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8/3/2019 Political Risk Analysis & Investment Decisions IRM
http://slidepdf.com/reader/full/political-risk-analysis-investment-decisions-irm 1/22
The Institute of Risk Management
Political Risk Analysis and
Investment Decisions
Session D11
John Maltby, Associate Director and Head of Political Risk,Control Risks Group
Matthew Horrox, Political Risk Consultant,
Control Risks Group
8/3/2019 Political Risk Analysis & Investment Decisions IRM
http://slidepdf.com/reader/full/political-risk-analysis-investment-decisions-irm 2/22
The Institute of Risk Management
Session D11: Political Risk Analysis and Investment Decisions
KEY QUESTIONS / TODAY’S AGENDA
• What is political risk?
• Why are political risks important for investmentdecisions and are decision makers doing enough to
assess them?
• What tools can we use?
• How do we do it?
• Your turn: a case study
8/3/2019 Political Risk Analysis & Investment Decisions IRM
http://slidepdf.com/reader/full/political-risk-analysis-investment-decisions-irm 3/22
The Institute of Risk Management
Session D11: Political Risk Analysis and Investment Decisions
KEY QUESTIONS / TODAY’S AGENDA
• What is political risk?
• Why are political risks important for investmentdecisions and are decision makers doing enough to
assess them?
• What tools can we use?
• How do we do it?
• Your turn: a case study
8/3/2019 Political Risk Analysis & Investment Decisions IRM
http://slidepdf.com/reader/full/political-risk-analysis-investment-decisions-irm 4/22
The Institute of Risk Management
Session D11: Political Risk Analysis and Investment Decisions
WHAT IS POLITICAL RISK?
A traditional narrow definition: often used by insurance
providers.
“Political risks arise from the unforeseen actions or
inaction of a foreign or third country .
These risks can frustrate the payment and profitability of
all types of contract and investment. They can also affect
the safe repayment of facilities and loans to financing banks and lenders.”
AON Crisis Management - 2004
8/3/2019 Political Risk Analysis & Investment Decisions IRM
http://slidepdf.com/reader/full/political-risk-analysis-investment-decisions-irm 5/22
The Institute of Risk Management
Session D11: Political Risk Analysis and Investment Decisions
WHAT IS POLITICAL RISK?
A broader definition: perhaps more relevant to
companies planning to invest abroad.
“Political risks, as defined as all non-commercial risks, are
inherent and often hidden in a country’s political, business
and cultural environment. They can have financial,operational, security and reputational impacts.
Corruption, direct action, bureaucracy, poor stakeholder
relations, political shifts, terrorism, legal and regulatory irregularities, religion and health can all be sources of
such risks.”
Control Risks Group - 2004
8/3/2019 Political Risk Analysis & Investment Decisions IRM
http://slidepdf.com/reader/full/political-risk-analysis-investment-decisions-irm 6/22
The Institute of Risk Management
Session D11: Political Risk Analysis and Investment Decisions
WHAT IS POLITICAL RISK?
Some example sources of political risk
• Political: Shifts in power
• Terror: 9/11, Turkey, Russia, Spain….
• War and Civil Conflict: Iraq, Kashmir, Africa, Middle East
• Finance: Asian & South American financial crises
• Health: disruption from SARS, Asian Bird Flu, HIV/AIDS
• Business Trends: Greater corporate social responsibility,transparency and fair trade
• Environmental: Shell Brent Spa, Baku-Ceyhan pipeline
8/3/2019 Political Risk Analysis & Investment Decisions IRM
http://slidepdf.com/reader/full/political-risk-analysis-investment-decisions-irm 7/22
The Institute of Risk Management
Session D11: Political Risk Analysis and Investment Decisions
KEY QUESTIONS / TODAY’S AGENDA
• What is political risk?
• Why are political risks important for investmentdecisions and are decision makers doing enough to
assess them?
• What tools can we use?
• How do we do it?
• Your turn: a case study
8/3/2019 Political Risk Analysis & Investment Decisions IRM
http://slidepdf.com/reader/full/political-risk-analysis-investment-decisions-irm 8/22
The Institute of Risk Management
Session D11: Political Risk Analysis and Investment Decisions
WHY ARE POLITICAL RISKS IMPORTANT FOR INVESTMENTDECISIONS?
