briefing
Managing risk in unstable countries:
A conflict-sensitive approach
Guidance for Chinese extractive
and infrastructure companies
The challenge: the difficulties of
operating in unstable countries
Chinese investment in emerging markets is rising
fast. The investment is both demand and supply
driven. China’s economy needs energy and mineral
resources to maintain its high growth rates while
entrepreneurial Chinese companies are increasingly
seeking out opportunities across Africa, Asia, and
Latin America.
Companies thrive on predictability and the rule of law.
Many emerging markets offer neither. In some places,
the state may be literally or functionally absent; in
others, it may be perceived as illegitimate or
repressive. Public services may be non-existent or
benefit only a few. Security forces may be ineffective
or too aggressive. Employment may be minimal and a
source of competition.
For all parties, the potential benefits of this new
economic partnership are substantial. But so are the
challenges. High returns often come with high risks
and companies investing in states with poor or weak
governance face multiple difficulties. Violence,
political instability, social tension, poverty, and
corruption create a management minefield for
businesses.
The risks to companies operating under these
conditions are:
 Financial – higher insurance, security and
transportation costs, higher wages for staff to offset
risks, increased cost of raising capital, threat of
extortion;
 Operational – destruction of property or
infrastructure, disruption and delays to the project;
 Human – killing, kidnapping and injury, evacuation
of staff, recruitment difficulties;
 Reputational – domestic protests, international
campaigns against the company.
As many Chinese companies have discovered, these
risks are very real. In January 2012, 29 workers from
a Chinese construction company were kidnapped in
Sudan. That same year, two Chinese workers were
killed by gunmen in Nigeria, and many of the Chinese
citizens evacuated from Libya were working on
infrastructure projects. In Myanmar whole
infrastructure projects have been put on hold or
cancelled and, in South Sudan, the decision by the
government to halt oil production (between January
2012 and March 2013) had a significant impact on
China National Petroleum Corporation’s (CNPC)
operations.
Chinese companies cannot control a country’s
stability. That responsibility lies with domestic
agencies. Nevertheless, Chinese companies do feel
the consequences of instability. This is most notable
in the following areas:
Security: abusive public (and private) security is a
primary cause of concern for all companies investing
in unstable countries. Allegations of beatings, killings,
torture, arbitrary arrests, and imprisonment by army
or police can have a hugely damaging effect on a
company’s reputation and its operations, even if the
company itself was not involved. Resentment towards
the project rises, the threat of further disruption
increases, and the company can become the focus of
national and international campaigns, even potential
litigation.
Benefits: a failure to ensure local communities enjoy
the full benefits of foreign investment is a common
cause of resentment. This is particularly true in
regions where there are oil, gas, or mining projects.
Government mismanagement, corruption, or
centralisation often means that revenues are wasted,
diverted, or never distributed back to the producing
region. Weak capacity at local government level also
obstructs much needed investment in infrastructure,
jobs, and economic development. This is not the fault
of companies but companies invariably become the
target of local discontent.
Expectations: the arrival of a major project into an
impoverished area can bring massive expectations
Managing risk in unstable countries: a conflict-sensitive approach
from local populations. Investing companies may be
seen as the main source of jobs and public services
such as schools, clinics and roads. Unless the area is
relatively unpopulated, no company will be able to
satisfy all these expectations. Frustration amongst
local communities can quickly turn to anger and
ultimately to opposition to the project. From the
earliest stages of investment companies should
explain clearly to local populations what they can and
cannot do.
Impacts: Major projects have major impacts. Many
will be positive but many will not. Operations require
land and water. These may be scarce or fundamental
to a community’s culture and traditions. Livelihoods
will be disrupted, the environment to some extent
damaged. Villagers may need to be resettled and the
in-migration which always accompanies large projects
can create conflict with the indigenous population.
Fundamentally, companies need to understand the
impacts of their investment and take steps to avoid or
minimise any disruption and maximise the benefits.
