Opportunity. Uncertainty. Possibility. Unpredictability. These wide-ranging terms describe what many investors think about emerging markets, especially those with a history of civil unrest, violence or a questionable rule of law.
We are in the business of helping U.S. businesses gain footholds in emerging markets in order to catalyze revenues, jobs and growth opportunities both at home and abroad. And as the organization that put political risk insurance on the map, we can help U.S. investors protect their investments in a variety of situations, including war, government interference, and restrictions on converting currency or transferring earnings.
If you are an investor or a lender in emerging markets, what do you need to know about political risk insurance? Here are three things to get you thinking.
PRI isn’t just for big companies.
Depending on the circumstances, both large and small businesses need political risk insurance. But often, it’s the small companies that may assume they can’t or won’t need it. OPIC offers qualified small businesses (with annual revenues less than $400 million) the opportunity to obtain OPIC’s political risk insurance at a discount through a streamlined approval process.
There is no minimum investment size requirement, and coverage is available for equity investments, parent company and third-party loans and loan guaranties, technical assistance agreements, cross-border leases, contractor and exporter exposures, and other forms of investment.
Insurance comes with advocacy.
OPIC also provides advocacy services for its client companies experiencing a challenging situation in a politically risky environment. For example: A host government refused to recognize an international arbitral award for a dispute that involved a U.S. investor and a local firm. In this case, OPIC sent a letter to the host government reminding them of its interest in attracting foreign investment, the importance of respecting the rule of law, and its obligation to honor the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Subsequently, the host government recognized the international arbitral award, and the U.S. investor was satisfied with the support and assistance that OPIC provided.
Coverage can (and should) be tailored to an investor’s specific needs.
Investors who may be shopping around for political risk insurance should make sure they’re communicating specific risks and issues on their particular project. They also need to consider how they will protect investments in multiple countries. At OPIC, we review multi-country investments and offer cost-effective, streamlined coverage in these cases.
A changing environment drives innovative new coverage options.
In addition to standard political risk insurance coverage, OPIC developed a new product for investors in renewable resources. An example of this coverage applies to the Reducing Emissions from Deforestation and Forest Degradation (REDD) structure, which uses market incentives to promote sustainable forest management. The new insurance product will protect investors in a REDD project from political risks such as changes in regulations, political violence or improper government interference.
One investor, Terra Global Capital, supports a REDD project in Cambodia intended to protect a large swath of forest through the sale of offset credits in international carbon markets.
The project 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. As a result, it will protect 64,318 hectares (158,865 acres) of forest, sequester CO2 emissions, conserve endangered biodiversity and help local communities create jobs.
Terra Global purchased 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 expects that political risk insurance for REDD projects will encourage more private-sector investment in this emerging sector.
With the current global economic climate ripe with opportunity and plagued with uncertainty, now is the time to seize opportunities in emerging markets with OPIC’s customized protection.