San Miguel - Macro Political Risk Factors - Essay Example

Running Head: EDITING Inserts His/Her Inserts Grade Inserts 3rd April, Editing In South America, San Miguel is a developing region with its capital San Sebastian. The state is rich in oil, mineral deposits, forests and other natural resources. However, the geographical location of the resources causes the problem of poor communication which becomes an obstacle in the exploitation and tapping of resources. The political condition of the region is stable and certainty prevails to a great extent because the current government has been in power for the last twenty years and thus, has obtained the bearing of strong union of mining. Their positions have already been consolidated and stabilized through the support of the dominating mining unions and they guarantee it by granting various incentives and allowances to the unions at the times when economy is in decline. There is some fertile land around the country’s capital San Sebastian. An American fruit company has bought a segment of this land for the purpose of cultivating and growing Bananas and citrus fruits, while some part of this fertile land is surrounded by the non-native locals and native Indians. The government grants the tenure of land and perpetuity is adopted to hold leasing. However, the government of this country retains all the rights to the compulsory purchase of the land by showing that either the national interests are being put on stake or the tenant does not possess the capability of cultivating and farming the land in a beneficial manner any more. San Miguel possesses an enormous potential for providing the tourism sites and this sector can be easily added to the economic base of the country which has been discouraged till now by the government bearing foreign capital. However, the government intended to work for the development of the tourism sector with the income of minerals and oil and by understanding to make a strong tourist base to the economy of the state. The mountainous regions of the country hold great potential to serve the tourists and promote winter sports. It provides the opportunities of skiing all around the year and one of the companies in North America already intends to develop the mountainous region of the country by providing winter sports facility to the tourists, and they signify their plans with the building of an airport. On the other hand, the coastal region which lies to the northern part of the country needs more development in order to prove as a tourist place and offers a scenic view as well as a favourable environment suitable for the tourism. It is worth noting, that the economy has been imbalanced due to the advent of newer sources of generating wealth and revenues. The region undergoes an inflation rate of 25% and a serious deficit occurs in the non-oil balance of trade along with the rising income in the urban areas and private sector at a quicker pace than in mining and agricultural areas. In different sectors of the country’s economy, the condition of labor is also entirely different. There are strong trade unions in the mining areas and San Sebastian while there is a poor organization in the agricultural sector of the country. Besides this, there is also a staggering exporting order for the cash crop of the home country and the imported products are sold at competitive prices which offer a potentially competitive environment for the local farmers engaged in the production of basic foodstuffs. Moreover, the development policy of the government rotates around three objectives: i. Broadening of the country’s industrial base, ii. The population redistribution in the areas away from San Sebastian, which refers to the development of the Southeast or North of the capital, iii. Development and stability of tourism sector. Due to the significance granted to the tourism sector of economy, the government’s higher priority is to establish and develop an airport. The commission has been designated the responsibility of developing an airport by choosing the best location of the three sites and constructing the proposed airport considering the strategies mentioned below: i. The airport must possess the capability of sustaining and handling a minimum of five million passengers each year. ii. The ground transit system needs to guarantee a maximum journey time of 40 minutes by the quickest mode to San Sebastian. iii. Substantial facilitations have to be provided for the freight traffic in order to enhance the elementary facilities of the country, specifically in association with the oil industry of the region. iv. The airport to be constructed has to furnish the standards of an international airport, constituting of a terminal building and a runway along with the acquirement of an added piece of land on the location, which will be able to serve the purpose of further expansions in future in the form of more terminal buildings and a double runway. v. The stipulation for the planning and development of the commercial structure as well as the supporting industries inside the airport complex for the reason that there is a requirement of around 1000 Sq. m of the advanced industrial units to serve as the factory and warehousing requirements of the airports as well as of the developing industry. vi. The prerequisite of the establishment of an international hotel on the location. 1.2 The Three Sites The commission is required to opt for one of the three reasonable and best sites acknowledged by the government for the purpose of constructing an airport. The titles A, B, and C provide a brief description of these three locations along with their features: Site A: contains a swampy land which is sufficient for the building of ground dispersal system and a runway, while, the acquiring of an additional land will be done to construct the terminal building and more land for the expansions of airport facility, which in future, could be obtained by recovering the land through draining the salt marshesfrom the sea. This is because the location inhabits a coastal ribbon opposite to the two islands. The rest of the site has been bound by the private domains in both the foreign and national ownership. One of the major advantages of adopting this location is the fact that the government posseses the ownership of this land, while, the choice of land pertains to the draining of salt marshes and recliamimg it from the sea for further developments. It is also possible that the lobby ruling the environmental policies may not