Book Review - THE RISKS WE RUN: Mining, Communities and Political Risk Insurance

Down to Earth No 67  November 2005

by Roger Moody

International Books 2005, pp322 Available from

Political risk insurance and export credit guarantees are not terms that normally grab people's interest - except those working in the financial sector. The Risks We Run should change this. This book shows how political risk insurance (PRI) helps to make the world safe for investors. It takes a critical look at the role of PRI in securing financial backing for large mining projects despite their high social and environmental costs.

In the first half of the book, mining campaigner Roger Moody explains the mechanics of political risk insurance and how it has been used as a political tool. He sees PRI as a conspiracy to protect assets which should be surrendered to their true owners - the local people. The second part of The Risks We Run comprises case studies of six gold mines backed by political risk insurance: Grasberg (West Papua); Omai (Guyana); Kumtor (Kyrgyzstan); Lihir (PNG); Yanacocha (Peru) and Bulyanhulu (Tanzania). These accounts are written by the community representatives, lawyers and NGOs who have been fighting for justice. In addition to describing the history of the mines and their financing, each study is a powerful testimony to the damaging effects of extractive industries on local communities.

Political risk insurance has become an essential part of business. In theory, it compensates companies for lost assets when operating outside their own countries - providing protection against risks such as political violence, expropriation of assets and financial controls. Any mine is a trade-off between ecological and social problems and the promise of economic benefits, so it is not surprising that huge sums are spent on PRI - nearly US$400 million just for the Lihir gold mine in PNG. But these amounts are small compared with the overall financing of a mining project and insignificant compared with the profits generated. PRI's real importance is to give mines a stamp of respectability and an essential 'kick start' in securing additional investment, rather than providing insurance.

As PRI is usually a condition of export credits, Moody outlines the context of export credit agencies, including the World Bank's Multilateral Investment Guarantee Agency (MIGA) and America's Overseas Private Investment Corporation (OPIC) and Ex-Im Bank and the Export Development Canada (EDC). These national and international bodies dispensed nearly as much financial backing as came from development aid globally in 2000.

The private sector is also heavily involved in mining insurance in general and PRI in particular. The US-based company Marsh & McLennan describes itself as the world's number one risk specialist and American International Group (AIG) is a major player providing insurance cover for mines. These private insurance companies are often even less accountable providers of PRI than national or multilateral agencies. Moreover, private insurers, brokers and specialised insurance companies protect themselves from compensation claims, for example by reinsuring with companies like Swiss Re.

Companies can also call in risk consultants to advise them. London-based Control Risk Group, which has ex-SAS officers in its senior management, has investigated international NGOs which actively campaign against mining, such as the World Development Movement, and Indonesian groups including the mining advocacy network, JATAM. It concluded that "NGOs are as much of the (Grasberg) mine's political risk profile as Amungme tribespeople".

The Risks We Run raises critical questions about the policies of the World Bank Group's Multilateral Investment Guarantee Agency (MIGA), the International Finance Corporation (IFC) and national export credit guarantee agencies with respect to environmental and social assessments and access to information. National and multilateral guarantee institutions are supposed to respect and defend the public interest, including respecting indigenous rights and addressing environmental concerns. World Bank institutions have a special responsibility since many national authorities and commercial investors base their standards on Bank safeguards or project assessments. Yet chapter after chapter shows that MIGA, IFC and other financial agencies lack the capacity and expertise to monitor regularly the implementation of the projects they have backed. They have repeatedly concealed important information about the environmental risks associated with particular mines from the public. At the same time, they have not used their power to apply pressure on investors or operators to improve environmental or human rights standards at these mines. The World Bank continues to refuse to implement the findings of its own 2002 Extractive Industries Review and recent policy reviews have made its social and environmental guidelines even weaker and more ambiguous than before.

The weaknesses of PRI are exemplified by Freeport/Rio Tinto's Grasberg mine in West Papua. This gold and copper mine - the largest in the world - was the first to receive PRI from the World Bank via MIGA and also received backing from OPIC. This became the focus for international campaigning in the 1990s. OPIC pulled out in 1995 when it was clear that environmental safeguards had been violated and Freeport/Rio Tinto rejected MIGA's cover in late 1996 when the agency announced a long-overdue environmental investigation. Freeport/Rio Tinto then continued to go its own way. The company's financial links with the military remained concealed; millions of tonnes of tailings enter the River Ajkwa every year; workers were killed in the collapse of the Wonagon waste dam; and human rights violations continue throughout West Papua.

Moody argues that any influence the World Bank or OPIC might exert to forestall these consequences could only have come from their refusing insurance from the start. In his view, the whole tangled web of PRI "substitutes ill-defined and only partial mitigation for impacts which should have been prevented from the outset". You may not agree with his analysis, but political risk insurance and export credit guarantees projects are likely to remain important vehicles in raising finance for mining projects. For that reason, The Risks We Run is a valuable tool for activists who need to know about PRI and how to use this understanding for the benefit of communities threatened by mining and other potentially damaging developments.