly half the municipal water purification systems in Ghana through the Ghana National Water Infrastructure Modernization Project. This investment is central to Ghana’s National Water Policy, which aims to increase the availability of clean water from 61 percent to 85 percent of the population by 2015. It will also help reduce waste by increasing the efficiency of the country’s water treatment plants from 77 percent utilization to 100 percent. Belstar Capital Ltd, a U.S. company, and Deutsche Bank arranged the $150 million in debt financing. The lack of clean drinking water and sanitation systems in Ghana cause more than 20,000 deaths annually through dysentery and other waterborne diseases.
This example shows how OPIC has a history of paying claims. We insured a U.S.-based financial services corporation against currency inconvertibility in Venezuela on a loan provided for the purchase of ferry-boat engines and other related equipment. In that case, the Government of Venezuela imposed new exchange controls that sharply restricted access to foreign exchange and required prior authorization for purchase and sale of foreign currency through a newly created Exchange Administration Board. This meant that the U.S. company insured by OPIC was unable to legally convert local currency to U.S. dollars for the applicable waiting period (60 successive days). OPIC subsequently approved the claim and paid the insured party (in U.S. dollars) the amount that it was unable to convert.
For more information about OPIC’s Political Risk Insurance products please visit www.opic.gov.