Thu, Jul 30, 2015

Mitigating Southeast Asia Natural Resource Risk

Natural resource projects in many parts of the world are inher-ently fraught with complex risks: exposure to corruption, politi-cal and regulatory shifts, local partner risks and environmental concerns, to name only a few. Southeast Asia is no exception, and is home to some of the most culturally varied and politically volatile sub-regions in the world.

While complex, the mitigation of such risks is possible through carefully gathered – and heeded – on-the-ground intel-ligence and an understanding of the local context. Kroll continu-ally encounters situations where a sophisticated understanding of the local operating environment can help responsible busi-nesses avoid problems in the first instance, and help disentangle the issues once they have arisen.

In Indonesia

In Indonesia, political and business interests often overlap. Kroll frequently encounters complex, matrix-like patterns of political stakeholders threaded around significant natural resource pro-jects. The number of parties involved is typically higher than that in other parts of the region, and in a country where corruption remains a constant issue, a multiplication of such stakeholders means a direct multiplication of corruption risk. It also means that projects are more prone to the push and pull of political interests (both national and local), which can often impede pro-ject development, and in some cases, embroil unwary foreign parties in emotive land disputes and local inter-family and inter-clan conflicts.

The reasons for the unusual complexity vary by region, but a primary driver is the continuing decentralisation of political authority in the country. While the process began in the country’s Reformasi period, the consolidation of political power in local governments continues today, and nowhere is this more evident than in the conflict between national and regency level authori-ties over concession rights and land permits. Dissonance between the viewpoints of stakeholders in the country’s Javanese centre and peripheral regions is common, and can be difficult to per-ceive, and the interests of local indigenous and environmental rights groups are critical to consider. As seasoned market players know, in any project – whether it is a geothermal project in Sulawesi or a gas infrastructure project off of Java – agreement from both national authorities as well as regency-level leaders is a requirement and must be monitored.

In Myanmar

Natural resources projects in Myanmar have their own set of risks, which are not entirely dissimilar to those of Indonesia. Stakeholders are a complex array of regional and central stakeholders, which, like in Indonesia, is made more complex by the multiple ethnic groups that occupy some of the most resource-rich regions in the country.
However, in Myanmar, the key difference is the presence of military actors – both national forces and regional ethnic armed groups – in stakeholder networks. This is a concern for a variety of reasons. Any company concerned with US sanctions issues must avoid any business relationships with the military, including the large military holding companies that are active land-holders across the country. Proxy relationships with sanctioned former generals and even sitting military officials is also common, so determining who it is you are actually dealing with is critical.

Because of these factors, reputational risk is perhaps highest in the region, as there remain multiple ongoing low-level conflicts across the country, and international scrutiny of the econ-omy remains high. Land rights issues are a constant concern, and highly emotive – especially in ethnic minority-controlled areas. Human rights issues around some of the country’s largest extractive projects are well-documented, but they exist around lesser-known projects as well. As the country continues through its reform process and control shifts to reformist groups, new instances of such issues will continue to attract international attention.

Remain Aware

None of the situations described above are obvious to an outsider. Smart investors without a real cultural understanding of how business is conducted could find themselves with a serious prob-lem, and they often do. Such issues need not be project killers, but it is definitely wiser to be aware of the situation beforehand rather than be wrong-footed unexpectedly.

This article was first published by Asian-mena Counsel, magazine for the In-House Community (www.inhousecommunity.com).


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