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Political Risk Insurance:Political Risk Insurance:Investment Risks & OPIC Solutions

Presentation to 1st International Trade ConferenceOmaha, NE

April 12 2016April 12, 2016

The U.S. Government’s Development Finance Institution

Agenda

• Introduction to OPICIntroduction to OPIC• What are Political Risks?• Types of investments OPIC insuresTypes of investments OPIC insures• Terms and Conditions• Benefits of OPIC Insurance• Some Case Studies


What is OPIC?As the U.S. Government’s development finance institution, OPIC mobilizes U.S. private capital to help address critical development challenges and in doing so, advances U.S. foreign policy and national security priorities.g p y y p

OPIC currently manages a $20 billion portfolio of projects in more than 100 countries and operates

lf t i i b ion a self‐sustaining basis at no net cost to the American taxpayer.


Overview of Programs OPIC offers innovative financial solutions to support private investors including debt financing, insurance, and support for private equity investment funds.

Products Current* PortfolioBased on a $29B Statutory CapacityPolitical Risk Insurance

― Protection against currency inconvertibility, expropriation and political violence, including terrorism, as well as other specialized coverage

$18 $19.9 BILLIONas well as other specialized coverage

― Policy coverage up to $250M per project, up to 20 year term

― Fixed premium, cancellable only by insured

Investment Funds

$2.1

$2.8

$10

$12

$14

$16 Political Risk Insurance

Investment Funds

― Senior debt for private equity funds selected by competitive process

― Investment decisions made independently by selected fund managers

― Provide up to $250M with bullet repayment, zero $15

$4

$6

$8

$10

Debt Finance

coupon structure

Debt Finance― Limited recourse, long‐term finance for private sector,

commercial projects― Loan amounts up to $250M per project

$‐

$2

$4

Total Exposure


― Specific programs for providing finance to small‐and‐medium‐sized enterprises *September 30, 2015

What are Political Risks?

Political Risk Definition: • The threat that political changes may affect the profitability or

viability of an investment.

Three Major Categories:• Inconvertibility ‐ conversion & transfer• Expropriation confiscation & nationalization• Expropriation ‐ confiscation & nationalization• Political Violence ‐ assets & business income loss


Currency Inconvertibility

Currency inconvertibility covers the inability to:• convert local currency into a hard currency (US$); orconvert local currency into a hard currency (US$); or• transfer local earnings out of the host country.

Examples:p

• Excessive delays in acquiring foreign exchange caused by host government action or failure to act

• Adverse changes in exchange control laws or regulations (e.g., Ukraine), or

• Deterioration in conditions governing h d f f l lthe conversion and transfer of local currency (does not include devaluation) (e.g., Egypt)


Expropriation

Expropriation covers losses of an investment due to expropriation nationalization or confiscation by theexpropriation, nationalization, or confiscation by the host government.

C i l d b th di t d “ i ” i ti• Coverage includes both direct and “creeping” expropriation• Contracts with foreign government entities can be insured against expropriation via breach of contract, including non‐g p p , gpayment of an arbitral award and denial of justice.


Political Violence

Political Violence insurance covers against the loss of assets or business income due to political violence, including but not p , glimited to: war, revolution, politically motivated civil strife, and terrorism.

C id f t l f f• Can provide coverage for temporary loss of use of assets, damage to or loss of use of critical infrastructure, extraordinary expenses, and forced abandonment


OPIC PRI Covers Various Forms of Investment Investment Form of Investment/Exposure

Equity Equity including retained earnings subordinated debtEquity Equity, including retained earnings, subordinated debt

Debt Bank loans, bonds, and capital or operating leases from third party financial institutions

A t T ibl t i l di i d i tAssets Tangible property, including consigned equipment

Private Contracts

Contracts among private parties to provide services, including construction, procurement, management, technical services,“k h ” f hi t“know how” or franchise agreements

Contracts with Foreign Governments

Contracts with a foreign government agency or company:‐ Bid bonds or guaranties , including advance payment, performance warranty or customs bondsGovernments performance, warranty or customs bonds ‐Tangible assets used to perform the contract‐Loans to Governments or SOEs‐Government contracts to provide goods or services


What Types of Projects Can OPIC Insure?

• OPIC can provide insurance or reinsurance for new projects, or modernizations, expansions, or privatizations of existing projects.

• All projects are subject to OPIC’s investor eligibility, country eligibility and investment policy requirements.

Type of Projects Specialized Forms of Coverage

Infrastructure, including power, airports, ports, railways, etc.

‐ Creeping expropriation, including breach of contract, denial of justice, arbitral award default for long‐term

h l t ith tpurchase or supply agreements with government owned and controlled companies.

