25 giugno 2018

Political Risk and renewable energy

political_risk

Political risk refers to challenges arising from government behaviour and decisions, political dynamics such as unrest or conflict, and importantly also socio-political stakeholder responses to a foreign company’s investment or operation. Political risk is a factor even in developed regions such as Western Europe, but in emerging markets, it can be much more serious because of weaker governance standards, instability, and sensitive cultural and social reactions to the presence of foreign companies.

Renewable energy investors and operators have significant opportunities in emerging markets, where renewables are often part of sustainable development strategies that include greater energy independence. Indeed, emerging markets are starting to outpace OECD countries in renewable investment. But political risk remains a concern, and to make the most of the opportunity, investors and operators need to be able to foresee the challenges and develop plans to address them.

Avietta’s political risk expertise can be adapted to a range of client requirements, and the following services are only indicative.

Assessment and planning

feasibility_analysisPre-entry feasibility analysis

The business case for a given market or investment opportunity might be sound in commercial terms, but the political environment still needs to be considered before a confident decision can be made on whether or not to proceed. Avietta supports clients with market and project feasibility assessment from a political risk perspective.

We identify factors that could affect the health of an operation, and also look beyond the horizon to see how the political landscape might evolve over the life of the operation. In the context of the client’s own risk appetite and its current international exposure, we assess these factors to help decide if the opportunity is within risk tolerance. This complements the commercial perspective for a fully informed “go / no go” decision.

Feasibility analysis can also be applied to help clients to prioritise countries for long-term growth planning, applying a framework in which the client provides the commercial side of the assessment, while Avietta provides the political risk perspective, enabling a robust comparison of potential international markets.

Entry-stage planning

epa05688558 Kenyan children play near the wind turbines of the Ngong Power Station as the sun sets over Ngong Hills in Ngong, in the outskirts of the capital Nairobi, Kenya, 25 December 2016.(issued 26 December) Kenya's power distributor Kenya Power said in November 2016 that the price of electricity will go down in coming months as the company shifts towards more cost-effective sources such as geothermal, solar and wind. One example of such source is the Lake Turkana Wind Power Project in northern Kenya, which is the single largest private investment in the country's history. When completed in 2017, 365 turbines in Turkana are expected to provide 310 megawatts, or one fifth of Kenya's generating capacity. EPA/DAI KUROKAWA

Once a company has committed to an investment or operation, it needs to prepare for the challenges and risks it could face on the ground. An entry planning project begins with a thorough understanding of the client’s operational profile to ensure that the assessment is directly relevant to the client context. The project then derives priorities from three strands of assessment:

  • Current and near-term political environment: We examine factors such as governance, stability, regulatory consistency, and local and international tensions to determine priority risks to the operation’s personnel, continuity, reputation and management control.
  • Socio-political stakeholders: This considers official actors, politically-connected groups, civil society organisations and predatory groups who see a stake in the client’s operation and who are likely to respond – stakeholders are mapped and prioritised for engagement and risk management planning.
  • Scenarios: Using an assessment of change drivers, we map potential directions of medium to long-term political evolution, and for risk management purposes prioritise plausible scenarios with the greatest potential for disruption. Indictors are developed to enable prior warning of the emergence of a given scenario.

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The result of this assessment then feeds into planning, including:

  • Near-term risk management planning, for example through adjustments to security and anti-corruptions approaches
  • Stakeholder engagement planning, for example through adjustments to corporate social responsibility approaches, bargaining and negotiating positions, and corporate diplomacy
  • Scenario preparedness, including strategic options for potential new change directions

While the client necessarily owns the planning process, Avietta’s assessment and planning support helps to ensure that the client is prepared for the socio-political challenges it could encounter, prior to establishing significant exposure on the ground.

The three strands of entry-stage assessment (political environment risks, stakeholders, and scenarios) can also be conducted as modular, stand-alone projects to help plug gaps in the client’s own research and planning initiatives.

Operational stage review

Once an operation is in progress, there could be significant changes to the company’s operational profile and exposure, or in the political environment, and an interim review is needed to ensure that risk and stakeholder engagement planning is up to date with current and emerging issues. Operational reviews can also focus on specific tactical problems, such as a worsening security environment or a change in government policy direction, and can address specific issues that arise in the relationship with key socio-political stakeholders.

Capacity-building

Capacity-building

Political risk management workshops

Sometimes a company knows the issues it could face, but needs support in articulating priorities and direction. Avietta works with clients to guide political risk workshops that clarify socio-political challenges and options to address them. Workshops can also be structured as a simulation that envisions the emergence of significant risks to identify strengths and weaknesses in political risk preparedness. One key benefit of a workshop setting is that it enables discussion and sharing between functional and departmental perspectives, leading to stronger alignment on common priorities.

Seminars and training

Knowing what political risk means, how it can be assessed, and the options to manage it are the basis of in-house political risk capability. Our senior executive seminars help to instil a strategic understanding of political risk and its implications for the company’s international operations. Our more detailed courses on assessment and planning augment current analytical expertise with processes and tools specific to political risk. Seminars and courses are highly interactive and enable considerable cross-learning between different functions and units represented among attendees. 

risk management

Resources

Avietta’s core team manages all political risk engagements, and are experts in political risk assessment and strategy. Our political risk services benefit from integration with Avietta’s renewable energy market expertise for tailored insight for renewable investors and operators, and also works alongside Avietta’s due diligence and intelligence functions.

