By Jay Vincent
The Saint Consulting Group
If you’ve ever invested millions or billions in capital to develop a project and watched it all disappear one night at the hands of a few elected officials who voted ‘no,’ stop reading. You know what political risk is and wish you had included it in your project risk analysis.
On a macro level, if you are an energy company with generation and distribution assets and future project plans, no minute goes by where your thoughts don’t turn to how climate change discussions on Capitol Hill or in Copenhagen will impact your business.
Companies with significant dollars at risk often turn to professionals to manage how political decision-makers will impact their industry. Lobbyists, PR professionals, attorneys and ad agencies are utilized to manage (or minimize) the impacts of political decisions on their short-term and long-term investments.
Increasingly, these efforts also extend to land use permitting by employing political strategies to minimize investment risk.
The investment community is no longer immune from local political or NIMBY influence. Long delays in the permitting process, endless legal appeals or even outright rejection of zoning and land use applications are a serious threat to investors.
Political risk management, be it for a wind farm, a gas-fired generation facility or a linear land use project such as a pipeline or transmission line is increasingly applied in the following areas:
Understanding risk is the first step to minimizing the loss of investment. How many of you wouldn’t allocate less than one percent of the capital raised for your project to understanding whether you would get any return on 100 percent of that investment?
Yet, a majority of those involved in the energy and capital markets community fail to conduct political due diligence to determine the risk of losing the vote that delivers the return on investment.
Once you’ve calculated the risk factors and made a decision to pursue permit approvals, you manage that risk by doing what it takes to ensure that every dollar spent in the development phase is an investment in future earnings once operations commence. A dollar spent reducing your development timeline means a quicker return.
Land use decisions are political. Therefore, if political pressure from residents in support of your projects is applied early and often, you’ll see your first dollar of investment return sooner. Local community opposition equals risk to early returns or no return at all.
Asset Protection & Sustainability
For a family that has bought a new home that purchase represents the most significant investment in their future. If a detrimental use were proposed across the street from their house, their opposition would be rooted first and foremost in a desire to protect their investment. The same is true for your investment in your project. Those who stand idly by while threats to their market build up around them are destined to see a reduction in returns on their investments.
Risk doesn’t end after your operations begin. Holding fast to your market in a down economy is critical to coming out of it intact and with advantages in the market.
Jay Vincent is senior vice president for energy, The Saint Consulting Group. email: firstname.lastname@example.org phone 312.970.5770 Ext: 7502