PRI: a safety valve for Africa’s pres­sure cooker

a safety valve for Africa’s pres­sure cooker

RISKAFRICA Magazine - - CONTENTS - Sarah Bas­sett

From war-torn, eco­nomic bas­ket case to in­vest­ment dar­ling. With in­creas­ing growth pro­jec­tions, im­prob­a­ble as it once seemed, Africa looks set to be the fu­ture hub of global growth. Po­lit­i­cal risks, how­ever, re­main the num­ber one ob­sta­cle cited for for­eign in­vest­ment, ac­cord­ing to the MIGA World In­vest­ment and Po­lit­i­cal Risk Sur­vey 2012 and man­ag­ing th­ese risks is crit­i­cal for un­lock­ing the con­ti­nent’s full growth po­ten­tial. In­creas­ingly, in­vestors are turn­ing to po­lit­i­cal risk in­sur­ance (PRI) as a key risk-mit­i­ga­tion tool and the mar­ket is chang­ing in re­sponse. “Po­lit­i­cal risk in­sur­ance plays an in­creas­ingly sig­nif­i­cant role in mo­bil­is­ing pri­vate in­vest­ment in sub-Sa­ha­ran Africa,” con­firms Alkan Shenyuz, head of global so­lu­tions at Veven­tis Risk So­lu­tions, spe­cial­ist providers of risk so­lu­tions for fron­tier mar­kets. Glob­ally, events in the Mid­dle East and North Africa have raised the spec­tre of unan­tic­i­pated events in seem­ingly sta­ble po­lit­i­cal regimes; re­cent ex­pro­pri­a­tions in Latin Amer­ica; con­tract rene­go­ti­a­tions in re­source-rich economies; and cap­i­tal con­straints have in­creased de­mand for PRI to cover in­vest­ments. Ac­cord­ing to Wil­lis Re, for large scale projects, PRI is now an in­dis­pens­able part of for­eign large scale pro­ject fi­nance and in­vest­ment in Africa. The el­e­vated po­lit­i­cal risk per­cep­tions of in­vestors have revved de­mand for ex­ist­ing prod­ucts and given rise to new prod­uct of­fer­ings and sub­stan­tial growth in ca­pac­ity.

In­dus­try growth and re­sponse

Arthur J Gal­lagher and Co. Lon­don bro­kers es­ti­mated in its July 2012 mar­ket up­date that ca­pac­ity in the global pri­vate mar­ket in­creased by 19 per cent in the first six months of 2012 alone. Grow­ing for­eign di­rect in­vest­ment (FDI) into de­vel­op­ing mar­kets as the mar­kets of Europe and North Amer­ica have stag­nated, and riskier de­vel­op­ing mar­kets have surged ahead. Along with el­e­vated global po­lit­i­cal risk per­cep­tions, this has revved de­mand for both tra­di­tional and new forms of cover, giv­ing rise to in­no­va­tions in of­fer­ing and ex­ten­sions on ex­ist­ing cover to meet the re­quire­ments of new mar­kets.

Tra­di­tion­ally, PRI has cov­ered po­lit­i­cal vi­o­lence (war and in­sur­rec­tion); na­tion­al­i­sa­tion and ex­pro­pri­a­tion of as­sets; and cur­rency in­con­vert­ibil­ity (the in­abil­ity to con­vert lo­cal cur­rency or trans­fer cur­rency out of the coun­try). Th­ese threats can desta­bilise en­tire in­vest­ment projects as well as spe­cific con­trac­tual agree­ments, such as large ex­port or­ders. More re­cently, sov­er­eign pay­ment de­fault risk cover has been added to the of­fer­ing of many pri­vate and pub­lic providers. This pro­vides cov­er­age to fi­nan­cial in­sti­tu­tions, con­trac­tors and ex­porters in the event of pay­ment de­faults by sov­er­eign, sub­sovereign and/or state-owned en­ti­ties in emerg­ing mar­kets.

