Risk identification
Doing business is always associated with a variety of risks, ranging from strategic risks (the risk that the company’s strategy will be ineffective) to project-related and technical ones. In case of agreeing to develop telecommunication capabilities in Slovobia the Australian Telewonder Telecommunications Corporation can face a number of risks, able to influence the project itself, as well as the company’s finances and reputation.
Firstly, the facts of the case allow suggesting that there is a significant risk of the company’s inability to complete a project due to external pressure. The major reason for that is the lack of democracy in the state that is likely to exert a significant impact on political stability. In case Muslim insurgency in the South-Western part of the country continues, it may lead to a revolution and a change of government.
Subsequently, it may appear that telecommunications fall without the scope of the priorities for governmental actions, and the financing of the project will be terminated.
In this regard, a range of financial risks exist. As it is stipulated in the facts of the case study, the major sources of projects’ financing include the governmental finances, funds of commercial banks, as well as a low-interest loan from the International Development Association. It can also appear that additional sources (e.g., foreign investments) will need to be attracted. Risks are associated with all the above sources, especially given the difference between official and black-market exchange rates
First of all, the possible change of the government can result in the fact that not enough governmental funds will be available to finance the project. Secondly, the weakening of the national currency (that will inevitably follow the change of the government in Slovobia) is likely to exert significant influence upon commercial banks’ capabilities and willingness to support long-term projects, requiring significant investments in Slovobia.
In this regard, it is also crucial to mention that the lack of opportunities to conduct democratic elections in a country, as well as a threat of revolutionary changes is likely to lead to an unavailability of foreign investments for long-term infrastructure projects. Thus, it can become highly problematic for Slovobia to obtain a low-interest loan from the International Development Association, as well as attract funds from foreign investors. Furthermore, if the country’s national currency weakens, it will require loans for ensuring relative stability of Slovars. The multifaceted financial risks show that it will be rather hard to obtain the monetary compensation from the Government of Slovobia in case the financing of the project will be interrupted.
When considering the project in Slovobia, it is also important to understand reputational risks. The lack of democracy and significant share of black market in the economy usually tend to go along with corruption, especially in the sphere of long-term infrastructure project. In case it is revealed that corrupt elements characterized the implementation of the long-term telecommunications project in Slovobia, the name of the Telewonder Telecommunications Corporation will be further associated with corruption and the lack of transparency in providing services.
While operating in Slovobia is associated with important risks, stemming from current political instability in a country and economic pressures, it can still be viewed as an opportunity to enter the market of post-Soviet countries, where telecommunications systems tend to be outdated and requiring in-depth change. Following the start of the project in Slovobia the company has a chance to obtain new requests for proposals from other states in the region. Therefore, an in-detail assessment of the above risks’ impact and possible risk mitigation strategies is necessary to understand whether it is possible to take such opportunity.
Risk impact assessment
As it was mentioned above, the company faces three major categories of risk, such as project, financial and reputational risks.
In case the current political instability in Slovobia results in the state’s inability to finance the project after the commencement of its implementation Telewonder Telecommunications Corporation will have to terminate the project. In this case it will hardly get the compensation for the time and efforts, invested into the project. It can also happen that the Corporation refuses from other project proposals, relying on the Government of Slovobia, and loses these opportunities. In most general terms, the later the refusal from further financing occurs, the more significant project-related risks occur. However, dependent on the mode of funding, the financial risks can either also increase or decrease.
Reputational risks, associated with the Corporation’s activities in Slovobia, are likely to reduce potential customers’ willingness to refer to the Corporation and, thus, make it more vulnerable to competition pressures.
Risk mitigation strategies
The project in Slovobia represents a set of both risks and opportunities for Telewonder Corporation. Therefore, if the Corporation decides not to refuse from a challenge, specific attention needs to be paid to the development of the risk mitigation strategies. The majority of the above risks can be mitigated with the help of envisaging specific clauses in the contract the Corporation will conclude with the Government of Slovobia.
Generally, any new Government is a successor of the previous one, and retains the obligations, taken by the former. However, taken an instable situation in Slovobia, it is necessary to emphasize that the change of Government and its development-related priorities does not preclude the termination of the contract. It is also possible to stipulate that the change of Government is not considered a force majeure for the purposes of this contract and provide for the Corporation’s right to compensation in case the Government of Slovobia decides to terminate a contract. If legal practices of Slovobia allow doing so, a specific commercial bank or several banks can provide guarantees in this regard. If significant shares of funds come from commercial banks, it is recommended that the banks become parties to the contract with the Telewonder Corporation, and provide respective guarantees of their participation in the project, despite possible changes in governmental priorities.
Furthermore, it is useful to envisage different rates of compensation, dependently on the stage of the project’s implementation, whereby it is announced that the Government is not able to continue the project.
It is also crucial that the price of the contract is set in U.S. dollars. It is highly important to provide that the Telewonder Corporation will only start the implementation of the project, if the Government of Slovobia and/or other actors are able to make an advance deposit, constituting not less than 50 percent of the whole price of the contract. The reputational risks can be tackled with the help of due diligence procedures to be run by the Telewonder.
