In Ukraine and beyond, the US DFC boosts its political risk insurance

About a year ago, the Superhumans health facility opened in Lviv, focusing on one key consequence of the war in Ukraine — people with missing limbs. An overwhelmed medical system was ill-equipped to handle the influx of patients desperately needing prostheses and other related care, so a group of Ukrainian businessmen opened a hospital. With an online queue of more than 500 people applying for services shortly after it opened, the facility sought to expand and offer other services, including reconstructive surgery for facial injuries and burns as the result of bombings and flying shrapnel. To do so, Superhumans, which provides aid for free, needed to raise funds from global philanthropists looking to support the country amidst its war with Russia and turned to the United States government for help to bring in investments. Building out the facility is expensive, and there is a real risk of it being damaged or destroyed during fighting. Donors wanted to support the project but questioned what would happen to their contribution if the hospital was hit. “For many donors, a very important factor is not to waste,” Philipp Grushko, co-founder of Superhumans, told Devex. But with $25 million in political risk insurance from the U.S. International Development Finance Corporation — what he called “wartime insurance” — he could tell donors that their investment was protected and they could rebuild if needed. “Apart from DFC, no one is willing to insure against war risks. They are the first to enable projects and provide this coverage,” Grushko said. DFC wants to further expand its use of political risk insurance, or PRI — protections against violence, government defaults, or political changes making it impossible to operate or get your money out. The agency’s total political risk insurance exposure last year was about $7.3 billion, a number that has been steadily growing since 2020. Since 1971, when DFC's predecessor, the Overseas Private Investment Corporation, or OPIC, was established, some $54.3 billion in insurance has been provided across 3,183 projects. DFC can provide up to $1 billion in insurance coverage per policy. While it seeks to grow its insurance product in general, DFC plans to focus specifically on two areas — supporting investment in Ukraine and addressing climate challenges through debt-for-climate swaps. “It’s been a really successful product and that's why we want to increase it,” Agnes Dasewicz, DFC’s chief operating officer, told Devex, adding that “we need to get it out there that we have this product. I don’t think most people know it’s available from the DFC.” This planned expansion, however, may face an obstacle. The government’s Management and Budget Office, or OMB, is pushing back against how the agency pays for these deals and, if it gets its way, it could significantly hamper DFC’s ability to expand its use of the financial tool, a former DFC employee, who asked for anonymity to share details of private conversations, told Devex. There are few development finance institutions able to provide political risk insurance, and as they face pressure to use investments to bring in more private capital, it could be a key tool for DFC and other DFIs it might work with jointly on deals. DFC and risk insurance While DFC is a young agency, OPIC helped create political risk insurance decades ago. And although the private sector now regularly provides the bulk of political risk insurance, DFC believes it plays an important role in markets it considers too risky or in transactions it’s not interested in. In many middle-income and lower-middle-income countries, there are “not a lot or no private sector options,” Slav Gatchev, managing director of sustainable debt at The Nature Conservancy, told Devex. A clear case is Ukraine, where commercial insurance companies aren’t inclined to go, investors and experts told Devex. While the Superhumans deal was a unique case of DFC insuring a philanthropic endeavor — it primarily insures private investments — Grushko said it could provide an example to others in Ukraine trying to expand businesses in the difficult environment. ‘So many businessmen would like to invest and expand,” he said, adding “There is potentially equity sitting in the market but it needs security. This is a signal to Ukrainian businessmen that are active in the market and considering expanding that this is something they could use and sleep well and keep investing in Ukraine and not in other countries where there is no war.” DFC can provide insurance for debt and equity deals in Ukraine, and it has done several insurance policies in the country, though the details of most of the transactions are not publicly available to protect the safety of partners, according to the agency. “Basically we are providing risk mitigation for private investors that are afraid of acts of war, the government expropriating their assets, or that they won’t be able to convert the currency to try to repay themselves,” Dasewicz said. The Superhumans deal is one example, but DFC had also insured a wind farm in a part of Ukraine that is now occupied by Russia. The investor, unable to run the wind farm or access it, filed a claim on the insurance policy and DFC recently paid it. Since 1971, DFC, and its predecessor OPIC, have paid out about 310 claim settlements totaling about $1.05 billion, according to the agency. DFC’s risk insurance deals have primarily been in low- and lower-middle-income countries in Africa and Latin America, with the bulk of the total dollar figure going to about 20 large transactions, according to a recent McKinsey report commissioned by the agency. It also found that 25% of the portfolio was in countries with a CCC+ credit rating or lower. In some cases, like the 2021 Belize debt-for-climate swap, DFC’s political risk insurance helped a sub-investment grade country issue an AA-rated bond and convince investors to participate in the unique transaction, Gatchev said. In debt-for-climate or debt-for-development deals, a portion of a country’s debt is forgiven or refinanced in exchange for the local government investing in conservation, climate, or other development