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Logo of Phnom Penh Post newspaper Phnom Penh Post - Risk Insurance - Is Cambodia too risky?

Risk Insurance - Is Cambodia too risky?

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.

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

law".

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.

Country Risk

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

bank financing.

Few investors are willing to use their own cash alone to finance a major investment

in Cambodia.

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

unrest.

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

1992.

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