Risks faced by Local Governments

TO: ALL RISK MANAGERS IN THE PUBLIC SECTOR
FROM : DR. JOHN VONG

Many people think that risk management is only applied in private sector. That kind of thinking is flawed. The public sector has risks too and care must be taken to manage those risks to avoid a political fallout that could. At the central government level the risks can be a national issue (for example, the Thailand case study) and have national consquences. At the local government level or provincial level, the risks will have adverse consequences for local authorities and may even be riased to the national level.

Risks fo Local Govts can be divided into 5 major classes (and all have financial implications): business risk, credit risk, market risk, operation risk and reputational risk. The magnitude of the risks depends on the scope of their functions and depth of responsibility.

1. Local Govt Business risk is experienced if they have high cost operating cost, or providing low quality service or when govt subsidies are lost, and when they venture outside their core function and responsibility (which then would fail to satisfy their local constitutents).
2. Local Govt Credit risk is described as the adverse impact on their borrowings due to an inability (or unwillingness in some ways) to repay the debt obligations to the investor/lender.
3. Local Gov market risk is the adverse impact due to changes in interest rate, foreign exchange rates and commodity prices that may affect their investments and debt obligations.
4. Local Govt Operation risk is described as an adverse impact due to business disruption and system failures. The examples are internal or external fraud, damaged assets and making errors in contracts of procurement and supply.
5. Local Gov Reputational risk can be described as an adverse impact due to negative image on issues such as not having proper governance, integrity, transparency or health and safety standards.