MBA

YP54 A
I TB School of Business and Management

Young Professional Lead the Future

MM6021
Corporate Risk Management


Mid-Term Exam
Risk Management System
PT. PP (Persero) Tbk

Lecturer:
Erman Sumirat, SE, M.Buss, Ak

Prepared by
Nadya Rizkita Putri A
29115630

2nd Semester 2016/2017
MASTER OF BUSINESS ADMINISTRATION
School of Business and Management
INSTITUTE TEKNOLOGI BANDUNG

 Declaration of Originality and Compliance of Academic Ethics

I hereby state that, this paper contains literature and original research work by
the undesigned student, as a part of her Corporate Risk Management class mid-
term exam.

All information in this document has been obtained and presented in accordance
with academic rules and ethical conduct.

I also state that, as required by these rules and conduct, I have fully cited and
referenced all material and results that are not original to this work.

Bandung, March 25, 2017








Name: Nadya Rizkita Putri A
NIM: 29115630
Executive Summary

PT. PP (Persero) Tbk is Indonesian state-owned enterprise engaged in provision
of building and construction services. With 6 segment focus in its business line
consists of construction services, property and realty, EPC, precast, equipment,
and investment, the company strive as one of the big league players in
Indonesias construction business for decades. Throughout various big
construction and infrastructure projects across the nation, PT.PP (Persero) Tbk
commences several services within their business line such as construction of
bridge, road, building, and harbor, or property and real estate of residential and
commercial area, also they have others like power plant for EPC and Investment
services.
As one of the company effort on building good corporate governance, they are
committed on implementing risk management system as a part of their company
policy. The policy has clear objectives and direction as well as duty to every unit
in the company related to its risk management. It is also regulated that every
employee is being responsible and accountable in managing each risks in
consistent and continuous manner. Their commitment also shown by the BoD
decree No. 73/SK/PP/DIR/2016 dated September 5, 2016 where they appointed
the Risk Management and PMO Bureau under the BoD as the highest
accountability holder in risk management, set the risk parameter to make sure it
is all well mitigated.
With good understanding of how an effective risk management is fundamental
to the companys performance, this paper will analyze how the companys risk
management policy affects its business growth. In order to have deep
understanding of the company risk management policy and its system, this paper
will be construct from identifying its risks, defining the peril-hazard-loss,
calculating the severity and probability, until analyzing and creating the
mitigation matrix.
Company Background

PT. PP (Persero) Tbk is Indonesian state-owned enterprise engaged in provision
of building and construction services. With 6 segment focus in its business line
consists of construction services, property and realty, EPC, precast, equipment,
and investment, the company strive as one of the big league players in
Indonesias construction business for decades. With such prominent
performance in the Industry, the company is potential for growing better in
future.

A. Company Profile

Company Name: PT. PP (Persero) Tbk
Ownership: 51% - Government of the Republic of Indonesia
0.10% - Employees and Employees cooperatives
of PP Shareholders

48.9& Public
Company Status: State-owned Enterprise
Business Line: Construction,Property and Real Estate,
Engineering Procurement Construction (EPC),

Infrastructure, Energy, Precast, and Equipment.
Date of
Establishment: August 26, 1953
Total Employees: 1,896 employees
Ticker Code: PTPP

Stock Exchange: IDX
Authorized Capital: Rp 1,500,000,000,000

Portfolio Capital
December 31, 2016: Rp 1,015,756,350,000

Paid-up Capital
December 31, 2016: Rp 484,243,650,000

Additional
Paid-up Capital: Rp 431,845,369,858

Figure 1 Company Profile
(Source: Annual Report PT. PP (Persero) Tbk, 2016)

B. Company Structure


Board of
Commissioners

President
Director

Business
Development, Dir. of Finance Director Marketing
Research Operations EPC Director and HC Director
&Technology, Risk
Management, SCM

Divisions Divisions Divisions Divisions Divisions

Figure 2 Company Structure

Source: Annual Report PT. PP (Persero) Tbk, 2016

The company structure illustration above is as been pursuant on BoD decree No.
73/SK/PP/DIR/2016 dated on Dec 31, 2016







C. Vision and Mission
The vision and mission of the company is grounded on three mutual
related elements, which are core business, high added value and
stakeholders. By running its core business, the company seeks to provide
high added value that will bring benefit for the stakeholders.

