24 Jan 2012

Business, water and risk

This article is typical in its discussion of water risk in company supply chains. It includes analysts complaining about risk, companies claiming they hedge risk, consultants offering to study the risks, and various "statistical" methods of understanding those risks.

What it fails to include is "regulatory uncertainty," i.e., a political decision that changes water allocation in an instant.*

Bottom Line: The biggest danger to businesses is not risk but political uncertainty. That's why reliable and predictable rules are the key to business prosperity (jobs, profits and happy consumers).
* Recall that risks can be modeled with probability (how many heads in 1,000 coin flips?) while uncertainty cannot: is the politician going to flip a coin, eat a sandwich or answer the phone? The article mentions how Coca Cola "factors in" local government leaders, but it fails to discuss their dominant role.**

** As a good example of government's inability to understand risk (or ability to ignore it), consider this government agency that "stated what it wanted to do, paid people to say that it is safe, and will complete the circle by declaring it to be a good thing." What's it? Mining groundwater from under the Mohave Desert for export to Southern California lawns. And that, my friends, is how government incompetence (or laziness) can combine with private greed to destroy the environment.