Q: What does a risk officer do?
The World Bank’s Multilateral Investment Guarantee Agency (MIGA) provides guarantees—insurance—against political risk for investors in infrastructure projects in emerging markets. I assess the political risk and expected developmental impact of projects.
Risk and development impacts tend to be inversely correlated. The places that represent the highest risk for investors are where you can have the greatest development needs and the greatest impact. So when you can mitigate those risks, you can deliver transformational projects.
These are typically big, high-profile projects for the countries. Ideally, upon completion they have a risk-mitigating function as delivery of basic services improves quality of life and confidence in the government.
Q: Would you describe some projects?
I worked on an off-grid solar power project in Democratic Republic of Congo. The country covers a giant landmass. It’s historically unstable. The government doesn’t have the capacity to deliver services in a way that would help address some of that instability.
I learned while working there that the country had one of the first GSM mobile networks because it wasn’t possible to lay telephone lines throughout the whole territory.
Similarly, it wouldn’t be economically viable to extend the power grid across the whole territory, but this off-grid technology using a renewable resource can solve the power problem and ideally improve the situation in the country. These off-grid technologies use mobile money, which can also help improve the standard of living for lower-, middle-, and even upper-middle-class people who haven’t had access to financial infrastructure.
As another example, recently I worked on the first independent power project in Djibouti. It’s also the first wind project in the country.
In many places, the government controls all aspects of the electricity sector. When demand expands but the government has constrained access to capital, the population suffers because power is not reliable or it’s too expensive. One solution is an independent power project, where a private company builds a generation plant and sells the electricity to the power utility over time.
Djibouti is a very frontier market with great needs in power generation. It’s really arid, so it’s very vulnerable to climate change. There’s already a large population of climate refugees relative to neighboring countries in the Horn of Africa, which is a strategic and also unstable region at the moment.
MIGA provided an investment guarantee for the 60-megawatt wind farm, which when constructed will provide Djibouti more reliable electricity in an economical way, using a renewable source.
Our projects involve investments up to hundreds of millions of dollars, making risk mitigation important.
Q: How do you go about assessing risk from political factors?
In political risk, which may also be called country risk, we look at drivers of fragility. What could go wrong? Will it? And if it does, how would it impact what you’re trying to do?
Of course, you can’t insure against everything that could possibly go wrong because then you would have limitless liability. So, we focus on risks around expropriation or nationalization; political violence including civil war, terrorism, and sabotage; currency transfer risks; and government breach of contract.
The political risk insurance industry looks at projects that include contracts of 5-25 years. We can have visibility into the medium term, the 3- to 5-year timeframe. We’re not in the prediction business, so the rest of the job is identifying the trends or the ingredients that might go wrong longer term.
It’s not easy. Past isn’t prologue when you’re talking about political risk. Knowing the history of the country can only tell you so much about the future. And the nice, shiny financial models we’d use in developed economies don’t work, at least not in the same way, because the country might not have contract enforcement or there is no secondary market to refinance or get out of projects.
Something I love is how multidisciplinary the work is and how you have to get up to speed quickly in so many different areas. There are country intelligence questions: How does the sector work in that country? Will the laws protect the project or make it difficult to get things done? What’s the security situation like? What about corruption? There are of course data tools and intelligence subscriptions, but gathering information and synthesizing it to understand how the specific activity that the investor is trying to undertake will play out in the context of the country…it’s a necessarily analog process.
It’s really important to spend time on the ground talking to the different stakeholders, from government officials to community leaders to the local population, getting a sense of their views and their concerns. Why is this project needed? What it will do for their daily lives?
You cobble together history, political science, economics, sector and industry knowledge, and first-hand insights. Based on all you learn, you come up with potential scenarios and make a call on what is the most likely outcome.
Q: What got you interested in risk initially?
As an undergraduate at Yale, I studied economic development and Middle East Studies. I saw that every country needs investment coming from outside, even very wealthy countries. I also saw this theme of, if you manage the risk profile of a country, if you improve security and operating conditions, if you ensure that laws are enforced properly, and property rights are protected, then not only does it bring potential investors into the country, but it makes life more predictable and better, to some extent, for the people living in that country. I just pursued that thread.
