As a general rule, war is bad for business. Apart from military suppliers and private security firms, violent conflict in a region spells disaster for foreign and domestic business communities alike as it removes what most companies consider the most important of all investment criteria: political stability and reliable governance.

Not only does war disrupt everyday commerce, distort commodity prices and reduce demand for consumer products, but more often than not it prompts an exodus of foreign firms and creates an investment gap which becomes a major problem when reconstruction starts.


And when a conflict ends and the long and arduous task of reconstruction begins, there is a window of opportunity during which prospective foreign investors must weigh up the potential risks versus the business opportunities of being a first mover into a post-conflict region. The difficulty comes in determining when a country has become a viable investment destination: there is no formula for doing so as much depends on a company’s appetite for risk and the value proposition the country has to offer.


Reconstruction efforts

The Organisation for Economic Co-operation and Development works with development agencies across the world in post-conflict regions to help in reconstruction efforts. Mike Gestrin, senior economist at the organisation’s investment division, says that the international development community is now focusing on a country’s business environment much earlier in the post-war development cycle than in the past. “In the old days, business climate was last on the policy agenda and you had to make sure the bullets had stopped flying first; core service issues were the priority,” he says. There is now a greater recognition of how the private sector can help in the reconstruction of a former war zone by directly supporting the building of roads, schools and transportation, “which makes sense as they may well become the primary beneficiaries of infrastructure improvements”, he says.

After Sri Lanka’s 25-year civil conflict ended in May this year, foreign companies may view the country as a lower-risk investment location. Global freight forwarder DHL has been a long-standing investor in the country and Amadou Diallo, CEO for south Asia-Pacific, is optimistic about Sri Lanka’s growth potential. He says the country’s strategic location along the major air and sea routes between Europe and the Far East uniquely positions the country to capitalise on increasing trade flows between south Asia and Europe and makes it a critical location for DHL.

Mr Diallo agrees with the current general consensus that the private sector has a role in reconstruction and is responsible for developing some of the infrastructure platforms of emerging markets in collaboration with local governments. “It all contributes to global trade in the end,” he says. DHL operates in 220 countries, many of which are in the midst of some kind of conflict. The company sees its role as enabling trade for businesses operating in those countries; otherwise it becomes pretty complicated for local people to trade in global markets, says Mr Diallo.

There will be situations when the risk is simply too great, but really knowing what is going on in the field is critical for making the decision about whether to pull out of a conflict zone or indeed when to invest further. DHL works on the basis of joint ventures with local operators and sees this as the key to correctly assessing a situation. “Our partners know the market better than anyone else. For example, in Sri Lanka we have been working with a joint-venture partner for the past 30 years,” says Mr Diallo.

Working with governments is critical to enabling the free flow of trade after a conflict. But whether a country is ready for investment is largely dependent on how fast governments open their markets to FDI, says Mr Diallo. “In Sri Lanka, for example, the stock market grew 50% in the four months since the end of the war whereas in other countries such as Iraq, for instance, it may take years,” he says.


Investing in Iraq

In post-war Iraq, foreign investment is badly needed in order to restart oil industry activity. But the Iraqi government’s efforts to court Western oil operators failed spectacularly in June this year at an auction for contracts on eight oil and gas fields. The only deal to materialise involved UK company BP and China’s CNPC agreeing to the Baghdad government’s terms – effectively halving the fees they would earn from the national oil company on every barrel of oil. There was also concern over the lack of a hydrocarbons law and clarity about the decision-making powers of the foreign oil companies versus the Iraqi national oil company with which they would be collaborating

on oil field reconstruction – all of which highlights the importance of establishing good business practices to entice foreign investment back in the aftermath of war. Governing authorities need to outline a legal framework and tax regime for investment as well as working on the provision of high-quality transport infrastructure and utility services.

The re-establishment of hotels and airlines is often a reliable barometer of a country’s recovery after war. In April, UK airline bmi announced its intention to re-establish air links between the Iraqi capital Baghdad and London from summer 2010. Aside from the short-term benefits of expanding into a post-conflict region – such as the immediate demands of an unserved market – there is the long-term benefit of loyalty towards a company which has taken a first-mover risk and provided much-needed foreign investment at a time when others have bailed out. “The Middle East is a region where loyalty counts a whole lot more than in Western businesses and they remember their friends,” says Nigel Turner, chief executive of bmi, who adds that his theory has been proven. “Everyone was piling out of Saudi Arabia in 2005, running for cover, but that’s when we went in and that has not been forgotten,” he says.

