Risk Management and Decision Making within the State, by Victor K Makwakwa

1 INTRODUCTION               

No institution is free from risk. There will always be factors that will influence entities negatively, and the government of the day and its departments, municipalities and other entities must manage that risk. Deficits and losses have serious financial implications on various departments, financial management has had an important role in the managing of finances, but currently the importance of risk management has improved over time and is used more as it protects government departments and other entities from losses and liability suits. Risk is a major problem that needs to be managed effectively by government departments as it is costly and detrimental to the department, thus managing risk helps institutions spend less on fixing problems or outsourcing, in addition the managing of risk provides for better functions and service delivery. The main purpose of this essay is to critically analyze risk management by focusing on the way in which government departments and or an institution manages risk effectively. Key terms to be defined include financial management, risk management, government department and decision making. Furthermore to be discussed is the importance risk management, the components of risk management, the risk management process and the way in which various departments manage risk effectively. Without risk management, government departments will not be able to function effectively and provide services efficiently, there will be continuous losses in the entity which affects the department negatively.            

2 DEFINITIONS OF TERMS

To further understand what this essay is about, one has to understand the key terms included, the key terms to be defined in this section are financial management, risk management, government department and decision making. After the completion of this section one may gain understanding and clarity about the latter information about the assignment which include the following terms.

2.1 Financial Management

According to Paramasivan and Subramanian (unknown) financial management is an essential part of the economic and non-economic activities which leads to decide the efficient procurement and utilization of finance with profitable manner. It is the art and science of managing money.                                                                                             

2.2 Risk Management

The Orange Book (2004: 9) indicates that risk is the uncertainty of an outcome, whether it is a positive or negative action. The risk has to be assessed in respect of the combination of the likelihood of something happening, and the impact which arises if it does actually happen. Risk management includes identifying and assessing risks (the “inherent risks”) and then responding to them.

2.3 Government Department

According to the Oxford advanced learners dictionary (2003) the government are the group of people who are responsible for controlling a country or state and the department are the sub-systems of the government, they are the bodies which make the government a whole.                       

2.4 Decision Making 

According to Harris (1998: unknown) decision making the study of identifying and choosing alternatives based on the values and preferences of the decision maker. Making a decision implies that there are alternative choices to be considered, and in such a case we want not only to identify as many of these alternatives as possible but to choose the one that best fits with our goals, objectives, desires, values, and so on. 

3 IMPORTANCE OF RISK MANAGEMENT

According to Hardy (2010: 10) risk is something that is unavoidable. It is included in each human circumstance and is a steady calculate our regular day to day existences and included inside open and private area associations. While there are numerous worthy meanings of hazard being used crosswise over different ventures and associations, the most well-known idea in all definitions is the instability of results (Treasury Board of Canada Secretariat, 2001).

Risk management, risk administration or even problem solving are synonymous to the management of hazards. These terms go hand in hand and are interchangeable. Successful risk administration can’t be honed in confinement, however should be incorporated with existing basic leadership structures and procedures (Peter, Gjerdrum & Peeling, 2009). In the past, risk management was seen as relating mainly to matters of safety and insurance. Over time, this systematic approach has evolved from a transactional functional to that of a strategic nature (Peter, et al.). These statements indicate that risk management is very important as it helps departments and all entities in general manage their losses.

In addition, Hardy (2010: 11) expresses that past practices saw hazards or risks as dangers and concentrated on shirking the negative occasions, regarded and treated risk as a different capacity. Bit by bit, associations started to coordinate hazard by tolerating hazard as a cost, moving their concentration to overseeing hazard, and perceiving hazard supervisors as hazard proprietors. Deliberately, offices are presently working towards a more extensive perspective of risk, understanding that risk is a vulnerability, moving the concentration to enhancing hazard and upholding hazard administrators as hazard facilitators and pioneers. Expanding on the development of hazard administration, ERM perceives that dangers can be seen as threats and openings or opportunities, and are a broad every day worry that is implanted in the operations. ERM changes risk management from a storehouse way to deal with an all-encompassing methodology that is facilitated at the most abnormal amount inside the association and that perceives the estimation of substantial and immaterial resources. Historically, organizations focused on hazard risk management and insurable financial risks. Today, the practice is a great deal all the more including, covering operational, vital, monetary, and notoriety dangers.

According to the Knysna Municipality Risk Management Strategy (2011: 19) the administration of risk is a basic piece of corporate governance inside a region or municipality. The Risk Management System is used as an instrument to aid key and operational planning, has numerous potential advantages in recognizing openings and dangers to the district accomplishing its key goals as decided in the incorporated improvement arrange. An effective Risk Management System will shield Councils interests and certification the best use of confined city resources. By executing and every now and again investigating the city Risk Management Strategy Council won't simply fulfill consistence with definitive requirements moreover improve its oversight and regulatory strategies.

