GB525 Unit 5 Political Risk Assessment Example

Six Risks, Two Horizons, One Depot in Arequipa: A Unit 5 Political Risk Assessment

[Student Name]

Purdue University Global

GB525: Global Business Environment

Unit 5 Political Risk Assessment

[Instructor Name]

[Date]

The manufacturer, the depot and every figure are composite and illustrative; the country conditions, institutions and sources cited are real.

The Investment

Iron Range Drivetrain of Duluth rebuilds final drives, wheel motors and suspension struts for the large haul trucks used in open-pit mines. Its components already run in several of the copper mines in southern Peru, and the parts now travel to a contractor in Chile for rebuilds, adding about five weeks to each cycle. The proposal is a leased depot in an industrial area of Arequipa with [40] technicians and about [$6 million] of rotating parts inventory, cutting the cycle to about two weeks.

The assessment uses two horizons. The near term is the first two years of operation, when the depot builds its customer base and its local workforce. The long term is the ten-year life of the lease, during which national politics, mining policy and community relations could all change.

Exhibit 1: The Risk Register

1. Road blockades along the mining corridor. Near term: high. Long term: moderate. Indicator: the number of active social conflicts involving mining in the southern regions, and blockades of the roads that carry concentrate and supplies. Source: the monthly social conflict reports of Peru's ombudsman office, which classify conflicts by type, region and status (Defensoría del Pueblo, n.d.). Why it matters: a blockade on a corridor road stops trucks carrying worn components to the depot and rebuilt ones back, so the depot's main service, speed, fails exactly when a mine needs it.

2. Turnover in national government. Near term: moderate. Long term: moderate. Indicator: changes of president and cabinet, and turnover of the ministers and senior staff responsible for mining and labor. Source: national news and the official gazette. Why it matters: Peru has had frequent changes of president and cabinet since 2016. Frequent turnover has not usually changed the basic rules for foreign investors, but it slows permits and makes it harder for mining customers to plan new spending.

3. Changes to mining taxes and royalties. Near term: low. Long term: moderate. Indicator: bills in Congress and statements by candidates on mining royalties, and changes in mining companies' investment plans for Peru. Source: congressional records and the mining companies' public filings. Why it matters: higher taxes on mining would not touch the depot directly, but they could slow the mines' expansion and the growth of the truck fleets the depot serves.

4. Local opposition to new mines in the Arequipa region. Near term: moderate. Long term: high. Indicator: the status of contested projects in the region, such as the long-running opposition to a large copper project in the Islay province. Source: the ombudsman's reports and regional press. Why it matters: the depot's long-term volume depends on new mines and expansions in the south. If major projects remain blocked, the depot would depend on existing mines alone.

5. Currency and convertibility. Near term: low. Long term: low. Indicator: the sol's volatility and the central bank's policy. Source: the Central Reserve Bank of Peru's published data. Why it matters: the sol has been among the more stable Latin American currencies, and the central bank has a long record of independence, so converting and repatriating earnings is not a main concern.

6. Crime and extortion affecting businesses. Near term: moderate. Long term: moderate. Indicator: reports of extortion against transport companies and businesses in the region. Source: police statistics and business association surveys. Why it matters: a depot holding millions of dollars in parts is a target, and trucking contractors on the corridor have faced threats.

The risks that matter most for the depot are not about the national government at all; they are about roads, communities and new mines in the south.

Reading the Register

Two patterns stand out. First, the near-term risks are operational: blockades interrupt service, and crime raises costs. These can be managed by how the depot is run. Second, the long-term risks concern the depot's market: whether new mines open and whether the existing ones keep expanding. These cannot be managed from Arequipa; they can only be hedged by limiting the commitment.

Henisz and Zelner (2010) argue that many political risks in emerging markets arise not from governments acting against foreign firms but from the reactions of local communities and other stakeholders to a project. Peru's southern corridor fits that description. Bremmer (2005) adds that political risk should be judged by how stable a country's institutions are, not only by how stable its government looks, and Peru's institutions have held through repeated political crises.

Mitigations

For blockades: keep a two-week buffer of rebuilt components at each major customer's site, so that a blockade delays the next exchange rather than stopping a truck. Build relations with the communities along the route through local hiring and purchasing, and track the ombudsman's reports monthly to anticipate conflicts.

For government turnover: allow extra time for permits and work through an industry association rather than relying on contacts in one ministry.

For mining policy and opposition to new mines: sign a ten-year lease with a break option at year five, so that the commitment can be reduced if new projects stall. Size the initial inventory to existing mines' fleets, not to forecasts of new ones.

For crime: invest in site security, use vetted transport contractors and insure the inventory.

For the whole investment: political risk insurance from a development finance institution would cover expropriation and political violence, though not the operational risks that matter most here. The United States and Peru also have a trade promotion agreement that includes protections for investors.

Recommendation

Proceed with the depot, with three conditions: a lease with a year-five break option, an initial inventory sized to the existing fleets at current customers, and a stocking agreement with at least two mines for buffer components. The near-term risks are real but manageable, and the depot's speed advantage is large enough to win business even with occasional blockades. The long-term risks are the reason to keep the commitment flexible rather than a reason to stay out.

Monitoring

The register should be reviewed each quarter against its indicators. A sustained rise in mining-related conflicts in the southern regions, a significant change to mining royalties or the final cancellation of major projects in the region would each trigger a review of the depot's expansion plans and, at year five, of the lease itself.

References

Bremmer, I. (2005). Managing risk in an unstable world. Harvard Business Review, 83(6), 51-60.

Defensoría del Pueblo. (n.d.). Reporte de conflictos sociales. Defensoría del Pueblo del Perú.

Henisz, W. J., & Zelner, B. A. (2010). The hidden risks in emerging markets. Harvard Business Review, 88(4), 88-95.