Political Risk Insurance Critical for Global Mining Projects By Mamadou Barry, Acting Head of Oil, Gas and Mining at the Multilateral Investment Guarantee Agency (MIGA) The mining sector is an important source of employment, revenues, and demand for local services and goods in the countries in which the mines are located. Commercial mining provides employment and transfers skills to workers and can also be an important source of social services to remote communities. With properly managed environmental, social and corporate governance, these projects can make a significant contribution to sustainable development and poverty reduction in host countries. Given the high price and rising demand for minerals and metals today, there is vast potential for investors in the sector. But there are inherent risks. While resource-rich countries present significant opportunities, they also pose challenges, not least because of their location in parts of the world with precarious political or socio-economic situations. Weak macroeconomic frameworks and inadequate legal and regulatory regimes often hamper development in these countries. And poverty and growing income disparities can fuel civil disturbances and conflict. Furthermore, tensions can develop between central and local governments over the distribution of royalties and taxes. And failure to address social and environmental concerns properly can exacerbate tensions with local communities, damage the reputation of project sponsors and lenders, and result in huge losses. Many governments in promising mining locations are reviewing old agreements and renegotiating contracts for a larger share of the profits. If a host government expropriates a project without paying full and fair compensation, investors can lose massive investments. The trend towards resource nationalism, fuelled by the boom in mineral prices, is another risk factor for investors in the sector. Complexities of this nature fall within the realm of political risks and present significant challenge to mining companies. Given the large capital costs and longer time horizons associated with projects, managing political risks should be a critical part of the global business strategy of mining investors. Risk Mitigation Options While many companies have developed the ability to manage technical and commercial risks quite well, dealing with political risks in emerging markets continues to be a major challenge for most. Moreover, lenders have portfolio or country risk limits. The financing prospects of projects often hinge on the ability of project promoters to mitigate real and perceived country-specific risks to the satisfaction of participants. Political risk insurance (PRI) is often the option that makes the most business sense when it comes to improving the risk-return profile of a mining project, satisfying lenders and attracting partners. A PRI Provider with a Mission Many private and public insurers provide PRI. Among them is the Multilateral Investment Guarantee Agency (MIGA), a member of the World Bank Group, which provides PRI to investors in emerging markets against non-commercial risks, including currency transfer restrictions; expropriation; war, terrorism and civil disturbance; and breach of contract. The agency’s objective is to maximize the development impact of projects and help improve the lives of people in developing countries. Since inception in 1988, MIGA has issued over $1.4 billion of guarantees in the mining sector. MIGA supports mining investors by providing PRI that protects investments against political risks and compensates for losses arising from covered political risks; providing information about business opportunities in emerging markets; and helping companies to comply with established social and environmental best practices. The agency’s support also extends to other sectors that are crucial for sustainable mining development, such as infrastructure and manufacturing. MIGA’s status as a World Bank Group entity and its structure as an organization with 172 countries as shareholders give it a unique ability to protect investors against government actions. The agency has a well-established and effective working relationship with host governments. Its dispute resolution services give investors peace of mind in knowing that MIGA is able to facilitate a constructive dialogue and steer all parties towards an amicable resolution in the event of a dispute between investors and host countries. The multilateral political risk insurer has had significant experience working with the world’s largest mining companies to help them address key noncommercial risks. For instance, when Marubeni LP Holding B.V. of the Netherlands embarked on a copper and molybdenum mining project in Chile, they applied for PRI from MIGA to protect their investment. The Minera Los Pelambres project, located approximately 200 kilometers north of Santiago, involved the expansion of the enterprise from an underground to an open-pit mine. MIGA’s support for the project was driven by Chile’s development needs and the World Bank Group’s poverty reduction strategy for the region. Some 15 percent of Chileans still live below the poverty line, with many millions precariously just above it. PRI Tailored for the Mining Sector MIGA’s extensive experience in the mining sector has led to the development of insurance specially designed to target mining-related investor concerns, such as the revocation of leases or concessions, tariff, regulatory, and credit risks arising from a government’s breach or repudiation of a contract, and disputes related to take-off agreements, production sharing, and exploitation rights. Selected MIGA Mining Projects Project Host Country Guarantee Investor Guarantee Holder(s) Country Amount (US$ million) Kupol Russian BEMA Gold Canada 304.6 Federation Corporation France Mitsubishi United Kingdom Corporation Société Générale S.A. Kenmare Moma Mozambique KfW- Germany 12.4 Mining Limited; Kreditanstalt Kenmare Moma fur Processing Wiederaufbau Limited Anvil Mining Democratic Anvil Mining Canada, Ireland 13.6 Congo, SARL Rep. of Congo Ltd., RMB International (Dublin) Limited Kahama Mining Tanzania Barrick Gold Canada 56.3 Corp. Ltd. Corp. of Canada Omolon Gold Russian Kinam Gold United States 27.4 Mining Inc. Federation Inc. Omsukchansk Russian Standard Bank UK 17.1 Mining & Federation London Geological Limited; New Company Arian Resources Corporation Kahama Mining Tanzania Société France 115.8 Corporation Générale, S.A. Limited Chambishi Zambia Anglovaal South Africa 30.0 Metals Plc Mining Limited Minera Los Chile Marubeni LP Netherlands 31.3 Pelambres Holding B.V. For more information on MIGA guarantees for investments in oil, gas and mining projects, contact Mamadou Barry at Mbarry2@worldbank.org, t. +1202 473 3561. Visit www.miga.org.