According to The Orange Book (2004:9) institutions exist for a reason or important purpose – whether it is to convey, or to achieve particular outcomes. In the private environment the basic role of an organization is regularly worried with the development of shareholder esteem and the making of benefits which are normally monetary; for government the objective is by and large extent worried with the conveyance of administrations or with the conveyance of a gainful result in the general society. Whatever the purpose behind the establishment may be, the transport of its objectives is incorporated by powerlessness which both positions threats to accomplishment and offers open entryway for extending accomplishment. Risk is described as this powerlessness of result, paying little heed to whether positive open entryway or negative threat, of exercises and events. The peril must be studied in respect of the blend of the likelihood of something event, and the impact which rises if it does truly happen. Chance organization consolidates perceiving and assessing perils (the "intrinsic threats") and after that responding to them. The organization or peril is along these lines basic in that its criticalness is lessening the level of unsteadiness.

Scarcity will always be a problem in any government institution, there is a lack of resources, benefits and assets and the advantages open for supervising peril are restricted consequently the fact of the matter is to fulfill a perfect response to risk, sorted out according to an evaluation of the threats. Peril is unavoidable, and every foundation needs to make a move to administer chance in a way which it can legitimize to a level which is widely appealing.

The measure of hazard which is judged to be average and reasonable is the "risk appetite". Reaction, which is started inside the organization, to hazard is called "interior control" and may include at least one of the accompanying: enduring the hazard; treating the hazard in a fitting approach to compel the hazard to an adequate level or effectively exploiting, seeing the vulnerability as a chance to pick up an advantage; exchanging the hazard; ending the movement offering ascend to the hazard (The Orange Book, 2004:9).

In life and in the general workplace, there will always be future or current circumstances that we cannot control or will have unwanted consequences. These uncertainties which are not beneficial are called risks, hazards, problems or any term which has negative implications to an event or objective. My understanding of risk management is that risks need to be controlled, organized and dwelt with in a manner that is beneficial to the organization or individual. There will always be risk and uncertainties, but those individuals who are decision makers need to plan and foresee the various challenges and implications of any task or function in which they want achieve. For example, when a municipality wants to undertake a various function, which could be the building of infrastructure, planners need to envision the possible risks at large, whether small or big, risks would include spending more than required, being under staffed or the loss of a member, the wrong material purchased etc. These risks or uncertainties need to be thought of and managed effectively and efficiently. Risk managements importance is that it helps decision makers and the whole organization as a whole function knowing that risks are taken care of or will be dwelt with.

4 RISK MANAGEMENT PROCESS

According to The Orange Book (2004:13) there is a risk management model or process which can be used by the government and all entities in the private and public sector. This model/process include identifying risk, assessing risk, addressing risk and reviewing and reporting on that risk.

4.1 Identifying risk

So as to oversee hazards and risk, an organization has to comprehend what dangers it confronts, and to assess them. Recognizing dangers is the initial phase in building the entities risk/hazard profile. There is no single right approach to record a foundations risk profile, yet documentation is basic to compelling administration of hazard. The distinguishing proof of hazard can be isolated into two particular stages. There is: beginning danger recognizable proof (for an establishment which has not beforehand distinguished its dangers structurally, or for another foundation, and there is; a ceaseless hazard ID which is important to recognize new dangers which did not already come up, changes in existing dangers, or dangers which existed stopping to be pertinent to the organization.

Dangers or risk ought to be identified with destinations. They must be evaluated and organized in connection to destinations. Care ought to be gone out on a limb which will have an effect on the business or foundational goals yet may not generally be promptly clear in pondering the specific goal. At the point when a hazard is distinguished it might be pertinent to more than one of the organizations destinations, its potential effect may shift in connection to various goals, and the most ideal method for tending to the hazard might be diverse in connection to various targets (in spite of the fact that it is likewise conceivable that a solitary treatment may sufficiently address the hazard in connection to more than one goal).

4.2 Assessing risk

According to The Orange Book (2004:19) there are three imperative standards for surveying risks and hazards: guaranteeing that there is an unmistakably organized process in which both probability and effect are considered for each hazard; recording the appraisal of hazard in a way which encourages observing and the distinguishing proof of hazard needs; being clear about the contrast amongst characteristic and leftover hazards.

It is important to build up some structure for evaluating dangers. The evaluation ought to draw however much as could reasonably be expected on fair autonomous proof, considering the points of view of the entire scope of partners influenced by the hazard, and abstain from confounding target appraisal of the hazard with judgment about the adequacy of the hazard. This appraisal should be finished by assessing both the probability of the hazard being acknowledged, and of the effect if the hazard is figured it out. An arrangement of high/medium/low in regard of each might be adequate, and ought to be the base level of classification.

