Chapter Nine - Reputation and Country Risk
‘For hapless foreign investors, the web of Suharto’s patronage held the key to success in Indonesia. The list of those who succeeded is a who’s who of international business including bp, PowerGen, British Gas, Mitsui, Itochu, General Electric, Edison International and Siemens. Now, just ten days into the post-Suharto era, those links have become a curse.’
Source: Financial Times, June 1998.
The Financial Times report about the fall of President Suharto in Indonesia captures the paradoxes inherent in most major companies’ approach to country risk in developing countries. The more you try to minimise your risk by getting close to the current regime, the more the new regime will want to undermine you. The more you compensate yourself for your risk by negotiating higher returns or fixing the returns in hard currency, the more you’ll be seen as a blood-sucking profiteer when the political climate changes. The more you surround yourself with bodyguards and fences, the more the local community will hate you. Your attempts to decrease your short-term risk end up increasing it in the long term, and all of these paradoxes combine to create the greatest risk of all—that you will be described as ‘hapless’ in the Financial Times.
After Suharto’s fall, many international companies had their contracts torn up or renegotiated under much less favourable terms and, in some cases, their parent group’s share prices suffered as a result. Some companies rescued the situation with a mixture of hasty political pressure, CSR and philanthropy, but only after several weeks of panic and negative publicity.
Clearly no company wants this to happen, but there is a widespread assumption that problems like these only arise at times of extreme and rare political change and that, in most countries for most of the time, you can protect yourself from country risk as long as you’ve got decent lawyers and fixers and have covered your currency risk.
But that’s simply not the case. In Indonesia, the transition was briefly frightening but not particularly extreme, and the new President was a protégé of Suharto. The international utilities companies that were the main target for cancellation of contracts had well-drafted ‘take or pay’ contracts with payments guaranteed in dollars. But that didn’t stop the new regime from cancelling the payments. The harsh reality is that, regardless of the law, if a country can’t pay then it won’t pay—particularly if the contracts are seen as the unjust leftovers from a previous corrupt regime and if the prices to the consumer are politically sensitive. At a time of a plummeting local currency, it’s simply impossible to outsource your financial risk to the local people, no matter how close you were to the previous President.
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Chapter 9 – links and resources
For a good example of cooperating with civil society to understand, communicate and improve your impact on poverty, have a look at the Oxfam report on Unilever's operations in Indonesia .
The Collaboratory for Research on Global Projects looks into legal and organisational aspects of major global infrastructure projects and has examined legal and political risk of long-term contracts with Governments.
Professor David Henderson's paper " Misguided Virtue ", published by the Institute for Economic Affairs , makes the basic case for using profits to measure social contribution.
Winners Never Cheat by Jon Huntsman , published by Wharton School Publishing ( Pennsylvania ) in 2005, gives a hard-headed and personal view of the importance of ethics and the strategic value of playing it straight
The Prince of Wales’ International Business Leaders’ Forum (IBLF) sponsors a range of initiatives on corporate governance and economic development and will assist groups of companies to form coalitions to oppose corruption. Its website ( www.iblf.org ) offers a range of resources including case histories and sources of additional assistance.
Transparency International is the most prominent campaigner against corruption. Its website ( www.transparency.org ) offers a range of resources for free download, including Business Principles for Countering Bribery. These are being used as the basis for anti-corruption criteria in the ethical investment index, FTSE4Good.