priorities. In the Belize deal, the government borrowed money from a subsidiary of The Nature Conservancy to buy back all of its external commercial debt at a discounted price, which was financed through the issuance of a blue bond, with DFC providing political risk insurance. The result was a reduction of the country’s external debt by 10% of its gross domestic product, and a commitment by Belize to spend about $4 million a year on marine conservation through 2041. At the time it was a unique use of the political risk insurance tool — with DFC essentially protecting against the government not paying the investors, acting “almost like a cosigner on a lease,” Gatchev said. Since then, DFC has done similar transactions in Gabon and Ecuador. “There’s just no way that these transactions would have happened without the use of credit guarantees and credit support” like insurance, Gatchev said. “Why? Because we are talking about sovereigns that have no, or very constrained capital markets access.” Part of the reason an insurance policy like this can help is that the U.S. government may be able to work with the government and investors to “deflect or improve or resolve the situation before it arises to the level of a claim,” he said. The transactions are often carefully scrutinized and of national importance, and may be among the cheapest forms of financing so they are more likely to be repaid, Gatchev said. A potential roadblock The Office of Management and Budget may get in the way of DFC’s planned expansion of political risk insurance if its interpretation of the financial tool prevails. “There’s multiple tension points with OMB and they relate to the accounting treatment and budget treatment of DFCs products,” the former DFC employee told Devex. The law that created DFC, the Better Utilization of Investments Leading to Development Act, or BUILD Act, states that insurance should be treated differently than loans or loan guarantees, and that it should be funded through the agency’s capital account, which is made up of proceeds from insurance premiums and recoveries and can be used to make payouts on claims. But the budget office says political risk insurance is “sometimes just a disguised guarantee, which would be subject to a different standard,” the former employee said. DFC argues it is not a guarantee but rather insurance against a specific risk, for example, the bad acts of a foreign government, not against all risks. And the market doesn’t treat it as a guarantee either, the former employee said. “The reason this all matters is because DFC has a finite bucket of subsidy,” the former employee said. There are numerous products competing for limited funding, including equity investments and technical assistance. DFC will do a risk calculation of each transaction, and based on the assessment of the risk — a potential loss on loans for example — it will set aside a subsidy, or some of its annual appropriations, to offset that risk. “That becomes potentially very expensive,” the former DFC staffer said, adding that it would mean “there’s not enough left to go around.” OMB doesn’t like the status quo in part because it controls funding that is appropriated, and so doesn’t control insurance. “They want to assert their control and not relinquish that,” the former employee said. What’s next? DFC plans to expand its political risk insurance team, which will focus on large transactions that involve climate, conservation, food security, and impact, Dasewicz said. Historically, a sizable number of the political risk insurance deals have supported development implementers including DAI, a private global development company, and the International Rescue Committee, offsetting the risk of operations in some countries where they work. While DFC will continue to provide insurance to those groups, it is not where it wants to grow. “What we’re really looking to grow is the big scalable transactions,” she said. DFC will also expand the team working on political risk insurance, both by recruiting new staff and by training existing staff. The agency will educate more potential customers about the political risk insurance product and what is available in Ukraine, starting with a group of European DFIs interested in exploring joint deals, Dasewicz said. They want to invest in Ukraine, and their shareholders or governments are urging them to, and they may be comfortable with the commercial risk, but the barrier is the political risk of investing in a country at war. DFC has a tool that they don't have in many cases, she said. There has been interest from banks and countries to do more debt swap deals, and a number of deals are in the works. “We want to continue to see the DFC humming along, be reauthorized, and be able to continue to write these large PRI policies,” Gatchev said. It is helpful that DFC can offer up to $1 billion in insurance, and it would be good if it continues to provide long-term policies, he said, adding that he’d like to see it have more variety in the types of insurance, including a more straightforward nonpayment insurance policy. The McKinsey report, which was commissioned by DFC, had several suggestions for how the agency could improve its political risk insurance product, particularly in how much private money it could help mobilize. Among the suggestions are targeting high-impact sectors, building out plans for customer engagement, working more with private insurers to reinsure deals, and building internal capacity. If political risk insurance can help a private sector deal across the line, it is a fairly low-cost way for DFC to drive commercial funds into key markets and sectors that need it, something the agency, and many other DFIs, are being pushed to do. Part of that private “mobilization” can come in the form of reinsurance, and DFC has done some transactions in the past, bringing on commercial insurance companies to reinsure up to 50% of the risk in one of the debt swap deals. “Our entire mission is not to displace private capital, if private insurers are willing to do this we want to crowd them in and we want them to do the next one and the next one without any kind of political risk insurance” from the DFC, Dasewicz said.