Political risk may be defined as the risk that a host county will take action or fail to take action that interferes with a foreign investment. Examples include expropriation by the government or seizure by rebels of an ore body or mine in a country other than that of the owner of the ore body or mine.

The most “common” forms of political risk that have affected mining ventures include:

  • Expropriation
  • Currency restrictions
  • Political violence

These days the following may be added to this list of classic political risks:

  • Transnational crime and corruption, such as occurs when drug growers and dealers would rather not have a mine near their farms, or seek to expand their investments into legal activities like mining.
  • Local versus national politics, such as occurs when local groups seek independence from the national government; Quebec is a good example.
  • Non-governmental threats, such as those posed by political parties seeking to win the next elections, religious groups seeking to divert attention from their other failings, NGOs, labor unions, seeking to expand their base of influence, and rich people who simply want to maintain an unspoilt environment near their hunting lodge.

Patrick Garver of Barrick talking at the Rocky Mountain Mineral Law Institute notes these approaches to assessing political risk:

Consider the principle attributes a foreign investor would like to be present to minimize political risk, including legal, political, and fiscal stability; clear investment policies; a predictable mining code; transparent dispute resolution; majority ownership; the ability to repatriate profits; and access to foreign exchange.

Look backwards at the history of the host country with respect to foreign investment, and look forward by considering the life, longevity, and policies of the present government.

Look at the courts, the cops, and the constitution and whether the state is failed or is failing or is likely to fail.

Look at the currency .

Consult the experts; read the papers; call people in the country; get out and travel the county; exercise due diligence.

The table below highlights some of the sources of political risk mining projects face—see this link for more:

Politics and Governance

Security

Reputation and Social Issues

Infrastructure and Health

· Political instability

· Unclear legislation / security of tenure

· Corruption / poor governance

· Changing royalty / tax regimes

· Civil unrest / ethnic conflict

· Kidnap

· Insurgency and terrorism

· Labor unrest

· Theft and pilferage

· Community opposition / social license to operate

· Artisanal miners

· JV partner reputation

· Human rights

· HIV / AIDS

· Disease

· Lack of transport, communications infrastructure

I am indebted to Mineweb for this table which is from an informative posting about managing political risk in mining. This table pretty well summarizes the nature of and alternatives to PRI in the mining industry.

Tool

What is it?

Application

Limitations

Political risk insurance

Insurance policy offered by major insurer usually covering "traditional" political risks - expropriation, currency inconvertibility, war, etc.

· Assure lenders or shareholders,

· Transfer some state-level political risks

· Merely a safety net, not a solution,

· can be expensive,

· many policies do not cover more common sub-sovereign level (e.g. local government, NGO) political risks

Portfolio diversification

Diversify projects in variety of jurisdictions in order to spread risks

· Spread possible projects across countries and regions in order to minimize impacts of potential risks

· Does not address the actual risks themselves,

· Limits opportunities

JV Partners

Choose JV partners on basis of being able to leverage their political connections, understanding

· Minimize likelihood and impact of risks by aligning interests with those of key local partners

· Can become liabilities with regime change

· Can use political influence against investors

"Prominent Victims

Include members in consortia that are important to host government (e.g. World Bank, major aid provider)

· Minimize likelihood of political risks by working with stakeholder that is important to host government

· Interests may not completely align with investor

· Presupposes "rational" host government

Lobbying and Employment of Well-connected country expert

Influence policy and regulatory environment through Embassies, other bodies, ex-diplomats, ex-ministers, etc.

· Help shape policy environment to suit one's interests; obtain preferential access to host government

· Lack of control; dependent on many externalities;

· Interests may not align; hard to measure

Security management

Manage political and security risks at operational levels; protect assets; manage threat levels

· Minimise impact of political risks to people and assets

· Protective measure mostly; Limited ability to address root causes of risks

Corporate social responsibility and stakeholder management

Obtain and improve levels of support for project by creating strategic partnerships with local communities and other stakeholders

· Obtain and maintain one's social license to operate, minimize reputation and security risks

· Requires careful planning and significant management time to ensure a project-specific approach,

· Planning mistakes can augment risks