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Conditions of coverage
The business has obligations to disclose all the known facts for the insurer to underwrite the deal. An insurer would look at the risks most probable for that business and make them aware which ones can be covered. This would depend on the asset you are looking to insure and the country where it is located.
Foo says EFIC would provide insurance for the majority of countries except a notable few: “Venezuela because of Chavez’s rhetoric in nationalising a lot of foreign investments, Cuba, Korea, and Zimbabwe. We would not provide coverage where there are UN sanctions such as in Iran.” However, these tend not to be popular markets for Australian companies, which are more likely to take out policies in South East Asia and the Pacific Islands.
“We would also be cautious about post-conflict countries,” he notes. “It’s not that we wouldn’t do it, but we’d analyse the risk more thoroughly; places like Afghanistan and Iraq. Sometimes we may need to do it because of national interests, for example if there’s a project in Iraq and a company wishes to do business there, and it’s deemed to be a big market for Australian exporters, we may have to protect it and assume those risks.”
Coverage only applies to new investments because businesses would have already chosen to take the risk on any existing investments. “We are trying to promote outward investments. If you have existing investments and you want to expand we can cover the expansion part, the provision of new equity,” says Foo.
For EFIC in particular, a government-related organisation, other criteria relate to whether Australia will benefit from the investment. “We’ll need to assess the benefits. One criteria is that they must be doing business in Australia, legitimately set up to do business here rather than a shell company to take advantage of our policy,” states Foo. “What we would not cover are projects related to speculative positions, buying property, for example: there have to benefits flowing back. We wouldn’t touch industries such as gambling and arms.”
Buying PRI
Public PRI providers include export credit agencies such as EFIC but also multilateral agencies like the World Bank and similar region-based banks. On the private side, the major companies like Lloyd’s of London, Zurich and AIG also provide coverage. There isn’t much difference in coverage and price between public and private agencies, but the advantage of buying with a public agency is having what Foo calls the “halo effect”.
“The difference is we have the ability to mitigate potential problems because of our G2G [government-to-government] relationship. We can be proactive and engage appropriate channels to make sure things don’t deteriorate,” he explains.
“Agencies like the World Bank have a larger halo effect: they have preferential creditor status.”
Not everyone will need PRI but it is something that businesses should certainly consider, especially when making investments in emerging economies. Like any insurance policy, you probably don’t want to have something happen to make a claim, but you’ll derive plenty of value from peace of mind.
- Case scenarios and summary provided by Chang Foo
Case Scenario: Contractors
A mid-sized contractor with oil rig equipment wins a tender to drill for soil samples in an emerging country. The company needs to deploy expensive equipment to the drill site and faces the potential risk of political violence, which could result in equipment damage. The company also worries about its ability to transfer its equipment, upon contract completion, to another overseas location, or have it returned to Australia: there is a potential that the host government could cancel its export licence. Oil rig equipment is in demand around the world, hence the risk is perceived to be high.
EFIC could help mitigate these risks by issuing a Plant and Equipment Political Risk Insurance policy. The policy can be tailored to cover not only all of the company’s equipment in the emerging country, but could also respond to cover the equipment as it is relocated to another overseas destination.
Case Scenario: Joint Venture
A small fresh fruit juice company looks to establish a joint venture company with an overseas local partner as a strategic move to increase market share by serving the market from local output, thus supplementing exports from Australia. The company faces unpredictable changes in the host country due to government policies that can disrupt its operations and place physical assets at risk. It is also at risk with respect to its ability to repatriate profits or pay intra-company dividends since all outbound remittances require the prior approval of the host country’s central bank.
Through the Investor’s Political Risk Insurance Policy, these political risks could be transferred to EFIC. EFIC’s policies can be tailored to meet exactly meet the company’s needs and exposures.
Case Scenario: Public Private Partnership
A high-technology information company could be in joint partnership with a government agency. The partnership arrangement entitles the entity to win government concessions with a first right of refusal to provide the information technology to all other government agencies.
Because of its propriety technology, the company worries that the host government could expropriate its overseas partnership arrangement or that future governments could breach its concession undertakings. These risks can be specifically mitigated by EFIC’s Political Risk Insurance Policy.
Summary of coverage
EFIC’s coverage includes the following:
Confiscation, expropriation and nationalisation: Actions by the host government that result in partial or total loss of investments or assets;
Currency inconvertibility and transfer blockage: Government controls that prevent the purchase or transfer of hard currency for dividend payments, loan repayment or other remittances;
Politically-motivated acts of violence, including war and civil war, which results in physical damage to property;
Deprivation: Cancellation of a valid export or operating licence by the host government;
Forced abandonment: Complete abandonment of a foreign investment as a direct consequence of political violence at the directives of the Australian government to evacuate the host country;
Breach of contract or arbitral award default: Following a contract breach, the matter is brought to arbitration with the award in favour of the insured where the host government defaults or simply refuses to pay.
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