The sovereign risk furphy

Industries are entitled to expect governments not to renege on contracts and not to act outside the rule of law. But let’s be clear: no business is entitled to expect the laws of a nation will always be what they are today. It is the role of governments to pass new laws and change regulatory regimes in response to new developments. Regulatory changes can be beneficial or detrimental to particular businesses. We accept this as one of many uncertainties that are simply part of doing business.

Does it matter that politicians and major businesses are misusing the phrase “sovereign risk”? I think it does, for two reasons.

First, to describe regulatory changes as sovereign risks is not merely semantic looseness. It is an exaggeration of the risks of sensible policies like emissions trading and a deliberate downplaying of the benefits.

Second, we should guard against the perception that businesses have a right to compensation any time taxes or regulations change. This would paralyse the core function of our governments and would damage our ability to adapt to environmental and other changes.

Our leaders must not be spooked by spurious claims about sovereign risk. The real risk in imposing excise on condensate, or creating a fair and effective emissions trading scheme, is that sectional interests and special pleading will undermine good regulation.