Overcoming operational risks associated with undertakings in Africa

Coming off a generally lower base than its continental contemporaries, opportunities for infrastructural development in Africa are extensive.

However, for every dozen or so success stories there are one or two companies that are negatively impacted by risk events. A risk event is essentially any external development — foreseen or unexpected — that negatively affects the operations of a firm. There are dozens of potential examples of risk events, so it is perhaps more valuable to categorise them.

On the macro scale, there are country risk events. These take place on a national level and include rapid and unexpected changes in government (political risk); changes in relevant economic policy, nationalisation being one such example (economic risk); and the risk of a country or country-backed agency failing to honour loan agreements or debt payments (sovereign risk).

According to Warren Bolttler, CEO of Price Forbes South Africa, a specialist provider of corporate and project insurance solutions across Africa, debt is often underwritten by sovereign guarantees which look great on paper but can still result in defaults. This credit risk is often the hurdle causing a deal to fall short of financial close.

Of course, these macro risks are contingent not just on forecasted developments within a country, but are also responsive to regional issues.

On a more micro scale, but still with a focus on countrylevel issues, contractors and engineering firms will face safety and security risks. These are often overlooked or misunderstood by project managers focused on bottom line concerns. The message is that a security risk event can have a significant bottom-line impact and compromise the legal, reputational and ethical standing of the company. Here, examples range from health and safety violations on site to the activity of armed groups in the area.

At the most micro, there are project-specific risks. Of these, arguably the core consideration is the potential risk posed by local project partners. By operating with and through local partner individuals or organisations, the firm shares the political exposure of these entities. This can pose a significant reputational concern, but also compromises operations if the partners are incompetent, not properly registered or have legal/ regulatory “baggage”.

The first step to managing risk is assessing risk. This should be done by means of a pre-project risk assessment. The report should address all of the above risk categories, and others as deemed relevant. Such a report should ideally be produced by an independent risk management organisation with experience in the project location. The risk management firm will likely conduct a desktop assessment of the risks, and compliment this with a due diligence investigation into local partners and clients. Often, a site visit is conducted to understand any unique risk dynamics.

The risk assessment serves to identify any “red flag” issues that should be addressed immediately or should prompt the firm to pull the plug on the project. These are extreme cases. Ordinarily, the risk assessment would propose arrangements to mitigate the risks outlined in the report. These are generally once-off recommendations that should be adopted by the firm. One such risk management arrangement is the procurement of appropriate insurance. Bolttler mentions that insurance is a form of risk transfer that could adequately address political risk, sovereign risk or even the bankruptcy of partners and clients.

The risk assessment report will advise standard operating procedures that dictate best practices at the site and head office to ensure risks are reduced as much as possible.

It is imperative that the risk assessment is updated on a regular basis, so that any changes in the risk profile can be addressed. To this end, the firm should receive regular reporting on developments that could impact the project. Again, a multidisciplinary risk organisation will be able to provide tailored monitoring, reporting and analysis.

The last component of a risk management strategy would be to put together a crisis management plan. This is a blueprint for how to respond to potential crises facing the project. The crisis management plan should include all relevant response resources available to the firm and dictate roles and responsibilities of personnel within the organisation.

Taken together, a sound strategy for risk management for infrastructure projects in Africa involves: a risk assessment, the implementation of recommendations from the assessment, diligent monitoring of developments that could change the project’s risk profile, strict adherence to standard operating procedures, and having a working crisis management plan that can be implemented in an emergency situation. Bolttler agrees with these operational risk management measures, but stresses the necessity for insurance and quality control of providers and contractors.

THE RISK ASSESSMENT SERVES TO IDENTIFY ANY ‘RED FLAG’ ISSUES THAT SHOULD BE ADDRESSED IMMEDIATELY IT IS IMPERATIVE THE RISK ASSESSMENT IS UPDATED ON A REGULAR BASIS, SO THAT ANY CHANGES IN THE RISK PROFILE CAN BE ADDRESSED