FACING THE DARK SIDE OF INTERNATIONAL BUSINESS

(excerpted from the “Fluent In Foreign Business” Chapter 10)

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Can you handle the flip side of the coin?

Several years ago, the European Bank of Reconstruction and Development (EBRD) approved a sizeable ‎loan to partially ‎rehabilitate a badly deteriorated municipal water system in the Ukrainian city of Dnipropetrovsk. ‎Given the tremendous difficulties municipalities in emerging countries face in obtaining financing, an ‎announcement like this should have brought joy to the people everywhere in the city and in the water ‎utility authority itself.  Instead it brought fear, intrigue, resistance and sabotage.‎

The Bank put out a tender for a project management company to implement the financing, for which ‎our firm co-bid with one of the world’s leading Dutch engineering consortiums. We were unsuccessful, ‎but in the process we uncovered a fascinating textbook case on how a dark flip side can seriously ‎interfere with what on its face appears to be a win-win situation.‎

As we started to interact with the officials from the water utility authority and the municipality, it ‎became clear that most of the senior officials and most of the 3,200 employees were opposed to the project.  On the surface it made absolutely no ‎sense, as the project promised to improve the quality of the city’s drinking water, improve sewer ‎cleaning facilities, improve the water pressure of the residents, conserve water, and reduce water ‎main ruptures. Ostensibly, the reason for the resistance was a fear that the municipality would not be ‎able to repay its debt obligations without impacting its financial condition.  Although a fairly valid ‎reason, it did not seem sufficiently compelling to justify all the intrigue and stall tactics that plagued the ‎project.

What was going on? Well, as part of the conditions for extending an economically viable loan, ‎the bank required that the debts be cleared from the balance sheet, the tariffs subsidies removed, ‎that international financial accounting standards be applied, and that periodic audits would take place. ‎This threatened to uncover a number of financial irregularities. Further, the accounting department would have to be reduced from 50 employees to ‎four and the entire staff would have to be pared down to 800 from 3,200 as part of transforming the utility from a bloated and inefficient Soviet-style organization ‎to a modern well functioning profitable enterprise.

‎But the project was still good and well-intentioned, right? Wrong! The municipal politicians did ‎not want to raise the water and sewer tariffs, because it would hurt them in the upcoming election. ‎Many workers were afraid of losing their jobs and illegal side businesses, and of having to work harder ‎in a leaner, high-pressure environment. And they were doing everything in their power to stall or ‎kill the deal. Their pay was low and the working conditions poor, but the workers in this case preferred the status quo. This is a very important lesson when working on the side of radical organizational change.‎

The Deputy Director who had championed the deal and was primarily ‎responsible for arranging the loan was now faced with significant and unexpected ‎resistance from a number of directions.  As the financing process began, he eventually ‎lost his job and implementation of the loan sputtered.‎

Although our firm ended up not participating, we identified some critical concerns: (i) the need to communicate and win support of the key project ‎participants and constituents prior to commencing a project, (ii) the need to examine in advance the ‎organizational dynamics of the enterprise set to undergo significant changes, and (iii) the need to ‎extensively shape and counsel the organization to maximize the project’s chances for success.

Chapter 13 addresses issues of overt corruption. Here, I address issues of conduct and human behavior that can engulf you like quicksand and hamper your ability to do business in a foreign country. I am talking about malaise, self-interest, fear, greed and jealousy, to name just a few of the obstacles. Unless you thoroughly understand the issues and characters behind particular transactions, markets and business dealings, you will have an extremely tough time doing business abroad. Things that make perfect business and social sense on the surface will not get done. Your offers of lowering prices, increasing efficiency, bringing prosperity to the population in your chosen market will be enthusiastically received at the top, even announced to the world, and then fizzle in the execution and die a slow death. READ MORE

 

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About Alexander Gordin
An international merchant banking professional with over twenty years of business operating and advisory experience in the areas of export finance, international project finance, risk mitigation and cross-border business development. Clients include foreign governments, municipalities and state enterprises as well as Fortune 500 and small/medium enterprises. Strong entrepreneurial instincts, combined with leadership and strategic skills. Transactional and negotiations experience in over thirty five countries. Author of the highly acclaimed "Fluent in Foreign Business" book and creator of the "Fluent in OPIC", "Fluent in EXIM","Fluent In Foreign Franchising", "Fluent in FCPA",and "Fluent in USTDA" seminar/webinar series. Currently developing "Fluent In ......" seminars and publications. Co-author of the Fi3 Country Business Appeal Indices. Extensive international business development and project finance transaction experience in healthcare, aerospace, ICT, conventional and alternative energy infrastructure, distribution and hospitality industries. Experience managing international public and private corporations. Co-Founded three companies abroad. Strong Emerging and Frontier Market expertise. Published and featured in numerous publications including: The Wall Street Journal, Knowledge@Wharton, NBC.com, The Chicago Tribune, Industry Week, Industry Today, Business Finance, Wharton Magazine Blog, NY Enterprise Report, Success magazine, Kyiv Post and on a number of radio and television programs including: Voice of America, CNBC, CNNfn, and Bloomberg. Frequent speaker on strategy, cross-border finance and international business development. Executive MBA from the Wharton School at the University of Pennsylvania. B.S. in Management of Information Systems from the Polytechnic Institute of NYU. Specialties Strategic Management Advisory, Export Finance, International Project Finance & Risk Management, Cross-border Negotiations, Structured Finance transactions, Senior Government and Corporate officials liason

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