RISK AND THE INSTITUTIONS OF GOVERNMENT.

The concepts of risk and risk management have a long intellectual history. Probably most people are familiar with the investment relationship between risk and financial return, with adopting a portfolio approach to spreading risk in investment, and with the notion that people have different risk tolerances (which may change over time). Economists distinguish between individual business, industry and market risk. As noted by one of the contributors of this book, "business is risky, causing profits and shareholder return to fluctuate". The point of risk management in the commercial sector is to minimise the variability of return on capital -- i.e. to increase the certainty of profit. The stated objective of the editors of this book is, "to look at how the state sector in New Zealand handles change and uncertainty". The methodological approach is, in effect, case studies of particular public sector initiatives over the last two decades -- ranging over the early 1980s' "think big" initiatives, privatisation of the Bank of New Zealand after the need for government capital injections, and the Cave Creek tragedy.

The list of contributors to this book is impressive. Graham Scott (previously Secretary to the Treasury) provides an informed view of the "think big" economic development programme of the 1970s and 1980s, and insight into the more recent issues associated with health sector reform. He also makes a useful distinction between policy and operational risk -- between doing the right thing and doing it well. Peter Clough of the New Zealand Institute of Economic Research provides a chapter drawing out the implications of uncertainty, using environmental issues as examples.

The Hon David Caygill contributes a political perspective on public policy issues, including a potted history of some of the major risk issues the Labour administration faced in the second half of the 1980s. The Caygill chapter adds to the distinction noted above of the difference between policy and operational risk by adding the risks that flow from failure to make decisions. While poor policy decisions or implementation are generally subject to second thought and are often reversible, failure to make decisions in time can have more serious effects.

The contribution from Arthur Grimes looks at risk and the banking sector, with a focus on the most desirable approach to central bank prudential supervision of the banking industry. Ian Duncan provides a useful, if brief, history of the policy issues that led to the introduction of the State-Owned Enterprise model in New Zealand -- and the issues that arose with that model. Along with Caygill, he points out that there is no necessary relationship between political and economic risk. That is, there is a significant potential for conflicting objectives between management of policy/economic risk and political risk management.

The chapter contributed by John Boshier provides a commercial sector perspective on risk, including an overview of models used to quantify risk-based decisions. Boshier (as with Peter Clough) highlights the inevitability of uncertainty and contrasts between "intended" and "realised" strategies.

The obvious question in reviewing a book on public sector risk management is what is different about the public sector which requires a different approach to risk management from that applied in the wider commercial sector. On this point Sundakov and Yeabsley make the interesting comment that unlike the private sector, which has a diversification option available as a risk-control strategy, the State concentrates risk. By this they mean that the New Zealand political system (and probably any political system) focuses on State interventions that stress equality of treatment and that consequently preclude "portfolio" policy approaches. Relying on a single instrument for each policy objective concentrates risk -- which is then exacerbated by a low political tolerance of failure.

The authors fail to totally persuade that risk management in the public sector is fundamentally different from risk management in any other sphere of activity. Diversification is only one risk management tool and it is only available to a portfolio investor. Even in the commercial sector diversification is not always a viable (or even desirable) strategy at the level of the specialist firm or investor. Other risk management tools are referred to by the other contributors to this book and include transparency and stronger accountability systems, established procedures, feedback loops, "stop loss" arrangements, scenario planning, and sensitivity analysis.

Both Caygill and Ian Duncan refer to what is different about government and the management of risk. Caygill states that, "ultimately, however, the government is necessarily answerable to the electorate. Many people's aims are not necessarily reducible to a single bottom line ... life is often simply more complex in the public sector". It is obviously true that the fact of government is a tenuous balance between what are often conflicting objectives. If decision processes and answers were clear and straightforward, they would not need to be taken at the level of Cabinet. Decisions and issues that need to be elevated to the political level necessarily involve conflict and trade-offs, and political decision makers are clearly faced with juggling a number of competing objectives. Obvious factors include economic development, social cohesion, fiscal position, international relationships, and the mood of the electorate and party political positioning.

To say that government is about balancing or choosing between competing objectives, however, does not mean that risk management in the public sector is fundamentally different from risk management in any other sphere of activity. Risk management is about dealing with the uncertainty principle -- uncertainty that the decisions made will in fact contribute to the objectives being sought and uncertainty that policy decisions can and will be implemented in practice as intended. It would seem that the issue of sorting out potential conflict between competing objectives is a higher order, different and prior issue, than risk management as it has been conceived to date.

Risk management, in the sense of controlling for policy and operational uncertainty, has as much relevance in the area of social policy as in any sphere of government activity. For that reason, this is a useful and informative book in providing an insight into risk management issues and techniques across a range of contexts. It is, however, ultimately unsatisfying in not directly addressing the area where dreams and aspirations (the raw material of political decisions) intrude and where public policy (and the associated policy and implementation risks) cannot be debated purely rationally.

edited by Alex Sundakov and John Yeabsley Institute of Policy Studies, Wellington

David Brosnan Ministry of Social Policy