International Companies and Post-Conflict Reconstruction

Cross-Sectoral Comparisons


<p>The role of international companies in post-conflict reconstruction is an essential complement to the work of international aid agencies. However, if policy-makers are to secure the maximum benefits from private investment, they need to understand how different companies and sectors view opportunity and risk, and find ways to assess their overall impact in post-conflict settings.</p><p>In development circles, the debate about the role of business in conflict-affected regions has tended to focus on natural resources, particularly petroleum and mining. This paper begins with a review of the extractive industries, but then broadens the discussion to the impact of three other commercial sectors: mobile phones, construction and engineering, and commercial banks. It cites examples from Afghanistan, Bosnia-Herzegovina, Iraq, Somalia, Sierra Leone and Timor-Leste.</p><p><strong>Opportunities and Timeframes </strong></p><p>The four sectors vary in the scale of investment that they need, and the time-frame in which they expect to make returns. These calculations in turn influence their attitudes to conflict-affected environments.</p><ul><li>For petroleum and mining companies, location is everything. If the geological opportunities are attractive, they will consider how to deal with political and security risks. ‘Junior’ companies are particularly willing to take high political and security risks at the exploration stage in the hope of making major finds before their competitors. However, the emphasis of companies’ risk calculations changes at the production stage. Large projects require hundreds of millions or billions of dollars of investment and may continue for 20 or 30 years. In principle, although not always in practice, the major Western investors who have access to this kind of finance look for countries that will be stable and secure throughout this period.</li><li>Mobile phone companies make smaller investments and get quicker returns. The initial outlay may be of the order of tens of millions or the low hundreds of millions of dollars. Companies start getting a return as soon as the first subscriber makes a call. Emerging markets—including conflict-affected areas—are attractive because they are far from ‘mature’ and may scarcely have been touched by competitors. Investors may be able to pay off their initial outlays in two or three years, even in conflict regions.</li><li>In the immediate post-conflict phase, major construction and engineering projects tend to be financed by bilateral or multilateral aid. International companies can be confident of being paid from this source. The political risks obviously increase to the extent that they are involved in operating projects—for example running power stations or toll roads—rather than simply building them. In that case, they will want to be confident of longer periods of stability to ensure the security of their profits.</li><li>Initially, the most promising clients for international banks are likely to be internationals, for example diplomats and NGOs. The prospects for domestic retail banking are likely to be slim for several years after fighting ends. International commercial interest is commonly very limited in the immediate aftermath of conflict. The companies most likely to be active are those that, like the construction companies, are directly involved in physical reconstruction or are serving international diplomats and aid agencies. By the third or fourth year after the conflict, there may be greater interest from investors who are prepared to make long-term commitments.</li></ul><p><strong>Security Risks </strong></p><p>Security risks affect different companies in different ways. Mines and petroleum wells represent expensive fixed assets, and their protection is of strategic importance both to the companies themselves and—in most cases—to the host government. Mobile phone companies are less exposed and the fact that vi they provide a public service means that they make less attractive targets for opposition movements. Construction projects are more like the extractive industries in that they too represent substantial fixed assets although they may be in locations that are easier to protect. Commercial banks, by the nature of their operations, are always located in large cities. However, the presumed Al-Qaeda bomb attack on the HSBC bank in Istanbul in November 2002 serves as a reminder that foreign banks may be targeted because they are seen as representative symbols of their home countries. Security is a major factor in bankers’ investment decisions.</p><p><strong>Political Risks and Corruption </strong></p><p>Even if there is no renewed fighting, investors can face significant regulatory obstacles. Often, officials lack the skills and experience to cope with the requirements of a new commercial environment, or are not in full control of their territory. At the same time, many countries emerging from lengthy conflicts retain outdated laws and regulations that might otherwise have been revised. At the international level, reputational risks and debates around legal liability of companies under international humanitarian law pose further threats.