Risk 360

Risk Management – Operating across overseas geographies

Today the world is uncertain and is facing a CUVVI environment. CUVVI stands for Complex, Unpredictable, Vague, Volatile, and Interlinked, i.e., an incident anywhere globally will impact everyone somehow. Due to the complex environment, companies across the globe need to be more prudent and continually alter their business models to adapt to such an environment to minimise the impact on the organisation’s business goals. The complexity further increases for the organisations importing or exporting their goods/services or operating overseas. These companies are likely to see a multi-fold increase in their risk landscape. Many such scenarios need to be factored in by organisations while drawing their plans from now on. Following and many more such set of headlines needs to be considered by Organisations operating in the global arena in their business plans:

  • “Exports of Indian automotive, pharmaceutical, and consumer goods companies will likely be impacted in the near term by political uncertainty, demonetisation, and poor economic growth in Nigeria”
  • “> 50 emerging countries are in danger of bankruptcy, as per a UN official. As so often is the case, the poorest and most vulnerable are likely to suffer the most”
  • “The world is in the middle of a global energy crisis of unprecedented depth and complexity. Europe is at the centre of this crisis, but it has significant implications for markets, policies, and economies worldwide”
  • “The lack of sufficient semiconductors caused widespread production cuts around the globe. Carmakers are estimated to cut 19.6 million vehicles from their production schedules between 2021 and 2023”

Hence, it becomes highly crucial to not only assess the geographies and countries while entering for the first time but also keep on reviewing the respective countries periodically where any company is present to assess dependence/exposure to the individual economy and to be updated about its business environment, regulatory requirements or any additional business necessities that may need to be addressed. It is essential to assess the risk-reward ratio of the country for strategic planning and meeting business objectives for any organisation. Companies could design a customised framework based on critical parameters that may be important to consider depending on organisational priorities.

Following are some of the aspects that are important to consider while evaluating any geography:

  1. Geographical location, Connectivity & Climate
  2. Safety and security aspects of the country
  3. Global sanctions list – UNSC, US, UK, EU etc. & ratings by global rating agencies
  4. Political and economic issues in the country
  5. Key aspects like GDP growth over a period of years, overall debt of the nation, Debt / GDP ratio, forex reserves, inflation, unemployment rate etc.
  6. Social aspects like health issues, crime, corruption, and malnutrition levels in the country
  7. Type & stability of government – democracy, monarchy etc.
  8. The legal system and the strength of the judiciary system
  9. VISA regulations include ease of doing business – Approval mechanism, fairness of conducting business, time taken for starting a new company or winding up a business
  10. Government relations between India and the subject country, current trade agreements / bilateral treaties, etc.
  11. Broad demographic profile – people, local business, relationship with the neighbourhood
  12. Availability of basic infrastructure like Water, Sanitation, and Infrastructure
  13. Status of natural resources – abundant as well as scarce
  14. On-site & off-site deployment of personnel – if people are to be deputed, how many? For what duration?
  15. Are there any specific risks at the proposed location(s) of deputation?
  16. Sector-specific aspects depend on the sectors the company is present in

It is also essential to analyse opportunities in the country under consideration. Suppose a country has a lot of untapped resources or future potential for growth. In that case, it could be a risk worth taking, assuming essential aspects align with the organisation’s risk appetite.

Let us see a few aspects to understand why assessing the country before entering any new geography is essential.

  • Political Risks:
    • Companies investing money abroad must be vigilant and careful about multiple factors. One of the aspects is the repatriation risk. A country could restrict repatriation of funds due to emerging country financials, low forex reserves, dwindling economy, inability to repay its global debt etc., which may lock up the funds of the investor. The policies and regulations in any country being observed for potential investments must be studied in detail before making any decision.
    • In one such case, a particular contract was awarded to an MNC in its last phase of government, and there was a change of government in the elections, which made the contract null & void or scrapped the project. Such situations may lead to the locking up of resources and finances for the long term. Legal battles may impact the operations & bandwidth of the organisation. One of the potential avenues to cover politically inflicted risks is political insurance.
    • In one such case, the C-suite team of a company decided to invest in a mine in international geography. Inhouse expert analysis and financial modelling projected the acquisition to be profitable and a future value enabler for the business. However, no representative visited the site where an important and key aspect was missed. The site was far off from the nearest port of export, and the terrain was unsuitable for regular transit, making the deal’s transportation and economics completely unviable.
    • Any company that plans to deploy its resources on foreign soil must assess the VISA regulations and requirements of the country. In one of the large infrastructure jobs abroad, an Indian firm faced a considerable labour shortage due to VISA constraints from the local government, which led to delays. Finally, the company could not meet the project schedule and faced liquidated damages from the client.
    • At times, there is a need to select a partner to work in a particular geography as the company may not be aware of the local conditions and means of conducting business. Some assignments and clients may mandate localisation requirements like partnering with a local player, minimum procurement from the local market, local workforce etc. In one such instance in a middle eastern country, a particular company got hold of a significant partner who supported them in understanding not only the grass root level issues to be addressed but also the not so apparent aspects which helped in the success of the venture.
    • At times, organisations must take some strategic assignments/projects in the future interest of the organisation. In some such cases, there are possibilities of:
    • Known history of unsafe environment in some countries where there is a risk to the security and safety of the workforce. There could be safety issues at offices, site of deployment or even during transit. Adequate security costs must be built-in while costing or budgeting for the project in such unsafe terrains
    • Unexpected medical incidents like accidents, pandemics like Covid19 hit in the past etc., may impact the overall schedule/delivery of planned projects
    • Tough terrains or linear projects passing through long distances, multi-country passage could lead to safety & security issues

Several types of insurance are available to cover some of these risks, for example, health coverage, kidnap and ransom insurance, etc.

  • Sometimes even softer aspects like the country’s culture, India’s relations with it, and the mindset of local people about India and its people also play an essential role in any company’s smooth and profitable performance in a particular geography.

Making informed decisions while taking crucial decisions like entering a new geography is extremely important. Companies need to analyse the present situation in the region and the future potential and risks that may come, spot the specific country risk events that might impact the company and carve out strategies to manage risks. The country, client and partner’s financial position and stability must be considered before deciding. A proactive attitude, taking informed calls, and managing risks are necessary and a mandate in this CUVVI world.

Blog is written by: Rajeev Tanna, CFIRM, Head – Risk Management and Internal Compliance, Tata Consulting Engineers Limited


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