Political Risk Services™ or the Coplin-O'Leary Country Risk Rating System™ is the methodology developed by Professors William D. Coplin and Michael K. O'Leary during 20 years of research at the Maxwell School of Citizenship & Public Affairs, Syracuse University with the U.S. Department of State, the Central Intelligence Agency, other government agencies, and major multinational corporations.

After calculating consolidated scores for all regimes (100% of possibilities), the PRS system converts these numbers into letter grades (on a scale from A+ to D-) for three investment areas: financial transfers (banking and lending), foreign direct investment (e.g. retail, manufacturing, mining), and exports to the host country market. PRS' unique system provides only industry specific forecasts, not a generic macro level assessment, as is usually the case.

Users can customize the PRS forecasting model to individual projects or the particular exposures of a firm with an optional weighting system, adding or subtracting variables and adjusting the model to fit specific firm or project attributes.

PRS Country Reports forecast the risk of doing business in 100 countries. PRS updates these 100 reports as political events dictate in each country. Each includes comments and analysis on recent events, profiles of key political players, and wide-ranging forecast scenarios, as well as basic historical and political background and data on the government, political entities, the environment, and the economy, including key sectors.

---Llewellyn D. Howell, Ph.D.

The PRS Group, Inc., applies the Coplin-O'Leary Rating System™ every day as the editorial staff for our Political Risk Services product line produces 100 Country Reports. In addition to defining the Coplin-O'Leary Rating System™ and related terminology we use in producing the Country Reports, this explanation also describes a set of calculations that you can use to create risk ratings. In the 18-month and five-year forecasts of our Country Reports, the risk ratings indicate the placement of countries from least risky (A+) to most risky (D-) for financial transfer, direct investment, and export markets. The system is designed in such a way that it can be adjusted to suit the needs of a particular project or combination of corporate interests.

The Coplin-O'Leary System™ is a general risk model. Our "Standard Worksheet for Coplin-O'Leary Model" will help you understand how risk assessments are translated into numbers and how the numbers are used to calculate risk ratings in our Country Reports. You can use our Customized Worksheet to design your own model based on the Coplin-O'Leary System™.

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Twelve factors are analyzed from an 18-month forecast perspective, including political turmoil, which is included in both the 18-month and the five-year forecasts.

Turmoil. Actions that can result in threats or harm to people or property by political groups or foreign governments, operating within the country or from an external base:

• Riots and demonstrations
• Politically motivated strikes
• Disputes with other countries that may affect business
• Terrorism and guerrilla activities
• Civil or international war
• Street crime that might affect international business personnel
• Organized crime having an impact on political stability or foreign business

Not included in turmoil are legal, work-related labor strikes that do not lead to violence.

Equity Restrictions. Limitations on the foreign ownership of businesses, emphasizing sectors where limitations are either especially liberal or especially restrictive.

Operations Restrictions. Restrictions on procurement, hiring foreign personnel, or locating business activities, as well as the efficiency and honesty of officials with whom business executives must deal and the effectiveness and integrity of the judicial system.

Taxation Discrimination. The formal and informal tax policies that either lead to bias against, or special advantages favoring international business.

Repatriation Restrictions. Formal and informal rules regarding the reparation of profits, dividends, and investment capital.

Exchange Controls. Formal policies, informal practices, and financial conditions that either ease or inhibit converting local currency to foreign currency, normally a firm's home currency.

Tariff Barriers. The average and range of financial costs imposed on imports.

Other Import Barriers. Formal and informal quotas, licensing provisions, or other restrictions on imports.

Payment Delays. The punctuality, or otherwise, with which government and private importers pay their foreign creditors, based on government policies, domestic economic conditions, and international financial conditions.

Fiscal and Monetary Expansion. An assessment of the effect of the government's spending, taxing, interest rate and other monetary policies. The assessment is based on a judgment as to whether the expansion is inadequate for a healthy business climate, acceptably expansionist, or so excessively expansionist as to threaten inflation or other economic disorder.

Labor Policies. Government policies, trade union activity, and productivity of the labor force that create either high or low costs for businesses.

Foreign Debt. The magnitude of all foreign debt relative to the size of the economy and the ability of the country's public and private institutions to repay debt service obligations promptly.

Five-Year Risk Factors

Four additional factors are analyzed from a five-year forecast perspective. (Turmoil is included in both the 18-month and the five-year forecasts.)

Investment Restrictions. The current base and likely changes in the general climate for restricting foreign investments.

Trade Restrictions. The current base and the likely changes in the general climate for restricting the entry of foreign trade.

Domestic Economic Problems. A country's ranking according to its most recent five-year performance record in per capita GDP, GDP growth, inflation, unemployment, capital investment, and budget balance.

International Economic Problems. A country's ranking according to its most recent five-year performance record in current account (as a percentage of GDP), the ratio of debt service to exports, and the annual percentage change in the value of the currency.

