For multinational companies venturing into the global resources sector, navigating political risk is a constant challenge. This ever-changing landscape demands a nuanced understanding of new threats and effective mitigation strategies. Let's explore four key questions:
How have political risks evolved in the past five years?
While traditional concerns like expropriation, political violence, and currency restrictions remain, newer threats have emerged:
- Empowered local voices: Local communities, regional governments, and NGOs now wield significant influence, potentially disrupting operations through protests, legal challenges, or social license withdrawal.
- Transnational crime and corruption: Criminal networks and corrupt officials can manipulate governments and undermine investments.
- Non-traditional competitors: State-owned companies, sovereign wealth funds, and other players can intensify competition, creating additional risk.
How has the global economy impacted political risks?
Booming commodity prices (until 2008) fueled pressure: Governments sought to extract higher revenue from foreign investors through renegotiated contracts, new taxes, or resource nationalism policies.
The disconnect between falling prices and ongoing pressure: Despite the recent drop in commodity prices, governments in many developing countries haven't adjusted their expectations, leading to continued pressure on investors.
The rise of non-traditional competitors: Flush with petrodollars during the boom, these players increased the risk profile for established companies, potentially influencing governments and resource allocation.
Barrick's perspective on political risk insurance (PRI):
Barrick uses PRI strategically but with reservations:
- Coverage limitations: Existing PRI products often focus on traditional risks and neglect newer threats, leaving some vulnerabilities unaddressed.
- Diminished deterrence: International organizations issuing PRI may have less influence in certain countries, reducing the perceived deterrent effect.
- Insurer reluctance: Some concerns exist about the level of advocacy insurers provide to clients in loss-avoidance situations.
Tools beyond PRI for managing political risk:
While PRI can be valuable, other tools play a crucial role in proactive risk mitigation:
- Comprehensive risk assessment: Thoroughly evaluating the country, region, and project before committing is essential. Continuous monitoring and adapting mitigation strategies are crucial.
- Fair deals and stakeholder alignment: Structuring deals that benefit all stakeholders, including local communities and governments, fosters long-term stability and reduces risk.
- Local partnerships with shared success: Choosing partners who contribute to the project and only profit if it succeeds aligns interests and promotes risk-sharing.
- Investment treaties and international arbitration: Utilizing existing legal frameworks can provide additional protection and dispute resolution mechanisms.
- Fiscal and tax stabilization agreements: Negotiating clear agreements beforehand can bring certainty and stability to projects.
- Building a strong social license: Proactive engagement with local communities and transparent communication are key to securing and maintaining the local "license to operate."
- Unwavering transparency: Adherence to ethical practices and complete transparency in all operations builds trust and mitigates risks associated with corruption or hidden agendas.
Conclusion:
Political risk is a dynamic force constantly evolving with global economic, social, and political trends. While the challenges remain significant, companies equipped with a deep understanding of the evolving landscape and a comprehensive risk management strategy can navigate these complexities and operate successfully in the global resources sector. Remember, the success of your business hinges on your ability to assess, adapt to, and effectively manage this moving target.