Renewable Energy Infrastructure, including solar, wind, hydro, etc.

‐ Loss of business income due to “regulatory risks” or breach of “feed‐in tariff” contract.

Non‐governmental and not‐for‐profit organizations, including emergency relief services or schools

‐ Loss of bank accounts, tangible property and extraordinary expenses (such as evacuation expenses or forced abandonment of assets)

Microfinance ‐ Foreign government acts affecting microenterprise


g g g pborrowers, partial expropriation (bank accounts), and local currency risks

Terms and Conditions of Insurance

• Eligible U.S. investor

• 20+ year coverage (3 year min.)

• Coverage of up to $250 million per projectCoverage of up to $250 million per project

• Retained risk requirement: OPIC coverage ranges from 90% (10% self‐insurance) for equity to 100% coverage for commercial bank loans or leases (from unrelated third parties).

• Premium rates fixed for full term of coverageg


U.S. Investor Eligibility

• U.S. Citizens

• Corporations established in the U.S. and more than 50% owned by U S citizens or corporationsby U.S. citizens or corporations

• Not‐for‐profits established in the U.S.

• Entities established outside the U.S. at least 95% owned by U.S. citizens or corporations.


Benefits of OPIC Insurance

• Experience in 150+ countries and high levels of risk

h l l l f l d b l f f• Can help attract a larger pool of capital and obtain long‐term financing for projects

• Deterrent against detrimental government interference (“Halo Effect”)

• Advocacy

• Full faith and credit of the U.S. government

• Cooperation with private insurers and multilaterals

• Strong claims and recovery record:$976 8 million of claim payments and settlements for 294 individual– $976.8 million of claim payments and settlements for 294 individual claims since FY71

– $893.7 million or 91% has been recovered by OPIC


Premium Rates

A $10 million equity investment insured for $9 million (90% of the equity) purchasing Expropriation at an OPIC rate of $0.60 (or 60 basis points per year) would have an annual premium of: p p y ) p($10,000,000 x 90%) x $0.60/$100 = $54,000

• Rates may fall outside of these ranges, depending on the particular risk fil f th j t f i li d


profile of the project or for specialized coverage.

Inconvertibility Case Study‐ Venezuela

• Caterpillar made $55 million in loans to Consolidada de Ferrys (Conferry) to purchase 2 high speed passenger ferries for their Margarita Island business.

• 2003: A two month general strike and a steep depreciation of the bolivar leads President Chavez’ to impose currency controls. Chavez also established CADIVI, a governmental entity, to regulate the purchase & sale of foreign currency.

• OPIC worked with clients to get their applications through the CADIVI process• OPIC worked with clients to get their applications through the CADIVI process successfully using local counsel and advocacy with Government.

• CADIVI process finally stalled, and OPIC paid a claim to Caterpillar.• 2011: Chavez nationalizes Conferry and OPIC pays an expropriation claim in 20132011: Chavez nationalizes Conferry and OPIC pays an expropriation claim in 2013.


Expropriation Case Study‐Indonesia

• 1990’s: Asia is booming and Indonesia’s demand for power far exceeds capacity• MidAmerican Energy and many other U.S. investors sign countless PPA’s with

PLN, backed by GOI guarantees• PPAs include international arbitration and investors and banks are falling all over

themselves to invest or lend money1998 M t f th i k t (R i A i M i ) i t fi i l i i• 1998: Most of the emerging markets (Russia, Asia, Mexico) go into financial crisis mode

• Indonesia cancels or puts on hold most of its PPAs, including MidAmerican’s• Next steps: MidAmerican goes to Arbitration only to have the Arbitration almost• Next steps: MidAmerican goes to Arbitration, only to have the Arbitration almost

thwarted by the Indonesian Government. Ultimately, MidAmerican wins an Arbitral Award, the Indonesians refuse to pay, and OPIC pays.


Political Violence Case Studies

• International Rescue Committee—Afghanistan, Chad, Dem. Republic of Congo‐assets

• Western Wireless‐ Haiti‐ telecom towers/equipment• Gaza Power Project‐ Israeli bomb damages power plant• Tea Importers Rwanda‐ Civil War destroys equipment• Tea Importers Rwanda‐ Civil War destroys equipment• Sector Resources Colombia‐ FARC violence closes gold mine


Documents

Political Risk Insurance - SALAMA INTERNATIONALsalamatrade.com/uploads/3/4/9/1/34910855/04_cindy_shepard.pdf · Political Risk Insurance Based on a $29B Statutory Capacity ... pro