«CONFERENCE REPORT October 23, 2009 The Fletcher School of Law and Diplomacy, Tufts University Hosted and Sponsored by: Conference Summary Political ...»

CONFERENCE REPORT

October 23, 2009

The Fletcher School of Law and Diplomacy,

Tufts University

Hosted and Sponsored by:

Conference Summary

Political risk mitigation techniques have become strategic components to enterprise risk

management as uncertainty surrounding government regulation, expropriation, currency

inconvertibility, and political violence becomes more common in today’s volatile economic

environment. On October 23, 2009, professionals from more than 100 organizations and graduate students from academic institutions throughout the northeastern United States gathered at The Fletcher School of Law and Diplomacy, Tufts University for its inaugural political risk conference. Hosted by The Fletcher School’s Political Risk Forum (FPRF) and Center for Emerging Market Enterprises (CEME), with corporate sponsorship from ExxonMobil, Managing Political Risk: A Cross-Sector Conference on Political Risk Measurement and Mitigation fostered a range of discussions on timely political risk measurement and mitigation trends and techniques from the international investment and business perspective.

Fletcher’s one-day conference served as a forum for the dissemination of ideas and best practices on political risk mitigation for business professionals and graduate students focusing on business and international affairs. The conference featured two keynote presentations – Dr.

Louis T. Wells of Harvard Business School as the morning keynote speaker, and Dr. Llewellyn Howell of the Thunderbird School of Management as the afternoon keynote speaker – and four distinct panels: Energy and Resource Nationalism; Political Risk and Business Intelligence;

Investment and Trade Finance in Conflict-Affected Countries; and Political Risk Insurance (PRI).

Moderated by leading Fletcher School scholars, the panels bridged professional and academic expertise in business, law, finance, conflict resolution, and natural resource policy within the political risk sphere.

The Fletcher School of Law and Diplomacy | Political Risk Conference Report Conference Panel Overviews Panel I: Energy and Resource Nationalism As oil and gas firms vie to secure raw materials around the world, the resurgence of resource nationalism in several producing countries has added a complex layer of risks and opportunities that must be considered carefully prior to investment. This panel explored the various strategies and tactics such firms are implementing to effectively address these issues. A cross-section of industry players with differing perspectives on the matter were represented.

Panel II: Political Risk and Business Intelligence In today's global economy, processes of political due diligence are a prerequisite to multinational investments. In the current geopolitical climate, investments are subject to a range of risks that include terrorism, unstable governments, and violent domestic groups, to name a few. This panel examined the diverse range of political risks that an investment can be exposed to, the regional variations to political risk, the methods that are often employed to assess them, and opportunities that exist for investing in today's world.

Panel III: Investment and Trade Finance in Conflict-Affected Countries There are more countries transitioning out of conflict today than there are in conflict.

Nurturing entrepreneurship, identifying investment opportunities, ensuring post‐conflict reconstruction and development and providing support and encouragement to local businesses are just some of the considerations in modern post-conflict economies. This panel explored risks and opportunities to facilitate trade, business investment, and operations in countries transitioning out of conflict and fragile states. The panel examined such risks from a comparative perspective that included export credit agencies, private and public investors, and private businesses.

The Fletcher School of Law and Diplomacy | Political Risk Conference Report Panel IV: Investment Guarantees and Political Risk Insurance Political violence, expropriation, and inconvertibility: these are risks that hinder investment in regions that could benefit exceptionally from additional business and job creation. Investment guarantees and political risk insurance (PRI) can cover these risks and facilitate investment in these regions. This panel assessed the circumstances in which investment guarantees and PRI are effective tools for mitigating company and project specific risks, as well as how these products can preserve or add value to an investment.

Morning Keynote Address Professor Louis T. Wells, Herbert F. Johnson Professor of International Management at Harvard Business School, served as the conference’s morning keynote speaker. Professor Wells set the tone for the day’s proceedings, identifying and subsequently defining what exactly constitutes “political risk.” He highlighted the common fallacy held by many firms that political risk insurance provides comprehensive coverage for all scenarios when, in fact, it does not.

Professor Wells also provided a terse overview of governments' perspective when involved in ventures with private investors.

Professor Louis Wells’ Main Points:

Political risk can be defined as actions taken by a host government that lower an investor's rate of return below projected levels.

Natural disasters, commercial risk, poor firm management and stiff competition or unfavorable market conditions cannot be defined as political risk.

Political risk insurance can protect firms against actions of nonpayment but do not provide comprehensive coverage for all scenarios.

Contract renegotiation is more likely in situations when changes in global markets conditions cause the investor to earn windfall profits or if financial crises alter the conditions of a negotiated deal.

The Fletcher School of Law and Diplomacy | Political Risk Conference Report Recourse to international arbitration for the settlement of investment disputes remains unattractive for investors and governments alike due to the prohibitive costs of proceedings, the length of the process, the difficulty in enforcing arbitral awards, and the likely destruction of the business relationship.

Panel I: Energy and Resource Nationalism The Energy and Resource Nationalism panel provided an overview of the energy sector’s current structure. The panel sought to address a number of questions, including: the energy industry’s approach to political risk assessment; how the current environment of increased resource nationalism will affect the operations of international oil companies (IOCs);

and, whether IOCs should invest in local infrastructure. Panelists concurred that political risk in the energy sector runs parallel to the demand cycle in the market. Evaluating the expansion strategies that were being followed by Chinese and Indian national oil companies, the panelists noted that these companies, normally criticized for having low margins, actually have employed strategies more successful than initially anticipated. When commodity prices drop, national oil companies are typically better able to renegotiate the terms of their contracts.

