OVER the past one and a half years, the Council for the Development of Cambodia (CDC)
has awarded investment licenses for a number of large investment projects. These
projects require a substantial infusion of investment capital into Cambodia for the
primary purpose of purchasing, leasing and constructing movable and immovable property
- i.e., land, buildings, plantations, roads, factories, machinery and equipment.
Financing for these large projects generally comes from a variety of sources, including
equity, cash, and shareholder loans.
However, the largest source of financing is usually in the form loans from offshore
Financial institutions are conservative when it comes to lending money to projects
in developing countries such as Cambodia.
They know that the borrowed funds will be used to purchase and construct property
situated in Cambodia, and, therefore, subject to the Cambodian legal system and the
policy of the Royal Government of Cambodia. This creates concern for many financial
institutions, who worry that the assets purchased with the borrowed money will not
be adequately protected.
The banks understand the old legal adage: "Possession is nine-tenths of the
They realize that a person or entity with physical control over property has an immediate
and significant advantage over those who may have a lawful legal interest in the
property, but who do not have physical possession.
In such situations, the rightful owner of the property must rely on the rule of law
to physically give possession to the rightful person.
Banks considering whether to lend to projects in Cambodia must consider whether
the property purchased or created with borrowed money will be protected so that the
investor can pay back the loan or the bank can repossess the property.
The risk that such protection will not exist is generally known as "country
risk" or "political risk".
Under standard procedures, banks will not loan for projects in risky countries unless
they have some concrete guarantee that their loan will be paid back.
Private insurance companies and certain national and international agencies have
stepped in to provide this type of guarantee through the insurance of the value of
the investment project.
Investors in developing countries will try to insure their project through one of
these entities. Based on this insurance guarantee, banks are able to greatly reduce
their exposure to non-payment of the loan.
Failure to obtain country risk insurance for an investment project can kill or greatly
delay the project.
Most investors would find it very difficult to proceed with a large investment without
Few investors are willing to use their own cash alone to finance a major investment
Until recently, it has been very difficult for investment projects in Cambodia to
find country risk insurance. However, Cambodia's overall country risk rating is improving,
and some investors have recently been able to obtain country risk insurance through
private or public organizations at commercially viable premiums.
Major Types of Risk
- Country Risk falls into three main categories:
One, the risk of political violence, such as war, revolution, terrorism, or civil
unrest. Under international law, host governments have little responsibility for
losses suffered by investors from such acts.
- Two, the risk that the host government will do certain deliberate acts, such
as expropriation, or interference with contractual rights, that will result in the
loss of an investor's rights to the investment assets. Since the host government
does have control over such acts, the host government would be responsible for compensating
the investor under principles of international law. However, enforcement of such
principles against the host government is usually very difficult.
- Expropriation, in this context, can be defined as an unlawful act of government,
or on behalf of a government, that results in the effective loss of all or substantially
all of an investor's property rights in its investment.
- Cambodia, like most countries, protects private property from expropriation except
where required by public policy and then only after fair compensation has been paid
to the owner.
- The legal basis for this protection is constitutional (Article 44 of the 1993
Constitution) as well as legislative (Article 3 of the 1992 Land Law and Article
9 of the 1994 Investment Law). Moreover, certain bilateral treaties protect investment
property if the nation is a party to the treaty.
- Three, the risk that the host government will restrict the conversion of local
currency into foreign currency.
- Again, the host government has control over this activity, but has little responsibility
to investors under international law for losses resulting from such restrictions.
Sources of Country Risk Insurance
To encourage investment in developing countries, national and international organizations
have been created to insure investment projects in developing countries. One such
source of risk insurance is the Overseas Private Investment Corporation (OPIC).
OPIC was formed in 1971 by the US Government. It insures against losses caused by
expropriation, inconvertibility of currency, war, revolution, insurrection, and civil
OPIC provides support primarily for US businesses.
Most developed countries have similar government agencies that offer country risk
insurance to companies investing in developing countries.
Another source of country risk insurance is MIGA - the Multilateral Investment Guarantee
Agency. MIGA was created to fill gaps in the various national risk insurance agencies,
such as OPIC, which favor investments made in certain regions by their own nationals.
MIGA was established in 1985 under the World Bank, and became an independent member
of the World Bank group in 1988.
Private companies historically providing country risk insurance policies include
AIG (American International Group), Lloyds of London, Panfinancial, and the Chubb
Group of Insurance Companies.
Most such insurance policies are negotiated through expert brokers who understand
the market and can bring the parties together.
This week's column highlights another significant reason why the establishment of
the Rule of Law is so important to the economic development of Cambodia.
Providers of country risk insurance will examine the status of the rule of law in
Cambodia before agreeing to insure a project and before setting their premiums. Failure
to obtain country risk insurance will result in delayed, downsized or canceled projects
due to a lack of financing.
However, Cambodia's recent economic development judicial reform, and promulgation
of commercial legislation has improved the investment climate so that risk insurance
is now beginning to be a viable possibility for most investments in Cambodia.
David Doran is the Resident Managing Director of Dirksen Flipse Doran & Le,
an international law firm with regional offices in Vientiane, Phnom Penh, and Ho
Chi Minh City. Mr. Doran has been writing regularly on Cambodian legal issues since