Risk Management in Public Administration

This chapter aims to provide a clear definition of risk management in an economy, from the point of view of the systemic risk, in connection with households, enterprises or macro-organizational structures such as states. It presents the authors’ typology of the threats to institutional risk management, based on the systemic approach, as well as considering the neoclassical framework for the analysis of risk attributes, the dependence of risk on information and uncertainty over time, the scientific trends in risk management, risk management processes in private and public institutions and risk management standards. It demonstrates that risk should be analysed in systemic and practical terms, and that theory should not ignore the actual threats faced by the global economy. It also confirms that risk is an interdisciplinary concept, which may and should be reviewed by looking at a variety of problems and threats—no matter how remote they may seem—that are researched by different scientific disciplines and appear in different practical activities.

The argument in this chapter is as follows: historically, when the Free Trade Agreement (FTA) was negotiated, most trade partners in the deal tried to replace reduced tariff barriers with non-tariff barriers. TTIP is a free trade agreement negotiated between the EU and the USA within which main tariff and non-tariff barriers are planned to be eliminated. Exchange rates were most frequently used as a way to protect national markets. Bearing in mind the role that the dollar and euro play internationally, there is a need to link the exchange rates of the two currencies. Such a move would have a bilateral impact on trade between the two markets. It would also limit the international risk of depreciation of these currencies, which is important in two ways: (1) in reducing protection in mutual trade relations; (2) in reducing the risk of fall in value of reserves kept in foreign currencies by individual states.

This paper investigates the relationship between credit spreads and credit default swap (CDS) spreads, and how these respond to changes in credit ratings. It is based on the analysis and a review of the existing world literature addressing this subject. Panel data models for 35 European countries for the period 2005–2013 were used. The independent variables used in countries’ long- and short-term credit ratings were awarded by the rating agencies Standard & Poor’s and Moody’s Investor Service. Credit ratings were converted linearly to the numeric variables. The paper examines the impact of countries’ credit ratings on the value of their CDS. The analysis was performed taking into account the level of investment and speculative group of risk.

The catalogue of financial risks identified by researchers and defined in relation to the business sector indicates that, at the micro level, almost all of them may also relate to particular entities in the public finances sector. However, there are fairly significant differences when it comes to objectives set for public entities, which frequently provide public goods, and the manner by which their operations are financed. The public sector, accordingly, does not view financial risk in the same way as private enterprise and because less exposed to financial damage manages risk differently. Moreover, it should be noted that the impact of particular types of financial risk on the financial standing of the whole sector, and on that of individual entities across the sector is different. Additionally, failure to assess and mitigate risk decisively on the part of public administrators in the medium and long term may have a huge influence on socio-economic growth globally.

Effective public management requires a risk-based approach. However, in the majority of cases, the theoretical rudiments of diagnosing and controlling risk in public management tend to embrace universal factors without incorporating the specific factors underlying the subsystems operating across the public sector. One such domain is public safety management systems, which involve the participation of a plethora of independent entities, each equipped with specialised but complementary competencies. The processes involved are distinguished by immense complexity and furthermore are operating in an unpredictable and volatile environment. As a result, these processes are highly susceptible to risk. There are insufficient studies devoted to the mechanisms allowing or producing these risks in the public safety management. This paper attempts to address and bridge this research gap. The aim of our investigation is to reveal the nature and sources of risk in public safety, as well as to explore the management processes which are most likely to minimize the occurrence of risk in the specific area researched.

The growing importance of risk management in business activity encourages managers to bring various methods and concepts into the decision-making processes. One of these concepts, introduced as a response to rapid changes in the conditionality of business activity, is a method for early warning (EW). This method can be used to identify risks, thereby having a positive influence on the effectiveness of decision-making processes. The introduction of an EW concept into the analysis of dynamics of changes in undesired events and processes, occurring both outside and inside enterprises, may reduce negative and strengthen positive processes in business activity. The authors present the EW concept, as well as its methods and tools, which may be implemented to support risk management. The identification of existing needs and requirements in this scope resulted from the previous research performed in Polish machine-building enterprises over the period 2010–2013. Outlined proposals may be implemented in enterprises operating in different lines of business. However, the implementation needs to be adapted to specific conditions of business activity.

Although the social entrepreneurship literature has been expanding in recent years, links between social enterprises and risks in their functioning have not been deeply explored. This chapter explores those links to create a conceptualization of risks affecting social enterprises. After reviewing existing theory, 26 potential risks were theorized and tested via a questionnaire. In our survey, we focused on social entrepreneurs’ risk perception. One hundred and sixty-one complete data surveys were collected and discussed. The paper begins with background on the social services, focusing on ways and means of its provision. It describes the characteristics of social enterprise, and risks it encounters. Then defines the survey architecture, measures, to end up with research results. We conclude that the dynamics of the social sector conceal a number of important unresolved issues. In this paper we address these issues, and attempt to achieve some understanding of the risks standing behind them.

At times of dynamic technological expansion, the transfer of the business operations to the Internet by organizations has become a natural practice. Presence in the Internet may take on various forms, and ranges from a static display of information on websites, through interactive services, to integrations and strategic use of the Internet. There are no doubts as to the benefits produced by the operations online to both organizations and their customers, and thus the dynamic expansion of e-organizations and e-services may be seen worldwide. In the European Union over 40 % of citizens purchase products online, 32 % of the society make use of e-administration services while 44 % use e-banking services. However, it should be noted that the transfer of the operations to the Internet also generates new risks related to electronic channels for distributing products and services. These will include the risks concerned with information security breach, transaction process, privacy, contradictory regulations, and so forth. The identification of hazards is essential for the launch of effective actions likely to reduce these risks, thereby fostering the growth of the e-economy.

