Jeremy Davis is the Managing Director of GPRA Group. The GPRA Group, based in New York City, provides micro political risk assessment and trade development services to multinational clients operating or planning to operate in emerging markets.
Q: What one fact that sets you apart from the competition would you like the market to know?
Jeremy Davis (JD): The GPRA Group is probably best known for its focus on micro political risks—that is to say a focus on firm-specific and location-specific issues. While country risk or sovereign risk assessments have their place, our clients generally find that most macro analysis is too generic to be actionable. Our experience is in assessing local matters that may increase a company’s costs, inhibit its achievement of business objectives or limit its ability to carry out its strategies. Examples may include corruption, regulatory restrictions, supply chain interruptions, labor strife and other local political struggles. Our goal is to recommend and often help implement a course of action that will mitigate these kinds of risks.
Q: You utilize “semantic analysis and social media trending tools (sentiment analysis)” in your work. Can you explain that in layman’s terms?
JD: Semantic analysis refers to the ability to extract meaning from data. The vast amount of information that we receive from the field needs to be quickly analyzed, categorized and cross referenced with other information so that we can spot trends and develop insights that serve our client’s interests. Semantic software tools automate this process giving us the ability to build maps (or graphs or networks) linking documents to people, to companies, to places, to products, to events, to geographies, to… whatever.
Social media trending tools analyze content and intent using publicly available data from various social platforms. For example, Twitter and Facebook played a central role in the events leading up to the Arab Spring by quickly framing and disseminating the core message of dissent. Twitter trending tools were used to identify both the content of each message (sentiment analysis) as well as the context of each message via hashtags. This enables analysts to understand the relative importance and impact of each event on a minute-to-minute basis.
Q: Beyond the political risk categories underwriters typically insure against (currency convertibility, expropriation, political violence, and non-honoring of sovereign obligations), what are some other political risks that you try to focus investors’ attention on?
JD: Political risk extends to legal issues (e.g., the rule of law, the regulatory environment), social issues (e.g., education, poverty, crime), resource issues (e.g., water and logging rights) and economic issues (e.g., the influence of a grey/black market or protectionist measures). These can have a significant impact on the ability of a company to succeed in a given region.
Q: The best analysis is only valuable if it gets to the right people who know what to do with it. How can you be sure that is happening?
JD: One of the ways that we address this issue is to offer training to top and mid-level executives and risk managers on how to absorb, interpret and use the information that we provide. Of course this has to be customized for each client in order to accommodate their experience levels, skills and expectations.
Q: What weight do you give to BITs and MITs when they are applicable to an investment decision?
JD: We do, of course, assess bilateral treaties to the extent that they affect our clients’ investment plans on matters of taxes, property rights, transparency of national laws, corruption, reform programs, dispute resolution, performance requirements or the movement of foreign personnel.
We are less concerned about multilateral investment treaties, as efforts to liberalize the international investment environment have largely failed to materialize. There is a perception among host countries that while MIT’s would benefit investors, they would provide little in return in the way of concessions or additional responsibilities.
Q: Supply chain risks are getting increasing attention. Do you see a trend toward pulling manufacturing back to home or nearby countries, or at least trimming the number of offshore suppliers, for economic or policy reasons?
JD: Rather than abandoning their global supply chain strategies, our clients are looking to mitigate those risks by taking steps that will lessen the likelihood that their supply chains will be disrupted. This includes increased due diligence of suppliers, greater attention to foreign regulatory issues and an increase in supply chain disruption and political risk insurance coverage.
Q: What sources of political risk or instability that are not in the daily press do you think investors should be thinking about?
JD: Climate change has become a major issue in the boardrooms of multinationals, and investors are increasingly requiring corporations to develop effective sustainability programs. In 2008, Goldman Sachs identified a potential global water shortage in the 21st century as a greater global risk than food shortages and depleted energy supplies. Only 1% of the earth’s water is usable by humans and given population and climate pressures, there is a high correlation between this type of natural hazard and political risk. Water, for example, is a local product, meaning it is generally difficult to transport and needs to be used close to its source. Industries that use large amounts of water in the extraction or production process, like mining, need to engage with local civil society leaders on political and social issues that extend from access rights to labor relations. At the same time, policy issues around conservation and water quality frequently need to be addressed at the regional and national levels. In addition to water, food and energy, we also track risks stemming from environmental challenges in the forestry and fishing industries.
Q: Insurance against political violence typically tries to draw a line between acts that are “politically motivated” and those that are have some other motivation, such as labor strife or theft. Some organizations that deem themselves “revolutionary” also seem to be involved in extortion, kidnapping, or other criminal activities. How would you draw the line?
JD: What counts is where the insurance company draws the line. We can try to negotiate how we would like it defined prior to the execution of the policy but we cannot predict the specific circumstances of each politically violent act before the fact. Our goal is to try to eliminate any gaps between what a commercial property policy would cover and what a PRI policy would cover. It would be unfair to see both carriers claiming an exclusion so we would have to go to bat for our client to bring it to some resolution and, hopefully, get that done by reasonable negotiation rather have to resort to arbitration.
Q: “Forced Abandonment” insurance may hinge on the investor’s home government requiring or advising that all of its nationals leave the country or region where the investment is located. Are there circumstances where evacuation is appropriate before or absent such formal instruction, and if so, what other standards might insurance policies employ to warrant abandonment?
JD: We don’t believe that the standard for forced abandonment should be that the home government requires the evacuation or abandonment. Policies should respond when it becomes apparent to any reasonable person that the safety of the employees or nationals is seriously impaired or in question. Threats, whether expressed or implied, and whether resulting from international disputes or not may very well require the exercise of a “better safe than sorry” approach to evacuation. All such cases, for better or worse, are matters of judgment and such judgments may be at odds with the determination of the underwriter. But people on the ground in difficult environments don’t have the luxury of deferring to someone else about their perceived danger. The investor will have to provide evidence that they felt imminent danger and the insurer should review the circumstances with a responsible view of the action taken—the evacuation. Unless it is apparent that the investor is simply handing over a problem to the insurance company because they don’t want to bother with a difficult but still tenable situation, the insurer should never deny coverage on a policy intended to protect lives when the abandonment resulted from the same motivations.
More about GPRA Group:
Our human networks gather local political, regulatory and business intelligence in developing regions of the world and analyze it in the context of the prevailing macro environment. We consult with local, regional and national leaders from business, government and civil society and apply a structured due diligence, assessment and monitoring process to anticipate in-country conditions. Our objective is to help our clients develop highly actionable plans to manage an array of political and commercial risks.
Customized services are available for:
- Exporters, multinationals and foreign direct investors
- Political and trade risk insurance providers
- Financial institutions
- Private investment groups