Topical Highlights from the first afternoon panel on Investment in Conflicted Areas:
Real trouble with mitigating political risk when investing in conflicted areas: "What bothers me is not the known unknowns, but the unknown unknowns." How can you mitigate against future events you can't predict?
Nature of political risk and investment has changed since the Cold War - civil society and grassroots organizations are now a major, engaged actor - how do you mitigate an actor that is not involved in a contract? Important to know who the right players are, and know that political risk is evolving.
Buying political risk insurance is only on part of the equation when securing investments in conflicted areas; and investors are moving beyond procuring insurance for political risk but looking for comprehensive coverage that will go beyond traditional political risk claims. For example how can you receive compensation when you receive payment for your investment, but the government impedes your available to garner future cash flows?
It's impossible for commercial banks to get the return on risk capital that they're projecting without export flows; extractive projects are good for this because exports can generate hard currency which can be stored offshore to guarantee payments to lenders.
When investing abroad, especially in conflicted areas, there is a big place for multilateral organizations like IFC, World Bank, and OPIC that make investments in conflicted areas that the private market could not normally do possible through institutional expertise and advisement, and putting capital into the project.
In Dr. Howell's afternoon keynote, "Measure Twice, Cut Once: A Walk Through the Underbrush of Political Risk Assessment" -- the first part of the the title refers to a carpenter's adage -- and he translates that to political risk assessment. He emphasized the importance of understanding "what's happening in the village and on the ground," crediting his time in the Peace Corps as providing him with exposure to many countries. Howell then outlined his 5 axioms on political risk
Developing country governments are shifting away from a laissez-faire approach to FDI and trying to manage it for their countries’ benefit. NGOs are growing more powerful (e.g. Oxfam). Companies are subject to more regulatory and legal scrutiny than ever befor, even on deals that might have happened a long time ago. Great opportunities are today accompanied by great risks.
Increased insight can increase strategic clarity in volatile environments. Availability of information is not the core problem today (20 years ago accessibility of information was most pressing), but does that mean there is no political risk, only false expectations? What can companies do with business intelligence and why do they miss opportunities to understand their operating environment despite abundance of information?
Over the last ten years there has been an explosion in corporate appetite for business intelligence products and strategic guidance. Yet, in many ways the information which companies seek is often already at their fingertips. By their very nature companies are collectors of information. If they fail at this task they’re out of business. They have to be sensitive to the consumer environment, but at the same time be attuned to the local political environment. Effective companies are able to leverage existing processes in new ways, to gather, understand, and disseminate information on the operating environment and risk in targeted nations.
Why do I say mixed feelings?
On topic 1: the main issue tackled was...surprise....Nigeria. Had it not been for Hobbs to make things interesting, the talk would have been annoyingly correct. As for other things Fletcher people tend to care (alternative energy, good governance, and all that....) they were not considered main problems. As Collyns put it, oil companies ask themselves other questions, such as "where is the oil?"
And I wanted to scream: In Greeeeenlaaaand.