Nowadays, Intellectual Capital (IC) is a dominant asset, which increases a company’s development and competitiveness on the market. The ability of IC to gain a competitive advantage in the market place allows the enterprise not only to be more efficient in the market, but also has an impact on its relationship and involvement with business partners during development process. However, it is worth mentioning that all components of IC created in the company combine and interact with each other in a unique way to contribute added value and can also generate a lot of threats in many fields. So, from that point of view, proper IC risk management can lead to increased competitiveness and wealth of the company on the global market. The main aim of this article is to describe types and determinants of IC risk and also to present a practical approach to the management of IC risk in knowledge-based organizations.

This chapter concerns the category of regulatory risk, in particular in the EU banking sector. It presents factors that justify managing this type of risk in the legislative process; it is of particular importance for the financial markets, which, as a result of the latest global crisis, are over-regulated in certain areas. However, some areas of the functioning of banks are still under-regulated. From among the conditions of law-making and enforcement, the meaning of cultural aspects is discussed, in particular in the context of multiculturalism of the European Union. Major publications dedicated to the issues of regulatory risk in the financial sector are presented and critically assessed. They are assessed in terms of prioritization of regulatory objectives, risk measurement and the system of communicating ex-ante and ex-post regulatory risk to key stakeholders. In the final, most applicative part, attention is paid to major issues related to implementing regulatory risk management in the practice of enacting and implementing banking regulations.

The work presents a study using General Discriminant Analysis (GDA) to distinguish between a fiscally distressed group and a non-fiscally distressed group in two dimensions: the general government sector and the sub-national government sector. The research was based on 26 European Union (EU) countries in the period 2009–2014, and 10 units of local government sectors were also taken into consideration. The probability of correctly classifying a particular case to its appropriate group of either fiscally distressed or non-fiscally distressed was recognized; therefore, variables that proved to be essential in the discrimination between these groups were also defined. The study assumed that there is a close relationship between financial distress and a state’s tier of government (sub-national/central), its revenue and expenditure, intergovernmental transfers, and debt usage. There is some evidence that the risk of financial distress is positively correlated with revenue concentration and size, and that it depends on the level of government intervention.

The aim of this chapter is to identify the areas where insurance companies’ investment policies influence risk management in the public sector and financial system stability in the European Union countries and to analyse the model of their investment portfolio allocation. The significance of the insurance sector for the public one is examined in the context of the so-called critical functions: (1) fulfilment of the function of insurance coverage; and (2) the mechanisms of long-term allocation of capital. The importance of insurance institutions both for the stability of the public sector and the whole economic system arises from the fact that these institutions perform the critical—from the perspective of society as well as the economy—function of insurance coverage which allows the management of risk and ensures continuity of operation. The capability of ensuring infallible fulfilment of insurance coverage constitutes a synthetic indicator of the stability of the socio-economic system. Performance of the functions of critical importance for the stability of the public sector by the insurance sector is also concerned with the mechanism of long-term allocation of capital, especially in the case of life insurance companies, which is invested in the financial market and in the real economy. The investment activities of insurance companies have an impact on the stability of the public sector, in particular: (1) by investing in instruments issued by the government, which is of particular systemic importance in the context of debt crisis in many EU member states; (2) by influencing the situation on the stock and bond markets, e.g. creating speculative bubbles, assets fire sale; (3) by transforming capital into investment in the real economy sector—an effect on the real economy through over-rating some sectors at the expense of others, thus determining the cost of capital. Activity of insurance companies on the market of public debt is of immense importance for risk management in the public sector.

The present article seeks to establish how tax system reforms, and especially changes in income tax, influence the risk of budget revenue fluctuations in EU member states. After a brief historical background on taxation, changes in the income tax in EU member states over 1995–2015 are discussed, and their implications for budget revenues are presented. As the authors’ analysis demonstrates, the risk of budget revenue fluctuations that might occur in response to changes in income tax rates and procedures in EU member states is insignificant.

Effective tax management requires a risk-based approach, particularly in area of VAT collection—which is very fraud prone. There are several factors that can decrease this risk. These are: a less liberal approach to tax collection (which obviously harms legally behaving taxpayers), higher efficiency of the revenue administration, higher efficiency of the criminal justice system, data openness and transparency, the ability of performing deep level analytics on big data spanning many areas, and the power to restrain organized crime groups. VAT-collection efficiency measures are particularly low in a number of the EU new member states, including most of the Visegrad group, and Greece, as well as Italy. While Slovakia and the Czech Republic, have recovered to pre-crisis collection levels in GDP (Gross Domestic Product) terms, the weak performance of Poland contrasts with other countries in Europe. This can be attributed to severe shortcomings of the Polish administration, particularly in the area of IT analytic support. The scale of VAT fraud in Poland is so large that it affects balance of payments statistics, and possibly also national accounts. This situation calls for diminishing a research gap produced by insufficient studies devoted to analysis of revenue data and the blocking of access to inconvenient data by public administrations.