Dragon traps on the Silk Road
- Investment Support
Russia/CIS Riskwatch - Issue 11 - January 2017
Dragon traps on the Silk Road
What is the risk environment really like on New Economic Silk Road? In ancient times travelers were attacked by bandits, caught up in wars, delayed by avalanches, laid up by sickness and sometimes died of thirst or hunger. We like to think that these are risks that we no longer need to worry about. Business leaders and strategists try to analyze country risk during the project feasibility stage and only initiate projects in countries with manageable security and health risks.
The problem with this approach is that it assumes that risk is static. Our experience is that risk evolves over time driven by many factors including:
- Changes of government. The government that enthusiastically approved your project to build infrastructure, to produce resources or build a manufacturing plant can change through elections, military coups or the death of a leader. The new government may have a different attitude to foreign investment or your project. In most countries this is complicated by the power of provincial and local government who typically have significant power over foreign investment, particularly infrastructure projects requiring to use of land and utilities. We have already seen examples of this in the past two years causing project delays and cost overruns while contracts are renegotiated.
- Changes in the economic situation. The global commodity price slump is reducing revenues in many countries. Countries reliant on oil and gas royalties are particularly impacted. Problems accruing from this situation include increased social unrest as governments reduce social programs and delays or defaults in payments for infrastructure projects. Some countries have already dealt with this problem by seeking loans from international organizations but many have not, or cannot. This problem should be monitored closely in the coming year as it is likely to get worse in many countries.
- Community risk. We typically view country risk as impacting on our projects but as projects expand from mobilization through the various stages of construction to commissioning and operations they exert impacts on local communities. Your project will compete with local communities for scarce resources like water, power, road space and skilled labour. Large projects always create winners and losers in local communities. Some will be happy because they get jobs or contracts. Some will miss out and become hostile or easily radicalized by extreme elements. Community risk is not always obvious at the commencement of projects where the typical focus is on technical issues.
These changing risks will trap unwary dragons! What can be done about it? The most effective solution is to identify the problems well in advance. Companies that do this will have the opportunity to avoid or reduce the impact of the problem by managing stakeholders. Companies that don’t do this will find themselves in crisis situations that will be costly and least and in some cases cause project failure. Here are some principles that will help.
- Understand politics at central, provincial and local level. This requires professional research at the start of the project and development of a system to monitor changes. It may require power mapping to establish who has the influence and authority to assist your business.
- Establish communication mechanisms. People you do not communicate to with are indifferent to your problems. People who are ignored become your enemy. You will need to establish ways to have meaningful dialogue with stakeholders. In the first place this involves identification of your own spokespersons and development of messages. You then need to arrange meetings with stakeholders. In some cases it helps to be proactive and assisting in getting communities leaders to meeting locations to hear concerns. Community leaders will be demanding on behalf of their constituencies. It will be important to set boundaries and make clear what is reasonably possible and what is not. It is also important to build trust.
- Analyze all risks. The full spectrum of risk should be identified and analyzed. There is no point having the world’s best security system only to find your project is unable to access land or water because of political issues. Risk management is an approach that recognizes that there will always be more risks than resources to deal with them. Professional risk managers assist project managers by identifying and all prioritizing risks so that resources can be allocated efficiently.
- Build walls and bridges. Security management is a spectrum with walls, alarms and guards at one end and conversation at the other. The ideal way to manage security problems is via conversations. Realistically most projects require a mixture of physical security and dialogue to solve security problems. It is better to have more talking and less physical security if possible.
- Train your employees. It is important that all employees understand the risks to themselves and the project. This will include cultural awareness and security training to ensure accidental offence is not caused which may strain relations with local communities leading to costly blockages or labour disputes. Managers also require separate training on how to identify and manage risk and crisis.
- Deal with unpleasant or ethical issues. All large projects have their share of unpleasant or ethical issues. This may include violent altercations between your workers and locals in bars, vehicle accidents, mistakes and corruption. Form an incident management team and deal with these situations as if they were a crisis. Proactively managing these issues pays off in the longer term.
- Appoint broadly skilled risk managers. Operations in foreign countries attract unfamiliar and ever changing risks. Identification and management of these risks requires broadly skilled people who can understand political and cultural issues as well as technical and operational issues.
The New Economic Silk Road promises to deliver huge benefits for China and its partner countries. The enormity of the project will undoubtedly attract a wide range of unforeseen risks. In order to be successful companies ‘going out’ need a high order of risk management delivered by highly skilled personnel.