5. Risks in Traditional Investment
The biggest risks faced by foreign investors in
developing countries
Volatile political systems
Expropriation risk
6. What is the policy risk?
The risk that a government will
discriminatorily change the
laws, regulations, or contracts governing
an investment—or will fail to enforce
them—in a way that reduces an investor’s
financial returns is what we call “policy
risk.”
7. Policy risks
Firms engaged in international business
have policy risk including:
Fuel supplies.
Exchange rates.
Currency conversions.
8. Reasons to Failure AES
Corporation
Public official’s inaction to Terminated
supply to non paying industrial
consumers
Public official’s inaction to supply fuel
to AES.
Public official’s demand for
government's own tax payment.
9. Ways to protect policy risk and
currency or price swings.
Use of legal contracts.
Use of insurance.
Trade in financial instruments
Use of risk-mitigation strategies
10. Why hedging against policy risk is
difficult
Insurance offers limited protection
against policy risk:
Since insurance protection is related
to
firm’s ability to manage the policy-
making process.
Insurance offer short-term coverage
or
don’t offer any coverage at all.
11. The project and the nature of policy risk
Conventional hedging strategies are
infeasible.
Average risk premium instrument in a
given country offers a false comfort
No financial institutions have not used
premium to pay out money when a policy
risk is realized.
12. THE NEW RISK — MANAGEMENT
PLAYBOOK
Constructing hedges against policy risk
through contracts, insurance or financial
risk — management tools
Rewriting the playbook
Improve operation
Quick cost — benefit analyses
Political pressure
13. INVESTING IN GOODWILL
Managers spend a great deal of time and energy
on improveing efficiency
It was struggling with poorly maintained
equipment that had detriorated before
privatization
A smarter approach was used by Italian state —
owned oil company Eni
CEO, Franco Bernabe visited Rio de Janeiro to
announce a $500 million investment. He
proclaimed : '' Now is the time to show that
Petrobras [ the state — owned oil company] has
long — term friends]''
14. FRAMING THE DEBATE
Firms need to master the art of political spin.
Presenting a venture as «fair»,equitable», or
«growth enhancing»
Dominant firms appeal to '' fairness'' by arguing that
smaller entrants cannot survive without the
government's helping hand
15. LG Telecom — the third entrant, behind the much
larger SK Telekom and Korea Telecom — made
repeated calls for '' asymmetric'' government
regulation of the market leaders in order to '' level the
playing field''
The Korea Times reported, '' The defining question is
whether the government will back new entrants in the
name of encouraging fair competition, or limit the
pool to experienced players''
May 2001 the South Korean government announced
that it would '' guarantee a market share of at least
20% for third major telecom operator through
asymmetric regulation on Korea Telecom and SK
Telecom''
16. FINDING POLITICAL
PRESSURE POINTS
The network of relationships in a society
greatly influence policy
outcomes, especially in countries with
weak legal systems
International investors must identify and
engage local politicians' power bases
17. Eni has shown the way, this time in
Kazakhstan. Through its subsidiary Agip
KCO
Conducts knowledge —
transfer, training, develop seminars
At least 60% of local employees are Kazakh
citizens
Constraction of various publick works
Crucial component of an effective strategy
is to assemble a coalition of interests
18. To political analysis managers
have consulted:
Employees
Local business partners
Supply chain partners
19. Information gathering
It’s different ways to gather information
Varies in intensity and structure
Radio
Newspapers
Conversing with locals
And different method to use in
computerized systems: Delphi
20. Multiple real-time indicators and
metrics
CEOs and board of directors demand
real-time data
This human intelligence effectively
incorporate into enterprise risk-
management models and frameworks
21. Information-Extraction Software
Data Mining:
Relies on the coincident location of
words
Natural Language Parsing(NLP):
Facilitates more refined sentence-level
inferences by syntactically distinguishing
among subjects, verbs, and objects
22. Why Country risk Rating Don’t
Work
Level of policy risk vary among investors
in a country
Country risk rating usually reflecting pas
policies out-comes
23. The “Tummy Test” and Other
Models
Speak about relevant sources by decision makers
Draws upon their own knowledge of similar
cases
Make an educated guess about the likely policy
outcome.
Necessities
Skill set of the decision maker
The relevance of past experience to the current
situation.
Involving specialized consultancies
24. War room
Method;
Brainstorming sessions
Influence map
“Influence maps” are used to depict each
politically relevant actor as a bubble arrayed in
space according to the player’s position on a given
issue, with the size of the bubble proportional to
the player’s power.
What happens if we target actor X?
What if we break the link between X and Y?
What if we try to reduce Z’s power?
25. The dynamic expected utility model based
on game theory.
Every actor with a vested interest in an issue
has a choice of
proposing a policy,
opposing a proposed policy,
or doing nothing.
to maximizes his, her, or its expected utility
in each period.
26. The selection depends on
The direction and intensity of the actor’s
preferences,
The salience of the issue,
The cost of proposing or opposing a policy,
Similar information about other actors.
The sensitivity of the outcome to various assumptions and parameters can then be
calculated, helping to identify which actors are so pivotal that a change in their
preferences, power, or salience would have a large impact on policy.
27. Models are used by the intelligence community and
by specialist consulting groups such as
Mesquita&Roundell, Sentia Group, the Probity
Group, and Commetrix.
Analysts;
Identified which actors were most commonly cited in
the press and referenced in their speeches and
writings.
Constructed a network of key “influencers” and
modeled various points of entry into this system to
identify the target areas and the messages that would
maximize their effect on the climate change debate.
28. The risks of investment may be great to
justify entry into certain political zones
,but by
Recognize the dynamism of the
environment
Implement appropriate strategies to
address
the risks quite manageable.
29. This system will retain elements of tacit
knowledge and experience & should be
powerful source of competitive advantage
Combining
data-mining
&
Traditional
approaches
tummy tests
toward an
analytically
oriented
Defensible
system
for
managing
30. Thank You All For the Patient Listening !
safdarlashari@hotmail.com
