MANAGING POLITICAL RISK
Politica l Ris k , C ountry risk
Measuring ro pr ia tio n Policies
Analysis, Post ex p
BY DEVAJAY KAPUR (21055)
WHAT IS POLITICAL RISK?
Political risk refers to the risk that political
decisions, events, or conditions in a country could
significantly impact the profitability, operations,
or assets of individuals, businesses, or investors.
These risks arise from the unpredictability and
potential volatility of political processes and
institutions within a given country or region.
TYPES
Bribery Capital Controls License Cancellation
- Change to organization’s License to
- Forced hiring of 3rd-party - Limits on profit repatriation
Operate ahead of an election
consultants for contract bids - Administrative delays in approving
- Loss of Social License to Operate from
- Unforeseen border “taxes” capital transfers
lack or loss of local community support
Nationalization Protests/Strikes
Regulatory Change
- Forced sale of asset(s) to government - Industrial action and work stoppages
- Complex new environmental or labor
buyer at below-market prices at key supplier(s)
standards
- Politically-driven increase in state - Anti-government or anti-company
- Regulatory enforcement authority
ownership of joint ventures protests and road-blocks
handed to a state-owned company
Taxation War and Terrorism Contract Default
- Windfall taxes levied over “excessively - Industrial action and work stoppages
high” profits - Duplicate tax claims - Politically-driven debt default -
at key supplier(s) Politically
by/between central and local - Anti-government or anti-company
governments -driven failure to deliver on a contract
protests and road-blocks
INDICATORS OF A STABLE POLITICAL SYSTEM
NUTURING ENTREPRENEURS EASE OF DOING BUSINESS MINIMUM REGULATIONS
A necessary precondition for Complex regulations are costly to Wealth creation is made easier by stable
productive investment to take place implement and waste management rules governing society and fair and
is secure legal rights to own and sell time and other resources. Moreover, predictable application of laws
at least some forms of property. If reduced government intervention in administered by an independent judicial
property is not secure, people have the economy lowers the incidence system free of corruption. Such a legal
an incentive to consume their of corruption. The way to succeed in structure, which replaces official whim
resources immediately or transfer an unregulated economy is to with the rule of law, combined with a
them overseas, lest they be taken provide superior goods and services system of property rights and properly
away. Low taxes are also important to the market enforceable contracts, facilitates the
because they encourage productive development of free markets.
efforts and promote savings and
investment
COMMON MANIFESTATIONS OF POLITICAL RISKS
REGULATION AND AUSRERITY SOCIAL LICENSE TO STATE SPONSORED
TYPE CASH FLOW EXPROPRIATION
MEASURES OPERATE COMPETITORS
Quotas/tariffs, competition
Protection of national financial Social/environmental
laws; government lawful stakes
institutions or companies; evolving Various forms of taxation (on opposition to economic
in public companies
regulation of financial institutions transfer pricing, windfall profits, projects; brandbased boycotts
etc.)
ADVANCED ECONOMIES Recent examples include
Recent examples include Recent examples include
blocked mergers in “strategic”
increased regulatory scrutiny of oil Recent examples include opposition to shale gas
industries (e.g., transport,
and gas companies in Alaska windfall taxes in Australia projects in North America and
agriculture, energy) in North
leading to project delays western Europe
America
SOE merger and acquisitions
(M&A) activities; Promotion of
Safe haven regulation; regional or Asset expropriation; compulsory
Indigenous opposition to private national champions
bilateral agreements partnerships; retroactive fines
economic projects Recent examples include
support for Chinese, Indian
DEVELOPING ECONOMIES Recent examples include red tape Examples include regulatory
Recent examples include and Russian state-owned
affecting levels of foreign direct changes to increase government
delayed or abandoned enterprises tied to
investment in the former Soviet stakes in mining projects in
manufacturing projects in Asia development aid to African
Union, Asia and Latin America Africa
and Latin American
governments
HOW TO IDENTIFY POLITICAL RISKS ?
STAGE 1
In business risk management, political factors' impact on objectives
is assessed, distinguishing between real risks and perceived ones.
Data is gathered from consultants, subsidiaries, and industry
sources, with larger firms using specialized software. Scenarios are
developed, considering events affecting likelihood, with ongoing
data adaptation. Risks are prioritized based on probability, impact,
recent losses, and susceptibility to extreme events, enabling
effective resource allocation for resilience and growth.
IDENTIFICATION SCENARIO PRIORITIZING RISKS
Develop evidence-based risk scenarios
DEVELOPMENT
Define events influencing the probability Prioritize risks based on their materiality to
Divide the
using class
specific into
and smaller
relevant groups of
data sources.
of each scenario. the company's business objectives.
