The Global Landscape is Shifting, and Fast: Opportunities and Risks for Investors
November 21, 2011—These are turbulent times. And for investors, a comprehensive risk-management strategy is more important than ever. That was the consensus of a diverse panel of experts at a MIGA-sponsored discussion: Global Risk in Today’s Changing Landscape. The event was held in conjunction with the World Bank Group’s Law, Justice, and Development Week 2011. The program, which brought together officials from international financial institutions, international development practitioners, government officials, lawyers, judges, academics, and representatives from civil society, explored how legal innovation and empowerment can contribute to development.
Opening the session, MIGA’s General Counsel, Ana-Mita Betancourt likened the current world to being on a rapidly moving train. "You catch a blurry view of something from the window and before it comes into focus, you move on to something else." Keynote speaker Vladimír Dlouhy, an advisor for Goldman Sachs in Prague and former Minister of Industry and Trade of the Czech Republic, painted a grim picture of the current economic and political landscape. He spoke of many destabilizing factors, including the unsustainable and growing demand for energy, water, and food. In spite of the many complexities it has brought us, he said, "Globalization is the only way to fight poverty—only we must manage the risks properly." His point led to a lively discussion on how investors could meet these challenges while ensuring the success of their investments.
The panelists, not surprisingly, agreed there is no "silver bullet" to managing risk in emerging markets. As Cathy Marsh, a partner in the Global Project Finance Group of Milbank, Tweed, Hadley & McCloy put it, "Beautiful big, expensive legal papers can’t fix a deal that is fundamentally wrong." Yet, she noted, a sound deal structure is nevertheless critical—especially in difficult jurisdictions. For legal counsel, this means being involved from the very beginning of an investment. According to Marsh, "You need to know the sector and the associated risks, and the underlying need for the actual investment. When it comes to the deal structure, all of the stakeholder interests need to be addressed and sufficiently documented."
Ravi Suri of Standard Chartered Bank expressed his view that "the biggest gap in risk management is technological change." He also felt that the conventional project finance model that has served industry well over the past 15 to 20 years doesn’t adequately address technological innovation. "Will regulation accommodate innovation? How is the science of climate change going to evolve?" Marsh, on the other hand, was more optimistic about the flexibility and future of the project finance model.
Panelist Michael Kelley, General Counsel and Managing Director at EMP Global, echoed Marsh’s view that knowing the local environment and legal framework is a key element of risk mitigation. "Local counsel is an invaluable resource; not only can they give you the regulatory information you need, but they know the people. They can also give you guidance on whether an investment is worth pursuing." Once a project goes ahead, having people on the ground "living the investment" and being part of the company is essential. As a fund, he added, EMP also has a long-term focus with a diverse portfolio to dilute sector or location-specific risks. Being agile and innovative are also traits that will help investors address changing circumstances.
But sound deal structures, a good business plan, robust technology, and local partners are not enough if you neglect stakeholder engagement. Witold J. Henisz of the University of Pennsylvania’s Wharton School underscored this point with ample evidence. "You are going to have conflicts with stakeholders and your ultimate success depends on your ability to manage these stakeholders over the life of the project." He spoke of an electricity privatization in Central Asia that failed miserably the first time around, but succeeded with an investor who designed a solution that was more appropriate for the local context. He noted that the companies who win hearts and minds are more successful. "Stakeholder engagement is not something we do because we want to feel better; we do it because it delivers value."
The panel also weighed in on the "Arab Spring." Marsh noted the sense of nervousness, saying "we saw deals essentially evaporate." Yet, despite the current setbacks, there was optimism in the room. Kelley commented: "the conventional wisdom says to sit on the sidelines, but now is the time to look at opportunities." Dlouhy reminded the audience of an important point—the region is not homogeneous and some countries will be able to get on track more quickly. He pointed to the optimism surrounding Tunisia’s quick mobilization of reforms.
Given the complexities of managing risks and the importance of stakeholder relationships, panelists agreed that multilateral organizations that support private-sector investment are continuing to play an important role, particularly in large project finance transactions. Kelley observed: "we’ve learned a lot from the multilaterals and they can play a role in ensuring long-term stability." Indeed, managing risk and engaging stakeholders—especially in host countries—are key elements to delivering on the multilaterals’ development mandate. As MIGA’s Betancourt said at the outset, "understanding and managing risk in developing countries is what we do."
Click here to view the event program.