Ac­cord­ing to Ana Cristina Borges, ex­ec­u­tive di­rec­tor at An­gola-based risk con­sul­tant MDS Africa, “Re­cent events, those of the Arab Spring in par­tic­u­lar, have in­creased in­vestor de­mand for spe­cialised lines such as civil un­rest and ter­ror­ism cov­er­age. Some in­vestors are ex­pand­ing the use of in­vest­ment in­sur­ance prod­ucts for as­sets such as oil rigs, mo­bile equip­ment and per­sonal as­sets. Si­mul­ta­ne­ously, there is an in­creased de­mand for all risks poli­cies and this is a new trend.” Ac­cord­ing to Evan Freely, global po­lit­i­cal risk and trade credit prac­tice leader at Marsh, where multi­na­tional cor­po­ra­tions in the past sought to pre­dict the risks of par­tic­u­lar coun­tries and in­sure against coun­tryspe­cific risks, there is now de­mand for multi-coun­try all risks cover.

When it comes to the tai­lor­ing of prod­ucts for lo­cal mar­kets, “Reg­u­la­tory dif­fer­ences are the key driver here,” says An­ton Roux, CEO of Aon sub-Sa­ha­ran Africa. “A pol­icy needs to com­ply with the reg­u­la­tory en­vi­ron­ment and re­quire­ments of which­ever one of the con­ti­nent’s 54 coun­tries it is writ­ten for and re­quires bespoke word­ing and tai­lor­ing. This in turn is of­ten linked to rein­sur­ance ar­range­ments and will de­pend on the treaty re­quire­ments of the un­der­writer.”

Risks on the rise

The 2013 edi­tion of the Aon po­lit­i­cal risk map sug­gests that global po­lit­i­cal risk has lev­elled off, af­ter an el­e­vated few years fol­low­ing the events of the Arab Spring. How­ever, African threats ap­pear to have spread, with seven coun­tries’ risk pro­files down­graded since 2012. The down­grades were for Al­ge­ria, Cameroon, Chad, Ethiopia, Mada­gas­car, Mali and Namibia.

“The fact that war be­tween neigh­bour­ing coun­tries has steadily de­creased has not trans­lated into an in­crease in sta­bil­ity,” says the Mul­ti­lat­eral In­vest­ment Guar­an­tee Agency (MIGA) World In­vest­ment and Po­lit­i­cal Risk Sur­vey 2012. “The dis­man­tling of se­cu­rity forces in re­sponse to more peace­ful border­lines, cou­pled with the boon in com­modi­ties prices, has in­stead led to in­creased in­sta­bil­ity within national bor­ders. Kid­nap, coups, re­li­gious fun­da­men­tal­ism and cor­rup­tion spurred on by the com­modi­ties race have cre­ated a tense po­lit­i­cal at­mos­phere ca­pa­ble of turn­ing in on it­self at any mo­ment.”

Na­tion­al­i­sa­tion and ex­pro­pri­a­tion emerged as a ris­ing risk in 2012, con­tin­u­ing into 2013, ac­cord­ing to the Con­trol Risks RiskMap Re­port 2013. Min­ing codes in Guinea, DRC and Mozam­bique have been un­der eval­u­a­tion with gov­ern­ments re­view­ing min­ing con­tracts. Zimbabwe most re­cently an­nounced an ex­am­i­na­tion of con­trols over the sale of min­er­als.

Di­rect ex­pro­pri­a­tion in­ci­dence have been in­creas­ing since the early 2000s, with coun­tries in­clud­ing Ghana and South Africa hav­ing in­tro­duced new roy­alty regimes or tax­a­tion rules for min­ing com­pa­nies or, as in Guinea and Zam­bia, new min­ing leg­is­la­tion that re­quires in­creased state par­tic­i­pa­tion in the ex­trac­tive in­dus­tries. How­ever, the MIGA re­port sug­gests that rather than an out­right con­fis­ca­tion of for­eign in­vestors’ as­sets, com­pa­nies are more likely to wit­ness, “an in­di­rect or in­sid­i­ous form of govern­ment in­ter­ven­tion known as creep­ing ex­pro­pri­a­tion”. This refers to state con­duct that sub­stan­tially de­prives a for­eign in­vestor of the use or ben­e­fit of their in­vest­ments, even though for­mal le­gal ti­tle may con­tinue to vest with the in­vestor. “For ex­am­ple, such ex­pro­pri­a­tion could take the form of the im­po­si­tion of a puni­tive tax regime that is ap­plied se­lec­tively against the for­eign en­ter­prise and which is not ap­plied to lo­cal com­pa­nies.”