Larger companies may employ specialized
three or four. Ask each group to pick
data-mining software for tailored risk
Conduct detailed assessments with Criteria include probability, impact, recent
structured approaches to eliminate excess losses, board-level concerns, and
one assessment.
example of discourse from the
information. vulnerability to extreme events.
given materials (newspapers,
magazines, internet articles, etc.)
HOW TO MEASURE POLITICAL RISKS ?
STAGE 2
Stage 2 involves assessing and quantifying political risk scenarios using
tools like DCF analysis for financial impact estimation and organizational
network analysis for operational impact assessment. Risk managers
evaluate the company's ability to manage risks using an ERM diagnostic
tool. In the Measurement stage, political risk management enhances
capital performance estimation accuracy and identifies investment
opportunities. This involves translating projected events into measurable
metrics to assess risk against the organization's risk tolerance, leading to
decisions on risk acceptance, avoidance, or management.
EVALUATE QUANTIFY RISK MANAGEMENT
Evaluate each scenario's likelihood and
Divide the class
potential impactinto
on yoursmaller
business groups of Use methods like DCF analysis for financial
Translate risks into measurable metrics and
Consider historical data, expert opinions, effects and organizational
three or four. Ask each group to pick decide whether to accept, avoid, or mitigate
geopolitical analyses, and other relevant network analysis for operational
them based on predefined thresholds.
one sources
example of discourse
to assess from
the probability of riskthe implications.
given materials (newspapers,
magazines, internet articles, etc.)
STEPS OF MEASURING POLITICAL RISK
POLITICAL RISK : FORECASTING MODELS
BERI PBS
Incorporates various factors such as political Assesses political stability, governance quality,
Divide the
stability, class into
economic smaller regulatory
performance, groups of social unrest, and other factors to predict
environment,
three or four.and Asksocial
eachconditions
group to toassess
pick political risks in different countries. PRS
the risk levels in different countries and regions. provides risk ratings and forecasts
one example of discourse from the
given materials (newspapers,
magazines, internet articles, etc.)
DBEGSI
S&P
Deutsche Bank and the Eurasia Group
collaborated to develop a stability index model The S&P index measures political risk by
that assesses geopolitical risks and stability in evaluating factors such as stability, policy
various regions, particularly focusing on emerging uncertainty, geopolitical tensions, and regulatory
markets and geopolitical hotspots environments impacting financial markets and
economies.
HOW TO MANAGE POLITICAL RISKS ?
STAGE 3
After identifying and measuring political risks, companies adopt an effective
system for active risk management. The initial step involves mapping potential
risk management methods against priority risks. Various tools and processes
are available to help companies manage and mitigate political risks are below:
DIVERSIFICATION INSURANCE HEDGING
Spread operations across multiple regions or Consider purchasing political risk insurance
es,markets
internet articles,
to reduce etc.) on any single
dependence
Financial instruments (e.g., currency options,
from OPIC & MIGA to mitigate financial losses forward supply contracts, commodity hedging
jurisdiction's political stability. resulting from political events such as instruments) to limit financial exposure to
expropriation or currency inconvertibility. political risks
SUPPLY CHAIN JOINT VENTURES COMMUNITY
INITIATIVES
Mitigation techniques include agile supply chain
Divide the class
capabilities, into
dialogue withsmaller groups of
local governments, Partner with local company who Initiatives to address potential opposition to
hiringor
local workers, understands political risk environment investments include partnering with local
three four. Askand increased
each groupinvolvement
to pick and/or is in political favor with government companies, engaging in lobbying, and
with local business groups.
one example of discourse from the establishing sustainability programs.
given materials (newspapers,
COUNTRY RISK ANALYSIS
Other than political risk it is important to look at other aspects of country risk analysis. Country risk analysis is a process used
by businesses, investors, and financial institutions to assess various factors that may impact the political, economic, financial,
legal, operational, market, social, cultural, and environmental landscape of the country.
CULTURAL
Social and cultural factors that may impact
business operations, including demographics, social
norms, and cultural attitudes towards businesses.
ECONOMIC &
FINANCIAL
This encompasses analyzing economic indicators
such as GDP growth, inflation rates, currency
stability, and credit ratings to assess the country's
economic health and potential risks.
LEGAL MEASURING COUNTRY RISK
This involves evaluating the country's legal Country Risk Ratings: These ratings assess the risk of non-payment by companies in a specific country. They
framework, including contract enforcement, consider external conditions beyond a company’s control.
