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“Dubai world” Dubai’s leading Real estate firm has faltered repayment of its dues and has sought time up to May 2010 to service the debts.Though it claims $ 60 billion as the debts to be serviced the pundits estimate this to be around $ 120 billion.

Experts agree that Dubai World built lavish projects that does not generate any revenue [ cash flow] as a result it has no working capital to service the debts.Apparently this looks to be a liquidity issue though in real sense it is more of solvency issue.

Having said where did the Risk Managers go wrong?

The fall out ceratainly is not due to unknown-unknown risk.The risk could have been predicted thus certainly is a known avoidable risk.

From the perspective of the loan creditors this is the result of error in their judgment.They believed that Dubai World was owned by the Government  of Dubai as such categorized as “Sovereign Risk” which in fact was not.Further they believed that the Government  of Dubai would come to their rescue in case of default /insolvency,thus presumed that they had the sovereign back up for their investments.This has been belied.Says  Abdulrahman al-Saleh, director general of Dubai’s department of finance “Dubai World was established as an independent company, it is true that the government is the owner, but given that the company has various activities and is exposed to various types of risks, the decision, since its establishment, has been that the company is not guaranteed by the [Dubai] government”. For details pl see the link:: http://www.guardian.co.uk/business/2009/nov/30/abu-dhabi-stock-market.%20%0dThe

Sovereign risk is the rarest of the rarity,so in real world it is also the road rarely travelled by the Risk managers.Obviously this was not monitored closely as it should have been.The risk of not correctly categorizing the risks itself is a serious risk.The loan creditors are paying dearly for this.

From the Dubai World’s perspective it has suffered a serious reputation risk.Reputation Risk is the risk of adverse change in the Enterprise’s Reputation. In this type of Risk you get in to it spontaneously as an off shoot of the other risks such as credit, market, operational risks. Yes, the Reputational Risk is fashioned by its dependencies. The problem with Reputation Risk is that even the Economic Capital may not bring about appropriate corrections. Market Capitalization is the immediate casualty . Getting rid of this is an organic process, meaning the future earning flows will take a serious beating. At Dubai the Realty Prices have already plummeted by about 30%, the stock price of the significant stake holders have taken a beating across the globe, Dubai world including its significant vendors  who are the victims are fire fighting to put their working capital in order.

What could have triggered this ugly situation?

First and foremost the risk was not possibly imbued in the strategy.When you embark on mega investments you need to have  a strategy supported by a road map of how the investments will happen VIS A VIS the financial objectives and the risk budgets.Importantly the expected returns needs to be factored against the potential risks.This means the risk has to travel beyond the compliance journey and get impregnated in the strategies.This is a sure defense against the illiquidity which eventually transforms in to insolvency.The ability to service the debts [ Debt service coverage ratio] is the crucial metric that determines the viability of leveraging the capital.Unfortunately most of the Dubai world’s assets did not generate any revenue,meaning it was starved of the cash flow that is vital for servicing the debts.This goes to show that the solvency issues were not strategically managed.

Risk appetite is the check and balance that determines the Enterprise’s risk behavior. It is the perimeter within which you are ought to make decisions, as such defines the Risk Boundary. With a carefully articulated appetite an Enterprise can easily digest the ill effects of Risk. To an extent the stake holders influence the firm’s appetite. Here possibly they were carried away by the perception that this was a state owned enterprise and things were in order. Dubai World embarked upon massive Real Estate ventures possibly at the cost of its liquidity .Apparently the appetite was not defined properly or violated.

Monitoring presumably was thrown to the wind.Risk is ubiquitous and is an ever moving object.The dynamics of the processes,environment,economic situation-all contributes to Risk.It [monitoring] is the best way to get updates on risks.The creditors as well Dubai World -both have missed the bus here. 

The organizational internal competency is a compulsive add on to ensure resiliency.Obviously this was not in place. 

How SAP helps a robust Risk Management? 

 

SAP GRC RM 3.0 helps in categorizing the risks as catastrophic, high, medium etc. The scenario management functionality helps to ascertain risks with different probabilities and based on this one can assess the extreme values –this is indispensible in the management of Risk.

