Spreading wings abroad - beware political turbulence

It was not too long ago when political risks were associated exclusively with developing and under-developed countries.

The Strategic Risk Managers operating from developed countries invariably cautioned the big corporations against setting up facilities in developing markets, where they could be exposed to a new range of political risks over and above the business challenges they are already familiar with at home.

Political factors which can determine financial risks could be when a country's government suddenly changes its policies. The risks include political interference with the activities of the foreign enterprise; instability of government policies aimed at foreign investors; risk of non payment by the government; breach of contractual obligations by the government and the risk to physical assets due to terrorism or social unrest.

Because of the volatile political situations in some developing and under-developed countries, investors have factored in such risks in their project feasibility reports.

This was a major reason that second and third world countries lacked foreign investment. The investors in emerging economies, until recently, had no such concerns, as they had no surplus resources to invest in other countries.

Investment flow changes direction

Over the last few years however, the direction of global investment has taken a reverse swing in many sectors and countries. The emerging mega corporations in the developing countries are now eyeing investment opportunities in the developed markets including the so called Mecca of free trade, United States.

It was almost taken for granted that governments of developed countries could not interfere with the movement of capital and investment. The recent experience of DP World in the US has however jolted the faith of free trade protagonists all over the world.

The Dubai-based company was forced to sell off its US operations to an American owner after US House and Senate GOP leaders bluntly told President Bush that Congress would kill the US slice of its takeover of P&O which has operations at six major US ports including New York and Baltimore.

Another major investment project from Dubai the Smart City in Cochin, India is also within the radar of political risks; the Election Commission has recently asked the Government Kerala to postpone a decision on the matter until the elections are over. The political fallout of this decision is that the new government may review the whole project ab initio.

With the oil price going for a toss and the construction activities on a permanent boom, the companies in the Middle East are now becoming larger in size, wealth and expertise. Obviously, these companies are now having bigger dreams to become Multi National Corporations with investments and operations in different parts of the world.

The number of companies in the Middle East, especially UAE, Saudi Arabia and Lebanon, looking at investment opportunities within different gulf countries, South Asia and even in some European and American countries are on the rise.

Mitigating troubles

When companies export their expertise and capital to develop businesses in foreign countries, their primary concern, after investing hard earned capital, is the ability to export their products and services to the world market and operate without interference.

When you factor in the country risk, you will find a need to raise the comfort level with your investors, bankers and other stakeholders based on the areas of the world where you have operations.

While political risks cannot be eliminated altogether, one can always mitigate the financial consequences of a political fall out on one's investments through Political Risk Insurance (PRI) and help alleviate some uncertainties.

The PRI, if appropriately negotiated and purchased from a financially sound and technically capable insurance company, can add a degree of comfort for your lenders and suppliers.

The companies in the region, especially those who have or are planning investments in foreign countries, whether they are among the developed or developing world, should seriously consider buying some levels of PRI so as to cover their equity and deliver some level of assurance against political risk to other key parties as well.

The writer is Deputy General Manager with Al Rajhi Company For Cooperative Insurance, Riyadh. The views expressed herein are his own and not necessarily subscribed to by his employers.