Sample Undergraduate Public Sector Risk Management Essay

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In the 21st Century, Managing Risk in UK Local Authorities is no Different from Managing Risk in Large Private Sector Companies

Introduction

The Global Risk Reports of the last ten years by the World Economic Forum have shown many risks that encounter cybercrime, water, food crisis, terrorist attacks, financial crisis, extreme weather events, and humanity (Van Der Vegt et al., 2015). The uncertainty regarding the severity of consequences and circumstances of a particular activity is referred to as risk (Aven and Renn, 2009).

The management of risk is the process that involves identifying, measuring, and adjusting threats to the organisation’s earnings and capital. Various sources like legal liabilities, financial uncertainty, errors in strategic management, natural disasters, and accidents can be the reasons for the threats.

National Institute of Standards and Technology, ISO, and other organisations have developed Risk management standards (Herbane, 2010). These risk management standards have been designed to help organisations recognise particular threats, evaluate unique exposures to control the risk, identify different methods to reduce the risk, and implement them following the organization’s strategy.

This essay involves comparing managing risk in UK local authorities with the management of risk in large private sector companies. Moreover, the critical evaluation of the risk management methods of UK local authorities and large public sector companies provides a similarity or difference in the procedures of how risk is managed.

Discussion

Managing Risk in UK Local Authorities

Management of risk is challenging in public environments because of the high unpredictability (Haynes, 2015). In the UK, the local councils are in a rush to dive into the commercial property market. The local councils are acting as a private sector, for which they are not set up because it involves huge risks. After many years of spending cuts from the central government, these councils are diving into the commercial adventure to fund their budget gaps.

The skill to manage commercial risk is the secret to success in retail arbitrage (Detter, 2015). Borrowing carried out by local councils is based on the rates provided by the state funding vehicle, which are much lower than private-sector borrowing. The investment of that money borrowed according to these rates will provide a higher yield, which means that local councils place the commercial risk on the balance sheets.

There is a similarity between the issues in this kind of commercial activity that is associated with private finances initiatives (PFI’s) and public-private partnerships (PPP’s) (Detter, 2015). The public sector’s investment in private sectors is criticised because of the inadequacies in the accounting of public sectors and the inability to manage commercial risk.

The public sector’s inability to unknown commercial consequences to manage, oversee, and long-term commercial contracts negotiation means that the government frequently loses substantially. The political criticism is to enrich the private sector using taxpayer money (Detter, 2015).

In the 21st century, rather than focusing on administrative process complexities and public service ethos, attempts are made for public services to focus on outputs and tasks achieved (Haynes, 2015). According to the study conducted by Mintzberg and Luthans in 2015, the local government managers that were involved in social services were different in the UK.

These managers mostly spend their time handling paperwork and communicating the information to the staff (Haynes, 2015). Planning for future activities and making critical decisions are less focused on by these managers. Most of the time of these managers is spent supervising forced skilled staff and the front-line choices being made. Compared to task-based activities, the focus is more on the need to undertake a professional support role (Haynes, 2015). This is why in complex and challenging working environments, professionals are engaged positively.

The risk of failure is much higher if the public’s perception is about the lack of trust between the market and the government (Haynes, 2015). Perception of the people plays an essential role in the investments of government in the private sector. The government needs to maintain good relations to gain the trust of the market. The good relations between the government and the market will create a positive image in people’s minds. In this way, the UK local authorities can handle the risk of failure in the private sector.

Appropriate tools, a private-sector framework, and professional management application can be made possible by devolving all the commercial assets in a self-governing urban wealth fund (UWF) (Detter, 2015). The UK’s local government is one of the largest property owners, but their ability to efficiently manage the property is low. Exceeding their public assets compared to the public debt has been overlooked because there is a complete understanding of the government’s portfolio.

The key to better management is the transparency of the sector or authorities. With the breakdown of public, commercial assets portfolio and consolidated understanding of the value, the improvement in the yield and supplement income from taxes is made easier (Detter, 2105). Transparency is essential in the local councils to be aware of the situation or circumstances (Scolobig et al., 2015). Transparency will help predict the proper picture of the problem and ensure the participation of every worker.

Flood risk has been a concern for the UK’s government for the past few years (Kundzewicz et al., 2014). The engagement of stakeholders has become essential to manage the flood risk. The engagement of stakeholders has been declared as a better way of managing risk. Stakeholder engagement often ends in conflicts and difficulties between stakeholders groups and political leaders (Blackstock et al., 2014).