support the idea due to the chances of disturbances and disruptions in the wildlife and natural geography. Site B, is a location on a falt hill where land is a bit topsoil on the base of igneous rocks. This location also engages the destroying of a local village which provides a dwelling place to more than 600 indians who possess the land on a long period of lease. The light aircrafts are also threatened with the undeveloped instrumentation for the reason that many of such type of aircrafts have crashed in the recent years. Therefore, the local people have formed the impression that the mountains on this location are ‘magnetic mountains’ which, in some way, interrupt and disturb the instrumentation and functioning of the aircarft which ultimately becomes the reason for the occurance of accidents. The local indians are anticipated to oppose the concept of construction of airport on this site the most. Site C, is located in the region of good farmland and the US plantation interests owns it and are also ready to sell the land. This site already has a small airfield however, it needs to be brought upto the standards of airport according to the criteria of government, by rebuilding the runway, ground disperse system and terminal building entirely. Only the influential people are spread on this location, living in big luxurious houses and having a lot money, and they will be affected by the construction of airport. The inmates of the houses on this location will only have to counter the exposure to noise pollution if the airport is constructed. The above section provides few prominent and significant features of each of the three chosen sites, however, an analysis of the financial budgetry requirements, different costs, and quantiative and qualitative assessment of risks for the many factors for three sits is needed in order to reach at a specific decision about them. The later pages exhibit all this information by assessing the three locations with respect to these consideration, and, at the end, a decision concerning the best feasible site shall be formed. 2.0 Political Risks There are many different definitions associated with the political risks. However, we shall be utilizing the dfinitions porposed by Torre and Neckar (1988) and Truit (1974) for the sake of this alalysis. They consider them as being truly ‘all non-business risk’ or, ‘the probability distribution that an actual or opportunity loss wil occur due to the exposure of foreign affiliates to a set of contingencies that range from the total seizure of corporate assets without compensation to the unprovoked interference of eternal agents, with or without government sanctions with the normal operations and performance expected from the affiliates’ in particular. The Robock’s (1971) definition also parellels with the other defintions which consider that the variations in the political environemnet which are not likely to alter the environment of the business will not be considered as political risk for the project, due to the reason that they are divergent to the basic features of directness of effects and discontinuity, which are essential for them to be of significance to the project. There can be no overstatement regarding the magnitude of accurate evaluation of the political risks and their ability for influencing the duration of the project, as there shall be decisive effects on the success through their occurance. According to Torre and Neckar (1988), during consideration of the factors which might put grave impacts on the international investor, the decisive issue for the determination of the poltical risk assessment should include the effects of reflective environmental shocks, whether they occur from a slow-paced process of political and social progression or from the violent and abrupt change. The San Miguel airport project is an endeavour involving a long duration of time, in which the association is delegated the task to plan, design, construct, and then operate and maintain the activites and functions of the airport over the thirt-year lease provided to them by the government. It will definitely have a high level of exposure to political risks in both long term and sudden factors during the entire period. 2.0.1 Analysis of political factors There are two major types in which the political risks can be classified: Macro-risks involving all those elements which influence all the foreign companies functioning in the country (Robock’s 1971). However, when bearing in mind the selection of site, these factors will be of minimum impact, but they must be taken as the policy of government when using the land and, it has to be bore in mind, that the extraction of resource may change over the period of time. The Micro risk factors involve those elements that inflence the particular projects or industries. These factors will prove to be of higher significance in long and short term when selecting a perfect location for the airport. Torres and Neckars (1988) identified the five basic headings, according to which the factors will be analyzed and are depicet6d in the figure 6.1: 2.1 Macro Political Risks (Table 2.1) 2.1.1 External/ economic Soico-political factors The economic risks will be analyzed and covered in the next part in the section of qualitative assessment. In order to evaluate the particular extarnal political factors, there is an inadequate data at present. 2.1.2 Risks from Internal Socio-political Factors There are merely two factors of this nature which can have a probable impact in general; 1. Changes in government policy: Towards the investment from foreign countries, the government of the region has adopted friendly guesture, however, now if the government were to opt for a more nationalistic attitude and change, there might be a risk of property expropriation and a likely disastrous loss may occur due to this factor. Thisd risks is inculcated and spread over the full length of the project. Though, the probability of this risk occuring is very low, however, the risk is considered as grade 3 risk since the government is democratically elected and remains stable and certain. 