Companies Can Mitigate Risk
In a Risky Business Environment
C0mplicating the current credit crunch crisis and worldwide economic downturn is the fact that some 75% of emerging markets have a political risk rating of medium high or extremely high. This is critical information to North American- and Europe-based business involved in and interested in expanding to new markets in the natural resources and manufacturing sectors, according to London, UK-based Control Risks, an independent, specialist risk consultancy.
This red flag should serve as a wakeup call to those expanding companies when engaged in the process of entering these markets to be more aware of these added political risks and seek to alleviate these risks.
Preston Keat, Director of Research at political risk advisory and consulting firm Eurasia Group. New York City, offers that, in order to moderate these risks, “… with some mining or extractive companies do is that over a 10- or 15-year period, they offer to give the asset back to the government. It also helps if you work with local partners that are making profits.”
Mr. Keat suggests that Conoco, which worked with a local partner out-performed Royal Dutch Shell and other, oil majors in the controversial Sakhalin Island oil and gas development project. In the end, such majors as Royal Dutch Shell who entered the project alone were later forced by the federal Russian government to sell assets.
Mr. Keat further adds that these extractive companies are always aware of political risk and usually work hard to lessen or avoid the risk. “They cannot help where natural resource deposits are. It is not as if they can go to another country. They are where they are.”
In another perspective, insurance firm London, UK-based Jardine Lloyd Thompson’s Head of Credit and Political Risk Analysis Dr. Elizabeth Stephens notes that the highest risk foreign firms face is “contract repudiation.”
She adds that when some companies in the extractive industry sectors are drafting agreements with hosting governments, they should include a more equitable share in order to intercept any attempts by the government to compulsorily re-negotiate terms later. “If oil prices are low, the host government should get 50%, for example, and if commodity prices are high, the percentage the government gets should reflect that. The government and the company need to profit in good times. The more a company understands the different components of risk and managing them positively, it is possible to mitigate them.”
Usually, extractive companies are aware of political risk as they investigate business possibilities in these types of markets.
Mr. Keat adds that “… they cannot help where natural resource deposits are. It is not as if they can go to another country. They are where they are.”
However, more and more of the companies outside of the oil and mining sectors must also evaluate the risk involved. These other companies do usually tend to look at political risk when they first enter an emerging market but then tend to ignore or fail to supervise the risk as the business relationship develops.
Mr. Keat warns, “Their supply chain is then put in jeopardy. There is inconsistent monitoring of political and regulatory risks. But, in a competitive environment, those companies that seriously monitor political risk are more likely to get their products to market.”
To complement OECD member countries’ own agencies to provide their domestic companies with export credit and political risk insurance, the World Bank also established MIGA (the Investment Guarantee Agency) in 1987 to facilitate these types of trade.
Neil Henderson, director of political risk and crisis management for reinsurance intermediary Aon Capital, says that the political risk insurance market has approximately US$1.9 billion in product capacity.
According to Mr. Henderson, research indicates that political risk is among the top five concerns for companies doing business in emerging markets.
Increasingly, the fast growing ship high jacking involving Somalian pirates may create an intolerable situation where the added costs of insuring the trade in this region may spark the major powers to enact a military solution if such continuing disruption of business threatens their own national security and economic well-being.
By: Mark Borkowski is president of Toronto based Mercantile Mergers & Acquisitions Corporation. Mercantile specializes in the sale of privately owned mid market companies. Mark can be contacted at firstname.lastname@example.org or www.mercantilemergersacquisitions.com