Yet many of the same factors that have driven economic growth and opportunity in developing regions (particularly Sub-Saharan and North Africa and Central Asia) are the same ones that have increased political risk. Greater industrialization, advances in technology, increasing commodity prices and population growth can have the dual effect of destabilizing regions while simultaneously providing the framework for enhancing economic and political growth.
According to a PWC study some 83% of multinationals assess political risk both prior to and establishing overseas operations and on an ongoing basis thereafter. At the same time, approximately 73% of companies that monitor risk don’t think they do so very well.
Why the disconnect? Take a look at the results of PWC’s survey of major multinational corporations regarding their primary sources of information.
Generic sources don’t provide real insight (gasp!)
This is what one major international construction company refers to as the “Wikipedia” solution. These sources may hint at operating conditions, but they are unlikely to be accurate much less actionable. Media reports, including those produced at the community level, are frequently limited by the reality of political pressure or biased (either intentionally or unintentionally). Home country information, despite good intentions, can quickly become dated and is a poor substitute for substantive local knowledge and local contacts. And companies that rely on information from plant employees soon realize the extent to which conflicts of interest (family ties, personal agendas, a desire to curry favor) can color an employee's perspective.
Think about the types of things a construction/engineering firm might want to know before beginning operations in a developing market. Here are a few:
- What is the probability that political instability will lead to breach of contract, confiscation, expropriation, nationalization, deprivation (CEND) or currency inconvertibility (CI) - the major building blocks of political risk insurance?
- What effect does the regional grey economy have on regional investments and returns?
- What are the real sources of power and authority at both a national level and local level?
- What is the extent of local corruption and how can an MNC accomplish its objectives without crossing the line of the Foreign Corrupt Practices Act?
- What are the real unemployment/under-employment numbers as they affect local business activities? Are the necessary skills available? Are there underlying reasons why a labor force may not be able to meet a company’s operational objectives?
- What forces could potentially lead to local civil disturbances?
- What are the political events and pressure points that may form the basis for country-wide political action?
- What are the primary sources of disputes initiating from sub-national governments or local regulatory agencies?
Which leads to the second key issue:
Macro data is important, but not sufficient
There is a vast amount of country-specific data readily available from economic institutions like the World Bank, the IMF and regional central banks. They provide valuable information regarding a country’s economic and social development indicators, creditworthiness, the extent of foreign aid, debt levels, central bank reserves and political constraints - all of which paint a picture of risk at a sovereign or country level. Typically these sources are used by political risk insurers to determine the likelihood and severity of CEND and CI events.
However, multinationals that rely too heavily (and often exclusively) on broad economic data run the risk of missing a large and critical chunk of the core field reality and events that if properly documented and analyzed would provide for early warning and prevention instead of mitigation and damage control.
If the Arab Spring uprisings are any indication of future events in other emerging markets, political risk will increasingly be initiated from the bottom up. Multinationals would be well advised to re-evaluate the sources and techniques they currently use to assess and manage political risk. The more diversified the information sources at all levels of society and the more sophisticated the processing, analysis and management methods, the greater likelihood that global construction and engineering companies will be able to achieve the favorable returns projected in politically risky emerging markets.
The GPRA Group