The Hindu Business Line : The next big risk may hit from a different angle

ANTONIO'S first big mistake in The Merchant of Venice was to bet his whole fortune on a fleet of ships, and his second mistake was to borrow 3,000 ducats from a single source, states the intro of David Shirreff's Dealing with Financial Risk, from Viva (www.vivagroupindia.com).

Two basic rules of risk management, as the author explains, are risk identification and diversification. "Antonio broke the second rule, and his creditor Shylock flunked the first," you'd appreciate, if familiar with the Bard's play.

Good risk managers have to make sense of the pile of info that lands in from all sources, though the lesser mortals may rather be like Pavlov's dogs, "conditioned to salivate or recoil as massed ranks of financial news sources pump out their messages," as the author would point out.

It may be of interest to accountants that in 1997 Coopers & Lybrand had published a manual of GARP or `Generally Accepted Risk Principles'. These were almost 90 in number, and attempted to cover every possible eventuality that could affect a financial firm, states Shirreff, when discussing the literature on risk. Goldman Sachs too contributed to the fund of knowledge by collaborating with Swiss Bank Corporation for a book titled The Practice of Risk Management, that included an account of `a day in the life of a risk manager'.

However, within months of the book's release in 1998, both the firms were caught in a deep crisis when Russia decided to default on its dollar-denominated domestic debt, narrates Shirreff. Moral, therefore, is: "Those who were supposedly at the forefront of identifying risks could still fail to sniff a crisis that was developing right under their noses." The author cites www.erisk.com for a library of case studies on foul-ups and the `wheel of misfortune'.

Post 9/11, one of the measures to ensure business continuity was the SEC's ARP or Automation Review Policy. While it is logical that fortification is done after any catastrophe, the author points out that such preparations do not mean the firms will be able to cope with a disaster that hits them from another angle!

"It is one thing to learn from history and guard against the same pattern repeating itself. It is quite another to arm yourself against the unexpected and the unthinkable," writes Shirreff, and goes on to narrate the story of the Sibylline books.

You may catch up on http://en.wikipedia.org with info about the books that the legendary last king of Rome, Tarquinius Superbus, had purchased for the oracular utterances they contained. Using historical knowledge to forecast future has its limits, says the author. "Generals do not win today's battles by re-fighting those of yesteryear." What then is the alternative? Apply imagination, use computer power, deploy game theory, engage in scenario planning, and don't back away from stress-testing and simulation, exhorts the author.

To the list, you can add Shirreff too, so as to worry about risks less!

There's money in water

WATER is the driving force of all nature, said Leonardo Da Vinci. And two thousand years ago, Thiruvalluvar had rightly declared that by the continuance of rain the world is preserved in existence, and therefore rain may well be called ambrosia.

Yet, water may rank low in the list of priorities for accountants, who normally accord greater importance to tax and law. I'd still propose that they read a new book on the subject, Where Water Seeps! by A. Narayanamoorthy and R. S. Deshpande, from Academic Foundation (www.academicfoundation.com).

The chapter on Maharashtra discusses how the Bachawat Commission had, in 1976, awarded 560 TMC of water to the State, to be used before 2000. Just four years before the deadline, the State set up MKVDC or the Maharashtra Krishna Valley Development Corporation to complete the projects that were at various stages of completion. "The total cost of the balance work was estimated at Rs 7,100 crore... It meant an investment of Rs 5.67 crore per day and Rs 16.79 crore per TMC of water." There are more dismal numbers in the tables that speak of `unrecovered costs' and `financial performance'. For instance, recovery percentage, computed as working expenses upon gross receipts, is around 2-3 per cent in Tamil Nadu, and worse in Andhra Pradesh. Haryana has a 17 per cent to boast of, while Punjab has seen a drastic decline from about 24 per cent in the late 1980s to about 7.5 in the late 1990s.

Another chapter to entice the finance-minded is the one on economic viability of DMI or drip method of irrigation, that is capable of achieving yield gains and water saving, compared to FMI or the flood method. The authors' field studies have revealed that DMI reduces cultivation cost by about Rs 1,300 per hectare per crop in the case of banana, and Rs 13,400 for grapes.

Productivity gains for these two crops were 29 per cent and 19 per cent more than in the case of FMI. Significant energy conservation too was achieved, one learns, because electricity saved worked out to 2,430 kwh/ha for banana and 1,470 kwh/ha for grapes. Don't forget that there are subsidies to soften the capital investment burden, accounting for about a third of the fixed cost.

It will be apt if the accounting body too chipped in with its inputs on irrigation reforms, especially from the finance side.

Economics of medicine

A BOOK on marketing, such as R. B. Smarta's Revitalizing the Pharmaceutical Business, from Response (www.indiasage.com), may seem out of place in this column, but an accountant may still find value in many sub-topics. For instance, Smarta's discussion of the `extra-value strategy', where he explains why it's not a smart thing to engage in price wars. "With a low price you run the risk of setting in a price barrier, and low margins mean that much less money to put into brand building."

A good way to drive your competition crazy might be to formulate an extra-value strategy, suggests the author. There's a chapter on `strategic marketing assets' that speaks about both intangible and strategic assets. The latter originates from five sources, mentions Smarta, and these are `architecture, reputation, innovation, synergy, and market research'.

On pricing, there are ample examples in the book about how the exercise can be done strategically. Do you know that sensitivity to price depends on doses required? "For instance, a physician will look for economy of therapy in the case of a breast cancer patient who needs continuous therapy with Danazol for, say, six months," writes Smarta. "The same physician may be insensitive to a single dose or short-term course of three days. These physicians are part of the patient-friendly, economy-driven segment."

Worth a patient read for those in the truth-business, for truth is as bitter as medicine, they say.

BooksOfAccount@TheHindu.co.in

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