Managing Risks - Towards a Safe and Efficient Society

2. Managing Risks - Towards a Safe and Efficient Society Brian Spedding A presentation to the Participants’ Forum at European Research 2002 11th November 2002 Human Behaviour & Business Aspects

3. “The ability to understand, measure and weigh risk is at the heart of modern life” Peter Bernstein, “Against the Gods: The Remarkable Story of Risk”

4. Importance & Issues • Changing trends and features increase complexity, vulnerability and uncertainty • Affect society’s structures and communications, industrial production and peoples' use of new products and technologies • Increases the levels of uncontrolled risk for fundamental functions of society and business life - as a consequence generates increased lack of safety in people's perceptions

5. Importance & Issues • Increasing complexity of technical systems and products makes them more difficult to understand, monitor and control • more vulnerable to internal failures and malfunctions • more vulnerable to external attacks • Recent events demonstrate the need for improved safety and security • Financial losses can be considerable • Hazards in technical systems may result in loss of human lives and environmental pollution

6. Risk Management is a balancing act Propensity to take risks Potential Rewards Balancing behaviour Perceived danger Accidents & hazards

7. Benefits • New business models for extended products and enterprise networks • More efficient use of assets and networking SMEs with larger companies • Prevention of accidents and events causing human losses and affecting human health, environmental pollution and economic losses • Safer and more humane surroundings for the citizens • Improved competitiveness for European industry

8. Human Factors

9. People Processes Hazards Risk

10. Human factors • Measure impact of human factors in risk identification, assessment and management • Assess possible results of improving human factors • improvements in human-technology interaction • addressing skill sets and training needed by operators in different environments, using different systems - both real and simulated

11. Improved HTI • Safety-relevant changes in psychological work demands • while implementing ICT • Optimising modalities in man-machine interface • Contextual assessment of organisational culture • Integrated assessment of human reliability in probabilistic analyses • Means for promoting transfer of experience and organisational learning

12. Improved HTI • Incorporate qualitative and quantitative evidence • Adopt techniques such as Bayesian Belief Nets and influence diagrams • Use risk-based indicators to follow up the risk during operation. • Link technical and organisational parameters by identifying the key safety barriers to control • Safety barriers assessment • Interview techniques • Identification of a typology of risk • Performance factors of an organisation and assistance in implementing projects

13. Business Aspects

14. Business aspects • Promote effective risk and reliability management • Develop new tools based on strategic decision making, economic risks, statistics • Develop and evaluate new and innovative business models - extend our concept of "value" • Companies moving from giving guarantees to delivering capacity and making life-long availability agreements • Require systematic consideration of reliability and safety in design, operation and maintenance • Robustness and flexibility will reduce risk and uncertainty, and add economic value

15. Cost of risk • Increased exposure to risk is a consequence of: • globalisation of economic activity • mobility of capital flows across national boundaries • widespread privatisation of public sector enterprise (e.g. utilities) • intensified competition • high volatility in international financial markets • Determine which assets are worth protecting, given the cost of doing so • “Cost of risk = insurance premium paid” • self-insurance, administration costs, hedging

16. Examples in business • Private Finance Initiative (PFI) • Asset management • Business continuity planning • Risk-based regulation

17. PFIs • Investment/financing decisions involving allocation of resources under uncertain conditions are associated with some risk • assumed (in the expectation of a higher return) or • transferred to others (through hedging and/or contracting arrangements) • Principles of infrastructure project finance deals (eg PFI) • allocate specific risks to the parties best able to bear them • control performance through incentives • use market hedging instruments (eg derivatives) to cover market-wide risks (eg interest and exchange rate fluctuations)

18. PFI - different risks at different stages • Construction • completion • cost over-run • performance • environmental • Operation • performance • regulatory • environmental • off-take • market

19. PFI - handling the risks • Moves towards fee-based project financing makes risk management of greater importance • Analyse project exposure to risks • from different perspectives • bargaining between stakeholders • economic viability • Monte Carlo simulation to assess uncertainties • variation over time X “Optimal Risk Allocation” “Maximum Risk Transfer” ? or

20. Asset Management • Increasing adoption of ever more complex technology and communication systems • greater dependency on complex technology brings a higher risk of business interruptions due to the failure of some of, or all, the systems and services supporting them • traditional maintenance management pays little attention to managing risk • Asset management • scheduling of maintenance activities - “living with defects” • trade-offs between risks and costs of downtime/disruption

21. Asset Management • Critical equipment/systems should be considered as assets supporting business critical processes • Positive management of these business-critical systems is needed • This enables: • better understanding of complex inter-dependencies, at all levels • management have better control, and flexibility to meet the demands of changing business needs

22. Asset Management • Effective asset management represents one of the main components in the reduction of organisational business risk • The key to effective asset management: • the ability to accurately predict the future performance and associated life cycle costs of assets • Develop an understanding of their current condition and service potential • Then apply advanced asset management techniques to this knowledge base

23. Asset Management • Life Cycle Planning • provides a strategic planning capability to compare projected NPV LCCs of various assets whilst still at the asset planning stage • Asset Renewal Optimisation • optimise renewal options for assets currently in service • maximise ROI • risk analysis, maintenance history and opportunity costs into consideration

24. Asset Management • Failure Mode Analysis • Consequences of Failure • Probability of Failure • Valuation Analysis • manage infrastructure valuation requirements • report on asset valuations, depreciation, capital expenditure, disposals, acquisitions etc

25. Business continuity • Turnbull report • From March 2001 companies listed on the London Stock Exchange have been required to make annual governance statements referring to their identification and mitigation of risk • More specifically the report "..places an obligation on listed companies to establish a sound system of internal control and incorporate risk management within their normal management and governance processes."

26. Risk-based Regulations • More flexible than the more traditional rule-based regulations • Risk analyses can help prove that new solutions are acceptable and even safer than traditional ones • but taking into account how people view risks is a challenge • Regulatory authorities able to concentrate efforts on areas were the risk is considered least acceptable, and where the effect in terms of risk reduction is highest • Need high-quality, robust risk analyses

27. Conclusions

28. Conclusions • People are an inescapable part of the risk equation • perception/identification of risk • management of risk • individually and in an organisational context • Business aspects of risk have many ramification • risk allocation • asset management • risk-based regulation • Transnational & cross-sector issues will be key