Rule of Law: clear legislation and sound regulations
are critical to companies. Together, they provide
security of contract and a transparent framework
common to all investments, domestic and
international. Where they are weak, however, or not
enforced or easily circumvented, companies face a
great deal of uncertainty. Projects can be nationalised
or contracts renegotiated; laws can be arbitrarily
applied or ignored; taxes imposed and bribes
demanded. Even full adherence to the law and
domestic standards may not be adequate in
managing local grievances or preventing protests and
disruptions.
These challenges are not unique to Chinese
companies. From Colombia to Indonesia, Nigeria to
Papua New Guinea, Western companies have been
struggling for years to manage operations in the
middle of ethnic, social, and political conflict. Through
experience, many lessons have been learned about
how to address the challenges and thereby minimise
the risks.
Over the past ten years through assessments,
training, advocacy and advisory support, working with
a range of governments, multilateral bodies,
development/humanitarian agencies and local civil
society groups, Saferworld has strengthened the
capacity of a variety of stakeholders to operate in a
conflict sensitive way. Since September 2012,
Saferworld has been facilitating policy research and
discussion between Chinese and South Sudanese
stakeholders on how China’s economic cooperation in
the development, infrastructure, and extractive
sectors could be more conflict-sensitive.
29 August 2013: Page 2 of 4
The response: risk management
through a conflict-sensitive
approach
In recent years Chinese companies have been
successful at winning contracts in emerging markets
through technical excellence and cost
competitiveness. In unstable countries, this is not
necessarily sufficient to guarantee a successful
project, particularly one with a long lifetime. Even the
best company can unintentionally heighten tensions
or find itself caught in the middle of an existing
conflict.
Companies need a social as well as a political license
to operate. They need the support of surrounding
communities as well as the national government.
Good relations locally are the surest form of risk
management: saving money and increasing profits,
avoiding delays and disruptions, contributing to
development and growth and enhancing companies’
reputations nationally and internationally.
This is the essence of a conflict-sensitive approach
(CSA). A CSA helps companies to understand the full
range of project risks and impacts. It enables
companies to anticipate threats and identify strategies
for avoiding or addressing them. Finally, it offers
companies a means of building positive relations with
host governments and local communities. There are
two main elements to a CSA:
Conflict risk analysis: all companies undertake
some form of political risk analysis. Most also carry
out environmental and perhaps social impact
assessments. In many countries, this is adequate. In
unstable countries, it is not. Standard risk
assessments focus on legal or financial risks but fail
to pick up on the more acute and diverse social,
political, and economic risks which are characteristic
of unstable countries. Similarly, standard impact
assessments fail to identify the many and complex
ways in which a project can impact on surrounding
communities and the wider region. This leaves
companies vulnerable. Projects in unstable countries
require a more sophisticated and rigorous approach.
Conflict risk analysis provides an in-depth and
comprehensive understanding of the full range of both
the risks to the company and the impacts by the
company.
Community consultation: engagement with local
people and organisations lies at the heart of CSA.
There are two reasons for this: first, it is impossible to
understand either risks or impacts without speaking to
those affected by the project; second, local
consultation will help to build wide support for the
project. Community consultations are not one-way.
Companies need to learn from local people but also
Managing risk in unstable countries: a conflict-sensitive approach
provide information to local people. This is critical in
managing expectations.
Frequently asked questions
Does a CSA mean higher costs?
Over the long term, no. A CSA can save costs by
helping to avoid lengthy delays or disruptions and by
maintaining strong relations with local people. A CSA
does entail extra resources in terms of staff to carry
out the analyses and maintain ongoing links with local
communities and it may also entail extra time.
However, experience shows that short cuts in
analysis or community consultation can result in
higher financial, security, and reputation costs later
on.
Can a CSA be integrated into existing processes?
Yes. A CSA is not designed as an additional process.
It is an expansion of existing company risk analysis
and impact assessments.
