This is a complex subject, let's take a look at a scenario that could happen:-
American company, A, is investing $10 million into Polish company C, who manufacture and distribute a range of steel products. This investment will represent 20% of company C's total equity. Company A is anxious about the strength of the Polish economy and any problems that could occur from a change of government.
The risks involved in this investment are:
- that the Polish Government will nationalize the factory so the US company will lose it's investment.
- that the Polish Government will prevent the payment of any dividends to the US either as a political act or to preserve foreign exchange reserves or because there is not enough foreign exchange to transfer in a convertible currency so the dividends get paid but remain frozen in Poland;
- that the Polish currency will depreciate against the US dollar and so the value of the investment will fall as well as the dividend in US dollar terms;
- that the venture will fail and the returns will not be as expected or indeed that the US company will lose all its investment.
I would suggest that company A should take out investment insurance to cover against political risks in Poland, due to difficulties with the Polish economy. They need to protect themselves against inconvertibility which could occur if there was government interference or economic difficulties (transfer risk). It may also be possible to get cover on currency depreciation, so as to protect their initial investment of $10 million.
Investment insurance will give cover against expropriation, which will protect them against changes in the government, or government actions that would deprive company A of its investment. Expropriation includes the nationalization or confiscation of the investment or of the property of the overseas enterprise. Indirect forms of expropriation by the host government with the intention of discriminating against the investor or the enterprise which have the effect of depriving company A of all of the investment.
Cover due to losses arisen from war, in which the Polish government is a participant, or due to revolution or insurrection in Poland. Company A is also insured against the inability of the Polish enterprise to operate the project due to war. There is restrictions on remittances risk cover which covers the frustration period of around six months of company A's attempts to convert the Polish Punt into U.S. dollars
Before insurance can be obtained investment insurance companies will want to be satisfied that the investment is acceptable to the Polish government. Company A will have a responsibility to observe all local laws and regulations and to satisfy all requirements which Poland may lay down in relation to the investment. Cover is dependent on these laws and regulations being observed by company A.
SEO Solutions and one way link publicity services provided by LinkAcquire.
David C Skul - CEO
LinkAcquire.com and Relativity, Inc. can provide global market exposure and solutions About the Author
