A robust construction marketplace offers an exciting opportunity for construction and engineering firms to expand beyond their borders to do business internationally. However, this pursuit of global growth exposes companies to political risks that they do not normally encounter in their native countries. Host-country instability and adverse government actions are among the examples of political risks that should be properly assessed and managed, especially when projects are located in emerging markets.
When companies pursue opportunities for growth in emerging markets, they face many complex risks, including political risks. Broadly speaking, political risk is the range of politically motivated events that adversely affect investments, contracts, or other overseas exposures.
Political risks that an engineering or construction firm might face include:
- Failure of the host government to pay contractually due amounts, due to either inability or unwillingness to meet obligations
- Refusal of a governmental entity in the host country to pay arbitration awards in favour of the contractor or the engineering firm
- Damage to construction equipment from politically motivated violence
- Seizure of equipment or assets by the host government
- Inability to convert local currency earnings or contract payments into hard currency
- Wrongful call of on-demand standby letters of credit posted as bid, performance, or advance payment bonds, or a fair call precipitated by a political event
Often, several of these threats may exist in a single operating location, which complicates the task of assessing your company’s full political risk exposure.