Before I knew risk insurance was an industry, I wanted to find ways to encourage investors to go into risky markets in a way that would benefit the people there. Yale SOM was a perfect place for me. One, because there were people in the school thinking about the role of business and society. And two, because I was able to really curate my academic experience. There were relevant courses at SOM—Emerging Markets Finance and Doing Business in the Developing World. But I was also able to follow the theme through classes at Yale Law School and in the university’s economics department.
Q: We’re living in a period of low trust in institutions. What is the relationship between trust and risk?
Lack of trust is a key driver of the risk I look at. A lot of the instability that we see in the world can be traced to situations where the social contract is broken or not upheld. In a country where there are electricity blackouts 15 hours a day, like in Iraq, you see mass protests on a large scale for long periods of time because trust is broken.
In the countries I cover—mostly in the Middle East and North Africa—the social contract is a big topic of discussion. What is the appropriate relationship between society and government? What do citizens deserve in return for paying taxes? Is everyone acting in good faith? Does every participant expect the others to be acting in the best interest of the whole?
A lack of trust raises transaction costs for everybody. It causes people to not do deals they would otherwise. Or in order to do the deal, they require a larger financial return or have to buy political risk insurance.
“Part of the role of institutions is to develop trust among a larger group of people than can possibly know each other. If everyone feels like, ‘OK, the system generally works,’ they are motivated to undertake new activities.”
I think part of the role of institutions is to develop trust among a larger group of people than can possibly know each other. If everyone feels like, “OK, the system generally works,” they are motivated to undertake new activities. Very often, trust results from a conscious choice by people who are in a position of authority to establish rules and play by them. That builds confidence, both among the population and among investors.
Q: Is what’s considered risk changing?
Yes. Climate change, economic inequality, and cyber risks are key risks that are being considered with more intentionality. The universe of things that can go wrong is expanding all the time as economies, as the whole world, gets more complex.
But it’s not just a matter of identifying new risks. The drivers of fragility on my checklist for assessing risk in emerging markets contexts—things like economic insecurity and inequality, sectarian divides or political polarization, marginalization of minorities, overzealous security forces, high perceived corruption, and low trust in government institutions—to one degree or another are being manifested in the U.S. right now.
In the last year or so in the U.S., we’ve seen how these factors can drive a level of discontent that creates upheaval. We’re also seeing that individual factors, which on their own would not result in instability, can interact and combine, especially in the context of a global pandemic. This has really led to a period of change and possibility, both in a negative and a positive sense.
Q: If you were analyzing the U.S. right now, what would jump out at you?
I have been viewing the situation in the U.S. with the sadness and fear that comes with a crisis like we’re in. But I’m also trying to have enough perspective for intellectual curiosity. It would be a fascinating case study if it weren’t so tragic.
The lack of trust jumps out at me. When you’re in a period when people don’t agree on facts, when news is something that’s not impartial, and where the government has in some ways failed to meet its social contract in the response to the COVID pandemic, these factors are vulnerabilities that can degrade a country’s cohesion and stability.
I am hopeful because it seems the guardrails have been working. And because I think there’s a sense of purpose to improve the situation. If you read the news, people are aware of these cracks which make us vulnerable. I hope they weigh heavily enough in our assessment of ourselves to create a sense of real urgency.
Q: Can the tools you use to assess risk help politicians and policymakers?
The short, glib answer is yes. Because most of what I do is common sense and the issues that need to be addressed are well known; policymakers have access to a huge body of scholarship on social and economic ills and how they can be countered. A key difference is that in a lot of the lower-income countries I look at, solutions might require new approaches or strengthened capacities. Whereas in developed countries like the U.S., with all the resources we have, it’s often more a matter of priorities than capacity.
“Trust is at the core of risk and also of mitigation. Trust comes from a social contract that lays out clearly the government’s obligation to society and to citizens.”—Mena Cammett ’12 of the World Bank
A less glib answer is that solutions will be somewhat bespoke. The specific priorities and solutions must be developed for the specific context of each country. But I believe that there’s a correlation between the framework and the outcome. In countries where there is a durable system, it’s usually because the people in power think stability is a prerequisite for safety and development.
I say it a lot, but trust is at the core of risk and also of mitigation. Trust comes from a social contract that lays out clearly the government’s obligation to society and to citizens. There’s a system in place which does not rely on any one person, can withstand challenges to it, and makes people confident that if they play by the rules, then they will have the desired outcomes. That’s how you build trust and develop durable institutions which support long-term stability.
Interview conducted and edited by Ted O’Callahan.