Managing global risk made easier
Control Risks’ recently released 30th annual RiskMap report, which analyses the global and regional political and security risks that businesses will face in the year ahead, makes interesting reading. Governments, businesses and investors use this RiskMap
Perhaps the most surprising fact emerging from the report is that the world appears to be a safer place, despite the fact that political risk in developed markets it at its highest level for decades and uncertainty prevails in the Middle East and much of North Africa.
David Butler, managing director for Control Risks Southern Africa, says that last year a number of ‘Black Swan’ events – unpredictable and dramatic incidents like floods and riots – showed us the importance of effective leadership. If businesses can react quickly and appropriately to these events, they can contain losses, says Butler.
For this reason, Control Risks says leaders require ‘a new style of nimble’ to be able to manage all sorts of risks in the year ahead, be they environmental, political or regulatory.
Key risks in South Africa
“Some countries have become more challenging from a risk perspective – South Africa is certainly one of those,” says Butler, who goes on to say that FDI flows to South Africa have been dropping and the reason is that it’s difficult to run finance models without a greater sense of policy certainly. The mining sector is intimately woven into the fabric of South African society and what happens in this sector affects a range of other sectors.
“A key risk is that resources are not easy to get to and they require a significant investment, say R10bn to sink a shaft,” Butler explains. “A finance model will look at a return on investment over 10 to 15 years; but because there is no policy certainty, it’s unclear whether investors will get any return at all – infrastructure challenges, the Eskom impasse, operating risks and skills shortages also add to the uncertainty.”
What’s telling is that investors at Mining Indaba indicated they would rather invest in Zimbabwe’s platinum or gold mines, knowing that 51% of their investments would need to be ceded under indigenisation laws, than invest in South Africa where so much remains unclear and uncertain. “It’s easier to mine in Zimbabwe because it’s easier to mine the product and investors can predict a return within five years, for example,” says Butler.
Control Risks points out that although the mining sector contributed about 8% to South Africa’s GDP in 2012, it has ‘a disproportionate psychological impact’ on investor sentiment and public confidence in government’s ability to transform the economy. But clarity on mining is unlikely to occur much before 2014 because of the distraction of elections in that year.
Meanwhile, government will monitor how closely companies comply with the mining charter and it may well push for more beneficiation to reach 2014 empowerment targets.
Butler says government needs to give out a consistent message to investors. President Jacob Zuma may have gone to Davos to insist that South Africa is a business-friendly destination, but investors will be aware of the spat between government and Amplats, with mining minister Susan Shabangu calling Amplats ‘arrogant’ and various ANC officials suggesting the company should have some of its mining rights revoked for indicating it would have to retrench up to 14 000 workers to remain profitable.
The recent shooting of workers at Amplats made investors skittish – shares fell by nearly 5% on the day and the Rand weakened on the back of the news.
It’s not all bad news, though
More miserable mining news aside, sub-Saharan Africa remains attractive to investors because it has been somewhat insulated from the developed world’s austerity agendas and the region remains poised to feed the structural rise in Asia’s demand for commodities.
Although Nigeria and Mozambique are expected to grow more rapidly than South Africa, in GDP terms, our more developed and diversified economy should still be able to attract investment. According to Control Risks, Chinese interest now includes construction, diversified industrial and financial services assets, which will ensure that Africa’s importance will only increase in 2013 and beyond. But this will call for a sharp eye on reputational and regulatory risks. “The ‘right’ business partners are key when it comes to strategy,” says Butler.
Editor’s thoughts:
There’s no doubt that certain business risks remain red-flagged: Europe’s financial crisis; regulation and compliance; reputation risks; pockets of political instability; even hacking and cyber-crime. However, the global outlook for business is generally good, with business resilience a factor that will play a role in success. What are your thoughts on global business risks for 2013? Comment below or email [email protected].
