With the South African construction industry having hit a wall following 2010 and government’s nationalisation debate steering new mining investment abroad, political risk experts report a rush of South African businesses into Africa, seen as offering greater returns on investment with comparatively manageable risk.
For example: “The current iron ore rush in Liberia, Sierra Leone and Guinea is seeing South African companies pouring idle plant and machinery into the region,” said Tracy de Kock, Manager ÔÇô New Business, Credit and Political Risks, Alexander Forbes.
Yet, with elections underway in two of these countries and just having been cancelled for fear of violence in a third, the possibility of political instability or even war remains very real.
Since competition for resources in developing economies is intense and civil institutions and the rule of law weak, power contests provide opportunities for unrest and violence. In these conditions contract and property rights are easily violated, abrogated, confiscated or stolen. 
Political risk cover makes business possible in unstable or unpredictable countries and is critical in helping investment reach parts of the world that it would normally avoid. As South African business’ appetite for African investment grows de Kock and her team are seeing a noticeable expansion in their African political risk book.
Yet it remains a hard story to tell as “businesses can’t really talk about political risk. It’s a bit like telling people you have kidnap and ransom cover” warns de Kock. If host governments find out that an investor’s plant and machinery is covered for political risk the temptation to take back, nationalise or cancel the concession can become overwhelming.
While this is becoming less of a problem in Africa it is certainly the case in countries like Venezuela as well as a number of central Asian republics where political risk cover has become increasingly expensive.
Much of the risk faced by South African businesses in Africa, especially in construction and mining, involves redundant and as yet unpaid for World Cup plant and machinery being moved to various opportunities in Africa. If this is stolen, nationalised or destroyed in war or political unrest the owners still need to pay it off “making political risk cover key to delivering returns on 2010 plant and machinery – and surviving the recession in South Africa” said de Kock.┬á┬á
The important thing is to have the right political risk cover in place before anything goes wrong. It is too late to try and get cover after the event. “Even if you think a country is safe, things can go wrong very quickly in developing economies,” warned de Kock.
In Africa, the most risky investment destination remains the Democratic Republic of Congo where many South African businesses have nonetheless been investing successfully for a while.
This “demonstrates the effectiveness of political risk cover in making investment possible even in volatile situations”, says de Kock. This year’s somewhat unexpected political riots in Mozambique also emphasised its fragility despite, and perhaps because of, good investment and growth rates. As such “many South African tourism, freight and agricultural businesses in Mozambique have this year, somewhat belatedly, recognised the importance of political risk cover”, adds de Kock.
Madagascar too has recently run in to electoral difficulties and violence “causing the many South African businesses involved in titanium mining ventures there to clamor for political risk cover”, said de Kock.
And even in Zimbabwe, which continues to buck the more investment-friendly African trend, political risk cover remains the only cover that you can still secure “with, ironically, the London market more willing to write Zimbabwe risk than the South African”, added de Kock.
