An online monthly research publication by the Ivey Business School 

Volume 13, Number 12
December 2007

Power politics

Guy Holburn’s research helps firms understand the political risks of moving into foreign markets

CalEnergy, an international energy firm based in the United States, invested more than US $500 million in power generation assets in Indonesia just before the Asian financial crisis in 1997. When Indonesia’s currency collapsed, the state power company reneged on agreed power purchase rates, leaving CalEnergy with an investment that was literally sunk in the ground and a government guaranteed contract of little value.

With the move to privatization and deregulation around the world, there are many new opportunities for foreign direct investment, especially in emerging markets. But, as CalEnergy discovered, they often come with significant risk. “It’s very rare for governments to expropriate directly,” says Ivey Professor Guy Holburn. “More likely they will do it indirectly by changing taxation, profit repatriation or licensing policies, or by exploiting contractual weaknesses.”

In one stream of his research Holburn focuses on corporate international expansion strategies and how multinationals decide which countries to invest in. In a recent study, jointly conducted with colleagues at Duke University and Wharton, he looked at private power generation projects in 60 countries to gain a better understanding of what leads to politically risky environments. Traditional measures of political risk tend to be based on short-term assessments of government policy and economic conditions. This approach has limited value for power projects, which last for decades.

In his study Holburn found that 20 percent of private power firms were forced to re-negotiate with host governments within the first 10 years. To understand why, he analyzed eight million news stories about national business-related events to identify societal attitudes towards private business in each country. He found that more re-negotiations took place in countries that believe government should have a strong role in managing the economy. “The underlying culture and societal beliefs are important,” he says. “Skeptical attitudes towards the private sector make it easier for opposing stakeholders to draw those sentiments into organized coalitions and take advantage of events, such as a downturn in the economy, to lobby against foreign investors.”

In a related stream of research, Holburn looks at how firms can work with governments, NGOs, activists and other stakeholders in order to shape their business environment. “Understanding how public policy is created and influenced is the first step for firms in designing strategies that enable them to play a role,” says Holburn. “However, firms sometimes stumble in their dealings with government since critical policy issues often occur only infrequently”.

There are examples though of firms which have successfully navigated through political and regulatory challenges. Recently Holburn produced a case study and video documentary on Porter Airlines and its battle to gain approval to fly out of Toronto Island Airport. Although the airline was opposed by a strong local residential and environmental group supported by Toronto mayor David Miller, the firm gained critical backing from the CAW. The union, who stood to gain by Porter’s commitment to purchase aircraft from Bombardier’s Downsview facility, helped lobby and ultimately lead Toronto city council to approve the proposal in 2003.

Holburn is also active in Ivey’s Lawrence National Centre for Policy and Management, which focuses on building links between business strategy and public policy. Recently he worked with the Centre to organize a conference on environmental sustainability in the electricity sector, an area he is continuing to research. “There’s no one perfect fuel that is low cost and environmentally friendly,” he says. “There are always tradeoffs involved, so having a mix of fuels and technologies is generally going to be the optimal approach. The challenge for the government is in reaching some consensus about the specifics of the mix.”

Holburn believes that there’s a substantial opportunity in conservation, such as switching to compact fluorescent lights or “smart” meters. “It’s important for governments to encourage households and businesses to use technologies that help them manage power more efficiently. A measure like time-of-use pricing would make people aware of the true cost of energy generated during peak periods. That in itself would make a big difference to overall electricity demand within Ontario.”

 

Professor Holburn's Homepage

Supplement: Q&A with Professor Stewart Thornhil on Survival and Growth of New Ventures

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