Welcome to the wooly world of waterless beverages, "sport futility vehicles" and wireless miscommunication. Instead of just coming out and directly taking over a foreign company's assets, government officials in some developing nations are using more subtle methods to give the edge to local businesses.
Below are examples that sent risk managers scurrying to the company's legal department to check the wording of a political risk insurance policy.
-In India, a U.S. company operating for several years relies on water to make its beverage product. In 2003, state government officials renewed the company's operating license. At the same time, they also cut off the company's water supply.
-In China, several foreign auto makers have been building automobiles, including sport utility vehicles, for about a decade. In a move not unusual in an economy still dominated by government-owned entities, Beijing's municipal government decides to blur the line between the public and private sectors and gets into the auto manufacturing business.
The local government passes a law mandating that only sport utility vehicles made by the same government-owned auto maker can travel on three main thoroughfares leading into the municipality.
-After receiving an operating license from the federal government in Ghana to run a telecommunications network in this West African nation, a U.S. telecom firm has invested million of dollars to develop a wireless network around the capital of Accra and other urban areas.
One of the terms of the license is that the U.S. company must meet subscriber targets and pass on the revenue to the federal government. But state and city officials hinder the U.S. telecom firm's expansion plans by withholding the necessary operating permits and other bureaucratic delays.
Frustrated that they are not receiving the income they expected from the foreign wireless network, federal officials in Ghana revoke the foreign firm's tax holiday and slap retroactive taxes on its operation. Government officials are also threatening to revoke the company's operating license.
All of these incidents--which took place over the last several years--are examples of the creeping expropriation that can occur in countries that ostensibly welcome foreign investors and their dollars.
A word of advice from international insurance brokers familiar with these types of political risks is that managers need to make sure their business contract gives their company access to an international court or arbitration body to settle disputes.
Forums like the International Centre for Settlement of Investment Disputes or the International Chamber of Commerce's International Court of Arbitration, can ease the pain of doing business in politically risky nations.
February 1, 2005
Copyright 2005© LRP Publications