Baroness Nicholson features in the Financial Times
Preparation is vital to doing business in danger zones
By Adam Palin
The pursuit of almost any financial opportunity comes with dangers, and investments in post-conflict areas may be accompanied by more than usual.
Companies attracted by the economic potential of politically unstable areas, such as hydrocarbon-rich Iraq and Libya, must place security at the centre of their operations.
However, says Richard Fenning, chief executive of Control Risks, the consultancy, companies focused on narrow business objectives often fail to attach sufficient importance to security matters. While some are overly risk-inhibited, others “remain recklessly blasé about risks they should be cautious of”.
Anthony Skinner, director of the Middle East and north Africa practice at Maplecroft, a consultancy, says that since the Arab uprisings that saw the overthrow of Egypt’s and Tunisia’s regimes. “There is greater awareness and companies are trying to ascertain the stability of regimes and anticipate shifts driven by social change,” he says.
The militant attack on an Algerian natural gas facility operated by BP and Statoil in January 2013, which killed 40 people, underlined the need for risk mitigation.
Charles Gurdon, managing director of Menas Associates, a consultancy, cites neighbouring Libya – where a political and security vacuum has prevailed since the collapse of Muammer Gaddafi’s 41-year rule in 2011 – as an illustration of how companies can misunderstand the investment dangers.
Violent rivalries between local militias have rendered the elected government in Tripoli powerless. There was great optimism the post-Gaddafi era would herald opportunities, and “lots of companies jumped on the bandwagon and went in without proper knowledge”, says Mr Gurdon.
A lack of information has increased the political and security risks that companies have exposed themselves to, he says.
To gain insight and support in post-conflict areas, companies often hire local “enablers”, explains Tim Mitchell, managing director of G4S Risk Management. These can offer strategic advice about influential people and systems that may not be transparent.
Engagement with local stakeholders – from community leaders to the wider population – is “a powerful mechanism to mitigate security risk”, says James de Labillière, head of war, terrorism and political violence at Hiscox, the insurer.
Demonstrating a positive contribution to communities may be particularly valuable, given the high levels of unemployment – particularly among young men – in post-conflict areas such as Libya.
When political continuity is far from certain, and the situation is highly charged, as in Egypt, Mr Skinner says it is important for companies to avoid overt support for any single political faction to avoid potential repercussions.
A pillar of effective security risk mitigation is the provision of traditional guarding services, offered by companies such as Aegis Defence Services and G4S.
For example, a report by Statoil into the attack on the Amenas plant in Algeria in January 2013 by al-Qaeda-linked militants, found companies may have been over-reliant on Algerian military protection.
But the limitations of physical safety measures are illustrated by the unwelcome presence of private security companies in Libya, says Mr Gurdon. “There are far too many Libyans with arms and not a lot to do; the last thing they want is mercenaries and [private companies] controlling security in the country.”
Threats can relate to physical assets – employees and equipment – and non-physical assets – such as contracts and rights – but there are specialist insurers that can cover corporate exposure in danger areas.
Mr de Labillière says that insurance should be considered a central part of the risk management process as it is an area that businesses can have greater control over.
Ed Nicholson, partner in the credit, political and security risk team at Jardine Lloyd Thompson, says brokers will work with companies to lessen any risks associated with an investment.
Products range from kidnap and ransom cover, and accident and evacuation insurance for staff, to insuring a company’s physical assets.
When an investment is dependent on finance, bespoke insurance against damage to assets as a result of political violence is usually a requirement, says Mr Nicholson.
Although most companies operating in high-risk areas consult insurance companies at the beginning of their investment, there are some that only consider doing so when it is too late, says Mr Nicholson.
“If you come to insurers [looking for cover] when things are starting to get a little hairy, the answer will usually be ‘no’.”
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Case study: Security risks in Iraq
Despite car bombs and shootings, Iraqis are preparing for the country’s third parliamentary elections on April 30.
It is the first national poll since US forces left in 2011, and international companies are also looking to the country’s future.
The economy has had strong growth in the past five years but an upsurge in terrorist attacks over the past year has seen civilian casualties rise to 2008 levels. More than 7,800 died in 2013.
“It is ironic, that at a time when the country is under monstrous attack, almost on a daily basis, most of Iraq is growing at 9-10 per cent a year,” says Lady Emma Nicholson, executive chairman of the Iraq Britain Business Council.
The trade organisation, which helps businesses enter the country, has expanded to 52 companies, up from 39 in 2011. Members include BP, PwC and Royal Dutch Shell.
Well placed: reserves are easy and cheap to extract
Iraq is host to the world’s fifth-largest proven oil reserves, which are easy and cheap to extract. International energy companies including ExxonMobil, Total and CNPC, operate fields there. “Many oil majors have a robust attitude towards Iraq because the geology is overwhelming,” says Richard Fenning, chief executive of Control Risks.
Other sectors, such as infrastructure and professional services, are following.
For those wanting a presence in this market of 32m people, being on the ground is important. “It is a mistake to believe you can do business at arms-length in the Middle East . . . It needs to be face-to-face,” says Lady Nicholson.
Kevin Bolton, principal consultant for crisis consulting at Aon Risk Solutions, says that, despite the cost, security companies are necessary to international companies.
But Mr Fenning says such companies provide no protection from political risks. With deep divisions between Iraq’s Shia and Sunni Muslims, it is unlikely, in the short term, that elections will allay investor concerns.
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