Another sign that a region is ready for investment is the re-­establishment of high-end hotels to serve the returning international business community. Hotels are often a target in violent conflict – particularly Western-branded chains – so the establishment of a brand-name hotel indicates a lowered level of risk. Emirati luxury hotel group Rotana and Lebanese holding company Malia have announced a partnership deal for the management of a five-star hotel in the northern Iraqi city of Erbil. The $55m, 205-room Rotana Erbil, due to open in late 2009, will cater largely for business travellers. The relative security of the Kurdistan area of Iraq makes it a good gateway to the rest of the country, according to the Rotana Group. “The Kurdish northern region is relatively safe and the hotel will help rebuild the country’s economy,” says a Rotana spokeswoman.

Despite the government’s failure to attract foreign oil companies, there is good evidence to suggest that the reconstruction of Iraq is well under way and that investment opportunities for larger companies are ripe for the picking. But timing is all important and a number of foreign companies entering Iraq during 2003/04 expecting a reconstruction boom got burned, says Crispian Cuss, a senior strategist at the Olive Group, a strategy and security firm which helps multinationals to operate in hostile environments.

The appetite and ability to absorb risk is much more evident in smaller private companies which can turn around and assess a market quickly and exploit the first few pickings of a post-conflict situation. Larger companies are beholden to shareholders, layers of hierarchy and legislative scrutiny, all of which often renders a situation too risky for many within the organisation. Small frontier investors are traditionally the first in, says Mr Cuss, and they either do very well or very badly. People who went into Iraq in the early days, providing logistics, housing and food, did well. “It is only really now in 2008/09 that with the reconstruction finally happening, larger companies are seeing a real opportunity,” he says.


Matter of timing

Apart from badly timed investments, the most common mistake among investors in hostile environments is the belief that business can be carried out from a distance. A lot of people thought that all they needed when they went into Iraq was a security plan, says Mr Cuss. Some companies see an opportunity but do not want to accept the risk so they try to do business through third parties and intermediaries, whereas a company prepared to accept the risk and meet local business people and government ministers is going to get the deal. “The two things they were lacking were political liaison and logistical support – it is important to meet the people who matter,” says Mr Cuss.

Global head of strategy at Accenture, Mark Spelman, says the drivers for investment in post-­conflict zones are no different from those created by globalisation more generally; these are access to consumer markets, talent, innovation, capital – particularly sovereign wealth funds – and commodities. “Then you can look at the risk factors against these opportunities,” he says.

The problem comes in assessing this risk. The biggest mistakes happen at the early stages of assessment before on-the-ground operations have been launched. For the companies entering Iraq in 2003/04, the false assumption was that the country was ready for reconstruction. “If the initial assumptions are wrong then the companies will have difficulty on the ground and the most common mistake is over-optimism up front,” says Mr Spelman.

Risk assessment becomes critical when ensuring the safety of staff working in hostile environments. The most basic staff safety requirement for a company is to know where staff are at all times, which many security companies can do with travel-­tracking software and other

security tools. The terrorist attacks in Mumbai last year demonstrated how many companies simply did not know if their employees were in the area and caught up in the attack.

When risk is assessed correctly and an investment is timed right, being one of the first companies to invest in a post-conflict region has its definite advantages of loyalty and long-term relationship building. But so too does holding fast throughout a conflict once a business has been established in a region. Property and investment group GRDC was founded in a joint venture in 2004 by two Georgian nationals and a foreign national. It now has a large portfolio of real estate investments, from land banking to the near completion of a 22,800-square-metre shopping mall adjacent to Tiblisi’s central station. CEO Tony Phillipson says the recent conflict with Russia has affected all investors. “Obviously demand has slowed down and we are one of the few companies that has continued to go forward on the development side,” he says.

For a company such as GDRC, continuing with plans, despite the political turmoil last year of a Russian invasion, had the benefit of clearing out the competition. The conflict saw most foreign investors halt activity

in Georgia even though few pulled out altogether. “In the case of our shopping centre we are the only ones who have continued development and it will be opening in October,” says Mr Phillipson, adding that a lot of the competition the company had been anticipating has dried up. “So you could take the view that the strongest have survived,” he says.