Po­lit­i­cal vi­o­lence and civil un­rest is a sec­ond noted risk on the rise, driven by dis­con­tent over cor­rup­tion and a lack of eco­nomic op­por­tu­ni­ties, as well as ris­ing fuel and food prices. Ac­cord­ing to El­iz­a­beth Stephens, head of credit and po­lit­i­cal risk anal­y­sis at in­sur­ance bro­ker Jar­dine Lloyd Thom­son, grow­ing con­cerns about jobs, so­cial in­equal­ity, el­e­vated food prices, and non­demo­cratic po­lit­i­cal regimes have given rise to civil dis­tur­bances and po­lit­i­cal vi­o­lence, of­ten lead­ing to prop­erty dam­age and busi­ness in­ter­rup­tions. Dur­ing 2012, the con­ti­nent saw a coup in Mali, throw­ing the coun­try into po­lit­i­cal tur­moil and el­e­vat­ing the sur­round­ing re­gion’s risk; a rise in ter­ror­ist group­ings and ac­tiv­i­ties in coun­tries such as North­ern Nige­ria, So­ma­lia and the Eastern DRC; while South Africa ex­pe­ri­enced se­vere labour stop­pages and vi­o­lent strikes across a num­ber of sec­tors. In March of this year, a coup in the re­source-rich Cen­tral African Repub­lic saw rebels oust Pres­i­dent François Boz­izé, fol­lowed by days of vi­o­lence and loot­ing, leav­ing the coun­try in sham­bles. Ac­cord­ing to global risk man­age­ment con­sul­tancy Con­trol Risks, th­ese changes are of­ten ac­cen­tu­ated by risk con­ta­gion, where changes in the risk pro­file in one coun­try can be eas­ily trans­mit­ted and af­fect the risk pro­file of oth­ers.

Ca­pac­ity de­vel­op­ment

“As a re­sult of grow­ing de­mand for PRI, the num­ber of providers en­ter­ing the mar­ket is ex­pand­ing and ca­pac­ity is am­ple,” says Conor Healy, se­nior risk of­fi­cer for sub-Sa­ha­ran Africa at MIGA. “How­ever, many pri­vate providers are not will­ing to en­ter the riskier mar­kets as a pri­mary in­surer. In th­ese cases, pub­lic providers such as MIGA and ex­port credit agen­cies can take the lead, ced­ing risk to other play­ers in the mar­ket. Cur­rently, $4.2 bil­lion of MIGA’s ex­po­sure is rein­sured.”

African pri­vate ca­pac­ity for PRI re­mains largely non-ex­is­tent, mean­ing the ma­jor­ity of in­vestors still look to for­eign mar­kets for cover, says Paul Lewis, man­ager of African busi­ness at PRP In­sur­ance Bro­kers. In 2009, Phyl­lis Mabasa, then man­ag­ing di­rec­tor at Sas­ria, ex­pressed con­cern that this lack of lo­cal ca­pac­ity in­creases the cost of cover and lim­its the op­tions avail­able. Roux, how­ever, points to the wis­dom of plac­ing cover on a mar­ket out­side of the in­vest­ment coun­try. “Should a coun­try’s poli­cies change dra­mat­i­cally, the host govern­ment could ex­pro­pri­ate the lo­cal un­der­writer, too; there­fore it makes sense to have an ex­ter­nal un­der­writer.”

Ac­cord­ing to Roux, go­ing through a mar­ket such as Lloyd’s can of­fer a cost ad­van­tage. “The scale of cover the Lloyd’s mar­ket takes on cre­ates an ad­van­tage in terms of pre­mium costs over pri­vate in­sur­ers who might strug­gle to ob­tain enough ca­pac­ity to cover their risk.” Steve Bes­sant, po­lit­i­cal vi­o­lence bro­ker at RK Har­ri­son, con­firms this, say­ing in a re­cent ar­ti­cle for Lloyd’s News, “Rates for po­lit­i­cal vi­o­lence are sta­ble, but they have been in­creas­ing in coun­tries where de­mand ex­ceeds sup­ply and where in­sur­ers are look­ing to man­age their ag­gre­gate ex­po­sure.”