Vision
To be a prominent construction and investment company in Indonesia with
global competitive advantages

Mission
- Providing construction services with high added values to maximize
customer satisfaction
- Developing employees competency and welfare in ongoing basis
- Providing high added value to stakeholders
- Building strategic synergy with partners, business partners, and clients
- Providing positive contribution to the environment and society by
developing green corporation

New vision and mission above were ratified by BoC and BoD under decree
No. 272/SK/PP/DIR/2013 dated October 16, 2013.
D. Corporate Values
PT. PP (Persero) Tbk is committed to implement Good Corporate
Governance to achieve the companys vision. In order to pursuit it, the
management has formulated corporate values which are performance,
professionalism, excellence, determination, genuineness, efficiency and
satisfaction, later in brief as PPEDGES.

Performance
- Effective work
- Refrain from being satisfied and perform continues improvement
- Strive to realize the companys goals

Professionalism
- Discipline
- Proactive, quick, and flexible
- Responsible, complying with the law, regulation and code of conduct
without conflict of interest

Excellence
- Thrifty and conscientious
- Producing high quality services/products
- Striving for max performance and taking into account occupational and
environmental safety

Determination
- Hard working
- Have determination and persistence
- Focus and firm

 Efficiency
- Efficient in working
- Concerned about costs

Satisfaction
- Grateful and have a great soul
- Focus in customer satisfaction
- Tolerance, polite, and respectful

Company Performance

In 2017, construction market is projected to grow by 14.26% and will excel as
one of most promising sector driven by acceleration of Government
infrastructure development plan. Various regulations were predicted to
accelerate infrastructure progress such as Perpres No. 30/2015 concerning land
acquisition and Perpres No. 3/2016 concerning infrastructure strategic projects
includes highway, port, and powerplant, which are related to the companys core
businesses.
Last quartal of 2016 also shown indicators that Industrial Land sectors are picking
up. This indicates that real estate industries is also growing for 2015-2019
periods.

Table 1 Industrial Land Investment 2016
Source: Mandiri Economic Outlook
Segment Company 9M16 %YoY Comment
marketing
sales (Rp bn)
Industrial land Bekasi Fajar 186 -10% BEST has around 60ha of land inquiries coming
from consumers, logistics, and plastic industries
and is confident to close an additional 13ha of
land sales in 4Q16. This should then bring
marketing sales achievement to 20.7ha or 83%
of FY16 target (25ha). As of 9M16, the company
has only sold 6.7ha of land.
Deltamas 884 -47% DMAS recorded 9M16 industrial marketing
sales of 52ha (Rp884bn) above FY16 marketing
sales target of 50ha. Additionally, the company
has over 100ha of land inquiries coming from
financial-related, sanitary, as well as oil and
chemical related companies.
 Modernland 232 -83% The company has recorded about 14.3ha of
Realty industrial land sales or about Rp232bn as of
9M16. The company has recently formed a JV
with Astra Land Indonesia to develop 67ha of
land in Jakarta Garden City with a total deal
value of Rp3.4tn.
Kawasan Industri 236 -20% As of 9M16, KIJA has booked 32.5ha of
Jababeka marketing sales with about 21.4ha coming from
Kendal industrial estate and the remaining
11.1ha sales recorded in Cikarang.
Surya Semesta 2 -66% As of 9M16, SSIA has only sold 1.1ha of
industrial land. Limited land bank in Karawang
estate might provide risk as SSIA is unable to
cater a large chunk of land sales. Worth to note,
launching of Subang industrial land estate is
delayed to FY19.

This condition brings opportunity for the companys higher growth in 2017. With
this growth optimism in construction sector, necessity to manage variety of
business opportunities is also higher. The company need to allocate their
strategic according to this growth directions and at the same time indicates the
risks came with it to optimize their growth.
Financial Performance
In 2016 PT. PP (Persero) Tbk booked Rp 32,6 trillion new contract. This number
shows 20,41% increase from the companys contract in 2015 of Rp27.07 trillion.











Figure 3 PT. PP (Persero) Tbk Contract Values for 5 Years
Source: Annual Report PT. PP (Persero) Tbk, 2016

In 2016, total operating income achieved Rp 1.97 trillion, was Rp371.18 billion or
equal to 23.24% higher than Rp1.60 trillion booked in 2015.









