The shifting sands above the oil: commercial and legal tools to manage political risk in emerging markets

Abstract

An increasing number of Australian resources companies are investing in emerging markets, particularly in Africa. Managing an investment in these countries, and the joint ventures invariably formed in them, is an important part of improving shareholder value, raising capital and managing political risk. These countries typically take a strategic approach to energy security and resource nationalism rather than the more market-focused approach of western states and companies. While the key risk is expropriation, political risk also presents itself in many other ways. During the long-term, an investor needs to minimise the likelihood that it becomes cheaper for a government to breach its obligations to the company than it is to comply with them. Doing that requires several important interrelated protections (both legal and commercial) to minimise political risk and ensure that if expropriation does occur, the investor has maximised its chances of recovering its losses. A range of commercial and legal tools—deployable inside and outside of a country—are available to structure these investments, support operations and minimise political risk in emerging markets. Drawing on his experience advising on energy and resources projects and transactions in more than 50 countries, author Chris Flynn outlines key legal protections to be sought in any contracts with respect to investments made in these countries. He also discusses useful commercial tools to help align the interests of the company, its local partners and government.