• Antonio de la Esperanza

Beware of war - PRI's and Project Finance


Welcome everyone!

The promotion of infrastructure is normally the first thing on the "to-do" list of every developing country. Increase in the infrastructure investment generates a significant increase in the GDP expansion of the countries and it creates an enormous amount of jobs, which helps the further development of other markets in the country.

So why are developing countries not putting everything on infrastructure development? Well, they are, but they have a lot of limitations, the main one, funding. Governments are unable to put on their back all the money necessary to fully develop their infrastructure.

So what is the solution? Private money, this is, banks, private companies, private equity funds and, foremost, development institutions.

What is the problem then? Well, these players need to see a return in their investments and this is intimately correlated to the risk they suffer.

A lot of the risks are covered by regular insurance policies and fixed fee contracts (we will talk about that on another post), but there are certain risks that are very difficult to foresee and cover: political risks.

Here is where the Political Risk Insurance (PRI) comes into play. The PRI is an insurance design to take away from the lenders of an infrastructure project in certain development countries those extreme situations that would imply the complete loss of a project and that are attributable to the actions of someone.

The risks covered in a typical PRI are the following:

1. Currency inconvertibility and transfer restrictions

Provides protection for events where, because of an action of the Government or its regulatory bodies, the lender is unable to change local currency into a hard currency or when they cannot transfer the money out of the country.

2. Expropriation

Provides protection for events where, because of an action of the Government or its regulatory bodies, the project is effectively taken over by such Government (there are a set of situations in which this can happen)

3. War, Terrorism and Civil Disturbance

Provides protection for the destructrion or disappearance of the assets of a project because of war, terrorism or civil disturbance in such country.

4. Breach of Contract

Provides protection in the event that a government does not honour an arbitral award. This is NOT a guarantee

There also additional types of coverage that can be negotiated with the provider, but these are the most important for any developer or finance party.

Who provides this kind of insurance? The larger providers are MIGA, one of the branches of the World Bank, and OPIC, the US development institution. The main problem with this providers is that they can only provide this insurance while the funding is still being negotiated, this is, they get into the funding as part of the lenders (and thus, they are normally secured and have certain rights in the intercreditors agreement), although they are normally also lenders (MIGA through IFC, IDA or IBRD).

When these providers cannot come into play, there the private insurance sector can provide that coverage, but at a higher cost...

I hope this is helpful. We've been working in a number of these and I think they are very interesting and they help develop regions with political issues.

Let me know if you have any comments!

T

Follow me on Twitter: @aesperies

#PRI #political #risk #insurance #politicalriskinsurance #antoniodelaesperanza

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