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Why manage risk?

Governments have a number of objectives that aim to improve living standards which are generally advanced through delivery of public goods and services. Risk comprises anything that might affect this delivery - either by impacting on costs or benefits. Risks affect governments' ability to deliver value for money. However, risk may be tolerated if expected benefits are assessed to outweigh expected costs.

Because of its size and unique role in the economy and society, the Crown has a role to play far beyond managing the direct risks to its own assets and liabilities. The Crown bears risk on behalf of all New Zealanders. Where the Crown is better placed than individuals to do this there are benefits. However bearing risk also incurs costs, because resources used to manage risk cannot be used to meet other objectives.

Sources of risk 

Risk can arise from everyday occurrences or from one-off shocks. These can have operating or capital implications, but all affect the balance sheet. Sources of risk include economic, environmental, natural disaster, biosecurity, societal, technological and operational events. See Figure 6.1 for a broad indication of consequences and likelihood of risks to New Zealand.

A shock is an event with an uncertain likelihood and timing that tends to have a greater effect on the Crown. Shocks can come from many sources with different likelihoods, sizes and impacts, and durations. Shocks to economic activity have particularly large effects on the Crown. New Zealand is a small open economy with relatively high external debt, mainly in the private sector, thus it is susceptible to economic shocks from overseas. This susceptibility makes risk management and resilience even more important for the Crown.

The Crown bears a number of contingent liabilities and implicit risks. Contingent liabilities are contractual obligations that arise after the occurrence of some uncertain event.[50] Implicit risks are non-contractual obligations that the Crown may choose to meet following a shock for policy reasons.

Figure 6.1 - Relative likelihood and consequences of various risks
Figure 6.1 - Relative likelihood and consequences of various risks   .
Source:  http://www.dpmc.govt.nz/sites/all/files/publications/national-security-system.pdf

Notes

  • [50]Contingent risks are documented in the FSGNZ.
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