In ancient times, travellers on the Silk Road often faced significant risks, including being attacked by bandits, caught up in wars, delayed by avalanches, laid up by sickness, and sometimes even dying of thirst or hunger. We like to think that these kinds of risks are somewhat diminished these days, but what is the risk environment on the New Economic Silk Road really like now?
When considering such questions, business leaders and strategists often try to analyse country risk during the project feasibility stage, and only initiate projects in countries with manageable security and health risks. The problem with such an approach is that it assumes that risk is static; our experience, however, is that risk evolves over time driven by many factors, including:
- Changes of government. The government that enthusiastically approved your project to build infrastructure, 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 toward foreign investment or your project. In most countries this is complicated by the power of provincial and local governments, which typically have significant power over foreign investment, particularly infrastructure projects requiring the 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 programmes, and delays or defaults in payments for infrastructure projects. Some countries have already dealt with this problem by seeking loans from international organisations 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 mobilisation through the various stages of construction to commissioning and operations, they also have impacts on local communities. Your project may compete with local communities for scarce resources like water, power, road space and skilled labour. Large projects tend to create winners and losers in local communities: some will be happy because they get jobs or contracts, but some will miss out and become hostile or easily radicalised by extreme elements. Community risk is not always obvious at the commencement of projects when the focus is usually on technical issues.
These changing risks can trip up unwary investors, but what can be done about it? The most effective solution is to identify problems well in advance. Companies that do this will have the opportunity to avoid or reduce the impact of a problem by managing stakeholders; companies that don’t will find themselves in crisis situations that will be costly and, in some cases, lead to project failure. Here are some principles that will help:
- Understand politics at the central, provincial and local level. This requires professional research at the start of the project, and the development of a system to monitor changes. Power mapping to establish who has the influence and authority to assist your business may also be necessary, as well as effective engagement plans for those key stakeholders.
- Establish communication mechanisms. People whom you do not communicate with are usually indifferent to your problems, while people who are ignored can become your enemies. You will need to establish ways to have meaningful dialogue with stakeholders. Firstly, 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 assist community leaders in getting to meeting locations to share their 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.
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Analyse all risks. The full spectrum of risk should be identified and analysed. 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 recognises that there will always be more risks than resources to deal with them. Professional risk managers assist project managers by identifying and prioritising risks so that resources can be allocated efficiently.
- Build walls and bridges. Effective security management is a spectrum with walls, alarms and guards at one end, and conversation at the other. 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 security and cultural awareness 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 risks and crises.
- Deal with unpleasant or ethical issues. All large projects have their share of unforeseen problems. These 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 both political and cultural issues, as well as technical and operational ones.
The New Economic Silk Road promises to deliver huge benefits for China and its partner countries, but 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.