Risky Business

8 Sep 2011

In an era of globalisation the perils of working abroad need careful assessment before venturing further afield in an effort to secure a steady fee income stream for cash strapped UK businesses, it certainly is far from simple to say the least.

Recent events in the Middle East and North Africa, (the so called ‘The Arab Spring’) have brought a great deal of uncertainty to those in the industry who had invested time and money in foreign ventures seduced by the concept that they could ride out the recession by securing contracts abroad.

Such projects lead to risky business. The Middle East, North Africa China, India and other emerging markets, all have distinct cultures and business ethics from those we take for granted such as freedom of speech and humanitarianism in the UK to mention a few.

Putting aside politics and morality, the financial rewards can no longer be certain!

The profit margins, if any, are difficult to gauge. In majority of these countries, you are forced to leave somewhere around 15% -20% of your earnings in the country and/or are required to spend it in there. For most projects that last tranche of fees is highly likely to be your profit margin.

In many cases you are not allowed to undertake work there without employing the local “agents”, further reducing your margins. Not to mention the cost of travel, support staff and additional resources that is needed to service these projects.

Following the Iranian revolution of 1979 many construction sites were left as ghost towns due disputes that arose following the governmental chaos that ensued. Historical land disputes were resurrected crippling further development it took over a decade for the property development to stabilise. Even now, over thirty years later, it remains a gamble.

In the case of Libya, you are damned! Many of the UK players who embraced the new attitude towards the West which followed Tony Blair’s new found friendship was always at risk of political change. There would seem no quick fix for those caught up in the recent UN action as victory against Gadaffi will not secure swift settlement of debts incurred by the previous regime. Defeat is likely to signal no realistic prospect for payment until the next occasion Libya feels warmth for the West which is unlikely to be this decade.

Listening to an industry colleague who was sharing his experiences of working in India recently, I found it fascinating that despite his comments about how much he enjoyed working there, his concerns were for the potential discontent from the lower masses as they see the super-rich prosper with no obvious benefit to the poor.

The Chinese are doing what the Japanese did decades ago, bring the skills in, learn them, do it better than those who taught them and sell it back cheaper! The Mid nineties crash in the Far East was the catalyst for the Chinese to determine that they would never let western markets consume their economy and set out the independence that led to their current dominance.

Last month the Bribery Act 2010 came in to force.  The 2010 Act signals a complete reform of corruption law that will enable courts and prosecutors to respond more effectively to bribery at home or abroad. In my view this is one of the most important statutes to affect those who contract abroad. What we in our society do not tolerate is often precisely what can be expected when working in these markets. Culturally it is seen as part of day to day life that certain individuals benefit from those who have interest in doing business with them.

 “Those companies doing business overseas will perhaps face the strongest challenges under the new law, with over 60% of respondents still having the perception that there are places in the world where it would be difficult to do business without paying a bribe…” extracts from article by DLA Piper.

The only defence available to commercial organisations charged with the corporate offence will be for the organisation to show that it had adequate procedures in place to prevent an act of bribery being committed in connection with its business. It is difficult to see how you can be in control of events without a permanent office in the country and team of legal eagles to keep you on the right side of law. Did I mention the cost!?

Venturing abroad and capturing work outside UK works for a lot of companies, but before expanding internationally, you should ask a few questions before buying that plane ticket.

I recently came across an article by James Caan of Dragons Den on overseas expansion. He mentions that, most people he asks what percentage of the domestic market you have, they answer by saying, it is under 5%! “If your domestic market is less than 5%, then why would you go to a country where you don’t know the regulations, you are not aware of taxation policies, employment laws, culture nuances of that country, plus taking on the additional burden of the currency risks, speculation and local inflation? It is mad...”

Add all those factors up and the come back to the question of international expansion. You don’t have 95% of the market at home, where you know all of these issues. But yet you want to expand into a market that creates a much greater risk for you and your business?

It is all about timing and choosing your markets carefully, doing your research, understanding your risks and managing them well.

So why would you do it? Some I suppose, do it for turnover to just survive, some have the romantic notion that they are an international company over night by winning a commission or two in one country and go out to grow their portfolio of works elsewhere, and there are those who can truly make a success of these ventures and grow their business on the back their new fund goldmine! Those are however, few and far between.

The question you have to ask yourself; is that the life for you? Putting all the financial and business risk aside, from a personal point of view, is the life of planes, trains and automobiles what you set out to do? Is spending hours, days from loved ones, living off a suitcase, nights in a different accommodation worth any potential rewards that may come from these ventures?

Babak Sasan
Director
SASANBELL UK