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Going Global: The Top 10 Risks

What utilities ought to know
before doing business overseas.
Fortnightly Magazine - February 1 2002


The variations of political risk are many, given the levels of federal, state or local power that can come into play to affect a project. Federal or sovereign risk is perhaps the most compelling of political risks, especially in countries where there is a weak or divided congress. While Colombia's fiscal and monetary policies are such that the country deserves an investment-grade rating from international risk assessors-like Fitch, Moody's and Standard & Poor's-such a high rating has eluded other countries-like Mexico-for years. If a government will not back the political risk in a project-from problems as basic as nationalization-then others will have to pay for the risk. In general, sovereign governments don't assume country risk these days: "Why should they if they don't have to?" asks Abbott, playing devil's advocate.

Still, some countries recognize that assuming country risk helps attract badly needed foreign investment, so governments take this extra step to assure inbound cash flows. "The government may accept political risk, as in Colombia, which permits commercial banks to come in for loans," observes Woodcock. But there are few countries in the world like Colombia, where a pipeline may suffer hundreds of bomb attacks per year.

Although the issue of the personal security of expatriate workers apparently has not yet been raised markedly in most countries, some multinational utilities are taking additional precautions against factors like sabotage, terrorism and kidnapping. "We've increased vigilance on security steps we already were taking, even with routine measures," says Robert Stibolt, the senior vice president of risk management and energy trading at Tractebel North America, in Houston.

3) Regulatory Risk

A large subfunction of general political risk, regulatory risk, can be a function of a fickle government, or a function of a nascent regulatory regime, where concession and privatization implementation practices are evolving with virtually every deal. "We often coach governments for five years before they get their rules right," says AES' Woodcock. "They get the idea that they want to privatize, but the rules are unattractive to foreign investors. So, we may work with heads of state, with energy ministers, or with privatization ministers for as long as it takes to get a set of rules that allow us to put a good business together in a country," he says.

In situations where governments set a rate of profit return for a project, those utilities that find conditions do not match concession contract terms can be left out in the cold for years. But foreign currency guarantee clauses, guaranteed floors and ceilings for business volumes, and other mechanisms are making the rate anticipation game more tolerable.

4) Economic Risk

Even the longest bull market in the world has to slow down at times. When Argentina adopted parity for the peso with the U.S. dollar years ago, the move was heralded as a milestone of economic progress. But today, the country is on the fiscal ropes, Argentina has defaulted on its debts, its currency has been de-coupled from the U.S. dollar, and is sapping the economic strength of the entire Common Market of the South,