We use these 17 factors in our summary risk ratings, first estimating the current risk level of each factor and then forecasting the change in its risk level under each of the three most likely regime scenarios. The numerical equivalents of these current and forecast levels are then used to calculate the risk scores.

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Regime Stability & Risk Ratings

Every PRS Country Report forecasts the "Most Likely Regimes and Their Probabilities." We predict the government most likely to be in power over two forecast periods, 18 months and five years, from the date of publication. The percentages after the regime names show the probabilities of those forecasts. In the "Forecast Summary," we show when a change has been made in the probability of a particular regime by giving the previous probability rating in parentheses. An asterisk (*) preceding a regime name indicates the forecast of a different regime from that of the incumbent, whether the change occurs by coup, election, change in orientation, or any other means.

A Note about Regime Names: The label assigned to a regime indicates the most powerful component of the government. This can be an individual leader and a political party, the dominant orientation within the leadership, or groups such as the military or a civilian-military alliance. The probabilities assigned to the most likely regimes are derived from the opinions of our country risk specialists.

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Turmoil Risk Ratings

The first content page of each Country Report shows the 18-month and five-year risk from turmoil. The term "turmoil" includes large-scale protests, general strikes, demonstrations, riots, terrorism, guerrilla warfare, civil war, and cross-border war. It also includes turmoil caused by a government's reaction to unrest. The short-term risk of turmoil affecting international business is rated as Low, Moderate, High, or Very High. The five-year rating is calculated from the "base" - the relative balance of forces supporting and opposing - and the forecasts of change under the three most likely regime scenarios. A previous rating appears in parentheses when the turmoil forecast changes. The 18-month forecast of turmoil risk is calculated according to a clearly defined formula based on the current level and the likely change under each of the three most likely regimes. The five-year forecast of turmoil risk comes from another formula combining the 18-month forecast, the long-term base level, and the likely change over the next five years under the three most likely regime scenarios.

Low Risk. For countries with this rating, most discontent is expressed peacefully, and the extremely rare occurrences of violence from political causes almost never affect international business directly or indirectly.

Moderate Risk. These are countries in which international business can sometimes be affected by occasional riots, acts of terrorism, and significant levels of labor unrest or other kinds of discontent.

High Risk. High-risk countries experience levels of violence or potential violence that could seriously affect international business.

Very High Risk. The turmoil level in such countries creates conditions that approach a state of war.

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Financial Transfer Risk Ratings

The term "transfer" in our risk Forecast Summary refers to the risk from financial transfer, non-convertibility from the local currency to the desired foreign currency, and the transfer of foreign currency out of the country. The transfer could be for the payment of exports, repatriation of profits or capital, or for any other business purpose. Risk ratings, expressed as letter grades, are used in both the 18-month and five-year periods. A previous rating appears in parentheses when a forecast changes. Countries are rated for financial transfer risk according to a scale ranging from A+ for the least risky to D- for the most risky. The 18-month letter grades are determined by four equally weighted factors, each combining the current level and the forecasts of change under the three most likely regimes. These are the factors:

1. Exchange controls on international business.
2. Payment delays facing exports to that country.
3. Policy related to fiscal and monetary expansion.
4. Governmental foreign borrowing.

Five-year letter grades are determined by three equally weighted factors:

1. The average score obtained from the 18-month calculations.
2. The level of turmoil forecast for the 18-month period and the level forecast under the three most likely five-year regime scenarios.
3. The average rank of the country on the indicators of international financial problems and the forecasts of change under the three most likely regime scenarios.

"A" Countries. No exchange controls, or other barriers to financial transfer, and little likelihood that controls will increase in the forecast period.

"B" Countries. Modest or sporadic delays in financial transfers; a reasonable chance that delays will be high in the forecast period.

"C" Countries. Modest to heavy delays and even blockage of financial transfers; a reasonable chance for barriers to increase, and little chance to decrease, within the forecast period.

"D" Countries. Heavy exchange controls and long delays for the transfer of currency; little chance that conditions will improve within the forecast period.

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Direct Investment Risk Ratings

The term "investment" refers to the risks to foreign investment in wholly owned subsidiaries, joint ventures, and other forms of direct ownership of assets in a foreign country. Risk ratings, expressed as letter grades, are used in both the 18-month and five-year periods. A previous rating appears in parentheses when a forecast changes. Countries are rated for direct investment risk according to a scale ranging from A+ for the least risky to D- for the most risky. The 18-month letter grades are determined by seven equally weighted factors, each combining the current level and the forecasts of change under the three most likely regimes. These are the factors:

1. Turmoil
2. Equity Restrictions
3. Restrictions on Local Operations (labor, management, and procurement)
4. Taxation Discrimination
5. Repatriation Restrictions
6. Exchange Controls
7. Labor Costs

Five-year letter grades are determined by four equally weighted factors:

1. The average score obtained from the 18-month calculations.
2. The level of turmoil forecast for the 18-month period and the level forecast under the three most likely five-year regime scenarios.
3. The relative strength of forces supporting and opposing restrictions on international investment and the forecasts of change under the three most likely five-year regime scenarios.
4. The average rank of the country on indicators of domestic economic problems and the forecasts of change under the three most likely five-year regime scenarios.