Quantitative and Qualitative Analysis: Combining both quantitative (numbers-based) and qualitative
property rights protection, and regulatory
(contextual) assessments helps measure risk.
compliance requirements Country Reports: Comprehensive analyses provide insights into specific countries’ risk profiles.
CASE STUDY: GREECE SOVERIGN DEBT CRISIS
BACKGROUND
Greece's 2009 sovereign debt crisis severely affected Greek banks due to their heavy exposure to
government debt, leading to funding challenges and a surge in non-performing loans (NPLs).
IMPACT
Greek banks faced liquidity shortages and capital adequacy concerns.
Non-performing loans soared amid economic recession and austerity measures.
RESPONSE
Bailout funds from international creditors aimed to recapitalize banks.
Restructuring and consolidation efforts were undertaken to enhance resilience.
Regulatory reforms focused on improving supervision and risk management.:
CURRENT STATUS
Greek banks have stabilized, but challenges persist due to regulatory pressures and low
interest rates.
The crisis highlighted risks of overexposure to sovereign debt and underscored the importance
of prudent risk management and structural reforms for financial stability.
EXPROPRIATION AND POST EXPROPRIATION POLICIES
Expropriation is the act of a government or authority taking private property for public use or benefit, often with
compensation paid to the property owner. However, expropriation can become a significant concern for businesses operating
internationally, especially in regions with unstable political environments, as it can occur without fair compensation.
INVESTMENT TREATIES TRANSPARENCY
Governments often negotiate bilateral Maintain transparency in the expropriation process,
investment treaties (BITs) or enter into multilateral including the rationale for expropriation, criteria for
agreements to protect foreign investments. They compensation, and procedures for dispute
provide platform for dispute resolution resolution
DIVERSIFICATION POLITICAL ENGAGEMENT
Diversifying investments across different
This involves evaluating the country's legal
regions and industries can help spread risk
framework, including contract enforcement,
and reduce the impact of expropriation on
property rights protection, and regulatory
overall business performance.
compliance requirements
CASE STUDY : The Tata Motors vs West Bengal Govt. Feud
BACKGROUND
The dispute between Tata Motors and the West Bengal government over
land acquisition for the Nano car factory in Singur stands as a pivotal mIn
2006, Tata Motors, led by Ratan Tata, announced plans to establish a
manufacturing plant in Singur to produce the Nano, a groundbreaking small
car. The West Bengal government, under Chief Minister Buddhadeb
Bhattacharjee, viewed this as a golden opportunity for industrialization and
economic growth in the region.
POLITICAL LANDSCAPE
West Bengal had been under the rule of the Left Front coalition, led by the
Communist Party of India (Marxist) (CPI(M)), for over three decades. The Left
Front had a strong presence in the state's politics and was known for its pro-
labor policies and land reforms. Even rising opposition party TMC was
against modern industrialization and emphasized on agriculture.
CASE STUDY : The Tata Motors vs West Bengal Govt. Feud
LAND ACQUISITION & LEGAL BATTLES
The state government invoked eminent domain to acquire the required land for the
project. However, this decision faced fierce opposition from local farmers, political
groups, and environmentalists who argued that it threatened their livelihoods and
the agricultural landscape.. In 2011, the supreme court ruled that the land
acquisition process was flawed and ordered the return of land to the farmers.The
court ordered the return of the land to 9,117 landowners, declaring the acquisition in
Singur as "illegal"
DECISION TO RELOCATE
Amidst the escalating tensions and uncertainty, Tata Motors took a decisive
step in 2008. Faced with persistent protests and a challenging political
climate, Ratan Tata announced the relocation of the Nano factory to Gujarat.
This move marked a significant setback for West Bengal's aspirations of
becoming an industrial hub.
CASE STUDY : The Tata Motors vs West Bengal Govt. Feud
POLITICAL RAMIFICATIONS & RECENT DEVELOPMENTS
The Singur controversy had broader political ramifications. The opposition
utilized the issue to criticize the ruling government's handling of industrial
projects and advocate for greater transparency in land acquisition
processes. In 2023, Tata Motors won a major victory in court against the
West Bengal government. An arbitration tribunal awarded the company Rs
766 crore, along with interest, in the Singur plant case
CONCLUSION
The Tata Singur case offers valuable insights into effectively managing
political risk. Effective engagement with stakeholders, including government
officials, local communities, and political leaders, is essential to navigate
political landscapes successfully. Comprehensive risk assessments should be
conducted to identify potential challenges, accompanied by robust
contingency plans.