Hazard appraisal ought to be archived in a way which records the phases of the procedure. Reporting hazard appraisal makes a hazard profile for the substance which: encourages distinguishing proof of hazard needs (specifically to recognize the most critical hazard issues with which senior administration ought to stress over); catches the explanations behind choices made about what is and is not mediocre presentation; encourages recording of the route in which it is chosen to address chance; permits each one of those worried with hazard administration to see the general hazard profile and how their regions of specific obligation fit into it; encourages survey and observing of dangers.

In conclusion once risks have been assessed, the danger requirements for the association will rise. The less sufficient the presentation in respect of a risk, the higher the need which should be given to watching out for it. The most bewildering need perils (the key risks) should be given standard thought at the biggest measure of the establishment, and should along these lines be considered much of the time by the Board. The specific risk needs will change after some time as specific threats are tended to and prioritization in this way changes.

4.3 Addressing risk

The Orange Book (2004:27) indicates that the purpose of addressing risks is to turn uncertainty to benefit by constraining threats and taking advantage of opportunities. Any action that is taken by the institution to address a risk forms part of what is known as “internal control”. There are five key aspects of addressing risk which include: tolerating risk; treating risk; transferring risk; terminating risk and taking an opportunity against that risk.

Tolerating risk is about the ability to handle that risk without taking any further actions. The ability to do anything by the institution is limited and the cost of taking any action is disproportionate to the potential benefit gained. In such a case, the response may be to tolerate the existing level of risk. This option, of course, may be supplemented by contingency planning for handling the impacts that will arise if the risk is realized.

Treating risk is about using control tools or mechanisms to handle the risk. The purpose of treatment is that whilst continuing with normal institutional activities, which give rise to the risk, action (control) is taken to constrain the risk to an acceptable level.

Trading or sharing of risk may be the best response for associations. It is the sharing of various risk. This might be done by general insurance, or it might be done by paying an outcast to put it all out there in another way. This decision is particularly valuable for diminishing money related perils or risks to assets. The trading of perils may be considered to either diminish the introduction of the foundation or bestow that risk to another association (which may be another organization office) which is more ready to do satisfactorily managing the danger.

Finishing or ending threats is about closing off an objective. A couple of threats might be treatable, or containable to sufficient levels, by completion the development. It should be seen that the decision of end of activities may be to a great degree obliged in government when stood out from the private fragment; different activities are driven in the organization part in light of the way that the related threats are awesome to the point that there is no other way in which the yield or result, which is required for general society favorable position, can be proficient.

At last tolerating an open entryway as to danger. This decision is not another alternative to those above; rather it is a decision which should be considered at whatever point persevering, trading or treating a risk. There are two edges to this. The first is paying little heed to whether meanwhile as directing threats, an open entryway rises to attempt beneficial outcome. For example, if an immense entire of capital financing is to be put at risk in an imperative wander, are the huge controls judged to be satisfactory to legitimize extending the aggregate of trade out question to expand significantly more unmistakable positive conditions? The second is paying little heed to whether conditions develop which, while not delivering threats, offer positive open entryways.

4. 4 Reviewing and reporting risk

The management of risk has to be reviewed and reported on for two reasons: to monitor whether or not the risk profile is changing; to gain assurance that risk management is effective, and to identify when further action is necessary. Processes should be put in place to review whether risks still exist, whether new risks have arisen, whether the likelihood and impact of risks has changed, and report significant changes which adjust risk priorities, and deliver assurance on the effectiveness of control (The Orange Book, 2004:31).

The survey procedures ought to: guarantee that all parts of the risk management process are investigated in any event once every year; guarantee that dangers themselves are subjected to survey with proper recurrence (with fitting arrangement for administration's own particular survey of dangers and for autonomous survey/review); make arrangement for alarming the suitable level of administration to new dangers or to changes in effectively recognized dangers so that the change can be fittingly tended to.

5 WAY IN WHICH GOVERNMENT DEPARTMENT OR INSTITUTION MANAGES RISK      

There are many ways in which government departments, public entities and municipalities manage risk. When these bodies manage risk, they use various frameworks or strategies that guide them in managing risk, they also follow a various process in managing risk. The risk strategy used by the Molemole local municipality will be discussed in depth. The risk they encountered is that of a lack of funds and an under staffed and skilled workforce which could not provide for the growing number of needs in a particular year.

The hazard administration technique directs the foundation on the best way to execute its hazard administration strategy. The hazard administration system ought not harp excessively on applied models and hazard administration hypothesis. This is regularly a misstep that outcomes in troubles in the genuine execution of the system. Simply, the technique ought to explain an abnormal state plan of activity to enhance the foundations hazard profile (National Treasury, 2010).