Are my competitors doing it?
More and more. Around the world, the pressure is on
companies to demonstrate that their investments can
bring positive social and environmental as well as
economic value. The pressure is coming from all
sides. Governments themselves are increasingly
insisting on higher standards as a condition in
contracts. Local and national organisations are better
organised, more knowledgeable, and increasingly
able to mobilise. As a result, many companies are
developing more sophisticated methodologies for
improving their social performance. These same
companies are also insisting on similar standards
from their partners, suppliers, and sub-contractors.
Conflict sensitive approaches not only protect
Chinese companies but also ensure that longer-term
benefits are made to community and country in which
they are operating. Adopting conflict sensitive
approaches is a way to contribute more to social,
environmental and development efforts in unstable
countries.
How does a CSA relate to national frameworks?
As China becomes more sensitive about the
consequences of its engagement, there has been a
greater emphasis from within China on the monitoring
and evaluation of Chinese assistance projects and on
developing more refined methods of risk analysis,
including a better understanding of conflict dynamics
in conflict-affected states. In this context, adopting a
CSA will make it easier for companies to guarantee
that they are complying with new legislation,
standards, and guidelines issued by the Chinese
Government relating to overseas investment. These
include:
29 August 2013: Page 3 of 4
 Eighth Amendment to the Criminal Law of the
People's Republic of China – was passed by the
Nineteenth Meeting of the Eleventh National
People's Congress on 25 February 2011. Article
164 adds legislative provisions concerning foreign
1
bribery.
 Circular to regulate the overseas investment
and cooperation of Chinese companies – in
2008, because of increases in labour and business
conflicts, environmental protection concerns, and
project quality problems, the Ministry of Commerce
(MOFCOM), the Ministry of Foreign Affairs (MFA),
and the State-owned Assets Supervision and
Administration Commission of the State Council
jointly published the circular. Companies that
violate laws and regulations and cause serious
2
incidents in the recipient country are penalised.
 Guidelines for environmental and social impact
assessments of the China Export and Import
Bank’s (EXIM) loan projects – issued in August
2007, the guidelines outline EXIM Bank’s
environmental and social responsibility
requirements in relation to the issuance of credit
3
loans.
 Overseas Investment Administrative Measures
– promulgated by MOFCOM in 2009, the
Investment Measures outline overseas investment
behaviour codes. Companies must undertake
preventive measures as regards personnel and
property safety, establish an emergency warning
system and reaction plan, and properly handle and
4
report emergency events.
 Outbound Investment Country (Region)
Classification Guidance – produced annually
since 2009 by MOFCOM as part of its
commitments under the Overseas Investment
Administrative Measures, this guidance document
aims to help companies better understand the
investment environment of host countries. The
5
2012 report covers165 countries and regions.
 Chinese Company Guide to Overseas Security
and Risk – issued by the MFA in 2011 the
guidance document outlines how Chinese
companies operating in high-risk countries can
minimise risk. It outlines the necessity of accurately
estimating security costs before initiating a project,
closely following and tracking the security situation,
and strengthening analysis on the political,
economic, legal, and cultural context of the host
6
country.
1
http://www.cecc.gov/resources/legal-provisions/eighth-amendment-tothe-criminal-law-of-the-peoples-republic-of-china#body-chinese
2
http://www.mofcom.gov.cn/aarticle/b/g/200808/20080805721680.html
3
http://worldstory.org/wswp/wpcontent/uploads/2010/12/china_exim_bank_environmental_guidelines_
2007.pdf
4
http://www.mofcom.gov.cn/aarticle/b/bf/200903/20090306103210.html
5
http://fec.mofcom.gov.cn/gbzn/gobiezhinan.shtml
6
http://cs.mfa.gov.cn/zlfg/bgzl/lsbh/P020111123376595599558.pdf
Managing risk in unstable countries: a conflict-sensitive approach
 Guidance on Social Responsibility for Chinese
International Contractors – in 2012, the China
International Contractors Association, guided by
MOFCOM, issued this guidance document. It
draws on international standards from the UN
Global Compact and ISO 26000 and provides
information on social responsibility issues including
project quality and safety, employee rights and
career development, customer (proprietor) rights,
supply chain management, fair competition,
environmental protection, and community
7
involvement and development.
