RISK MANAGEMENT IN MUNICIPALITIES

1. RISK MANAGEMENTIN MUNICIPALITIES INCA LOCAL GOVERNMENT SUMMER SCHOOL 2004 Lucas Opperman Director: LGC Consultants November 2004

2. GENERAL APPROACH TO RISK MANAGEMENT • Risk categories • Strategic • Operational • External • Physical • Financial

3. GENERAL APPROACH TO RISK MANAGEMENT • Purpose of risk management policy • balance sheet protection • business continuity • protection of reputation • defining management roles and responsibilities • defining reporting framework

4. GENERAL APPROACH TO RISK MANAGEMENT • Risk management framework • identification, evaluation and documentation of risks • measurement of risks: quantitative and qualitative • determination of processes to avoid, mitigate or manage identified risks • determination of maximum risk exposure (risk tolerance)

5. GENERAL APPROACH TO RISK MANAGEMENT • Risk management framework • reporting of risks: frequency and format • moderate levels of risk are acceptable • identification of priority risk areas: safety and security, public health, environment, service delivery, financial administration • annual review of risks and risk management framework

6. “PRAGMATICS” OF MUNICIPALRISK MANAGEMENT • Kinds of risk • external risk • public liability (persons, assets, environment, public health) • non-performance (legal, contractual and reputational repercussions, public protest, intervention) • external origin • non-payment • acts of God

7. “PRAGMATICS” OF MUNICIPALRISK MANAGEMENT • Kinds of risk • internal origin • physical losses and damages • mismanagement of resources (low productivity, poor or non-performance, waste, losses) • financial losses • prejudice to municipality’s interests (wrong tenders, wrong strategic decisions, wrong appointments)

8. “PRAGMATICS” OF MUNICIPALRISK MANAGEMENT • Kinds of risk • internal origin • physical losses and damages • mismanagement of resources (low productivity, poor or non-performance, waste, losses) • financial losses • prejudice to municipality’s interests (wrong tenders, wrong strategic decisions, wrong appointments)

9. “PRAGMATICS” OF MUNICIPALRISK MANAGEMENT • Causes of risk • human frailty: crime, negligence, mismanagement • poor control environment • change • size and complexity • political divisiveness

10. “PRAGMATICS” OF MUNICIPALRISK MANAGEMENT • Counters to risk: GOOD GOVERNANCE • accountability and transparency • much useful guidance provided in current municipal legislation • either obviate risk, identify it timeously or minimise its impact

11. “PRAGMATICS” OF MUNICIPALRISK MANAGEMENT • Counters to risk: good governance • sound financial policies provide required governance framework • fixed assets • budgeting • credit control and revenue collection • supply chain management • rates and tariffs • indigency management • banking and investments • subsistence and travel

12. “PRAGMATICS” OF MUNICIPALRISK MANAGEMENT • Counters to risk: good governance • reliable financial systems which are understandable and auditable • cash management • budgetary management • revenues and expenses • debtors and creditors • fixed assets • stores • payroll • credit control

13. “PRAGMATICS” OF MUNICIPALRISK MANAGEMENT • Counters to risk: good governance • general systems • PMS with performance controls • workable political and administrative structures • delegations • statistical systems • human resources • service delivery • distribution losses

14. “PRAGMATICS” OF MUNICIPALRISK MANAGEMENT • Counters to risk: good governance • proper reporting structure: internal and external • excellent prescribed accounting and reporting standards • from draft budget to annual oversight report • regular, consistent, timeous, complete, up-to-date, transparent • management reporting (FMIS) • knowledge is strength

15. “PRAGMATICS” OF MUNICIPALRISK MANAGEMENT • Counters to risk: good governance • ratios and benchmarks • based on own past experience or experience of comparable enterprises • determined according to own performance objectives • industry norms: tread with caution • (generic formulae based on averages)

16. “PRAGMATICS” OF MUNICIPALRISK MANAGEMENT • Counters to risk: good governance • sound control environment • division of responsibilities • budget comparatives • fixed assets • stores • payments • procurement • cash • accounting reconciliations • financial regulations

17. “PRAGMATICS” OF MUNICIPALRISK MANAGEMENT • Counters to risk: good governance • insurance • financial protection against consequences of unforeseen events • reliable claims statistics • public liability, movable fixed assets, current assets • internal reserve • reinsurance

18. “PRAGMATICS” OF MUNICIPALRISK MANAGEMENT • Counters to risk: good governance • internal audit • resources (human and equipment) • skills • knowledge • independence • statutory requirement: risk-based audit plan for each financial year includes: • internal controls • accounting procedures and practices • risk and risk management • performance management • loss control

19. “PRAGMATICS” OF MUNICIPALRISK MANAGEMENT • Counters to risk: good governance • audit committee • independence • skills • knowledge • advisory role • internal audit • financial controls • accounting policies • risk management • quality of financial reporting • performance management • effective governance

20. “PRAGMATICS” OF MUNICIPALRISK MANAGEMENT • Counters to risk: good governance • roles of Province and National Treasury • good work ethic • probity • commitment • transparency and accountability • codes of conduct