“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.