In the 21st Century, Managing Risk in UK Local Authorities is no Different from Managing Risk in Large Private Sector Companies
Introduction
Over the past decade, the World Economic Forum’s Global Risk Reports have extensively documented a wide array of risks that encompass cybercrime, water scarcity, food crises, terrorist attacks, financial instability, extreme weather events, and existential threats to humanity (Van Der Vegt et al., 2015). These reports underscore the inherent uncertainty surrounding the potential severity and circumstances of various activities, a concept commonly referred to as “risk” (Aven and Renn, 2009).
Risk management is the comprehensive process of identifying, quantifying, and mitigating threats to an organization’s financial stability and capital. These threats can originate from various sources, including legal liabilities, economic volatility, strategic management errors, natural disasters, and unforeseen accidents.
Notably, organizations have access to risk management standards developed by entities such as the National Institute of Standards and Technology and the International Organization for Standardization (ISO) (Herbane, 2010). These standards are designed to assist organizations in recognizing specific threats, evaluating unique exposure levels, devising strategies to control these risks, and implementing risk mitigation measures in alignment with their overarching strategic goals.
This essay undertakes a comparative analysis of risk management practices within UK local authorities and their counterparts in the private sector. Furthermore, it critically evaluates the risk management methodologies employed by UK local authorities and large public sector corporations, shedding light on both commonalities and disparities in the approaches to risk mitigation.
Discussion
Managing Risk in UK Local Authorities
Risk management in public environments presents a unique set of challenges due to the inherent unpredictability (Haynes, 2015). Local councils are increasingly venturing into the commercial property market within the United Kingdom, effectively assuming roles typically associated with the private sector. This strategic shift is driven by years of funding reductions from the central government, compelling these councils to seek alternative revenue sources to bridge budgetary gaps.
Effectively managing commercial risk is the linchpin of success in this retail arbitrage (Detter, 2015). Local councils often resort to borrowing funds at preferential rates provided by state funding vehicles, which are significantly lower than those available in the private sector. Investing these borrowed funds at such rates can yield higher returns, but it also means that local councils bear the commercial risk on their balance sheets.
A striking parallel can be drawn between this form of commercial activity and the challenges encountered in public finance initiatives (PFIs) and public-private partnerships (PPPs) (Detter, 2015). The public sector’s involvement in the private sector has faced criticism due to inadequacies in public-sector accounting practices and the inherent difficulties in managing commercial risks.
The public sector’s struggle to predict, oversee, and negotiate long-term commercial contracts often results in substantial losses, leading to political scrutiny over using taxpayer funds to enrich the private sector (Detter, 2015).
In the 21st century, there has been a notable shift from focusing on administrative processes and public service ethos toward emphasizing outputs and task-oriented achievements (Haynes, 2015). A study by Mintzberg and Luthans in 2015 highlighted differences among local government managers involved in social services in the UK. These managers primarily dedicate their time to administrative tasks and information dissemination to staff, with less emphasis on future planning and critical decision-making. Their roles predominantly involve supervising skilled staff and overseeing frontline decisions. Thus, they are more oriented toward providing professional support in complex and challenging work environments (Haynes, 2015).
The risk of failure is significantly elevated when public perception reflects a lack of trust between the market and the government (Haynes, 2015). Public perception plays a pivotal role in government investments in the private sector, necessitating solid relations between the government and the market. Building and maintaining these positive relations foster a favourable public image, which, in turn, allows UK local authorities to navigate the risk of failure in the private sector effectively.
Effectively managing all commercial assets through establishing an autonomous urban wealth fund (UWF) can facilitate the use of appropriate tools, a private-sector framework, and professional management (Detter, 2015). Despite being one of the largest property owners in the UK, local governments often struggle to manage their properties efficiently. This discrepancy between public assets and debt remains unaddressed, primarily due to the lack of comprehensive government portfolio understanding.
Transparency emerges as a critical driver for enhanced management within the sector or authorities. Breaking down the portfolio of public commercial assets and fostering a consolidated understanding of their value facilitates improved returns and supplementary income through taxation (Detter, 2015). Transparency plays an indispensable role within local councils, allowing for an accurate assessment of the situation and ensuring the participation of all stakeholders (Scolobig et al., 2015).
In recent years, the UK government has grappled with increasing flood risk (Kundzewicz et al., 2014). Effective management of this risk has necessitated the active engagement of stakeholders, recognized as a superior approach to risk management. Nonetheless, stakeholder engagement often leads to conflicts and challenges among stakeholder groups and political leaders (Blackstock et al., 2014).
