The Chad-Cameroon Petroleum Development and Pipeline Project
• What is political risk? How is it measured? How is it mitigated?
Political risk means the risk that an investment's returns could suffer as a result of political changes or instability in a host country. Instability affecting investment returns could stem from a change in government, legislative bodies, other foreign policy makers, or military control. The outcome of a political risk could drag down investment returns or even go so far as to remove the ability to withdraw capital from an investment.
Following the above definition, the project of Chad-Cameroon pipeline seems to be very risky; the idea is to pump oil to Atlantic coast to be exported further. The pipeline should go through Chad and Cameron.
Chad: 30 years under civil war managed by General Idriss Deby regime. Country is politically instable what cause poor economic development.
Cameron: very poor and the most corrupted country in the world.
Oil companies tried to mitigate project risk via World Bank participation in financing of the project and multilateral development agencies as partners in this deal. The choice of these organizations seems to be obvious because of extensive lending and policy experience with developing countries and presence of WB in Cameroon and Chad since years.
There were 2 main risks which were defined: 1. High risk that money will be consumed by few people and not all Chadians. The additional revenue which Chad could earn on the project to fight with poverty is not legally described. 2. There is high threat that Cameroon might take the pipeline into hostage and required higher transit fees.
To mitigate these risks, WB decided to create Revenue Management Plan (RMP), which in detailed describes the way of revenue allocation. Revenues will go first to an escrow account in London, then to two commercial banks in Chad where the oversight committee is to see that 80% goes to priority areas