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Is Government Risky?

· Steve Cusworth,Government,Risk,Analysis

"Frankly I think there is some naivety in the idea that governments can largely eliminate uncertainty, or should even try." Minister for Energy Angus Taylor, 30th August 2018

In Australia, despite recent leadership chaos we are fortunate that our governments are relatively stable, consistent and operate within known boundaries in a rules-based order. This seems at odds with the stunning quote above which conflicts with why government exists in the first place but in general, our governing institutions provide a measure of comfortable predictability. Nonetheless, government risk is everywhere. We define ‘government risk’ as the uncertainty that flows from changes in government decision-making and the continual evolution of policy, programs and politics.

Government risk manifests through political dynamics dictating unexpected policy changes, sudden regulatory impositions increasing compliance challenges and over-the-top public reactions from government due to a need to be seen to be ‘doing something’ in response to poor industry behaviour.

Examples of events that elevate government risk include the looming Victorian and NSW State elections and the ditching of the National Energy Guarantee. By their nature, elections create uncertainty (polling for both elections is showing a tight race in both, elevating uncertainty even further). The NEG collapsed after months of work due to internal political dynamics of the Coalition Government. This latter issue, when combined with the ugly leadership challenge and change of Prime Minister, exposes several risks around the capacity and priorities of the Government to deliver reform and make hard decisions. This has knock on effects such as on the potential willingness of Australian Government departments to implement executive government decisions since there is potentially a sense of the inevitability of change from bureaucrats tasked with implementing such reforms.

The Financial Services Royal Commission laid bare a range of reputational and conduct risks that the financial services sector has been carrying for some time. The sector can expect a new host of risks and a significant reaction from government to ‘fix the mess’ through a regulatory and compliance approach because the industry was unwilling to fix it themselves. In this regard, the financial services sector is no innocent bystander impacted by the ‘dead hand of government’ – the behaviour and deliberate lack of action by many players has ultimately left it up to government to publicly shame the sector followed by an enforcement and regulatory blitz.

The recently announced Royal Commission into the Aged Care sector is further demonstration of a sector facing government risk and the energy sector is also staring down the barrel of a threatened Royal Commission due to government claims of price gouging (this latter proposed inquiry has a sniff of political expediency as opposed to seeking to use the Royal Commission process for genuine reform).

There is another side to the ledger - the risk of lost upside. When organisations have limited awareness of their government stakeholders or have not taken steps to position themselves as front of mind, there is a risk of missing opportunities for government partnership or new program co-design. Experience also shows us that not having a seat at the table increases the chance of being surprised by less than favourable policy or regulatory outcomes.

Exposure to these risks is not limited to external actors (business, non-profits, the community) but also government itself in the form of departments and agencies. New service delivery activity or reform projects can be significantly impacted by rising levels of uncertainty. With expectations from stakeholders both internal and external to government, agencies tread a fine line of being accountable for delivering on government policy whilst dealing with many government risk factors outside of their immediate control. These can harm implementation of projects, cause political headaches for ministers who then intervene (by accident or design), or otherwise work against the stated aims of a department or agency.

Having a comprehensive understanding of the government risk profile is one thing – managing that risk is another. Whilst many aspects of government risk are outside the control of an impacted organisation, steps can be taken to hedge against these risks.

Like any form of risk management, understanding the government risk profile and potential impacts on an organisation is the first step. From there, risk mitigation planning that includes understanding how and from where those risks could manifest will provide the outline of what to do about them. Making sure no stone is left unturned in terms of preparing robust arguments and policy positions and getting in front of the right decision makers early and often before risk becomes reality is crucial.

Government is not risky – but the inherent uncertainty that exists due to so many factors influencing how government makes decisions does increase government risk.

Steve Cusworth is the Managing Director of FPL Advisory.

FPL Advisory is a team of specialists resolving risks and creating opportunities with respect to government. We work with public sector and corporate clients to execute strategies for owning and managing change.