Public administration faces some rigidity in adapting to the outcomes of the public participation process (Tseng and Penning-Rowsell, 2012). Other issues include a lack of institutional support and deficiencies in communication and information sharing (Thaler and Priest, 2014).
Managing Risk in Large Private Sector Companies
Private capital markets are the primary source of financing for infrastructure investments, with private firms shouldering the responsibility for managerial expertise (Marques and Berg, 2011). However, the cost of infrastructure projects can escalate when contracts fail to address risks comprehensively. Identifying risks within sizeable private sector companies is a structured process often guided by a risk matrix (Arena, Arnaboldi, and Azzone, 2010).
This matrix calculates the risk’s magnitude by multiplying the level of impact by the probability of a specific event occurring. At the outset of the bidding process, prospective contractors are furnished with a risk matrix that delineates contractual clauses addressing each risk (Marques and Berg, 2009). This transparency ensures that bidders possess full awareness of the potential business risks, promoting an environment where all stakeholders are aware of future eventualities.
Large private sector companies classify various types of risks, encompassing operational, financial, construction, revenue, technical, regulatory, political, and default project risks (Marques and Berg, 2011). Typically, these risks fall into two major categories: project and general (Loosemore, 2007). Project risks are associated with microenvironments specific to each project, while those related to PPP projects are deemed external. The severity of these risks dictates their classification.
Subsequently, these risks are allocated between sizeable public sector companies, with each risk type assigned to either the public or private sector to optimize economic cost management (Marques and Berg, 2011). The risk allocation process considers various contextual factors and project-specific details, including legal precedents, technical expertise, and other pertinent considerations (Ke et al., 2010).
Risk allocation hinges on identifying the party best equipped to manage a particular risk effectively. This allocation of risks is a pivotal step within sizeable private sector companies and directly impacts organizational performance based on the methods and expertise available for mitigating these risks.
In large private sector companies, risks often encompass maintenance, performance, operational, design, and significant repair issues, with others contingent on external environmental conditions and inherently unpredictable (Marques and Berg, 2011). Unfortunately, private sector companies prioritize predictable risks and may overlook these contingencies, significantly affecting their performance and operations.
Inadequate risk sharing is observed in concession contracts within sizeable private sector companies, with European law mandating that the concessionaire bear the operational risk of water infrastructure. In contrast, construction risk is allocated to the private operator as part of the investment case (Marques and Berg 2011).
Furthermore, environmental risk has emerged as a pressing concern for large private sector companies in the UK, prompting shifts in production strategies to address these challenges (Blowers, 2013). For instance, the UK has recently focused on curbing carbon and greenhouse gas emissions to combat global warming (Moss et al., 2010).
In response, private sector companies involved in automobile manufacturing have taken measures to contribute to this cause. Consequently, prices of diesel and petrol cars have risen. At the same time, electric vehicles have been introduced as an alternative, aligning with the government’s efforts to mitigate the risk of global warming in Europe (Chu and Majumdar, 2012).
The depletion of natural resources presents a global concern, notably in the UK, where gas consumption rates are notably high in Europe (Steen-Olsen et al., 2012). In response, large private sector companies have shifted away from utilizing natural gas as an energy source, opting instead to import liquefied natural gas (LNG).
This strategic shift has aided in averting the depletion of natural resources (Collier et al., 2010). It underscores that large private sector companies in the UK exhibit a heightened level of efficiency in risk management, leveraging advanced methods and techniques to navigate and mitigate threats successfully.
Conclusion
Over the past decade, UK local authorities have made notable strides in adopting various effective methodologies and techniques to manage risks. However, there exist certain inherent flaws in their decision-making processes. For instance, venturing into the commercial market may not be the optimal solution to bridge government funding gaps, as it introduces additional risks to the country’s economic stability.
Should local authorities opt to pursue this path, it becomes imperative that they concentrate on refining their risk management methods and techniques. Furthermore, involving stakeholders in managing flood and disaster risks emerges as a best practice, offering a more comprehensive approach to addressing the consequences of these risks.
In contrast, large private sector companies exhibit a higher level of proficiency in risk management when compared to UK local authorities. While the fundamental methods employed to manage risks often overlap between the two sectors, their implementation varies significantly.
Large private sector companies within the UK have demonstrated commendable acumen in risk management. From the discussion above, it is evident that risk management in both sectors shares commonalities. However, the risk management practices of large private sector companies outshine those of UK local authorities regarding efficiency and effectiveness.