Annex B: Note on risk management
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Risk is uncertainty of outcome. It can arise in two ways:
- Threats: damaging events that can lead to
failure to achieve objectives
- Opportunities: constructive events that can,
if exploited, help with the achievement of objectives but that are
also surrounded by threats.
There are two aspects of risk:
- The probability that a risk will
materialise
- The impact that the risk would have on the
effectiveness, economy or efficiency of the programme if it did
arise.
It is impossible to eliminate risk from any financial
arrangement. It would, in any case, be undesirable to do so: the
desire on your or the provider’s part to avoid a risk can create an
incentive on you or the provider (respectively) to deliver the
programme’s objectives.
This correctly implies mutuality. When you allocate the risks in
a programme between government and the organisation in receipt of
finance, you must not offload as much risk as possible onto the
recipient. You must allocate risk in a balance that is
effective, economical, efficient and fair. You must
consider:
- The objectives of the programme [see Establish specific purpose]. Some programmes,
such as experimental pilot programmes, are inherently more risky
than others. All programmes will carry some risk. It would be
unfair to deal with this by allocating all the risks to the
potential provider. Doing so would also undermine the achievement
of the programme’s objectives: you would deter some potentially
good providers from taking part in the programme
- The extent to which each party has control of the
risk. You must not expect the provider to bear all the
demand risk (that is, the risk that the estimated
demand for the service does not materialise) if you have much of
the control over the demand. At the same time, it is appropriate
for the provider of the service to bear the output
risk: that is, the risk that the provider does not deliver the
required outputs, leading to a loss of desired outcomes. But this
must be on the basis that these outputs have been fully agreed
between the funder and provider
- The capacity of the potential provider. For example, an
organisation with large reserves will be in a better position to
manage risks than a small organisation with small reserves.
If your programme is large or complex, you should hold a
risk meeting (or series of meetings) to apportion
risks. In a risk meeting, you can share your concerns about the
risks in the programme with others and reach a balanced view. It
may be appropriate at times for the risk meeting to include both
funders and representatives of the third sector. The allocation of
risk should also be embodied in the written agreement between
funder and provider.
Guidance on risk is available from HM Treasury’s ‘Orange Book’,
[Footnote 1] from HM Treasury’s
‘Guidance to Funders’ and from
the Office of Government Commerce publication ‘Management of Risk: Guidance for
Practitioners’.
The risk of fraud in funding programmes is discussed in Section 3 of this tool.
- [back from footnote 1] HM Treasury,
The Orange Book: Management of Risk – principles and concepts,
HM Treasury, October 2004.