MIDDLE EAST RISK WATCH – ISSUE 3 – DECEMBER 2015

Labour risk - understanding your supply chain


Labour is the key component of most supply chains. For the Middle East, and GCC countries in particular, low-cost, migrant labour has been the engine room for numerous projects in the region. Many of these projects involve foreign investment and brand owners, increasing the attention from stakeholders, NGO’s and the media on labour practices.

Recent projects in the region, such as global sporting events and arts and education developments in Abu Dhabi, have seen a strong media focus on labour conditions and treatment, damaging the reputation of stakeholders involved and risking further investment.

As the number of construction projects in the GCC continues to grow, for businesses and investors attracted by opportunity in the Middle East, labour risks in the supply chain often remain unknown. Whilst due diligence procedures may be in place for direct local partners, a knowledge ‘black hole’ often exists when it comes to contractors, suppliers and third tiers in the supply chain. This puts reputations on the line, increases project delays and cost, and leads to compliance risks through unknown exposure to illegal labour practices.

Policy frameworks for worker welfare and labour standards continue to evolve in the GCC. In recent years the UAE has made particular progress through the introduction of mandatory electronic payment, restriction on recruitment fees, and other worker-protection measures. The gradual development of the regional regulatory environment can be viewed against a backdrop of already developed international standards from NGOs such as the International Labour Organisation (ILO) and emerging extra-territorial legislation such the UK’s Modern Slavery Act 2015.

Foreign investors and businesses with mature corporate responsibility programmes looking to apply international standards and practices within their supply chains in the region are likely to meet several challenges. Navigating a path between corporate responsibility commitments on the one hand and achievable practice on the other is central to many of these challenges. As a 2015 report  into labour practices during the construction of New York University in Abu Dhabi demonstrated, trying to implement practices that are unattainable in the region can increase labour risk exposure as contractors fail to meet them. 

So how do foreign businesses and brands investing in Middle East projects manage their exposure to labour risk?

To manage labour risks in the supply chain foreign businesses must understand their exposure, apply workable controls, and monitor and adjust the local implementation of those controls. Here are five key steps to managing labour risk exposure for a project or investment:

1.Understand exposure
The starting point in managing labour risk is to understand exposure. This begins with examining what an investment or project is exposed to in terms of local and international labour regulations, and how compatible existing internal policies are. Secondly, understanding who might create this exposure by mapping the supply chain to identify stakeholders and their interest, and using targeted due diligence on partners and suppliers to make informed risk management decisions.

2. Build control
Labour risk is managed by building effective controls that focus on preventing labour risks at source as opposed to fixing their symptoms. An effective control framework is built on an organisation’s values and commitment to the fair treatment of its labour force. Central to control is the development and communication to all stakeholders of standards for labour welfare compatible with local laws and organisational values. These will be underpinned by mechanisms for implementing the standards, including contract terms, training and awareness, and consequences for non-compliance.

3. Monitor
This is not a risk that can be managed ‘at arm’s length’. Having a monitoring regime to ensure labour standards are being met is essential, but this shouldn’t be limited to a vendor questionnaire in a contract. Even the most non-compliant partners in a supply chain can tick a box. First-hand evidence of compliance has to be collected at source to ensure that standards – and legal obligations – are being met. This includes interviews with workers, visits to work sites and accommodation to assess conditions, and requesting evidence of the policies and processes of partners in the supply chain.

4. Report
Transparency and action is essential to reassuring stakeholders and investors, and managing any potential reputational risk. Reporting the efficacy of controls and identifying opportunities for improvement gives confidence that risks are being managed. It is important to define the frequency and methods of communicating the performance of risk controls. This will be determined by both internal reporting needs (updates to the board or risk and ethics committee, for example) and external requirements, such as the yearly statement required under the UK Modern Slavery Act. It is also useful to identify possible risk scenarios that could emerge from labour risks (such as direct action by the workforce or emerging laws) and rehearse a crisis communications response.

5. Resolve
When divesting in an operation or a project, discharging labour risk responsibly is essential in minimising risk impact. Risk is still present at this end point and it is essential to continue to monitor controls and seek assurance from suppliers and contractors that any instances of non-compliance with have been resolved to minimise future reputational or investment impact. This is also a prime opportunity to use lessons learned for understanding exposure on existing or future projects.

Therefore, managing exposure to labour risk makes good business sense. It helps to minimise business and project disruptions, benefits an organisation’s reputation, can provide competitive advantage, and gives assurance to stakeholders and shareholders that an organisation is in control of its supply chain.

By James Lewry, Associate Director, Control Risks

[1] Independent report by Nardello and Co. into allegations of labour and compliance issues during the construction of New York University in Abu Dhabi 2015