Investment & Operations in Complex Environments

The second panel of the 2015 Fletcher Conference on Managing Political Risk examined the bread and butter of political risk: evaluating the costs and opportunities of complex environments.  

Take a look to see what political risk experts say about how the complexities of the world are changing.  Are we learning from our mistakes? Or are we slowly accepting more and more uncertainty?

Panel 2: Investments and Operations in Complex Environments

Firm strategy in complex areas requires deep knowledge of host-nations, starting from market entry and continuing through the life cycle of the business. The inherent challenges of operating in emerging and frontier markets arise not only from the policies and politics of the host countries but, in some cases, sociopolitical instability and violent conflict. How can a company successfully employ political risk management and corporate security strategies to ensure that anticipated financial gains will be captured, and that operations, personnel, and assets will be protected? How do businesses and markets survive amidst conflict? What opportunities exist amidst uncertainty? Panelists will explore the relationship between country and corporate risks and how companies and investors manage this balance in complex environments.

Moderated by Professor Bhaskar Chakravorti, Senior Associate Dean of International Business & Finance

 

Rick Fisher – VP for Global Corporate Security, CB&I

  • Risk can be political or financial and companies are focused on assessing those threats.
  • For a company like CB&I evaluation of risk in the world today has become very important especially since the world has changed dramatically in the last twenty years
  • From an operational standpoint a firm has no control over the threat. However, risk can be evaluated and mitigated.
  • Establish cost effective program to mitigate the risk:
  • Outside consultants have capabilities that are very valuable to corporates in evaluating emerging trends and risks.
  • In Colombia for example CB&I witnesses 14000 people coming per day by bus – the potential risk of simply that activity in Columbia shows some of the challenges in operating in those markets.
  • Firms are looking to future opportunities worldwide but often there are areas of the world where the risk outweighs potential benefits.

 

Michael Moran, Managing Director, Global Risk Analysis at Control Risks

  • Practicable risk intelligence is the need of the day
  • Engaged in helping some of the biggest companies working in come of the hardest places -- operational/security risk
  • Political risk boutique based around the world to bring “ground truth’ is important-- having people on the ground in the world brings value proposition to the client
  • In comparison, the think-tank model of political risk is more expensive in bringing the ground research
  • On a day-to-day Control Risks performs a significant amount of macro analysis and more thought leadership than was previously done.
  • Client base is no longer western multinationals but increasingly Asian and MENA clients who are interested in assessing the political landscape in North America.

  

Frank Linden, Senior Risk Management Officer, Multilateral Investment Guarantee Agency (MIGA)

  • Need to know what you want to manage, how to measure it
  • Insurance for political risk at MIGA involves five products- have clear definition of insurance for political risk -- have 5 products:
    • Transfer and convertibility restrictions which is becoming topical in the context of Ukraine
    • Exposure to expropriation—could be outright of creeping expropriation through environmental audits, tax audits etc.
    • Breach of contract: for example take off agreements can be annulled by the host country governments
    • Asset damage as a result of military action/civil unrest
    • Sovereign credit default: a government may default on a loan on bond contract but the government’s ability and willingness is-- willingness is a political decision which constitutes the basis for political risk insurance
  • MIGA has grown to do about $3.5 billion in business per annum and sovereign credit default is a big part of that business.

 

Daniel Wagner, CEO, Country Risk Solutions

  • The overall risk mosaic is not simply political
  • Cross-border risk encompasses those risks—they are not simply political or economic risk, but also developmental, environmental, financial -- figure out what’s going on in a country
  • What matters in this business is a consulting company’s ability to add value to a firm and in turn the organization’s ability to use that information in a meaningful way.
  • Organizations may not be prepared to understand cross border risk .

 

Discussion period

  • What risk is looming large in the speakers’ minds?
    • The G-41 world we’re living in is worrisome: that is the 41 major terrorist organizations that are morphing and integrating in ways and places would not have expected. For example, an ungovernable porous border that stretches across the middle of Africa is a concern. The limitation of resources and/or willingness of Western countriesis going to be a problem.
    • We are one or two terrorist attacks away from complete change in the way we conduct our day-to-day lives
    • Russia is a concern especially given the way sanctions are unfolding. Ukraine may be pending default, saw this coming.
    • In Turkey the political interference in private business is emerging as a risk to operations.
    • United States, which has guaranteed regional and sub-regional stability around the world since WWII, has become brittle, defensive. The United States’ positions around the world are increasingly incapable, or irrelevant, and need to get regional actors involved.  The US cannot sustain its role as the sole guarantor of protection globally.
    • Safety of employees in a worldwide network for a large firm is concerning. Those threats are not simply terrorist activities but dependent on the regional context.

 

  • What is the boundary between criminality and security to the point where you get to political risk? At what point does that become political risk?
    • In several countries criminal activities can be perpetuated by the governments   themselves so the boundary can be blurry oftentimes

 

  •  Where do you place cybersecurity in the political risk dialogue?
    • Cyber crimes are becoming an increasingly important discussion in corporations now
    • The Sony incident shows the vulnerabilities that require the need to enhance capabilities.
    • The involvement of non-state actor in cyber crimes shows the challenges in identifying the source of risks.
    • Consulting companies themselves become vulnerable to cyber threats if they venture into assessing those threats for clients. Therefore, there is reluctance from their side in stepping into that research.
    • Insurance companies are at a nascent stage but a profitable product. The companies have not yet determined what the coverage should be since insurance may not be able to guard against related consequences like reputational damage, sales drop etc.
    • There are still a lot of “unknown unknowns” in this area and catastrophic damages are still difficult to conceptualize.

 

  • How do you quantify qualitative risk?
    • Daniel Wagner: mix quantitative and qualitative would be an ideal
    • Michael Moran: Scenario analysis may be a good model of comparison for a client. However, those numbers would still need a qualitative analysis to make a case in front of the top-level management for firms.
    • Frank Linden: numbers may be arbitrary but they allow to have a second conversation around risk
    • Rick Fisher: Despite the qualitative and quantitative risk assessment firm-level decision-making comes down to appetite for risk as a company

 

  • What makes a successful consultancy in this field?
    • Track record of the firm in prediction accuracy
    • Firms generally get sources from different consultancies
    • Consulting reports may only be an input in final decision-making at the firm level.

 

Matthew KellerComment