Avietta’s core personnel bring considerable international experience and unique emerging market insights to projects, particularly on Russia / Central Asia, the Middle East and North Africa, and sub-Saharan Africa. Our close associates include experts based in emerging market regions, and specialists in relevant risk management functions.

Finally, our global access derives from an associate network that we can draw upon as needed to support client requirements in an array of emerging markets, including Asia and Latin America.

people

Approach

Avietta works interactively with clients in order to ensure that our insights align with client aims, planning processes, and actual concerns. By working with client teams on the ground, we gain a deep sense of their immediate operational context and challenges, an understanding of current political risk and stakeholder management approaches, and the different priority concerns among country and operational management. Bringing this contextual understanding together with an objective external perspective results in more relevant, focused intelligence than a purely desk-based approach.

Avietta’s approach is guided by a commitment to business ethics in our own work and the ethical concerns that clients have when working in sensitive socio-political environments, and by discretion and respect for organisational and individual privacy.

Example cases

Green energy investor, Middle East

Middle East

This specialist investment firm had a growing portfolio in the Middle East prior to the 2011 uprisings in the region. Unrest that year slowed down regional growth plans, but by 2015 the client had resumed scoping regional opportunities. But there were still some serious question marks about regional stability and new issues of concern, not least the regional impact of the Syrian and Yemeni civil wars and Egypt’s continued socio-economic fragility.

The company asked Avietta for an assessment of how instability and conflict were affecting renewable energy plans and commitments in the region, and for a forward-looking assessment of regional stability in order to better position their regional growth plans.

The project found that overall commitment to sustainable energy planning had recovered following 2011, although budget constraints following the economic slowdown of the Arab Spring period still hindered ambitions outside the GCC. The scenario analysis focusing on regional stability revealed several potential directions, but the worst case scenario of further and even sharp deterioration affecting the wider region was quite plausible, and it had the potential to severely undermine growth potential and even existing investments.

Avietta worked with the client in a summary workshop to derive strategic options for different, and especially the worst, scenarios, and the results were taken into the client’s next corporate strategy planning exercise.

Renewable energy operator, Africa   

Schermata 2018-06-26 alle 09.08.13

This international energy company’s renewables division had signed a long-term cooperation agreement with the country’s sustainable energy development agency, as a prelude to tendering for specific projects. Although the government and ministry of energy, the agency’s parent organisation, had high ambitions for renewables, the client found that coordination with relevant authorities was complex and slow, and seemed to be challenged by political differences between state companies and agencies involved in the wider renewables initiative.

The company needed to know what was behind the apparent slow and confusing reception it was getting from relevant agencies, and if there was anything it could do about it. Additionally, it sought to understand how the evolving political landscape would affect renewable energy planning.

The project found that much of the complexity in dealing with different actors was a result of long-standing factional tensions within the ruling regime – different factions sought control over specific public sector assets and initiatives as part of their power contest, and energy was a key stake for all players. Hence relevant organisations had different factional “sponsors” and were subject to the shifting tensions and alliances between them. In fact this contest seemed to be entering a final stage, and we anticipated that after a period of reconsolidation, the presidential faction would predominate and planning would become more rational and coordinated.

The findings were discussed with the client team, and the joint conclusion was to retain a light presence in the country to maintain current relationships, but to take a patient response and wait for the conclusion of the factional contest before committing to specific initiatives or tenders. The relationship with the sustainable energy development agency was politically neutral, but we advised that the client should be cautious about deepening other relationships until the regime had overcome its internal differences.

africa-power

Renewable energy operator, emerging market growth planning 

The client was the international division of a European energy company, and while they recognised that there was significant opportunity in emerging market renewable energy projects, they had limited experience beyond Europe and were uncertain about which emerging markets would be feasible for a newcomer to more volatile environments.

Avietta held an initial workshop with the client team to establish their ambitions, but also importantly their sense of risk appetite in terms of operating environment. We discussed their few emerging market experiences to help assess how prepared they were for different levels of risk. Together we also derived a list of potential country markets that they had been considering, and conducted an initial screening to develop a manageable set of prospects.

Avietta then assessed each country along specific political risk factors of most concern to the client, and we also included some benchmark countries that the client was already familiar with as reference points. Aggregate scores provided a political risk ranking. Meanwhile the client’s own team was putting together a ranking in terms of commercial potential, based on renewable investment and capacity trends.

The final workshop brought together the commercial and political risk rankings to identify the countries with the optimal balance between manageable risk and reward. The workshop was also an opportunity to summarise the common types of issues that the company could face in the selected countries, and what kinds of risk management capabilities it should emphasise to prepare for expansion. An important element of this was that proximity to the client’s home country, in cultural and geographic terms, was actually a risk management consideration in itself.

Avietta continued to work with the client on country-specific initiatives once its emerging market strategy entered the implementation phase.

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