Political risk cover: a major deal breaker for power projects in Sub-Saharan Africa

Political risk cover is the ‘make or break’ for power projects in Sub-Saharan Africa, according to Aon Risk Solutions’ latest whitepaper.

Demand for this type of insurance is growing but the region’s political instability makes securing appropriate insurance difficult.

According to Gemma Avey, strategic development manager for the Aon Global Power Specialty, and Silja-Leena Stawikowski, head of political & special risks at Aon Credit International in Germany, there are a number of deal breakers,

Avey says: “We have witnessed an increased demand for political risk cover for power projects in this region. While this used to be an ancilliary cover its is now often the “make or break” cover for a power project in the region. While demand is high, by interviewing key decision makers in the market we were able to understand that political risk cover is still complex depending on the type of project, the region and crucially the ownership structure of these projects.“

“We observed that multilaterals play a huge role in making projects in this region come to life particularly by being able to offer longer tenures or sometimes cover without certain ministry guarantees that the commercial market would need.”

Stawikowski adds: “Each project is scrutinized on its own merits and different markets such as the export credit agencies (ECAs), the private political risk insurers (PRI-market) or the multilaterals have partially different underwriting approaches, it is vital to engage them as early as possible. A deal breaker for cover could be if the project is not deemed sustainable for the host country, the lack of experience of certain project parties or if certain guarantees are not obtained by the government.”

“There are many ambitious projects envisaged for the region, but whilst there is political volatility here investments are not secure without the appropriate political risk cover. Political situations can escalate rapidly as we have seen in countries such as Ukraine that were deemed stable.“

The majority of underwriters interviewed for the report stated that while some major multinational companies have the means to monitor political risk – smaller and maybe less experienced companies do not. This means that it is even more vital for the small and mid-sized companies to engage experts to understand the exposure to political risks and how negligence can have critical impacts on any size of project.

The whitepaper aims to share the challenges, concerns and advice of leaders in the market to provide insights to companies investing in or owning a power generation or transmission asset in this region.

To read the full report, click here.