Scholarship and news on political risk systematic and unsystematic risk pdf opportunity. The paper is aimed at presenting a conceptual analysis of the political risk that impacts investors, project sponsors, creditors, and host government alike. First, an attempt to conceptualize and define political risk is made along with its subsequent categorization into its different types.
Then, the methodologies of mitigating and managing political risk are elucidated upon. Lastly, political risk insurance as a mitigating factor of political risk is briefly dwelt upon. Risk is future contingency of deviation of ex-post returns from ex-ante returns of an investment. This deviation may either be profitable or unprofitable to a commercial venture. Most of these risks relating to a project are either commercial or non-commercial. Commercial risks arise when profitability of the project, and consequent fulfillment of debt obligations, is uncertain owing to market conditions. There is no universally acceptable definition of what is or what constitutes political risk.
This obscurity is beneficial as it presents a scope to tailor the concept of political risk to include, and attempt to mitigate, risks which may be specific to only a particular economy, sector or a firm. The fact that political risk may either be systematic or unsystematic therefore presents a unique paradox in attempt to define political risk. Nature of government: It includes any form of government viz. In objectively assessing political risk through actions of government, the definition limits inherent subjectivity in political risk analysis.
For instance, high subjectivity in assessing risk of terrorism will be substantially contained if measured through objective lens of existing legal framework and political fervor against terrorism. Political risk must assume equal significance in relation to domestic investment in a company or a project. For instance, even governments may bear impact of negative political risk by incurring opportunity costs of lost foreign investments, or, fiscal deficit if such political risk had been passed on to the government by the project sponsor. The expansiveness of political risk highly counteracts any systematized approach towards categorizing its different manifestations.
However, it must be noted that each actor is capable of producing the effect of political risk through its unique actions. Risk of expropriation: Nathan holds that expropriation risk is either direct or indirect. Example: Direct expropriation of captive coal block mines by Government of India from private companies after first-cum-first-serve allocation of such mines was held as constitutionally ultra vires by Supreme Court of India in Manohar Lal Sharma v. Risk of changes in regulatory regime: It means the risk of politically motivated changes in regulatory policies or legal framework of the host government which render the project unprofitable. Risk of war and terrorism: Since wars and terrorist organizations are no longer associated with a specific nation-state or a geographical area , politically motivated wars and terrorism are not country risks rather political risks. Nevertheless, there may arise circumstances wherein such war or terrorism is focused against specific industry, sector, economy, government or its policy framework, viz. MoU Belt, especially in Dantewada, Chhattisgarh, etc.