The Ksynsa Municipality utilizes the hazard administration system to oversee chance successfully in that it illuminates and helps the official and work force on their parts and duty and to guarantee that the dangers identifying with their specific region of control are figured out how to guarantee that the best result is accomplished (AusAID, 2006).      

According to the Molemole Local Municipality Risk Management Strategy (unknown: 6) the municipality adopts the Public Sector Enterprise Risk Management Framework. This framework provides a structured approach to identifying and managing risk within preset risk appetite and tolerance levels. For Molemole municipality, there are key components of the framework which are used to manage risk. These components include the internal environment, objective setting, event Identification, risk assessment, risk response, control activities, information and communication and lastly monitoring.

Every municipality has an internal environment which it needs to consider and scan. The municipality in managing risk uses a SWOT analysis of its surroundings. The inner condition or internal environment; encompasses the tone of an association, and sets the reason for how a risk, hazard or problem is seen and tended to by the institution, including hazard administration rationality and risk craving, within the internal context the institution may scan the uprightness and moral qualities of employees and nature in which they work. The municipality in managing risk scanned their internal environment of its strengths and weaknesses, they in other words had an internal audit of the municipality. They found that they do not have the capacity to provide efficient and effective services to their inhabitants due to a lack of financial and human resources.

Objective setting; Destinations and end goals must exist before administration can recognize potential occasions influencing their institution. ERM guarantees that administration has set up a procedure to set targets and that the picked goals bolster and adjust to the substance's central goal and are predictable with the problem or risks that may arise. When objectives are set, management have been strategic in their planning and objectives. The municipality’s objective is to provide adequate services to its inhabitants and also improve employee skills. In managing their risks they were able to work with private and non-governmental bodies which helped with the training of staff and accumulation of funds, this was also a form of transferring and sharing risk.

Event identification; Interior and outer occasions influencing accomplishment of the municipality’s goals must be recognized, recognizing dangers and openings. Openings or opportunities are diverted back to administration's technique or target setting forms. The opportunities and threats in the external environment need to be identified. The municipality found that working with other institutions is an opportunity to treat, tolerate and transfer risk. They were able to provide services on time and sufficiently with the help from external bodies. Threats will arise when these bodies cannot help the municipality and if their employees do not improve from the training they obtained and if the little funds they have are not used economically. Opportunities may arise due to tourism which may increase the revenue of the municipality as it a place of culture and festivities.

Furthermore Risk Assessment; Risks are analyzed, considering likelihood and impact, as a basis for determining how they should be managed. Risks are assessed on an inherent and a residual basis. The assessment that services cannot be provided because of unskilled staff and financial limitations was undertaken by the municipality. They found that they can provide services, but not as how they are expected to be provided. The inhabitants of the municipality will have to wait a few days for various services to be provided.

Risk Response; Management selects risk responses - avoiding, accepting, reducing or sharing risk – developing a set of actions to align risks with the entity’s risk tolerance and risk appetite. In this phase like mentioned above, the municipality worked with private and non-governmental bodies to provide training for staff and finances which enabled the sufficient provision of services, for example in providing water and electricity and refusal services, the municipality worked with private waste management due to PIKITUP not delivering on services due to strikes. Control Activities; Policies and procedures are established and implemented to help ensure the risk responses are effectively carried out. Information and Communication; Relevant information is identified, captured and communicated in a form and time frame that enable people to carry out their responsibilities. Effective communication also occurs in a broader sense, flowing down, across and up the entity. Monitoring; the entirety of ERM is monitored and modification made as necessary. Monitoring is accomplished through ongoing management activities, separate evaluations or both.

CONCLUSION

Within any organization or institution and in life, uncertainty and risk will always be a given. One cannot have a goal or an objective without thinking or envisioning possible threats or uncertainties. Institutions will surely face risk in their life time, and how they respond to that risk whether proactive or reactive is highly important. The objectives and goals of a municipality or the national government are directly linked and associated with uncertainty and risk. Those in management positions and the decision makers in government need to be strategic and plan effectively, in their planning they need to aware of the risks and factors that may influence them both positively and negatively. Risk is a major problem that needs to be managed effectively by government departments and the public sector as it is costly and detrimental, thus managing risk helps institutions spend less on fixing problems or outsourcing. Risk management is about the mechanisms and tools used to identify, control, fix or change risk. The managing of risk provides for better functions and service delivery. To derive optimal benefits, risk management ought to be conducted in a systematic manner, using proven methodologies and techniques. Lastly my understanding of risk management is that risks need to be controlled, organized and dwelt with in a manner that is beneficial to the organization or individual. There will always be risk and uncertainties, but those individuals who are decision makers need to plan and foresee the various challenges and implications of any task or function in which they want achieve. In ending, do we have good decision makers?                                                                            

BIBLIOGRAPHY

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