When we think of risk management we tend to focus on minimizing the risk of failure. But equally important is the risk of not performing as well as we could have. 

World Bank Group President Jim Yong Kim has often spoken of the need to take smart risks to improve effectiveness. And while it’s too early to assess the impact of the Bank Group’s new change agenda, IEG’s annual report on the Results and Performance of the World Bank Group for 2013 contains some encouraging  - and some might say surprising – findings on risks and results.

Risk averse?

The report looked at 200 Bank investment projects to assess the risks at the start of the project and the results at the end of it and what it found highlights the importance effective risk management. For those who see the Bank as risk averse, the key finding of this section of the report may come as something of a shock: The Bank is taking informed risks. Of the 200 sampled projects, nearly half – 46 percent – had substantial or high risks at entry. In fragile and conflict-affected states (FCS) nearly three quarters of Bank projects had high risks.

Equally striking is the Bank’s ability to deliver high rewards in high risk situations. The projects with the most risk were generally in FCS countries, but they performed on average as well as those in middle income countries where there were far lower risk levels. Still, the best projects outcomes were in those middle income countries were risks were lowest.

Focus on work quality

For IFC, assessing and managing the risks it takes in its investments is fundamental to its business.  But here again, IEG’s analysis of risks and results may be surprising.  As with Bank projects, IEG finds that IFC investments with fewer external risk factors tend to perform better.  No surprise there. However, our analysis also suggests a strong association between the quality of IFC’s own work in appraising and supervising the investment and its development outcome.  This means that good work quality can mitigate risks to development results.  The effect of these internal factors on project performance was stronger in higher risk countries and regions, which suggests that greater attention and resources to internal work quality could result in a significant payoff. 

Weaknesses in operational outcomes also suggest a need for improved risk management at the project level, in particular during a project’s implementation. IEG found that there is a need for greater dynamic risk management across the World Bank Group, such as the use of internal reporting as a risk monitor.   

Risk management and incentives

And finally, there is the issue of incentives. Overall, the Results and Performance report found that the Bank Group’s risk management systems operate effectively across a range of financial and reputational risks and that risk failure is minimized. So, the tools are in place, but how do you encourage people to use them? Smart risks can yield results, but how do you create the incentives for people to take them?