I would say risk, es­pe­cially po­lit­i­cal risk, is a ques­tion of per­cep­tion.

One thing there ap­pears to be unan­i­mous agree­ment about is that the Lloyd’s mar­ket cer­tainly has the ca­pac­ity to meet de­mand. None­the­less, for FDI in Africa, cover is not al­ways avail­able, or is not avail­able at an af­ford­able price. “Cover is widely avail­able, if the in­vestor or busi­ness is will­ing to pay. But the cost can be pro­hib­i­tive for cer­tain re­gions and cer­tain risks,” says Lewis. Like­wise, Roux notes, that the cost of plac­ing a risk in the DRC will be far higher than that of a risk in Kenya. For cer­tain coun­tries or in­dus­tries, the risks are con­sid­ered so great that cover is not avail­able at all. “In South Africa and Zimbabwe, for in­stance, it is not pos­si­ble to ob­tain cover for na­tion­al­i­sa­tion be­cause of the lack of clar­ity on pol­icy in th­ese coun­tries,” Roux ex­plains.

The growth of pub­lic ca­pac­ity, how­ever, has in­creased both cover op­tions avail­able and pol­icy tenors within African mar­kets. The African Trade In­sur­ance Agency (ATI), founded in 2001, now pro­vides cover for 10 mem­ber coun­tries with a fur­ther eight coun­tries in com­plet­ing their mem­ber­ship. Backed by the World Bank, the ATI is the only Africa-based mul­ti­lat­eral fi­nan­cial in­sti­tu­tion pro­vid­ing ex­port credit in­sur­ance, po­lit­i­cal risk in­sur­ance and in­vest­ment in­sur­ance. It re­cently in­creased its cap­i­tal base af­ter an in­vest­ment from the African De­vel­op­ment Bank. The agency has sup­ported over $2.5 bil­lion worth of trade and in­vest­ments across the con­ti­nent, pro­vid­ing cover for many pre­vi­ously unin­sur­able projects and busi­nesses

With in­creased pri­vate ca­pac­ity in in­ter­na­tional mar­kets, in­ter­na­tional pub­lic providers have turned their fo­cus to de­vel­op­ing mar­kets which at­tract less in­ter­est from pri­vate in­sur­ers. MIGA has nu­mer­ous FDIs as well as a num­ber of south-south projects, such as South African in­vest­ments in sub-Sa­ha­ran Africa. Al­though, as a rule, busi­ness mod­els mir­ror the pri­vate mar­ket and its pric­ing, pub­lic providers of po­lit­i­cal-risk cover of­fer cer­tain no­table ad­van­tages. “Our com­par­a­tive ad­van­tage comes in our stand­ing as a mem­ber of the World Bank Group, which al­lows us to take on higher risk at longer tenors than the pri­vate mar­ket,” says Healy. This also al­lows MIGA to me­di­ate dis­putes with host coun­try gov­ern­ments. The ma­jor­ity of dis­putes are re­solved be­tween the in­sured party and the host govern­ment.

Per­cep­tion ver­sus re­al­ity

While the value of this kind of cover is clear, the in­creased per­cep­tion of risk has been a noted boon for the in­sur­ance in­dus­try with some ques­tion­ing whether risk has ac­tu­ally in­creased as greatly as de­mand and per­cep­tion sug­gest. Roux sug­gests, “Africa needs a de­cent pub­lic re­la­tions agency. Africa is full of op­por­tu­ni­ties and we do not fo­cus on th­ese enough. As a re­cent re­port from Ernst and Young sug­gests, those do­ing busi­ness in Africa love it and those who aren’t think it is a bas­ket case.” “I would say risk, es­pe­cially po­lit­i­cal risk, is a ques­tion of per­cep­tion,” says Shenyuz. “Africa is a vast con­ti­nent of di­verse peo­ple, cul­tures, ge­ogra­phies and sys­tems of gov­er­nance. I’m quite sur­prised to hear how fre­quently com­men­ta­tors bun­dle the risks as­so­ci­ated with one re­gion with those of an­other.” Ac­cord­ing to Shenyuz, the rea­son for the steady growth in risk man­age­ment ser­vices sup­port­ing in­ward in­vest­ment over the last few years is that no two projects are the same. Each pro­ject does come with its own set of risks.

