Project Risk ManagementProject Risk Management

Dec 2010

2

What is Risk?What is Risk?

Risk is the uncertainty of an action or activity which may have an impact on the

achievement of the (project’s) objectives, outputs & benefits

It is the result of the combination of Impact & Probability

Project Risk ManagementProject Risk Management

Why?

• Undertaking any project entails risk • A random & ad hoc reaction to identification &

management of risk is often fatal to success/ sustainability of the project, or may require costly interventions

3

What?

• Systematic process of managing risk: To achieve objectives in a manner consistent with public

interest, human safety, environmental factors & law To minimize the adverse impact of risk on project's

resources, objectives & outputs

Does not mean eliminating risk but reducing operational surprises/ losses

Risk IdentificationLog frame

Design & superv’n docs

Brainstorm

Risk AssessmentMeasurementPrioritisation Classification

Risk ResponseAvoid (eliminate) Reduce (diminish)Share (outsource)Accept (retain)

Risk Monitoring & ReportingUpdate regularlyCommunicate

4

Risk Management CycleRisk Management Cycle

Depends on risk appetite/preferences

Assists in process of identification/

mitigation

Based on assumptions which may be

risky

5

EXTERNAL RISKS EXTERNAL RISKS

INTERNAL RISKS INTERNAL RISKS

COUNTRY ENVIRONMENT

PARTNERSENVIRONMENT

POLITICAL ENVIRONMENT

LEADERSHIP AND GOVERNANCE

POLICIES, PROGRAMS AND PROCESSES

COUNTRY FOCUSED SERVICE DELIVERY AND CONSULTATIONS

RESOURCING AND STEWARDSHIP

PRODUCTIVE WORKFORCE IN A HEALTHY WORK ENVIRONMENT

PLANNINGINNOVATION &

RISK MANAGEMENT

ACCOUNTABILITY

INFORMATION SYSTEMS PERFORMANCE AND RISK MEASUREMENT, MONITORING

AND REPORTING

CONTINUOUS IMPROVEMENT AND LEARNING

SOCIO-ECONOMIC

ENVIRONMENT

Risk IdentificationRisk Identification

Risk Inventory PyramidRisk Inventory Pyramid

Risk UniverseRisk Universe

Define the Risk Universe– Develop understanding of business area– review documents, interviews

– May be structured by process and/or location

Define High Priority risks– Evaluate the nature & types of errors/ omissions that could occur, i.e., “what can

go wrong”

– Consider significant risks common in the industry or experienced in past

– Information Technology risks (i.e. - access, backups, security, data integrity)

– Volume, size, complexity and homogeneity of the individual transactions processed through a given account or group of accounts (revenue, receivables)

– Susceptibility to error or omission as well as manipulation or loss

– Robustness versus subjectiveness of processes for determining significant estimates

– Decentralized authority

– Extent of change in the business/ human resources

– Other risks extending beyond potential material errors/ omissions in financial statements 6

10

UNACCEPTABLE RISKS

ACCEPTABLE RISKS

Impact Description

6 •Catastrophic: requires urgent/ extensive action; lives lost, funding withdrawn, project failure

5 •Major: requires urgent/ extensive action; cancellation/ suspension of funding, very costly remedies

4 Significant: delays in funding, impacts potentially > 1 component, requires urgent intervention of third parties (donors/ ministry), costly remedial actions

3 Moderate: requires remedial action as soon as possible, impacts on 1 component, modest cost

2 Low: requires some remedial action, minor costs

1 Negligible: no interference with other activities, no financial cost

Likelihood Description

6 •Virtually certain to occur in the time frame

5 •Highly likely in the timeframe; several precedents

4 Likely to occur; some precedents

3 Unlikely, but not unprecedented

2 Unlikely, without precedent

1 Virtually impossible

“Black swan”

Risk Assessment - MeasurementRisk Assessment - Measurement

8

# Basic objective Risk event Risk Consequence L I RP Risk Mitigation Strategy Actor Timeframe

1 Profitable farmer managed and self-financing irrigation schemes established and operational

Decline in the sugar price and impacts on the economic viability of sugar cane as an anchor crop

•Farm viability deteriorates•Financing institutions refuse to fund capital and on farm development•Large scale irrigation development compromised with resulting increase in poverty and increased food security risk

H H 5 •Crop diversification in line with, national & international market needs •Develop local livestock ownership into commercial herds with supp. feeds produced on irrigation areas•Pursue downstream development initiatives with potential to add value to crops grown on the scheme, these initiatives could be production of crops with potential for bio-fuel starch, oils & fibre production

Project leadership, national Sugar Association, project beneficiaries

Annual

2 Policy, institutional & social environment supportive of equitable integration of smallholder farmers into the commercial economy

People resisting land use change

Land and irrigation development delayed; less land is available for redistribution; Few landless people benefit from irrigation

M H 5 Facilitate agreement on equity options acceptable to all parties

Project leadership land owners, Traditional Authorities & project beneficiaries

L: Likelihood/ I: Impact/ RP: Risk Priority

Risk Monitoring Risk Monitoring Log frame approach to risks - exampleLog frame approach to risks - example

Project Risk Management in IFADProject Risk Management in IFAD

Begins at COSOP

Countries with high corruption/ poor governance ratings subject to additional checks/ controls embedded into project design & implementation

Risks highlighted in project design documents

Manage risks through expanded Log Frame – suggested approach for projects

Annual Portfolio review – assess fiduciary aspects, project implementation progress, outputs & outcomes, sustainability, likelihood of achieving development objectives & impact in increasing physical & financial assets/improving food security

7

9

Risks in IFAD projectsRisks in IFAD projects

9

10 Golden Rules10 Golden Rules

Thank YouThank You