Figure 4 PT. PP (Persero) Tbk Total Operating Income for 5 years
Source: Annual Report PT. PP (Persero) Tbk, 2016

Aside from the performance above, the company also shows growth in
productivity to sales of 2016 with Rp8,681 millions/person/year which is 8.3%
over the 2015 performance with Rp8,014 millions/person/year. Below is the
illustration over the companys productivity in 5 years.










Figure 5 PT. PP (Persero) Tbk Productivity to Sales in 5 Years
Source: Annual Report PT.PP (Persero) Tbk, 2016










Figure 6 PT. PP (Persero) Tbk Productivity to Sales in 5 Years
Source: Annual Report PT.PP (Persero) Tbk, 2016



The companys financial performance shows growth from its performance the
years before. This illustrates the companys financial performance is in good
direction and healthy.
Enterprise Risk Management

Based on ISO 3100, Risk is the effect of uncertainty on objectives, its often
described by an event, a change in circumstances or a consequence. Since the
definition links risks to objectives, the objectives themselves need to be
challenged and the assumptions on which they are based should be tested, as
part of the risk management process. Meanwhile, risk management is the
process in which the risk holders methodically address the risk attached to their
activities. A successful risk management should be proportionate to the level of
risk in the firm, aligned with other corporate activities, comprehensive in its
scope, embedded into routine activities and dynamic by being responsive to
changing circumstances. The focus of risk management is on the assessment of
significant risks and the implementation of suitable response to it. The risk
management process based on the ISO 31000 is as illustrated below:

Figure 7 Risk Management Process

Risk Identification

The Risk Management and PMO Bureau are accountable for identifying and
evaluating the companys exposure to risks. They also need to arrange strategic
plan to ensure every potential risks are well mitigated. In order to do so, a well-
rounded understanding of risk identification as foundation on arranging a good
risk management is crucial. Systematically, risk can be divided into 2 parts, which
are Business Risk and Financial Risk.

A. Financial Risk
Financial risk is risks caused by the financial policy/financing method. It is
usually occurs in form of market risk and credit risk. The PT. PP (Persero)
Tbk as a company also exposed to a financial risk. The related risks are:

1. Credit Risk
The company credit risk is mainly exposed to the companys account
receivables from their late projects. The companys financial
instruments that have the potential for credit risk consists of cash and
cash equivalent, accounts receivables, and other receivables.

PERIL HAZARD LOSS

Project payment in credits Discontinue the payment Delayed payment
Volatile Economy Condition Economy crisis Client default

Due to the nature of the companys business line in construction
industry, the company will be much likely exposed to credit risk.
Construction projects payment method likely is paid later so it will be
accounted as the companys account receivable. Like the table above
shown, with the payment method in the industry its likely for the client
 to be exposed with the possibility of payment default. This will put the
company exposed to the possibility of credit risk.

2. Liquidity Risk
Liquidity risk is generally arises when the firm is in immediate cash
needs. In this company case, it happens when the cash flow in and cash
flow out does not off-set each other so they are endangered of liquidity
in cash during projects.

PERIL HAZARD LOSS

Project payment in credits Advance payment period Delayed payment
does not match the
terms by project owners
Advance payment period Lack of liquid
of the client is dated
after due date of
operation costs payment


B. Business Risk
Business Risk is risks caused by the original business of a corporation. It is
usually occurs in one of four ways which are operational risk, strategic risk,
compliance risk, and reputational risk. The PT. PP (Persero) Tbk risks that is
classified in this category are:

1. Productivity Risk
The company productivity risk is a part of operational risk. This is
exposed the company into a possibility of productivity problem in the
companys operational.

 PERIL HAZARD LOSS
Projects in Remote Area Late shipment of material Delayed Project
Lack of Good Decreasing product quality Decreasing
relationship with customer loyalty
employee union
Low workers productivity Delayed Project
Bad Environmental, Lack of coordination and Delayed Project
social, weather record of its condition during
condition project execution


2. Technology Risk
Since the Industry where the business lines of the company compete in
is very sensitive to technology, it is also become a risk that the
company very much exposed at. When the company cant keep up with
the new technology, it will likely become an issue because its
competitor out there might beat them in using it first and become an
advantage and added value which can tackled the companys market.

PERIL HAZARD LOSS

New Material Technology Other firm use it first Leverage on new
material
Material too expensive to use Capital too high
Low workers productivity Delayed Project
Change in Design Delayed execution
time






3. Legal Risk
Since the company business is based in service and related to civilians
public construction, they are exposed to the legal and compliance risk.

