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Political Risk Assessments

 

What is political risk?

Political risk is the danger that political action - by a government, regulator, court or those who influence them - will damage a transaction, investment or established business. It ranges from expropriation, sanctions and the withdrawal of a licence to less visible problems: a permit that never arrives, a contract awarded to a better-connected rival or a local partner whose protection evaporates when a minister falls.

Much political risk advice is delivered from the top down: a country is scored, a forecast is issued and a deal is judged against an aggregate rating. Such analysis has its uses. But the risk that derails a specific transaction is rarely captured by a country score.

It lies at the level of named people and entities: who controls your counterparty, whose patronage they depend on and what happens when that patronage shifts.

That is the level at which we work.

Political risk from the bottom up

At Maddocks Insight, we approach political risk as we approach enhanced due diligence: through research conducted in local languages and in the jurisdictions that matter.

A country rating tells you the average weather. It does not tell you whether your counterparty is standing in the storm. The questions that matter are usually specific:

• Who controls the entity in practice, and to which political figures or factions are they tied?
• Is your local partner's position built on a relationship that may be about to change?
• Is the official awarding your licence, concession or contract a politically exposed person?
• Could a change of government place your assets, contracts or approvals under review?
• Are there direct or indirect links to sanctioned individuals, entities or regimes?

These are investigative questions before they are forecasting questions. They are answered by examining specific people, companies and networks, not by reading a national score.

When is a political risk assessment needed?

A political risk assessment is warranted whenever politics may materially affect an investment, transaction or dispute, including when:

• entering a market through a local partner, agent, sponsor or joint venture
• relying on government contracts, concessions, licences or regulatory approvals
• investing in sectors where the state is an owner, customer or gatekeeper, such as energy, natural resources, infrastructure, defence or telecommunications
• screening a counterparty whose standing appears to rest on political connections rather than commercial merit
• assessing exposure to expropriation, forced localisation, sanctions or abrupt regulatory change
• understanding the political backdrop to a dispute, asset-recovery effort or counterparty's sudden change of fortune

The work may be preventive: before a deal closes, before entering a new market or before committing capital. It may also be reactive: after a change of government, a ministerial reshuffle, a policy announcement or the review of a concession.

In either case, the questions are the same: who controls the decisions that affect us? What do they want? Is our position exposed? What is likely to happen next?

If you are unsure whether a situation warrants this kind of work, we are happy to advise before any work begins.

What does a political risk assessment comprise?

Every assignment is shaped by the exposure and the questions you need answered. Our work typically includes:

• identification of the real ownership and control behind a counterparty, including ultimate beneficial owners and the political figures or factions connected to them
• mapping of political exposure, state links and patronage networks, including whether such connections have been used improperly
• assessment of the relationships on which your position depends, and what may happen if they change
• screening for sanctions and watch-list exposure, including indirect links that emerge only once ownership has been mapped properly
• analysis of the regulatory, legal and contractual environment as it applies to your transaction
• local-language adverse-media and open-source research, drawing on specialist databases and proprietary tools where official records fall short

Where necessary, we can extend the scope to support litigation, asset tracing and recovery, or to reconstruct the political background to a dispute.

Who actually decides?

A policy, licence or contract is rarely decided solely by the office that signs it. Behind the formal title are the people who shape the outcome: the official who drafts the regulation, the adviser whose view carries weight with the minister, the ministry that controls the budget or the business interest with privileged access.

Mistaking nominal authority for effective influence is among the most expensive errors in unfamiliar markets.

Our decision-maker research identifies:

• the individuals and institutions that control the decision in practice
• their backgrounds, interests and affiliations
• the factions, patronage networks and rivalries that may determine the outcome
• any political exposure or links between those decision-makers and your counterparty, partner or competitors

Anticipating policy change

Clients increasingly need a view not only of where a counterparty stands today, but also of where government policy is heading.

The extractive sector is a common example. A new mining code, royalty, windfall tax, localisation requirement, export restriction or move to renegotiate existing concessions can reshape the economics of an investment overnight.

Rather than offering an abstract probability detached from its causes, we establish what is driving the proposed measure and how firmly the intention behind it is held. Our analysis addresses:

• Likelihood: how advanced the measure is, who is promoting or resisting it, and what would need to happen for it to take effect or stall
• Decision-makers: which individuals and institutions are driving the change, and what interests it serves
• Sector impact: the practical effect on costs, licences, ownership thresholds, repatriation of funds and existing agreements
• Impact on you: the consequences for your transaction, counterparty, subsidiary or local partner

The aim is not to dress prediction up as certainty. It is to provide an evidence-led assessment of what is likely, who is behind it and what it would mean for you.

How is our approach different?

Much political risk advice amounts to a country score and a desk-based forecast. Our approach differs in three respects.

1. We investigate people and entities, not averages. The risk that destroys a deal is usually specific to the counterparty and the transaction.
2. We work in local languages and from primary sources. Our team combines language skills with regional expertise across Europe, the Middle East and North Africa, China, sub-Saharan Africa and the Americas. Political relationships are often exposed in local-language sources, not translated material.
3. We are a boutique consultancy, and the principal does the work. Engagements are overseen personally by our founder, not delegated down a chain. This gives us the expertise and flexibility to deliver exactly what a situation requires, including in difficult jurisdictions.

Who we work for

Our political risk work supports:

• International law firms: on transactional, investment and dispute matters
• Accountancy and Big Four firms: as a specialist research partner
• Risk consultancies: including discreet, white-label and subcontracted assignments
• Corporates and compliance teams: for market entry, partner selection, and third-party and anti-bribery and corruption screening

Political risk and compliance

Political exposure and compliance risk are closely linked. A counterparty's political connections may raise questions under the UK Bribery Act, the US Foreign Corrupt Practices Act (FCPA) and anti-money laundering requirements. A politically connected partner can also be the route through which those risks materialise.

Understanding the political dimension of a counterparty is therefore both a commercial safeguard and part of effective risk-based due diligence.

Discuss a political risk assignment

If you are weighing a market, partner or transaction where politics forms part of the risk, we would be glad to help. Contact us to discuss your requirements, and we will respond promptly.