 Guidelines on Environmental Protection in
Overseas Investment and Cooperation – in
2013, MOFCOM and the Ministry of Environmental
Protection jointly released these guidelines. They
require Chinese companies to comply with
environmental protection regulations, respect
religions and the customs of host nations, and
protect the legitimate rights and interests of
8
labourers.
29 August 2013: Page 4 of 4
stakeholder body comprising governments,
11
companies, and civil society.
 UN ‘Protect, Respect, Remedy’ Framework –
recently endorsed by the UN Human Rights
Council, this framework commits companies to
respect human rights in all their operations. It
comprises three elements: commitment to a human
rights policy, human rights due diligence, and
access to remedy. It has won the explicit support of
thousands of businesses worldwide as well as
12
many industry associations.
 Global Compact – Global Compact is the largest
voluntary corporate responsibility initiative in the
world with over 10,000 corporate and other
stakeholders. The Global Compact seeks to assist
companies in managing risk through its ten core
principles covering labour, the environment, human
rights, and anti-corruption. The Global Compact
has local chapters in many countries including
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China.
 Opinions on Development of a Culture by
Chinese Enterprises Overseas - was jointly
issued by MOFCOM and six other ministries and
departments. The Opinions require Chinese
enterprises to adapt their management
philosophies and employment practices in a
manner that suits the local context in which they
9
are operating.
About Saferworld
Saferworld is an independent international
organisation working to prevent violent conflict and
build safer lives. We work with local people
affected by conflict to improve their safety and
sense of security, and conduct wider research and
analysis. We use this evidence and learning to
improve local, national and international policies
and practices that can help build lasting peace.
Our priority is people – we believe that everyone
should be able to lead peaceful, fulfilling lives, free
from insecurity and violent conflict.
We are a not-for-profit organisation with
programmes in nearly 20 countries and territories
across Africa, Asia and Europe.
How does a CSA relate to international
frameworks?
A CSA is a methodological approach which helps
companies to ensure they are operating in line with
international standards. In the last decade, these
have moved very fast and there are numerous global
frameworks and multi-stakeholder processes which
are having a significant influence on companies’
investments in unstable countries. The most relevant
of these include:
Saferworld – 28 Charles Square, London N1 6HT, UK
Registered Charity no 1043843
Company limited by guarantee no 3015948
Tel: +44 (0)20 7324 4646 | Fax: +44 (0)20 7324 4647
Email: [email protected]
Web: www.saferworld.org.uk
 Voluntary Principles on Security and Human
Rights (VPSHR) – VPSHR is a set of principles
focused on ensuring companies’ operational safety
and security within a framework of respecting
human rights. In addition to the principles
themselves, there is a multi-stakeholder process
10
for sharing experiences and improving practice.
 Extractive Industries Transparency Initiative
(EITI) – EITI is an international standard that
promotes transparency around oil, gas, and
mineral revenues. It is overseen by a multi-
7
News China (2012) ‘Foreign contracted engineering industry
guidelines for social responsibility’ 29 September
(http://news.china.com.cn/txt/2012-09/29/content_26677123.htm)
8
http://www.mofcom.gov.cn/article/b/bf/201302/20130200039930.shtml
11
www.eiti.org
12
http://english.mofcom.gov.cn/article/newsrelease/significantnews/2012
05/20120508131401.shtml
http://www.businesshumanrights.org/SpecialRepPortal/Home/Protect-Respect-RemedyFramework/GuidingPrinciples
10
13
9
www.voluntaryprinciples.org
www.unglobalcompact.org