In the new film “Arbitrage” the character played by Richard Gere thought he had made a highly profitable mining investment in an Eastern European country with a “friendly” government. But suddenly things are not working the way they were supposed to. He cannot access the returns from his investment —the government will not let him take them out of the country. "Yes, it can and it does happen," Richard Gere sadly remarks. And then his plans start unraveling - leading Gere into …well, scary risk mitigation …
This is only a movie, but it illustrates a major shift in approaches to country risk. Old strategies that relied on personal connections to leaders or individuals close to the regime in an emerging country are a recipe for disaster. With the backdrop of the turbulent political shifts in the Middle East and North Africa, investors are recasting the way they analyze and mitigate political risk.
More and more investors recognize that local partnerships are still key—but that they need the right kind. These local partnerships must have quality, competence, and breadth, and not depend simply on political connections. Investors are focusing more on upstream work, sourcing of information and market analyses, and benchmarking. They recognize that an unfair contract will be the first one to be cancelled or renegotiated by the next government. They also know that addressing environmental and social impacts and assuring returns to local communities is critical to enhance sustainability and mitigate risk of rejections of the project by these communities.
Political risk insurance can compensate an investor in the case of expropriation, war and civil disturbance, breach of contract or—as in the “Arbitrage” example—transfer restriction. But equally importantly, involvement of a multilateral organization such as MIGA can brand the project on the environmental and social sustainability aspects, and can help defuse issues as soon as they manifest themselves and before they reach the boiling point when they destroy the project.
Investors will continue to look for returns. With lower growth in richer countries and the slowdown in the BRICs, we are witnessing a shift in global investment patterns. Traditional investors are exercising much more caution and new investors are seeking opportunities in more challenging markets. Our job is to assist both investors and countries as they seek to reap sustainable benefits of private investment, reducing the likelihood and impact of a “friendly” government suddenly destroying Richard Gere’s dream of a great investment.