2. Attacks by the rebel movement A Marxist group of rebel is functioning in the country currently, which has knots to the movement of Peru, known as shining path. The shining path is notorious and has involvements in terrorist activities, and there is a likelihood of the airport project becoming the target of opposition attacks from the elements of this movement. Due to the current congruency of opposition and higher visibilty of the project, this risk has to be accounted for and its effects could prove to be profound. There is a probability of this risk affecting the project in its operational stage and is a grade 3 risk. 2.2 Site Specific Risks from Macro Political Risk Factors 2.2.1 Site A Change in the Policies of Government: the land which can be provided to the consortium, for th construction and development of ground dispersal system and runway, is actually owned by the government. However, there could be a risk incurred in the project if the tourism development policy would alter with the help of foreign finance which is the basic necessity for the goodwill for airport construction. If, after giving up the land, the government restored its old unfrientdly posture and asked for the return of land or monetary reimbursement of its worth at the exisitng market price, there would be harsh disruptions and imbalances in the estimated financial expense or the course of the project would be interferred and this can have striking impacts on the project. However, it is unlikely to happen because the government is stable and there are imperetive considerations for the urban developments. Moreover, the application of the same risk is also considered to be high for the silk beds which are the property of government. This risk will be gravely presented at the initiation of the project and is a grade 3 risk. 2.2.2 Site B Culturally motivated protests: there are some religiously and historically important remains near the site. The indians value these remanants greatly , and due to this, there may be protests and oppositions by them to the building of airport near their holy places as it may disturb their functioning. There are chances that the project will stand a very high risk of protests and opposition from these indegenious religious elements. However, since the government is responsible for selecting this site, it will be able to push back these indegenious hands and will force the development of airport through this area, but this risk must be taken into consideration by the consortium during the construction, particularly with reference to the work delyas that will bring disturbances in terms of protests and the security and safety of the properety and staff in case such portests are not violent. 2.3.3 Site C Site C also remains vulnerable to the macro risk factors. 2.3 Micro Political Factors The risk landscape is exposed to the micro risks which are project specific and are of special significance and consideration. Though, the association can shield a little against these risks, alleviation of the micro risks is within its capabilities through the selection of site. 2.3.1 Site A 2.3.2 Protection of Environmentalo dissonance by the Environmentalist lobby: the reclaimation of land from sea through the salt water marshes may be needed around this site. Due to this, there will be a definite affect on the wildlife and marshland located on the coast. There could be possible protests from the environmental lobby against the planned developments and the progress of airport construction could be impeded at the initiation. The lobby is afraid that the functioning of the airport could also be disturbed if the envronmentalists oppose the industrial development in this area after the building of seaport has started. Generally, the enviornmentalist lobby are funded and organized in a good manner and thus, possess the capability to set up legal actions which could direct delays only in the beginning of the work as the issues would need to be resolved, and the costs on projects would also increase in terms of legal fees. The likelihood of the materialization of this risk is quiet high and would be a source of disturbance to the planners and developers. Adding to this, the private domains around the land exists which could result into the hostility from the dwellers of the place regarding the noisy airport just within the premises of their properties, and the dangers which might be associated by the accidents of aircrafts taking place during the landings and takeoff which might cause damages to their properties directly. This risk also has a high occurance for the reason that people usually do not want that the airports be constructed just adjacent to their houses, although the influence of this opposition might not be very considerable. Thus, this is known to be the grade 1 risk. 2.3.3 Site B The local owners’ protests and oppositions to the sale: the local indians live on this land and own this site on a long term lease. The developers will need to purchase this land from them and thus, one of their villages will have to be destroyed. However, since the government has selected this site for the purpose of airport construction, it is porabable that it will make all the necessary arrangements. However, the consortium will have to keep in mind that higher costs will be incurred as the land will have to be purchased at the market rates, which will affect the initation of the project. Adding to this, if this segment of the population denies moving their dwellings and take legal measures against the forced relocations; the work on the project will certainly be delayed. This risk is a grade 2 risk. 2.3.4 Site C Environmental dissonance by the pivate estate: there is a presence of the environmental dissonance on this sight in terms of the pollution created by the noise of aircraft and other disturbances linked to it. Since, very rich, influential people own these houses, the development of the airport could be halted by them through legal actions which would result in causing delays to the beginning of the project and also impact its working in the initial phases. However, the government could solve the problem by purchasing the surrouding houses if they are not much expensive, or else, such disputes would probabaly be solved through government intervention with a minimum level of impacts on the development. This is generalized as a grade 4 risk. 2.4 Recommendation for the site selection for airport construction with an approach to alleviate the political risk factors After considering all the political risks associted with the project, the following recommendations would be suitable based on the amount and thrust of the political risks: Most suitable site: Site C: only the grade 4 risk is present. Second Most suitable site: Site A: one grade 3 and one grade 1 risk is present. Least suitable site: Site B: particurly subject to a grade 2 grade 1 risk. REFERENCES Read More