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

   Here is the list (so far):

War & Insurrection

Currency Inconvertibility & Transfer

Nationalisation & Creeping Expropriation

Landowner/indigenous peoples’ disturbance.

 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’

Currency Inconvertibility Parking

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.

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