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One Belt One Road: Modern Risks along an Ancient Trade Route
November 14, 2016
The impact of reviving the Silk Road through Central Asia and sea trade routes across regional Asia has been the subject of much speculation. Less has been discussed about the implications for the private sector, and the benefits and risks of taking advantage of what OBOR has to offer.Like any effort in international trade, companies need to take the usual precautions and consider the political risk associated with cross-border trade. What distinguishes OBOR from an insurance perspective is the vastly different countries and markets the regional foreign policy covers, as well as the varying geopolitical factors at play. As such, evaluating each policy for each project and country will be vital to ensuring companies understand all the risks and their insurance coverage.China’s revived interest in the regions along the ancient Silk Route should see vital public infrastructure built, such as hospitals, roads, power generating plants and schools. One of the boldest infrastructure projects being discussed under OBOR is the building of a railway linking Asia and Europe through Central Asia, which would eventually decongest the Suez Canal by reopening the land trade route, allowing for vastly more land connectivity between the continents.The potential stabilising effect stemming from regional economic development under OBOR cannot be underestimated. For example, it is hoped that an increase in employment opportunities will lead to a reduction in unrest and violence linked to high unemployment rates in certain countries along OBOR. That said, winning the hearts and minds of local communities will be key to the success of international ventures. Foreign companies which are seen to be overly self-interested stand to face significant challenges if community interests are not prioritised.When discussing the exciting benefits and opportunities for international companies associated with OBOR, particularly in regards to major infrastructure projects, it is important to give serious consideration before committing and work to assess the risks and plan accordingly.Some of the key risks to consider include:
- Regulatory risk and legal framework: Lack of awareness of legal framework and regulation when working abroad can lead to costly delays if companies aren’t prepared.
- License revocation: Infrastructure companies operating abroad often need to apply for a large number of licenses, such as import/ export and environmental licences, before they can break ground. This often comes at a hefty cost. Additionally, there is the risk of licence revocation. In a recent case, a well-known telecoms operator saw its licence to operate in a country revoked by the government with little to no prior notice or explanation, leaving it in a very precarious situation. Such actions result in a company needing to repatriate teams, assets and materials
- Political violence: This is especially relevant to OBOR in light of the political landscape in some of the countries the land route passes through. Some characteristics known to the region include weak governance and lack of social welfare, which has the potential to lead to political instability, rioting, terrorism and conflict. All these factors may impact contractual issues, increase risk to foreign and local employees, and result in financial losses.
- Environment and social sustainability: Adhering to internationally-recognised standards when working on large scale infrastructure is critical. While the Asian Infrastructure Investment Bank (AIIB) and other infrastructure banks comply with these principles, companies and governments need to also follow suit and ensure all environmental and social aspects have been taken into account before breaking ground. It is essential that companies have done their homework and don’t find themselves risking the lives and livelihoods of local population in the process of building infrastructure.
Paying attention to the social aspect of a project can ensure the local community have good faith in a foreign company. This has the potential to avert political risk and situations such as a revocation of license due to a perceived lack of interest and care shown towards the host country and population. The importance of environment and social care cannot be underestimated and are essential to the overall smooth running of a project, as well as long-term preservation of the planet.
- Currency Inconvertibility: This may also pose a risk in countries on the OBOR path. Regardless of the outcome of the project, a company is exposed to a potential loss if the currency they are paid in can’t be converted due to extreme volatility, or sanctions.
- Breach of contract: While seemingly an obvious risk, breach of contract remains a major issue when working in countries with a potentially weak judiciary and a lack of accountability.
Despite the hazards and uncertainties, OBOR projected investments are estimated to benefit 4.4 billion people in 65 countries (Source : SCMP) and has the potential to truly revive a powerful trading route of the past.