"A" Countries. Few restrictions on equity ownership in most industries; few controls on local operations, the repatriation of funds, or foreign exchange; taxation policy that does not discriminate between foreign and domestic business. Little likelihood that restrictions will increase, and little threat from political turmoil.

"B" Countries. Some threat on equity ownership, frequently in the form of a requirement for partial ownership by nationals; restrictions on local operations, particularly regarding local procurement; few restrictions on repatriation, but some exchange controls possible; some threat to business from political turmoil; and a possibility that restrictions and turmoil may increase.

"C" Countries. Considerable restriction on equity ownership, including a requirement that nationals hold a majority percentage; considerable restriction on local operations, repatriation, and foreign exchange; some taxation discrimination possible; and a serious threat of political turmoil. A good chance that restrictions and turmoil will remain high or increase during the forecast period.

"D" Countries. Considerable restriction on equity ownership, including a prohibition against equity ownership by foreigners; substantial regulation of local operations, repatriation, and foreign exchange; taxation discrimination; political turmoil that may present a serious threat. A good chance that restrictions and turmoil will remain high or increase during the forecast period.

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Export Market Risk Ratings

The term "export" refers to the risks facing exporters to the country, especially risks related to market conditions, barriers to imports, and delays or difficulties in receiving payment for goods. Risk ratings, expressed as letter grades, indicate the climate for foreign exporters for both the 18-month and five-year forecast periods. A previous rating appears in parentheses when a forecast changes. As potential export markets, countries are rated for risk according to a scale ranging from A+ for the least risky to D- for the most risky. The 18-month letter grades are determined by six equally weighted factors, each combining the current level and the forecasts of change under the three most likely regimes. These are the factors:

1. Turmoil
2. Exchange Controls
3. Tariffs
4. Other Trade Barriers
5. Payment Delays
6. Foreign Debt

Five-year letter grades are determined by five equally weighted factors:

1. The average score obtained from the 18-month calculations.
2. The level of turmoil forecast for the 18-month period and the level forecast under the three most likely five-year regime scenarios.
3. The relative strength of forces supporting and opposing restrictions on trade and the forecasts of change under the three most likely five-year regime scenarios.
4. The average rank of the country on indicators of domestic economic problems and the forecasts of change under the three most likely five-year regime scenarios.
5. The average rank of the country on indicators of international economic problems and the forecasts of change under the three most likely five-year regime scenarios.

"A" Countries. Stable politically and economically; low trade barriers and adequate foreign reserves to allow for prompt payment; little chance that conditions will deteriorate.

"B" Countries. Some protectionist sentiment and a poor foreign exchange position may lead to moderate tariff and non-tariff trade barriers; modest delays in payment result from poor economic conditions; some chance that the business climate will deteriorate.

"C" Countries. Strong protectionist sentiment and weak foreign exchange position, producing high tariff and other barriers to trade; the risk of prolonged payment delays or non-payment, requiring conservative credit policies; little chance that conditions will improve and a strong chance that they will deteriorate.

"D" Countries. High tariff and non-tariff barriers resulting from a combination of protectionist sentiment and a lack of foreign currency; prolonged payment delays or non-payment likely; little chance that conditions will improve and a strong chance that they will deteriorate further.

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Steps in Calculating

All data in our worksheets come directly from the assessments and forecasts of country specialists (the "Forecast Summary of any report). Calculations on the worksheet generate a score for each of 17 variables (12 for the 18-month forecast period and five for the five-year period). Different combinations of variables make up the three risk ratings.

For the 18-month forecast, TRANSFER uses variables 6, 9, 10, and 12; INVESTMENT uses variables 1, 2, 3, 4, 5, 6, and 11; and EXPORT uses 1, 6, 7, 8, 9, and 12.

For the five-year forecast, TRANSFER uses variables 13 and 17; INVESTMENT uses variables 13, 14, and 16; EXPORT uses variables 13, 15, 16, and 17. In addition, the corresponding 18-month score is a component of each five-year risk score.

Click here for a PDF of our Standard Worksheet.

First, the number for the first blank next to variables 1-12 (column headed C.L.) is obtained from the CURRENT & BASE listings for "Turmoil," "Invest," and "Trade" on the Forecast Summary. Current & Base risk or restriction levels are scaled as follows:

Click here to download a printable PDF file that includes a discussion of how to apply our risk ratings, and a summary of applications.

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