What is PRI?

As always the best definition of Political Risk Insurance (PRI) is at Wikipedia. AON will sell your mining company a PRI policy. Their services include:

  • Construction insurance programs for lenders, investors and sponsors in new mining projects
  • Bespoke risk management programs covering mining and related industries
  • Risk assessments
  • Due diligence for mergers and acquisitions
  • Insurance advisor for financial institutions
  • Alternative risk financing for environmental risks and mine/site remediation
  • Political risk insurance for new projects and existing operations to cover both lenders' and borrowers' interests

To see how PRI works in the mining industry, see this document that records the story of PRI in Columbia at the Las Animas mine. More documents from OPIC on PRI in mining are at this link.

I am no fan of PowerPoint presentations. However I am impressed by the one at this link that gave me an introduction to and some details of PRI. To whet your appetite, here are the bullets that trace the development of PRI:

  • Began by governments following World War II to encourage investors to rebuild war-torn Europe
  • Private insurers became active in the mid 19702
  • Today, there is a thriving global private political risk market
  • Most major governments continue to be active through their export credit agencies

Another PowerPoint presentation from the late 1990s that gives considerable detail about PRI to the mining industry in Africa is at this link. Even easier, and always up-to-data, is the World Bank Group Multilateral Investment Guarantee Agency site for general information about PRI.

The table below highlights just 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

Many of the above issues are often inter-related. For instance, a local community grievance can be seized upon by a local politician and/or an international NGO the grievance could become a security issue.

Alternatives to PRI?

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


Companies & Organizations

PRI providers are listed on the InfoMine Suppliers database. Above I mentions Aon. Here are some others:

· American Mining Insurance Company

· Casualty & Surety, Inc.

· Contacto Corredores de Seguros S.A.

· Global Risk Partners

· HUB International

· Overseas Private Investment Corporation

· Price Forbes Metals &Minerals

Heath Lambert explain their PRI policy and policies at this link. As so often is the case, they expect you to have fought back before they will pay out.

Africa Trade Insurance Agency may be able to help you—they helped First Quantum Minerals with PIR for mining equipment in Zambia (see slide 36). I particularly liked their Environmental Operations Manual. It would be interesting to see how it is applied.

Links, Books & Papers

Links to more publications on PRI and many other aspects of international mining are at this site.

A detailed, academic study of PRI is in the paper Measuring Risk: Political Risk Insurance Premiums and Domestic Political Institutions.

The International Risk Management Institute has a $76 book Political Risk Insurance Guide if you seek in-depth information.

The Risks We Run: Mining, Communities and Political Risk Insurance is a book that is as critical of PRI and the mining industry as any you will find. The book is “reviewed/supported” in a posting from the Society for the Study of Peace and Conflict. Relative to PRI in India, the reviewer states: “The Risks We Run is a must read for campaigners, human right activists as well as researchers and academicians in India. The history of extractive industries has a bad reputation in India by flouting environmental and social responsibilities. In the present context, while State governments of Orissa, Jharkhand and Chhattisgarh are wooing investors for the exploration of rich minerals at the heart of tribal lands and private risk-consultant groups are hell bent on advising the investors, this book will give an opportunity to the common man to evaluate the structure, process and outcome of those mining industries.”

If you choose not to buy the book, you will find a description of some of the mines dealt with in the book at The Whirled Bank Group.