In or­der to ob­tain the most cost-ef­fec­tive cov­er­age, it is cru­cial that an in­vestor or busi­ness care­fully analy­ses and thor­oughly un­der­stands the risks for their busi­ness in a par­tic­u­lar coun­try and area. “Not only are the threats dif­fer­ent from coun­try to coun­try, but of­ten from one part of the coun­try to an­other, so it is im­por­tant to avoid gen­er­al­is­ing a per­ceived risk. Bet­ter-in­formed clients who work on ac­tual risks rather than per­ceived ones are more likely to re­quire only the most suit­able in­sur­ance prod­ucts,” says Shenyuz. “A new in­vestor may be equally con­cerned with the risk of na­tion­al­i­sa­tion, ex­pro­pri­a­tion and a state not hon­our­ing sov­er­eign obli­ga­tions. In re­al­ity, our anal­y­sis may en­able them to pin­point one risk and de-pri­ori­tise the oth­ers. This al­lows them to struc­ture a risk man­age­ment plan around the most log­i­cal threats to the pro­ject in ques­tion.”

Aon helps clients re­duce the cost of cover through ef­fec­tive mit­i­ga­tion and man­age­ment strate­gies. “We run a cri­sis man­age­ment team and mon­i­tor move­ments and changes. Be­cause a client can demon­strate a thor­ough strat­egy to han­dle rapid evac­u­a­tion, for ex­am­ple, they will qual­ify for re­duced pre­mi­ums on cover.”

For­eign in­vestors in Africa must con­sider a com­bi­na­tion of tech­niques to en­sure they are pre­pared for any even­tu­al­ity, says Shenyuz. “This in­volves any­thing from en­sur­ing they un­der­stand the govern­ment’s eco­nomic pol­icy in or­der to help an­tic­i­pate im­mi­nent cur­rency or cap­i­tal con­trols, to en­sur­ing trans­port links to the port are safe and se­cure. A multi-lay­ered risk man­age­ment plan which an­tic­i­pates a range of sce­nar­ios and utilises a range of mit­i­ga­tion tech­niques from se­cu­rity train­ing to in­sur­ance which min­imises the im­pact of ex­pro­pri­a­tion is the most ef­fec­tive strat­egy for a cap­i­tal pro­ject.”

Into the fu­ture

The World In­vest­ment and Po­lit­i­cal Risk Sur­vey 2012 sug­gests that po­lit­i­cal risk poses a threat of po­ten­tial loss of cap­i­tal cru­cial for growth for the con­ti­nent; and for in­vestors, a loss of op­por­tu­ni­ties to cap­ture po­ten­tial high yields from a vast, still largely un­tapped mar­ket. Ac­cord­ing to the most re­cent Grant Thorn­ton In­ter­na­tional Busi­ness Re­port, 32 per cent of for­eign in­vestors into Africa are putting off in­vest­ment de­ci­sions be­cause of cur­rent po­lit­i­cal con­di­tions. How­ever, with growth in the so-called tiger economies pro­jected to be as high as 7.9 per cent in 2013 into 2014, it is likely that many in­vestors will sim­ply turn ev­er­more to PRI.

“The de­mand for PRI will con­tinue to grow as aid bud­gets shrink and coun­tries look to­wards pri­vate in­vest­ment and com­mer­cial debt to ad­dress their sig­nif­i­cant in­fra­struc­ture deficits. PRI will con­tinue to play a sig­nif­i­cant role for those in­vestors who are look­ing at sub-Sa­ha­ran Africa in search of higher yields,” con­cludes Healy.

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