While public security is one of the more notorious risk factors when it comes to doing business in certain parts of Latin America, there are other factors that potential investors need to pay greater attention to. High levels of public security do not always go hand in hand with political and economic stability, while weak or inefficient judiciaries and institutions, insufficient human resources, divergent cultural values and a lack of appropriate compliance assets can all seriously hamper any business operation in the region, according to Frank Holder, chairman in Latin America of FTI Consulting, a global business advisory firm dedicated to helping organizations protect and enhance their enterprise value.
Nearshore Americas: What are the biggest risks that affect companies investing in emerging markets like Latin American?
Frank Holder: I think the biggest risks are related to insecurity, but there are many kinds of insecurity. The most difficult to deal with are juridical or institutional insecurity. In most emerging markets, things like the rule of law, a fair playing field for all, free movement of capital goods, etc. are not as straight-forward, understandable or efficient as in more developed markets. So there are very significant risks for someone coming into a market like that – in particular if they’re trying to come in without a local partner or they’re acquiring 100% of some other company that’s already functioning, because there can be additional cultural issues that they are not aware of. If a company doesn’t have a specific track record in the emerging market in question then it can be quiet risky from that standpoint.
NSAM: So what measures can companies take to mitigate the risk posed by juridical or institutional insecurity?
Holder: Well I think the best way they can mitigate the risk is to ensure that they do an extremely thorough amount of due diligence. Or if they’re going to acquire something in the market it’s incredibly important to do not just your standard financial, legal and tax due diligence, but to also supplement that with FTP due diligence or an anti-corruption due diligence of some kind, an overall anti-money laundering or compliance-type due diligence and a reputational due diligence, in order to avoid surprises later on, post acquisition. We’ve seen a number of cases where an acquisition will happen and then the multinational that’s acquired the local firm will end up paying the price for things that happened maybe in previous periods or that continued on after the acquisition and that they were unaware of.
The second measure is to make sure that you have the ability to put adequate controls and compliance in place in the post-acquisition integration period, or if you’re doing a startup right from the beginning or a joint-venture with another partner then I would always try to insist on having management control rather than devolving that to the local partner because of these cultural issues and the risk that presents. In some cases you can’t do that, but if it’s a minority investment then I would at least ensure that you have a lot of rights and that you do a lot of diligence upfront.
NSAM: Which are the best and worst ranked countries in your 2013 Latin America Public Security Index?
Holder: Just to be clear, this is focused on physical security, whether it’s personal or physical assets, and it’s focused on the business community, so it takes into account not only homicide rates, petty theft rates, home invasions, merchandise-in-transit thefts, kidnappings, violent crime, organized crime, etc., but also things that corporations and investors are very concerned about as well, so we pick up some of the information directly from our corporate clients.
Public security is a concern in the region and it does generate additional costs in terms of securing your assets and your people, and it does influence and sometimes change decisions about where an investment is going to be made. What we’ve seen is that the better ones are traditionally Panama, Costa Rica, Uruguay and Chile, while Haiti normally comes out with a very bad score in public security for obvious reasons: natural disasters coupled with the government situation and extreme poverty. But among the bigger and wealthier countries, Venezuela by far gets the worst ranking.
NSAM: How big is the risk when investing in countries with well publicized security problems such as Mexico?
Holder: Mexico is an interesting case. You have some very serious public insecurity problems – that’s the absolute truth. But it’s also got some nuances to it that are important to understand. The northern border area and the southern border area are much more violent than other parts of the country in general. They have a lot of gang-related, drug cartel-related and government-against-drug-cartel-related violence and some degree of political violence, and we’re starting to see a degree of vigilantism, which hadn’t occurred before and which, in Colombia for example, is what gave birth to the paramilitary forces there. Some of that is starting to occur in some parts of Mexico as well, so that’s a completely new phenomenon over the last decade or so which has become very serious. And to that I would add the general problems that all Latin American countries have and Mexico has in a big way, which is theft of merchandising in transit, kidnapping, violent crime, petty crime, the theft of property and the traditional sort of insecurity, and that’s more concentrated in the bigger cities in Mexico – Mexico City being one of them obviously – but it’s not necessarily tied to the other phenomenon that’s creating even more headlines and an additional degree of insecurity in the country.
NSAM: But if you do decide to do business in Mexico, what measures can you take to make your operations as safe as possible?
There are a number of things you can do. One is to be careful when you’re locating facilities to check very carefully and see what the situation is with organized crime problems – don’t sit a facility right down in the middle of the problem, just because it happens to be a little closer to the border or a few cents cheaper in terms of electricity or something like that. Obviously some companies have to be everywhere if you’re looking at retail or banking so it’s just really recognizing where you have high-risk problems and taking appropriate measures. For example, a lot of companies manufacture something in Mexico City and then transport it around the country, so they have to have an additional layer of security around that merchandise as it travels to its destination – which is unfortunate because you pay taxes and would expect a public security force to help out, but it’s just not enough – so you have to calculate that into your costs.
