Political risks faced by companies in challenging markets require a political answer. It seems to be obvious but it is rarely the case. The presentation introduces the concept of Business Diplomacy as an effective tool to mitigate these risks.

1. Business Diplomacy: An Approach
to Political Risk Management
Julien Schiettecatte
Principal Consultant& Director, Atlantic Strategy Group
October 9, 2015
Sciences Po Bordeaux.
Master, Risks Management in Southern Countries

2. Political Risk Management (PRM) : A
Growing Cost and Opportunity for Business
From an investor point of view Political Risk (PR) is
regarded as the second biggest constraint to FDI in
developing countries. PR is no longer something a
company has to accept, but something that can prevent
an investment from taking place.
PRM is now being done by
• Lawyers/Consultants
• In-House
• Financial Markets/ Banks
• Insurance companies

3. Focus on Political Risks
PRs in the extractive sector :
• Political Risk- Resource Nationalism identified by
MIGA as the most important in mining sector in
2013/8th in 2008)
• Breach of contract
• Regulatory changes (royalty) or export tax/quota
« beneficiation »
i.e Zambia, Indonesia, RDC
• Expropriation
• Parameters that can influence PR
• Economic and commodities cycles
• ROI and government’s participation in the project
• Fiscal regime and governance of natural resource
• Elections

4. Avoid or Manage? Impact of
Political Risk on Companies
PR disrupts value created by Companies
• Financial Impact (bonds, shares)
• Economic Impact and role of rating agencies
• Financial transparency for shareholders and
public opinion (reputational risks)
• Political Risk Insurance can be rarely invoked
Hence the need to mitigate PRs. However table
shows that companies are mostly using
commercial or financial tools to solve PR. While
a effective PRM calls for a more proactive and
multilateral approach …

5. Business Diplomacy: An Effective Tool to
Overcome Political Risks
Conditions required to use Business Diplomacy, such as:
• A significant issue prevents the company’s continued operation in a host country
• Harm is caused solely, directly or indirectly, by the action or inaction of a government
• Negotiations and discussions are blocked despite attempts by the company to solve
the issue
• Importance of the issue warrants the intervention of home country or international
organisations
• Both the company’s interests and the interests of its home country must align
• Home country uses bilateral or multilateral diplomatic channels to solve the issue
• Resolution of the PR through Business Diplomacy leads to a commercially
sustainable solution

6. Looking Beyond PRM – Benefits for Companies, IFIs
and Host Countries
• Securing strong political ties with home countries and international organisations (World
Bank) and international financial institutions (IFC, EBRD, EIB)
• Establish an informal mechanism to resolve future disputes between the company and
host country
• Contributes to fulfilling (non) financial reporting requirements set up by financial markets
authorities and regulators ie . assessing, mitigating and disclosure of risks associated to
a particular project
• Adopting Business Diplomacy gives a competitive advantage to companies abiding by
the rule of law by reducing exposure to corruption and reputational risks
• Reduce IFIs exposure to risky investment, creating conditions for more investment
• Business Diplomacy shed lights on the governance of developing countries ie. public
financial management of resource rich countries
• Empower political opposition in case of wrongdoing by the host government

7. Conclusions
• PRM is no longer a nice to have - It is a must have to protect against the
destruction of a company’s value
• Trends toward (non) financial transparency and reporting is accelerating
this new imperative
• PRM requires companies to think and act as a political actor by linking the
resolution of a host country dispute with an international political agenda
• Triangulation and aligning a company’s interest with home country’s and/or
international organisations’ interests is paramount