What’s yours is mine: The risk of expropriation, what companies need to know
Our newsfeeds these days seem to be teeming with stories about political risk and a rise in protectionism to changes in governments, there is a lot for clients – and their political risk underwriters – to be thinking about.
The delicate nature of political risks means that there are often areas of exposure and claims that are little talked about and not always well understood.
One area of this complex environment that corporate clients need to be aware of is a trend for governments to seek to assert greater control over their economies. For some governments, the promise to take back control of certain assets or resources can be a big vote winner, or at least a distraction from negative news headlines elsewhere.
This can take the form of physical assets, such as power plants, being nationalised, or of overseas companies being obliged to cede part control of their business to local investors or authorities if they wish to continue operating in a particular territory.
In some instances, governments pay compensation to companies that lose all or some control of their business because of nationalisation or part-nationalisation. For example, Saudi Arabia paid compensation to the American oil companies that were shareholders of Saudi Aramco during its gradual nationalisation in the 1970s. In other cases, it may require a lengthy arbitration process before companies receive compensation, if they do at all.
Even in cases where settlements are possible, the process is often lengthy or arduous with a clear potential impact on a company’s ability to operate and on its bottom line.
For example, in 2017 the Tanzanian government banned the export of certain raw materials including gold and copper concentrates. International gold mining company Acacia Mining, which operates three of the largest mines in Tanzania, late last year said it was considering suing the Tanzanian government after it had been prevented from exporting for some 20 months. Acacia also has been faced with fines and accusations of unethical behaviour which it alleges are unfounded. The dispute between the mining company and the government continues.It isn’t just clients in natural resources or basic industries that need to be aware of the risk of expropriation or nationalisation of assets. Clients with operations that might seem less obvious political targets, such as utilities, may also find themselves required to give up part control of their operations in certain countries.
And while some governments are clear, in advance, of their intention to nationalise assets or assume some local control, in other cases this can be more subtle, or less-well sign-posted.
There are some ways in which clients can minimise the risk of having assets expropriated.
Perhaps the most obvious way to minimise expropriation risk is to ensure there is local equity investment in projects and to borrow money from local banks – so that there is local skin in the game, so to speak, should a contentious nationalisation occur.
It is also possible to buy insurance cover to help protect your assets in cases of expropriation.
Insurers of this risk typically would work with analytical firms to help their clients understand the risks associated with a territory.
As underwriters we prefer to take a long-term view of risk and to work with clients to understand their global risk management strategy. The time to put in place a program is before a problem arises. The policies we offer are typically multi-year.
Companies that have had operations in a certain country for many years can suddenly find their assets at risk if a government changes. But risk management and risk transfer can help to ease this concern and help those companies continue to operate.