Tuesday, September 15, 2009

Engineering and Political Risk

Political risk matters to engineers. Risk is the probability that an event will turn into a measurable loss or lead to an unattended consequence. It is composed of two factors, probability and impact. How likely is the risk to occur? If it does occur, how big an impact will it have? Engineers are trained to deal with risks associated with contracts and natural disasters - earthquakes, floods, droughts, etc. Engineering organizations are also experienced in dealing with economic risks, such as inflation or credit risk. Most people understand the risk from smoking, political risk is much harder to quantify, yet no less different nor important to engineers than other forms of risk.

Globalization allows engineers to complete projects all over the world. From electronic equipment plants in China to highways in Turkey - the outlook and definition of political stability is a dynamic target for projects in distance countries. The political, social, economic, and foreign policy profile of a country (especially in the developing world) can change quickly and dramatically. Types of political risks that engineers and engineering organizations face can include the following:
  1. Geopolitical - international wars, great power shifts, and economic sanctions/embargoes.
  2. Global energy - politically decided supply and demand issues.
  3. Terrorism - destruction of property and kidnapping/hijackings.
  4. Internal Political Strife - revolutions, civil wars, Coup d'etat, nationalism, and social unrest.
  5. Expropriations - confiscations of property and creeping expropriations.
  6. Breaches of Contract - government frustrations or reneging of contracts and wrongful calling of letters of credit.
  7. Capital Market Risks - currency controls, politically motivated credit defaults/market shits, and repatriation of profits.
  8. Subtle Discrimination and Favoritism - discriminatory taxation and corruption.
  9. Unknowns/Uncertainty - effects of global warming, effects of demographic changes, and political events that cannot be foreseen.

Three things that organizations can do when trying to deal with political risks - (1.) Keep an open mind on long-term risks. While most organizations short-term bias is understandable, not having planning for big events that can be either grave threats or great opportunities can pose significant risk. Over the past 50 years, major geopolitical changes have occurred at least once a decade, (2.) Structure your organization to be nimble and know your strengths in case of a major shock, and (3.) Consider buying political risk insurance.

You can also remember the words of British Prime Minster Benjamin Disraeli "As a general rule, the most successful man in life is the one who has the best information."

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