Sample Undergraduate Public Sector Risk Management Essay
Published byat December 12th, 2022 , Revised On January 26, 2023
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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
The Global Risk Reports of the last ten years by the World Economic Forum have shown several risks that encounter cybercrime, water, food crisis, terrorist attacks, financial crisis, extreme weather events, and mankind (Van Der Vegt et al., 2015). The uncertainty regarding the severity of consequences and events 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 organization’s earnings and capital. Various sources like legal liabilities, financial uncertainty, and errors in strategic management, natural disasters, and accidents can be the reason for the threats.
National Institute of Standards and Technology and 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 these methods to reduce risk by 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 weather there is similarity or difference in the procedures of how risk is managed.
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 the gaps in their budget. The skill to manage commercial risk is the secret to success in commercial arbitrage (Detter, 2015).
Borrowing carried out by local councils is based on the rates provided by the state funding vehicle, which compared to private sector borrowing are much lower. The investment of that money, borrowed according to these rates will provide higher yield which means that the commercial risk is placed on the balance sheets by local councils.
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 has been criticised because of the inadequacies in the accounting of public sectors and the inability to manage commercial risk by the government.
Public sector’s inability to unknown commercial consequences to manage, oversee and long-term commercial contracts negotiation means that the government frequently loses substantially. It is because of the political criticism to enrich the private sector using the 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 managers of the local government that were involved in social services were different in the UK.
These managers mostly spend their time on paperwork handling and communicating the information to the staff (Haynes, 2015). Planning for future activities and making key decisions are less focused by these managers. Most of the time of these managers is spent in supervising forced skilled staff along with the front line decisions being made. Compared to task-based activities, the focus is more on the need to undertake a professional support role (Haynes, 2015). That is why in the complex and difficult working environments, professionals are engaged positively.
The risk of failure is believed to be much higher if the public’s perception is about the lack of trust between the market and the government (Haynes, 2015). Perception of public plays an important role for 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, private sector framework and the application of professional management can be made possible by devolving all the commercial assets in a self-governing urban wealth fund (UWF) (Detter, 2015). The local government of UK is one of the largest property owners but their ability to efficiently manage the property is low. Exceed of their public assets compared to the public debt has been overlooked because there is a complete understanding of the portfolio by the government.
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 situation and ensure the participation of every worker.
Flood risk has been a concern for the UK government for the past few years (Kundzewicz et al., 2014). The engagement of stakeholder has become important to manage the flood risk. The engagement of stakeholder has been declared as a better way of managing risk.
The stakeholder engagement often ends in conflicts and diverse difficulties between stakeholders group 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, communication, information sharing (Thaler and Priest, 2014).
Managing Risk in Large Private Sector Companies
The private capital markets are the main 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. The identification of risk in large private sector companies is carried out with the help of 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 provide bidders with the 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 or 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 which are associated with each project are included in project risks. Whereas, the general risks concerning the PPP projects are external. These risks are classified according to the severity of the events occurred.
After the classification, these risks are allocated in 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, availability of technical expertise and others (Ke et al., 2010).
The allocation of risks should be based on where it could be best managed. The allocation of risk is an important step in large private sector companies that directly impact the performance of the organisation 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 risks 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 types of risks, as they can directly affect the performance and operations of the company.
The concession contracts in the large private sector companies do not share risks adequately among the sector. According to the European law, the risk of operating the water infrastructure must be borne by the concessionaire. The construction risk must be allocated to the private operator in investment by the private sector (Marques and Berg, 2011).
Moreover, the environmental risk has been a problem for large private sector companies in the UK. The companies are changing the pattern of their production to tackle the risk of environmental problems (Blowers, 2013). For instance, recently, the UK started focusing on the carbon footprint and greenhouse gas emissions 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, the prices of diesel or petrol cars were increased and they introduced electric cars as an alternate. The concept of electric cars helped the government reduce the risk of global warming in Europe (Chu and Majumdar, 2012).
The risk of natural resources depletion is a concern all over Europe, especially UK (Pearce, 2014). The ranking of UK in terms of gas consumption is high in Europe (Steen-Olsen et al., 2012). Thus, 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). This 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 risks.
The local authorities of UK 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. Involvement of stakeholders is considered as the best practice to manage and overcome the consequences that are occurred due to the risks involved.
Whereas the large private sector companies are managing the risks in a much better way than the UK local authorities. The methods of managing are usually the same among both the sectors but the implication differs from each other.
The large private sector companies have responded well in the risk management throughout the UK. From the above discussion, it can be concluded that managing risks in both the sectors is not different from each other. The risk managed by large private sector companies is more efficient and effective than the risk managed by the UK local authorities.
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