NU Online News Service, April 29, 3:34 p.m. EST
Many construction firms significantly underestimate the political risks they face when moving into emerging markets, according to a study by Zurich Financial Services Group.
Those finding were contained in the Swiss firm's latest insights report labeled "A global perspective for project owners on managing construction risks."
The report examines "where the pitfalls are" for firms tempted to expand into emerging markets where governments are turning to foreign private sector companies to finance, build and deliver essential services.
"While emerging markets offer enhanced opportunities, these projects also present formidable political risks, including abrupt changes in a host government, abrupt changes to existing policy, the unlawful calling of guarantees, an act of war, civil strife, sabotage, terrorism or a currency crisis," said a statement from Michael P. Bond, executive vice president, Zurich International Surety, Credit & political Risk.
"Given that political risk is largely unavoidable, the question hinges around how the risk can be mitigated. Understanding the political, economic and legal context of a country is the key," he added.
The report said increased political stability and transparency in some emerging markets, "such as the former Communist states of Eastern Europe, have been matched by worsening conditions in parts of Africa, Central Asia and even Latin America."
"Changes in political leadership have often reversed the course of once-friendly governments, with contracts reopened for negotiation and government policies implemented to gain control of foreign owned projects," the report continued.
A map with the report, evaluating areas with high possibility of confiscation, expropriation and nationalization (CEN) red flags Venezuela, Republic of the Congo, Zimbabwe, Somalia, Yemen, Syria, Iraq, Afghanistan and Belarus.
Zurich's study looks at areas of importance to construction projects including hazard analysis, risk profiling, alternative construction methods and enterprise risk management.
Among other advice in the report, project owners and contractors must do more rigorous hazard analysis of new building products and processes and be careful of "the 'fly-fix-fly' method of analysis that makes assumptions about safety and quality of materials and processes.
It suggests among other things that project owner-managers consider are: whether there contractor has recently changed suppliers, is venturing into projects different from previous experience, is using materials in new applications.
The report can be accessed at http://zdownload.zurich.com/main/insight/construction.pdf.