Investment destinations often in:
• Unstable, unpredictable, complex or hostile countries
– Politically
– Economically
Investments often require:
• Large sunk costs upfront
• Staff to relocate to project site
• Reliance on local infrastructure, institutional safeguardsand inputs (material and labour)
8/3/2019 Political Risk Analysis & Investment Decisions IRM
http://slidepdf.com/reader/full/political-risk-analysis-investment-decisions-irm 9/22
The Institute of Risk Management
Session D11: Political Risk Analysis and Investment Decisions
WHY ARE POLITICAL RISKS IMPORTANT FOR INVESTMENTDECISIONS?
Investment concerns:• Stability, predictability and ethical standards of business
environment over project life
• Reliability of local labour force, infrastructure, partners(including suppliers, customers and distributors),
government, legal system and bureaucrats
• Safety and security of assets, personnel and proprietaryinformation
Affecting H&S of personnel, reputation, finances
8/3/2019 Political Risk Analysis & Investment Decisions IRM
http://slidepdf.com/reader/full/political-risk-analysis-investment-decisions-irm 10/22
The Institute of Risk Management
Session D11: Political Risk Analysis and Investment Decisions
ARE DECISION MAKERS DOING ENOUGH?
• Over estimate government action and over reliance onpolitical risk insurance, which:
– Provides cover for highly unlikely action (e.g. expropriation)
– Excludes cover for possible actions (e.g. war with nemesis)
• Under estimate other stakeholders, institutional or
cultural norms• Poorly understood political risks
– Too difficult and perhaps “woolly” or subjective therefore
ignored – Economics more straight-forward and “scientific” therefore
central to decisions
– Economists, bankers or project sponsors often assume they
are qualified to make political assessments
8/3/2019 Political Risk Analysis & Investment Decisions IRM
http://slidepdf.com/reader/full/political-risk-analysis-investment-decisions-irm 11/22
The Institute of Risk Management
Session D11: Political Risk Analysis and Investment Decisions
KEY QUESTIONS / TODAY’S AGENDA
• What is political risk?
• Why are political risks important for investmentdecisions and are decision makers doing enough to
assess them?
• What tools can we use?
• How do we do it?
8/3/2019 Political Risk Analysis & Investment Decisions IRM
http://slidepdf.com/reader/full/political-risk-analysis-investment-decisions-irm 12/22
The Institute of Risk Management
Session D11: Political Risk Analysis and Investment Decisions
WHAT TOOLS CAN WE USE?
For Comprehensive Project Risk Assessments:
• Political risk assessment• Stakeholder analysis
• Due diligence on partners
• Security survey
• Business continuity, crisis management planning
As well as:
Financial / economic feasibility study / modelling
8/3/2019 Political Risk Analysis & Investment Decisions IRM
http://slidepdf.com/reader/full/political-risk-analysis-investment-decisions-irm 13/22
The Institute of Risk Management
Session D11: Political Risk Analysis and Investment Decisions
WHAT TOOLS CAN WE USE?
For Comprehensive Project Risk Assessments:
• Political risk assessment• Stakeholder analysis
• Due diligence on partners
• Security survey
• Business continuity, crisis management planning
As well as:
Financial / economic feasibility study / modelling
8/3/2019 Political Risk Analysis & Investment Decisions IRM
http://slidepdf.com/reader/full/political-risk-analysis-investment-decisions-irm 14/22
The Institute of Risk Management
Session D11: Political Risk Analysis and Investment Decisions
KEY QUESTIONS / TODAY’S AGENDA
• What is political risk?
• Why are political risks important for investmentdecisions and are decision makers doing enough to
assess them?
• What tools can we use?
• How do we do it?
• Your turn: a case study
8/3/2019 Political Risk Analysis & Investment Decisions IRM
http://slidepdf.com/reader/full/political-risk-analysis-investment-decisions-irm 15/22
The Institute of Risk Management
Session D11: Political Risk Analysis and Investment Decisions
HOW DO WE DO A POLITICAL RISK ASSESSMENT?