There is some inflexibility in public administration to react to the outcome process of public participation (Tseng and Penning-Rowsell, 2012). However, the other problems include the lack of institutional support, lack of communication, information sharing (Thaler and Priest, 2014).

Managing Risk in Large Private Sector Companies

The private capital markets are the primary source of financing the infrastructure investments, and the private firms are responsible for the managerial expertise (Marques and Berg, 2011). The cost of infrastructure is raised when the contracts fail to address the risk in the inclusive method. Identifying risk in large private sector companies is carried out with the help of a risk matrix (Arena, Arnaboldi, and Azzone, 2010).

It is calculated as the corresponding impact level multiplied by the probability of occurrence of any particular event. At the start of the process, bidders should be provided with the risk matrix that includes the contractual clauses addressing each risk (Marques and Berg, 2009). It will give the bidders complete knowledge about the probability of business failure. The process becomes transparent, and everyone is aware of the circumstances that could occur in the future.

Different types of risks are classified in large private sector companies. They include operating, financial, construction, revenue, technical, regulatory, political, and default project risks (Marques and Berg, 2011). The risks are usually categorised into two major groups: project risks and general risks (Loosemore, 2007). The events that are concerning microenvironments that are associated with each project are included in project risks. In comparison, the known risks concerning the PPP projects are external. These risks are classified according to the severity of the events that occurred.

After the classification, these risks are allocated to large public sector companies. Each type of risk allocation is assigned between public and private sectors to minimize economic cost promotion (Marques and Berg, 2011). The risk allocation depends on different contextual issues and particular projects, including the judicial and law precedents, technical expertise, and others (Ke et al., 2010).

The allocation of risks should be based on where they could be best managed. The allocation of risk is an essential step in large private sector companies that directly impact the organization’s performance or company based on the methods or expertise to tackle the risk.

The large private sector companies usually face risks that include maintenance, performance, operation, design, and major repairs, while other chances are dependent on the circumstances (Marques and Berg, 2011). These risks occur based on external environmental conditions and are not predictable. The private sector companies usually don’t have plans to tackle these risks as they are more focused on predictable risks. These companies should focus on these risks, as they can directly affect their performance and operations.

The concession contracts in the large private sector companies do not share risks adequately among the sector. According to European law, the concessionaire’s risk of operating the water infrastructure must be borne. The construction risk must be allocated to the private operator in the private sector’s investment case (Marques and Berg, 2011).

Moreover, environmental risk has been a problem for large private sector companies in the UK. The companies are changing their production pattern to tackle the risk of environmental issues (Blowers, 2013). For instance, recently, the UK started focusing on the carbon footprint and greenhouse gasses emission to control global warming (Moss et al., 2010).

In this regard, the private sector companies that manufacture automobiles decided to contribute to this cause. Following this concern, diesel or petrol cars’ prices were increased, and they introduced electric cars as an alternate. The concept of electric cars helped the government to reduce the risk of global warming in the region of Europe (Chu and Majumdar, 2012).

The risk of natural resources depletion is a concern worldwide, especially UK (Pearce, 2014). The ranking of the UK in terms of gas consumption is high in Europe (Steen-Olsen et al., 2012). In this regard, the large private sector companies, instead of using natural gas as the source of energy, started importing the natural gas in its liquefied state (LNG).

This stance of large private companies helped control the depletion of natural resources (Collier et al., 2010). It showed that the large private sector companies in the UK are more efficient in managing the risks, as they have better methods and techniques to manage and overcome threats.

Conclusion

The UK’s local authorities have adopted several methods and techniques to manage risks over the last decade and are managing them accordingly. But there are some flaws in the decisions of these authorities. Like entering the commercial market is not a good option for the government to reduce the gap in government funding, as it will generate more risk to the country’s economy.

If they have decided to do so, the local authorities should focus on better methods and techniques to manage or tackle these risks. Moreover, the local authorities should involve the stakeholders in the management of the flood and disaster risk. Stakeholder involvement is considered the best practice to manage and overcome the consequences that occurred due to the risks involved.

Whereas the large private sector companies manage the risks much better than the UK local authorities. The managing methods are usually the same among both the sectors but the implication differs from each other.

The large private sector companies have responded well in risk management throughout the UK. From the above discussion, it can be concluded that managing risks in both sectors is not different. The risk-managed by large private sector companies is more efficient and effective than the risk-managed by the UK local authorities.

References

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Collier, P., Van Der Ploeg, R., Spence, M. and Venables, A.J., 2010. Managing resource revenues in developing economies. IMF Staff Papers, 57(1), pp.84-118.

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