Managing Indirect Risks Fundamental to Operational Fluidity

Foreign investment toward the realization of onshore and offshore operations in Mexico has begun to pick up, necessitating a revaluation of the existing risk landscape. While many of the external vulnerabilities are preexisting, their intersection and severity will depend on a project-by-project basis. As such, to ensure operational safety and uninterrupted fluidity, project supervisors should anticipate the management of indirect risks to fluctuate in composition. 

​“Despite the high level of uncertainty in the country and the sector, there are still many opportunities in upstream, midstream and downstream activities. To maintain the inflow of foreign investment, companies should prioritize their exposure to indirect risks, the source of most safety challenges,” said Daniel Linsker, Partner, Control Risks Consulting. 

There are three main evolving tendencies that companies should consider when forming their strategy road-map for an operation: the ESG “tsunami,” new labor and social regulatory provisions as well as domestic institutional failures. The first issue concerns a cross-cutting and inescapable tendency toward the global economy’s nurturing of better social and labor relationships and the establishment of better business practices. This tendency is closely tied to regulatory initiatives, including the enforcement of labor standards and practices established by the International Labor Organization (ILO), as agreed upon through the USMCA. 

Since their implementation, these labor standards have encouraged contributors to participate in collective bargaining activities, which is changing the dynamics of employer-employee relationships. Other regulatory considerations include the protections and rights of Indigenous communities enshrined in Convention 169 of the ILO. Similarly, the protections outlined have given communities the ability to bar the development of projects, fundamentally changing the approach and relationships companies are looking to develop with local communities.   

Lastly and most concerningly is the ​erosion of regulatory capacity on behalf of the state, rooted in interacting elements including republican austerity, unqualified leadership take-overs, corruption and further issues. This dysfunction has led to the arbitrary use of state institutions like the SAT, UIF and FGR, which in turn has complicated compliance roadmaps and impacted operational timelines, leading to millions in added costs. This is also occurring in parallel to a general deterioration of security in the country that has emboldened organized crime to extort companies. 

Since these risks do not unfold in a vacuum, the challenge for companies is to identify the degree to which these risks overlap and control them through thorough investigation and efficient allocation of resources. In practice, this demands the identification of project-specific risks according to geographic specificity and the draft of a clear “map of power” so that personnel can reference, understand and act on contingency plans. Furthermore, active listening and communication should be avidly encouraged throughout the chain of command to avoid and identify risk opportunities.

“Altogether, these risk-management mechanisms will enable companies to remain operational and even grow despite unfavorable circumstances,” said Linsker.