Complex scenarios using BW queries can also be analyzed. SAP GRC RM 3.0 in tandem with SAP Strategy management helps embedding the risks in the organizational strategy thus helps warding off the strategic Risks.

Key Risk Indicators [ KRI] are basically early warning signals.They can be defined in RM 3.0 and used to track the adverse events.This helps a pro active Risk management in sense we get distress signals as and when the risk is about to impinge.

The incident management functionality helps monitoring the various risks proactively supported by heat maps and dash boards , while the survey functionality helps you to hone the Risk Appetite.

 

In short RM 3.0 has every thing a Risk Manager would be looking for in his /her normal course of work.                                                  

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4 Comments

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  1. Pravin Sarwade
    Concise articulate article on the advantage of SAP GRC RM 3.0 and its advantages once companies leverage the application to their benefit.
    Thus identification of crisis before it snowballs or erupts can contain damage to a large extent by using Risk mitigation approach in parallel with SAP GRC process control 3.0.
    Wake up call for credit rating agencies to use integerated Risk management solution
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    1. Ramesh Ramaswamy Post author
      Thanks Praveen.
      As you rightly mentioned RM 3.0 in tandem with PC 3.0 will be very effective in terms of Risk management,Internal controls and compliance management besides help obviating the redundancies.
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  2. Krishna Mohan Unnam
    I am not very sure how to put the actual scenarios into the perspective of risk management but it is more related to macroeconomic strategic risk than to the operational risks. I am doubtful, how well the applications will be able to handle economic and other strategic risks as applications are mainly made for capturing operational risks and to certain extent business strategic risk.

    The situation in Dubai is similar to dot com boom and to the subprime crisis. The risk was evident but no one could afford to miss the bus, so many who were getting into the bus were aware of the risk. How many intelligent people can believe that housing prices can grow day on day basis rather than year on year basis?

    But easy money is a temptation and risk is well known. I just cannot accept the argument that Dubai world was equivalent to sovereign risk. If that was true, may be the guys with money do not have time to check out the basic fact or too lazy to do some work. Even of you consider it as sovereign risk i don’t see any income for Dubai govt to repay these kind of loans.

    The fact is every one believed that these investments are going to change the business landscape in Asian region and these were going to change rules of the holiday and leisure industry. To certain extent, these were achieved and remaining has many reasons to understand why it could not happen.

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    1. Ramesh Ramaswamy Post author
      Hi,
      Thanks for the comments
      I have some thoughts to share.
      I still bet on SAP RM 3.0.We have functionalities to support scenario analysis like Monte Carlo curve, log normal etc. The qualitative Risk analysis supports assessing complex economic and other strategic risks. When alloyed with SAP Strategic Management the Risks can be embedded at the Strategic level.
      KRIS can be defined with respect to Financial, Business, Customer and other base lines.
      Am sure this will dispel your doubts and concerns about the efficacy of Applications Vs managing macro economic driven startegic risks.

      In my perception the problem is more with the practitioners of the Application [Risk Management Tool] than the Application.People start looking at Risk management only when they are in trouble. By and large the Risk Management is used just to meet the compliances.If deployed properly the Application is the best pro active solution in sense it has the where withal to handle the coplexities,volume and redundancies.
       
      Properly defined and monitored KRIs would have surely given an indication of the trouble. I still believe that the stake holders have missed the bus in the matter of Risk appetite and proper monitoring.

      I agree with you in mentioning that the issue involved is not “sovereign Risk”. This has been emphasized in the blog itself. To repeat the relevant portion of the blog “From the perspective of the loan creditors this is the result of error in their judgment. They believed that Dubai World was owned by the Government of Dubai as such categorized as “Sovereign Risk” which in fact was not”
      I remember a quote: “Enterprise with Caution”.I think this was least remembered and respected by Dubai World when they embarked upon their dream of transforming Dubai  the “leisure capital of the world”.
      Regards
      Ramesh

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