Total Risk Assessment Methodology (TRAM)
• Identifies risks
• Puts risks in context
• Looks at impact
• Looks at likelihood
• Looks at controls• Arrives at recommendations
TRAM
Total Risk Assessment
Methodology
TRAMTRAM
Total Risk AssessmentTotal Risk Assessment
MethodologyMethodology
CR CR GG
8/3/2019 Political Risk Analysis & Investment Decisions IRM
http://slidepdf.com/reader/full/political-risk-analysis-investment-decisions-irm 16/22
The Institute of Risk Management
Session D11: Political Risk Analysis and Investment Decisions
TOTAL RISK ASSESSMENT METHODOLOGY (TRAM)
Identify all appropriate risks
Assess the key risks & triggers
Assess risk controls
Manage and monitor the risks
Evaluate the impact and likelihood
T AL RI S K
A S S E
S S ME NT ME
T H OD OL O G
Y
T O
Agree & communicate objectives
Establish the risk landscape
8/3/2019 Political Risk Analysis & Investment Decisions IRM
http://slidepdf.com/reader/full/political-risk-analysis-investment-decisions-irm 17/22
The Institute of Risk Management
Session D11: Political Risk Analysis and Investment Decisions
IDENTIFYING RISKS
Security
of Physical
Assets
Security
of Personnel
Security
of Financial
Assets
Political
Risks
Economic
Risks
Legal &
Institutional
Risks
Business
Culture Risks
Reputational
Risks•Starting point
for analysis
• List possiblerisks using
category
checklist:
8/3/2019 Political Risk Analysis & Investment Decisions IRM
http://slidepdf.com/reader/full/political-risk-analysis-investment-decisions-irm 18/22
The Institute of Risk Management
Session D11: Political Risk Analysis and Investment Decisions
ASSESSING IMPACT AND LIKELIHOOD
CRITICAL
SERIOUS
SERIOUS
LIMITED
ROUTINE
E
X T R E M E
M A J O R
M O D E R A T
E
M I N O R
I N S I G N I F I C A N T
I M P A C T
LIKELIHOOD
• Plot identified
risks
• Use knowledgeand judgement
• Facilitates risk
prioritisation
RARE UNLIKELY CREDIBLE LIKELY ALMOST
CERTAIN
8/3/2019 Political Risk Analysis & Investment Decisions IRM
http://slidepdf.com/reader/full/political-risk-analysis-investment-decisions-irm 19/22
The Institute of Risk Management
Session D11: Political Risk Analysis and Investment Decisions
FURTHER STEPS
For each risk you would go on to:
• Identify the triggers for each risk• Identify controls (security provisions, contingency plans
etc.) in place or proposed
• Determine possible and desirable controls• Undertake a gap analysis
• Prioritise action to be taken and make
recommendations
8/3/2019 Political Risk Analysis & Investment Decisions IRM
http://slidepdf.com/reader/full/political-risk-analysis-investment-decisions-irm 20/22
The Institute of Risk Management
Session D11: Political Risk Analysis and Investment Decisions
KEY QUESTIONS / TODAY’S AGENDA
• What is political risk?
• Why are political risks important for investmentdecisions and are decision makers doing enough to
assess them?
• What tools can we use?
• How do we do it?
• Your turn: a case study
8/3/2019 Political Risk Analysis & Investment Decisions IRM
http://slidepdf.com/reader/full/political-risk-analysis-investment-decisions-irm 21/22
The Institute of Risk Management
Session D11: Political Risk Analysis and Investment Decisions
CASE STUDY
In 20 minutes, in groups:
• Review case study project documentation
• Identify potential risks (using wheel of risks for ideas)
• Assess impact that each risk have on investor, and thelikelihood of it manifesting
• Plot risks on an Impact-Likelihood Matrix
• Groups will feedback at the end
8/3/2019 Political Risk Analysis & Investment Decisions IRM
http://slidepdf.com/reader/full/political-risk-analysis-investment-decisions-irm 22/22
The Institute of Risk Management
QUESTIONS
Session D11
John Maltby, Associate Director and Head of Political Risk,
Control Risks Group
Matthew Horrox, Political Risk Consultant,
Control Risks Group