Built on trust

Established relationships in-country can actually mitigate future risks, even in a perennially unstable host country. In 2007, the African republic of Guinea was beset by political turmoil which included a period of marshal law and a regime change resulting in significant civil unrest. By that time, Canadian listed company Global Alumina had been in the country since 1999, attracted by a nation which boasts one-third of the world’s bauxite reserves. The company enjoyed tremendous government support when it took a basic agreement for a refinery project to parliament in 2004. The international development community had been working with the government for decades on a plan to develop its aluminium industry and the country’s refining capacity to help poverty reduction; this meant that the firm was incredibly well received.

According to the company’s chief financial officer, Michael Cella, the firm’s relationships cross party lines and run very deep. In this way, the company has mitigated future risks of political turmoil because its relationships are so ubiquitous. “The biggest first-mover advantage was the opportunity to build solid foundations of trust which are remembered and rewarded in the long run – a firm grounding which has helped us over the years,” he says.

Despite the political turmoil in 2007, the company raised substantial capital from selling part of its interests: one-third to BHP Billiton, one-­quarter to Dubai Aluminium and one-eighth to Abu Dhabi’s Mubdala. With its strong joint-venture partners, the company hopes to initially produce 3.3 million tonnes of alumina a year from a $5bn plant which is in the planning. There are very definite advantages of being a first mover into Guinea, says Mr Cella, including the ability to negotiate prime real estate and priority access to existing port and rail infrastructure within the country – a significant economic advantage against competition because replicating a comparable transport infrastructure would cost somewhere in the region of $1bn.


First come, best served

A sure benefit of investing in a country after a period of instability is the welcome that a foreign investor is likely to receive from a grateful host country government. In Sierra Leone, the mining company Titanium Resources was the first to reopen its operation in 2006, after a long and bloody civil war ended in 2002. The company was active in Sierra Leone before the country suffered the instability of civil war and continued to invest and maintain a skeleton presence despite the troubles. Any benefits received were as a much a result of the long-term relationships that the company had established in the country as any first-mover advantage, says chief executive John Sisay. The company received incentives from the government to return and make the significant investments required to restart operations.

“These were part of a package of measures which provided the necessary reassurance to our trading partners and shareholders that our investment would be sustainable over the long term,” says Mr Sisay. The government encouragement in getting the mines re-opened was not surprising as prior to the conflict Titanium Resources was one of Sierra Leone’s biggest tax-payers.

Whether a company is entrepreneurial in nature or a large multinational with a long-standing history in a host country, deciding on when to invest in a post-conflict region, if at all, will involve a complicated matrix of factors. At which point along the sliding scale of risk a company decides to invest will depend on its size, sector and appetite for risk. As the saying goes, there are no rules in war, and perhaps just a little of that sentiment can be applied to investment in its aftermath.


For the top ten tips on investing in hostile environments, visit


Top ten tips for companies investing in hostile environments

The Olive Group is a risk management and security company -- or a 'life support provider', as it calls itself -- helping companies to operate in hostile environments, most recently helping the oil and gas industry in their efforts to establish operations in Iraq. Senior strategist Crispian Cuss shares his top ten tips for companies operating in hostile environments:

1. Understand your risk appetite. What is it you wish to achieve? Define the parameters you are prepared to work within because the risks and rewards must add up.

2. You need a threat analysis of the environment - both situational and specific. A generic country risk assessment is not enough, a detailed understanding of the local environment is required.

3. Stakeholder engagement with local community is essential to safeguard your project and ensure local support.

4. Make sure you complete due diligence on local partners before entering into any agreement.

5. Be wary of finders’ fees, or agents who claim to act on behalf of clients.

6. A duty of care to own staff and agents working for you is vital. Preparation and training of staff, briefings, individual tracking, medical plans, evacuation, etc are all essential.

7. Ensure you have adequate security, logistic, communications and life support plans.

8. Ensure you have evaluated possible reputational risk.

9. Be wary of contracting law limitations in emerging markets.

10. Be aware of human rights issues, and be compliant with local laws and licensing arrangements requirements.