Commodity prices increase nationalisation risk

Expropriation back in fashion 

State ownership of industries like coal mining and rail services had seemingly gone out of fashion with the end of the Cold War, however governments in many developing countries
continue to confiscate and expropriate the assets of foreign companies.

Expropriation has become a particular issue for companies operating in Venezuela, Bolívar and Ecuador, although government interference and regulatory risk is also creating problems in other Latin American countries, as well as parts of Africa, Russia and Asia.

Companies that are most exposed to expropriation risk are those involved with extraction industries like mining and oil, says Peter Hornsby at broker Lockton. However the power generation and communications sectors have also had problems with political risk in the past, he says.

The most extreme example of expropriation is Venezuela where the socialist government of Hugo Chavez has nationalised hundreds of businesses since it came to power in 1999. Under his tenure, Venezuela has nationalised some 300 companies in key sectors, including oil, infrastructure, utilities, communications, manufacturing, mining and banking.

The risks of political regret

Expropriation like that seen in Venezuela is typically the result of an ideological attack on foreign assets, says Hornsby. “In recent years we have seen more aggressive idealistically driven expropriation, most notably in Venezuela, Bolivia and in Zimbabwe with its seizure of White owned farms,” he says.

However expropriation can also be driven by “regret risk.” Governments are sometimes minded to renegotiate contracts with foreign companies, for example when they believe that concessions to extract natural resources have been given away cheaply, says Hornsby. This has been the case in the Democratic Republic of Congo and is an ongoing threat in South Africa where the government is under pressure from the youth wing of the African National Congress to nationalise mining assets.

Commodity prices drive risk

Commodity prices are increasingly a driver behind expropriation, in particular for mining and oil companies that are seen to be making big profits, says Carlos Caicedo, an analyst at political risk consultants Exclusive Analysis. In some countries the operations of foreign extraction companies have been seized by government, while others are pursuing less aggressive tactics and are negotiating additional taxes.

“It is telling when governments in politically stable countries like Chile, Columbia and Peru ask mining companies to give away additional revenues. We would also expect actions against the mining sector in other countries, including Bolivar, Ecuador and Venezuela,” says Caicedo.

Food for thought

Increases in commodity prices can also lead to a generic rise in political risks like expropriation, says Peter Jenkins, a political risk underwriter at Beazley. “For example, when food prices are high there can be civil unrest. This puts pressure on the government to react with accusations of price fixing and confiscations of imported food stocks or deprivation of exports as governments try and keep food in the country and thus reduce prices.”

In Venezuela, President Chavez has expropriated food companies and a supermarket chain in a bid to tackle food security. High food prices and food security are also an issue for other Latin American countries, and similar moves to nationalise food companies could follow in Argentina, Ecuador and Bolivia, says Caicedo.

Expropriation cover is for the experts

Expropriation insurance can be used to protect a company’s investment in overseas assets – like a mine or a factory - or it can be used to cover mobile assets like plant and equipment used in the oil and construction industries, says Jenkins.

The insured risks are varied and range from a fairly straight forward risk such as construction equipment in Africa to a power plant in Indonesia with a Power Purchase Agreement with the local state utility. “This is a highly complex risk that requires a bespoke form of cover,” says Jenkins.

“Expropriation is an area of cover that requires the client to sit with the broker and the underwriter to structure insurance that really meets their risk profile and the needs of their investors and lenders. It can be a very complex area to insure and needs underwriting expertise, bespoke wordings and good communication with the client,” he says.

Potential to grow

Political risk insurance has been growing in popularity, but more companies could buy the cover than is currently the case, says Hornsby. “For some companies the political risks associated with operating in some emerging markets are greater than traditional perils such as fire, which most companies already buy insurance for,” he says.

Lloyd’s is an important market for expropriation cover, says Hornsby. Recent innovation in the Lloyd’s market includes cover for less direct forms of expropriation. An example of expropriation via the “back-door” includes the refusal to renew water extraction permits to foreign owned energy companies in Russia. Without the extraction permits foreign firms are forced to seek partnerships with Russian companies that have such licences.

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