RISK MANAGEMENT IN MUNICIPALITIES INCA LOCAL GOVERNMENT SUMMER

RISK MANAGEMENT IN MUNICIPALITIES INCA LOCAL GOVERNMENT SUMMER SCHOOL 2004 Lucas Opperman Director: LGC Consultants November 2004

GENERAL APPROACH TO RISK MANAGEMENT l Risk categories – – – Strategic Operational External Physical Financial

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

GENERAL APPROACH TO RISK MANAGEMENT l 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)

GENERAL APPROACH TO RISK MANAGEMENT l 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

“PRAGMATICS” OF MUNICIPAL RISK MANAGEMENT l 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

“PRAGMATICS” OF MUNICIPAL RISK MANAGEMENT l 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)

“PRAGMATICS” OF MUNICIPAL RISK MANAGEMENT l 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)

“PRAGMATICS” OF MUNICIPAL RISK MANAGEMENT l Causes of risk – – – human frailty: crime, mismanagement poor control environment change size and complexity political divisiveness negligence,

“PRAGMATICS” OF MUNICIPAL RISK MANAGEMENT l 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

“PRAGMATICS” OF MUNICIPAL RISK MANAGEMENT l 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

“PRAGMATICS” OF MUNICIPAL RISK MANAGEMENT l 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

“PRAGMATICS” OF MUNICIPAL RISK MANAGEMENT l 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

“PRAGMATICS” OF MUNICIPAL RISK MANAGEMENT l 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

“PRAGMATICS” OF MUNICIPAL RISK MANAGEMENT l 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)

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

“PRAGMATICS” OF MUNICIPAL RISK MANAGEMENT l 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

“PRAGMATICS” OF MUNICIPAL RISK MANAGEMENT l 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

“PRAGMATICS” OF MUNICIPAL RISK MANAGEMENT l Counters to risk: good governance – audit committee • • independence skills knowledge advisory role Ø Ø Ø Ø internal audit financial controls accounting policies risk management quality of financial reporting performance management effective governance

“PRAGMATICS” OF MUNICIPAL RISK MANAGEMENT l Counters to risk: good governance – – roles of Province and National Treasury good work ethic • • probity commitment transparency and accountability codes of conduct