</p><p>In the aftermath of conflict, physical reconstruction understandably tends to be one of the most pressing immediate objectives. Moreover, if national reconciliation is a priority, both host governments and donors will hesitate to crack down on vested interests that represent powerful political constituencies. Delays in necessary reforms carry a high price. High levels of corruption discredit the reconstruction process, and increase the risk of renewed conflict. Particularly if combined with an outdated legal framework, corruption impedes both domestic and international business.</p><p><strong>Global and Regional Companies </strong></p><p>Large companies—the truly global players—will seize opportunities in post-conflict countries if these are commensurate with their size and capabilities, for example in Iraq, but this is relatively unusual. In smaller economies, particularly in the first year or two after the conflict ends, the larger companies are rarely willing to take high risks for returns that—on the scale of their balance sheets—are likely to be marginal.</p><p>In practice, the most active foreign investors in the smaller post-conflict states are niche players with a higher tolerance of risk, or regional companies with regional development strategies. Mobile phone companies provide an example in sub-Saharan Africa, including the post-conflict countries in the region. The leading operators are either European niche-companies, or regional companies based in South Africa or Egypt. Standard Bank is a major international bank with a particular specialty in emerging markets. It has been one of the first to open a branch in Afghanistan, and has operated in Sierra Leone since colonial times. However, in other cases—for example Austrian banks in Bosnia, ANZ Bank in Timor Leste and Stanbic in the Democratic Republic of Congo—banks set up operations in post-conflict countries because this fits in with their regional strategies.</p><p>Diaspora investors—people who originated in the host countries but have established themselves abroad—also play a particularly important role. Celtel, a Netherlands-based mobile phone company which operates in 13 sub-Saharan African countries, was set up by an entrepreneur who was born in Sudan and wished to ‘give something back’ to his home region. Much of the foreign investment in Afghanistan comes from Afghan-Americans.</p><p>If policy-makers wish to encourage foreign investment in post-conflict economies, they need to take special consideration of the needs of smaller and regional companies. Among other things, these companies may need better access to finance.</p><p><strong>Conflict Impact Assessment </strong></p><p>Both business development and aid aspire to promote economic recovery. However, individual projects may, if badly designed, exacerbate social and political tensions rather than alleviating them.</p><p>Greater awareness of the risk of ‘doing harm’ has increased interest in the concept of conflict impact assessment as a sub-category of social impact assessment. The UN Global Compact, which was formally launched by UN Secretary-General Kofi Annan in 2000, took up this theme in one of its first dialogues between the UN and representatives of the private sector. In 2002 the Compact published its <em>Business Guide to Conflict Impact Assessment and Risk Management in Zones of Conflict</em>. Meanwhile, researchers and NGOs have been taking this idea forward by developing new conflict impact assessment tools. For example, International Alert will soon publish both a Macro-level and Project-level Conflict Risk and Impact Assessment tool as part of its forthcoming <em>Conflict-Sensitive Business Practice Toolbox for Extractive Industries</em>.</p><p><strong>Corporate Responsibility and Peace-Building </strong></p><p>Like development projects, international companies may contribute to either peace or war, but on their own will serve neither as the sole source of conflict nor the sole remedy. The most important questions are how to minimize the risk of causing harm, and how to maximize the social benefits of their activities.</p><p>Most of the larger international companies now emphasize the importance of corporate social responsibility and this often includes charitable endeavors such as corporate sponsorships of education or health programs. Such initiatives are important in their own right, but companies’ most significant social impact will come from the way that they conduct their core activities, and in particular from their relationships with local communities and sub-contractors.</p><p>International companies may be larger or smaller players in local commercial ecosystems. They may act as predators, or they may provide a catalyst to other companies and entrepreneurs. In the worst cases, companies can inadvertently fuel the structural causes of the conflict, undermining prospects for recovery. However, by presenting a vision of a different kind of future, where personal success comes from entrepreneurial initiative rather than military expertise, international companies and their local partners can help find a way out of cycles of deprivation and conflict.</p>