Energy and Resource Nationalism Panelists:

Mikkal Herberg, Director, Global Energy & Economics (former), ARCO David Hobbs, VP & Managing Director of Global Research, CERA Napier Collyns, Cofounder, Global Business Network Antoine Halff, Head of Energy Research, Newedge USA Professor Bruce Everett, Adjunct Associate Professor of International Business, The Fletcher School (Panel Moderator)

Energy and Resource Nationalism Panel’s Main Points:

Only 5% of worldwide oil reserves are privately owned, with the balance controlled by governments. IOCs, therefore, only have access to resources through contract.

The Fletcher School of Law and Diplomacy | Political Risk Conference Report Although all companies that invest abroad conduct some form of political risk analysis, IOCs are guided by the simple imperative of investing where the resources are.

Political risks in resource-rich countries are continuous and have traditionally shifted along a spectrum according to market cycles; as oil prices rise, governments tend to demand a larger share of the revenue, thus increasing political risks of contract renegotiation or expropriation.

However, today’s IOCs need to consider risks not only stemming from fickle government landlords, but also from a range of other stakeholders.

Large, integrated IOCs have traditionally been the only organizations capable of efficient production. However, today they are facing new challenges, including the advent of service companies that are more responsive to governments and have become increasingly competitive in terms of their own technology and expertise.

Chinese and Indian national oil companies (NOCs) were cited as having particularly interesting strategies due to their deep pockets and willingness to absorb greater risks.

For instance, the Chinese are often criticized for accepting low margins in exchange for ensuring access to reserves.

NOCs may be employing a more sophisticated strategy than it initially appears, as they understand the fungibility of contracts; as prices drop, they have been able to renegotiate the terms of their contracts with the governments of Sudan, Angola, and Kazakhstan, among others. Thus, a scenario where IOCs are increasingly crowded out by partnerships between NOCs and service firms could unfold in the coming years.

Because major IOCs are capable of sustaining through periods of decreased revenues and margins, it is largely expected that they will remain just as relevant in the future as they have been in the past.

A market’s institutional environment largely is largely determinative of the outcome.

The more cash that is pumped into an economy characterized by weak institutions and corruption, the more likely it is that it will be used irresponsibly and inefficiently.

The Fletcher School of Law and Diplomacy | Political Risk Conference Report Panel II: Political Risk and Business Intelligence Increasing regulatory and legal scrutiny surrounding today’s investment climate fuels a commensurate need for high-quality political risk and business intelligence. While this increased insight should enhance strategic clarity in volatile environments, companies continue to encounter challenges in such situations. The Political Risk and Business Intelligence panel aimed to investigate the gap that exists between information provided by intelligence firms and its incorporation into corporate strategic decision-making mechanisms. The panel focused its discussion on discerning why business intelligence and political risk assessments are not more widely incorporated into firms’ strategic decision-making processes, despite clear evidence of the associated benefits. Though the panelists argued that certain sectors of the economy were more responsive to business intelligence than others, they stressed the valuable role that their organizations play in providing clients with salient and actionable intelligence that is not accessible via open, public sources. Furthermore, because business intelligence requires constant monitoring, only political risk firms can provide the timely analysis needed for decision-making. As generic approaches cannot be effectively applied to a wide variety of challenges and risks that may arise, political risk firms are uniquely suited to assist companies in structuring customized solutions.

Political Risk and Business Intelligence Panelists:

Mike Baker, President & Founder, Diligence LLC Nelson Cunningham, Managing Partner, McLarty Assoc.

David Gordon, Director of Research, Eurasia Group Peter Nolan, VP Corporate Investigations, Control Risks Group Andrew Marshall, Managing Director, Kroll Professor Brian Ganson, JD, Adjunct Professor of International Negotiation, The Fletcher School (Panel Moderator) The Fletcher School of Law and Diplomacy | Political Risk Conference Report

Political Risk and Business Intelligence Panel’s Main Points:

The key value proposition of business intelligence is providing timely analysis that answers the right questions.

Political risk assessment should look beyond individual projects; it should concern itself with how to structure a portfolio.

The reason that some companies are more eager to invest in risky opportunities, while others are more conservative in approach, often comes down to personalized decision

Business intelligence is about constant monitoring and contingency planning. It must be conducted ex-ante, and as each dispute is unique, it must be addressed with tailored

Though the internet and other public sources provide easy access to generic information, it rarely translates into substantive and actionable information.

Responsiveness to business intelligence varies by sector. Extractive and financial services firms are very responsive to intelligence, whereas retail firms are less so. Clients that are sensitive to the consumer environment tend to be more attuned to the political

Assessing corruption issues in a new operating environment is crucial to a firm’s success. American companies feel a competitive disadvantage due to the Foreign Corrupt Practices Act, which contributes to why they are the leading consumers of business intelligence.

The three stages that firms undertake are identifying, understanding, and applying business intelligence to mitigate political risks. The shift from the second to the third

The Fletcher School of Law and Diplomacy | Political Risk Conference Report Afternoon Keynote Address Dr. Llewellyn Howell, Emeritus Professor of International Management of The Thunderbird School of Management, delivered the conference’s afternoon keynote address.