Risk Analysis – Shine Your Eye

0

RISK MANAGEMENT WATCH

By Robert Mbonu

“Anxiety Mounts over Closure of Abuja Airport”…. With the planned closure of Nnamdi Azikiwe International Airport, (NAIA) on March 8, air travellers to Abuja may be in for tough times, as foreign airlines plying the route are pulling out of the plan to divert traffic to Kaduna airport. The diversion of flights to Kaduna is to pave way for the repairs of the NAIA runway for six weeks.

Foreign airlines, made up of African and European carriers, are rejecting Kaduna airport, citing security and logistic concerns. The decision to shun Kaduna airport is already generating disquiet in some quarters, as Abuja air travellers will have to travel about 250 kilometres by road to Kaduna, and spend more to fly to Lagos if their travel destinations are outside the country.

A major foreign airline has cited inadequate facilities at the Kaduna airport, and its lack of in-flight catering services, as a reason for diverting its Abuja flight to Lagos. Other reasons include the safety and security of passengers and crew, as well as key operational issues.
Basically, the airlines have done some level of risk analysis, and decided that the size of the risk is not worth taking or commensurate with any desired returns.

Size of risk is worked out by using the combination of likelihood and impact. We have an innate ability to work out huge combinations of possible impacts and likelihoods in our heads, but this is born of our experiences, and children learn this gradually throughout their lives. In the early years we have to simplify the risk message for children – this is dangerous or that is poisonous – but in later years they need to be able to make more sophisticated risk decisions. The starting point for working out if a business risk is ‘big’ is to think of it in terms of its impact and likelihood. This is the Risk Analysis.

When analysing the likelihood and impact of a risk, we use various techniques involving past data and history, or a range of verifiable information and people’s opinions.

For example, if we are trying to predict the risk of running out of stock in a warehouse, we would turn to the past records of stock coming in versus stock going out, look at the storage capacity, and then take a view on the risk. But we also need to include things that are uncertain that might affect the stock coming in such as accessibility of the warehouse, and changes in the supply chain. For the outgoing stock we would need to factor in uncertainties in demand. In terms of storage capacity there may be uncertainties with regard to demand for space by other stocks, or unforeseen events that limit stock availability, such as a fire or flood.

In banking and other financial institutions, the calculation of risk is their bread and butter. They would take any given risk and think of it in terms of a range of possible impacts, and then look at the data to analyse the range of possible likelihoods for those impacts.

Think of it in terms of going to the bank and asking for a loan. The bank manager will refer to a number of things in order to make an assessment as to whether this loan is –

• A good risk where the bank is 100% likely (likelihood) to get ALL of its money back (impact)
• A medium risk where the bank is less than 100% but more than say 75% likely to get more than 75% of its money back
• A bad risk where the bank is less than 75% certain that it will be able to get any of its money back

Interestingly, none of these positions guarantees that the loan will be granted, as much depends on the current trading position of the bank and its own internal levels of capital. Moreover, banks will even consider loaning on ‘bad’ risks where the return (higher interest rates) might be sufficient to take the risk and the capital is available to support that loan.

It can be confusing that the terms likelihood and impact are used interchangeably with other words;

• Likelihood – alternatives include chance, probability, frequency.
• Impact – alternatives include consequence, weight, cost.

Risk is objectively analysed in terms of likelihood and impact. It is best to start with the biggest risks, and then address the others in reducing order. Some of the biggest risks might be really difficult to analyse, so then you would break the risk into main components of causes and consequences, and analyse each of those and apply some mathematical logic to finding the overall score for the risk.

Scores for risks are often determined in terms of a scale. Most often, organisations use a 1 to 5 scale for each of likelihood and impact, but there are many different scales, and none are wrong.

The size of a risk is therefore determined by its rating. Data and information are key to obtain a rating. In the absence of which, we may have to rely on people’s opinions and experience, particularly when looking at future uncertainties in the variables that affect the risk. The larger the range of views from people who understand the risk and the context for the risk, the more accurate the analysis will be.

There is also an issue with assessing the likelihood and impact of a risk as to whether we are talking about the situation in today’s world with today’s controls, sometimes called residual risk, or whether we are talking about the original risk, otherwise called gross or inherent risk. The foreign airlines may have analysed the risk based on the residual risk – with the current controls. They may have considered that the Kaduna airport terminal is small, old and lacking modern facilities. An airport is much more than just a suitable runway. Are the emergency equipment world class and up to date? Every decision based on a risk assessment must be subjected to some risk based analysis. Every likely impact of the risk must be understood beforehand; in fact they would have performed a range of impacts and their likelihoods. The combination of these factors may have informed their decision to stay away, until the Abuja airport re-opens.

The Ministry of Aviation must present and defend their position to use the Kaduna airport, using the available risk documentation tools and standards. The foreign airlines need to be convinced, and confidence of the flying public and stakeholders must be won. A detailed publicly available risk report should be presented, clearly listing every possible foreseeable risk, and what mitigation and control measures have been put in place to address them.

• Mbonu, FERP, CIRM (UK), HCIB, MsRM (Stern), studied Engineering, is an experienced Banker and Enterprise Risk Management professional. Earned a post graduate degree in Risk Management from New York University Stern School of Business, and is a member of the Institute of Risk Management -UK. Can be reached on 09092092046 (SMS Only); email: rm4riskmgt@gmail.com