NSAM: Moving away from public security, in your opinion, which are the most stable, risk averse Latin American economies to invest in?
Holder: That’s an interesting question, because the most stable countries overall are slightly different from the ones that are just super-stable from a public security standpoint. When you look at juridical, institutional and public security you will find that a lot of them tend to match, as stability seems to breed stability when it comes to different kinds of insecurity. So Uruguay and Chile are very stable countries to invest in, in every sense, and Costa Rica and Panama are also very stable in the same way, but you get a few additional countries like Colombia, which has historically had a very stable financial system and a very stable political system, but it had a terrible insecurity problem due to drug cartels and organized crime, which has largely been controlled – I won’t say defeated because these drugs are still coming from somewhere – but it’s been brought down to a controllable situation. So I’d say Colombia becomes more interesting in that sense, as does Peru, having become a very stable place for investors to put their money over the last decade or so.
Then you have countries moving in the opposite direction like Argentina and Venezuela, which have done everything you can imagine to be unpredictable and unstable when it comes to investing money in the long-term in their markets. Then you have some other countries like Mexico, which is actually a very stable place except for the public insecurity problem that we’ve discussed. The capital markets move fairly freely, you have a stable currency and politically the main parties have alternated twice now, but you have this problem with the inefficient institutions like the judiciary and you have this public insecurity problem.
And then Brazil is just a question mark. It’s not as extreme as Argentina, Venezuela, Ecuador or Bolivia, but there are some question marks because the government has meddled with the interest rate artificially, they have sort of changed the rules in some sectors, like the energy sector, and they have an incredible, onerous burden when it comes to taxes and government bureaucracy. So it doesn’t get such high marks as some of these other countries and we’re now seeing this conversation about the Pacific Alliance countries versus the old Atlantic countries, because it seems that Mexico, Panama, Costa Rica, Colombia, Peru and Chile are going one way, and Venezuela, Argentina and maybe even Brazil seem to be going another way.
NSAM: What other factors are important when it comes to site selection in Latin America?
Holder: I think when people are making long-term investments in the region, whether in infrastructure or commodities, they are very focused on the flow of capital and goods, and there being an even playing field for locals and multinationals. Even if they understand that maybe the judiciaries are inefficient or that there is a degree of corruption or other problems, they are very interested in alternative dispute resolution processes actually working, and the capability to have a coherent government in front of them to try to resolve some of the main problems – this is what it takes to bring these multi-billion dollar investments in.
NSAM: And what are some of the most commonly overlooked risks in the region?
Holder: I think one which is growing is what I would call ‘the human resources risk.’ This is when you make a major investment in a certain country and you overestimate the capacity of technologically qualified people to perform what needs to be done, or the infrastructure of the country to be able to handle it.
For example, say you’re making a big oil or gas investment in Brazil over the next few years, Brazil is chronically short of the technical engineering expertise it needs in that field and it has to attract it from abroad but then it’s actually very difficult to bring people in because of the way the bureaucracy works. Then you’ve got other countries like Colombia that make great places for shared services centers and call centers, but now there’s a very difficult competition for the limited amount of bilingual, highly educated folk that are available to perform those kinds of services. Some people are putting facilities in places where they thought they had an infinite supply of natural gas but suddenly find, as in Argentina, that the government didn’t have the right policies for further investment and they’ve now cut off a lot of that flow because there’s not enough to go around.
NSAM: You wrote a book on integrity in business. How can encouraging integrity help businesses to avoid major setbacks in Latin America?
Holder: I think the main conclusion you can draw from our experience, having assisted and investigated many of these real blowups or meltdowns, is that soft power seems to work better than hard power in terms of avoiding these sorts of problems. By soft power, I mean having a very strong tone from the top of the management teams, very strong awareness and training programs in place that allow people to understand what’s acceptable and what’s not when you have to make real-life decisions, and a very strong whistleblower program without people getting hammered when they do make a complaint about something if it’s not being handled appropriately. There is a place for hard power too, as soft power doesn’t cover everything, but it can certainly help reduce your risk profile significantly.
Another huge factor is where the resources are allocated. I won’t name any names but there are certain banks that have say 500 compliance officers in just one state in the US, and then in Mexico they’ll only have four or five, when most places in the US don’t have the same risk profile that Mexico does. In the end you have all of the compliance assets located in jurisdictions that just don’t have all of the risk, and where you have all this risk, you’re very under-staffed from a compliance standpoint.
And another factor is one we talked about earlier, which is the value of doing your diligence beforehand and not doing business with crooks or with people that don’t share your cultural values, and not accepting that things are done differently here, because today’s community is global from a compliance standpoint – you’re just as responsible for what you’re doing in Kazakhstan, Surinam or Bolivia as what you’re doing in New York, Louisiana or Montana. So it’s very important to ensure that your organization is able to assimilate this universal compliance culture that needs to be in place.