Workshop on International Law, Natural Resources and Sustainable
Development
Risky Business: Political Risk Insurance and the Law and Governance of Natural Resources
Celine Tan
School of Law, University of Warwick
Political risk insurance (PRI) is emerging as an important component in the international
investment regime. Once a niche financial product offered through a handful of mainly
government-supported schemes, the public and private market for PRI has expanded in
tandem with the expansion in global investment flows over the past two decades. Recent
events, such as civil unrest in the Middle East and North Africa and sovereign debt crises in
Europe and Latin America, have further elevated the profile of PRI as a mechanism for risk
mitigation in international business. A sub-set of a broader arsenal of investment guarantee
instruments, PRI serves ostensibly to reduce investor exposure to losses resulting from
unexpected ‘non-commercial’ events, including currency and foreign exchange risks,
expropriation, war, civil unrest and terrorism, breach of contract and non-honouring of
sovereign financial obligations. PRI has been traditionally targeted as an instrument for
securing investments in the natural resources sector, notably in extractive industries and
energy infrastructure, deemed especially vulnerable to political risk due to their high capital
costs, long investment horizons and often politically contentious or conflict-prone operating
environments.
This paper explores the role of PRI in the regulation and governance of natural resources
sectors in developing countries. As a technology of risk management, the operational and
regulatory framework of PRI establishes a set of normative discourses, practices and
institutions that seek to manage not only the conduct of the capital-importing state vis-a-vis
the foreign investor but also the host state’s relationship with its domestic constituents.
Here, imaginaries of risk are utilised to problematise state conduct, including acts
responsive to the democratic polity and state responsibility to protect, and to transform
such behaviour into acts of economic uncertainties requiring the intervention and mediation
from external actors. At the same time, these imaginaries are used to commodify such
uncertainties and to render them fungible and calculable for the purposes of protecting
foreign capital.
Located within these broader discourses of risk and governmentality, the normative
implications of PRI modalities become clear. The assemblage of discourses and practices
that have developed around political risk insurance serve not only as disciplinary
mechanisms in themselves – in terms of constructing an informal regime of surveillance
over host state governmental practice – but also impact upon international and domestic
law and regulation relating to foreign investment. Operating in a hybrid public-private
sphere, PRI arrangements involve a more complex web of contractual and non-contractual
relations than commercial insurance products and parties to such arrangements are
inserted into a much more intricate framework of legal and political governance, with
correspondingly broader international and domestic implications. In natural resources
projects where tensions regularly exist between the interests of the foreign investor, the
host state and local communities, PRI arrangements can reframe the terms of engagement
between these various stakeholders and redefine the host state’s engagement with the
broader international community. The normative effects of PRI as an insurantial risk
technology thus can and do have significant distributional effects, realigning the burden of
risk and responsibility between various stakeholders and further disembedding foreign
capital from the social and economic polity in host states.