PERIL HAZARD LOSS

Buying land/property Land ownership dispute Delayed project and
loss money for
lawsuit
License process takes a long Delayed project
time
New regulation Unavailable socialization on Delayed project and
the new regulation loss money for fined

4. People Risk
The risk occurs by the companys relation to other businesses they are
working with.

PERIL HAZARD LOSS

Buying material Fraud by the vendor Quality, Time, and
money
Co-working with sub-contractor Incompetent in their Quality, Time, and
job money
Fraud by the vendor



5. IT Risk
Since the companys line of business spread across the nation, IT
becomes a very crucial part of their business. It can exposed them into
risks when its not running properly.

PERIL HAZARD LOSS

Internet disruption Information between Delayed project and
projects, HQ, and other loss money for
parties got disrupted lawsuit
New Design Unclear design due to Delayed project and
designing process from the decreasing quality
project manager has not
been finished

Risk Measurement
Risk measurement is a fundamental step to do in risk management system. By
doing this the company can make an assessment of the risk and put a proportion
of it based on its severity.
In the risk measurement there are 3 step that must be doing. There are :
a. Measuring Probability and Severity
We evaluate the probability that event can be occur and see the impact of
the potential events. There are some criteria to measure probability and
severity :

Probability Parameter
Criteria Score Description
Low 1 Almost never to happen
Unlikely 2 Unlikely to happen
Moderate 3 Possible to happen with low probability
Likely 4 Likely it will happen
The probability of the event occurred is really
High 5
high

Severity Parameter
Quantitative Qualitative Approach
Criteria Score
Approach
Insignificant 1 Up to 5% So little impact
Minor 2 >5% to 10% There are some trace of damage
Moderate 3 >10% to 15% The impact is visible
Major 4 >15% to 20% The impact is visible and huge
>20% The damage is huge and really
Catastrophic 5
affecting the company


 Risk Measurement
NO Peril Probability Severity Probability Severity Total
Rating Rating Risk
1 Project Payment High Over 20%, 5 5 25
in Credits Catastrophic
2 Volatile Economy Likely Over 15%, 4 4 16
Condition Major
3 Projects in High Over 15%, 5 4 20
Remote Area Major
4 Lack of good Moderate Over 10%, 3 3 9
relationship with Major
employee
5 Bad Low 5%-10%, 1 2 2
Environmental, Moderate
social, weather
condition
6 New Material Likely 5%-10%, 4 2 8
technology Moderate
7 Buying High 5-10%, 5 2 10
land/Property Minor
8 New Regulation Moderate Up to 5%, 3 1 3
insignificant
9 Buying Material High Up to 5%, 5 1 5
Insignificant
10 Co-working with High 5%-10%, 5 2 10
sub-contractor Minor
11 Internet Unlikely Up to 5%, 2 1 2
Disruption insignificant
12 New Design Unlikely 5%-10%, 2 2 4
Minor
TOTAL RISK 114


Risk Matrix
5 Catastrophic 9 7,10 3 1
4 Significant 6 2
Severity
3 Moderate 8 4
Rating
2 Minor 11 12
1 Insignificant 5
1 2 3 4 5
Modera
Low Unlikely Likely High
te
Probability Rating

Keterangan :
: Very Low (range 1 3)
: Low (range 4 6)
: Medium (range 7 9)
: High (range 10 12)
: Very High (range 13+)

Risk Level
NO Peril Severity Probability Score Risk Level Risk
Rank
1 Project Payment in Credits 5 5 25 Very High 1
2 Volatile Economy Condition 4 4 16 Very High 3
3 Projects in Remote Area 4 5 20 Very High 2
4 Lack of good relationship 3 3 9 Medium 6
with employee
5 Bad Environmental, social, 2 1 2 Very Low 11
weather condition
6 New Material technology 2 4 8 Medium 7
7 Buying land/Property 2 5 10 High 4
8 New Regulation 1 3 3 Low 10
9 Buying Material 1 5 5 Medium 8
10 Co-working with sub- 2 5 10 High 5
contractor
11 Internet Disruption 1 2 2 Very Low 12
12 New Design 2 2 4 Low 9
TOTAL SCORE 114

Since there are 12 Risks in PT. PP (Persero) Tbk in the calculation for high risk
company is 5x5x12 = 300, from the Risk level table above we can conclude that
the company is considered as a moderate risk company with total score 114.
 Risk Mitigation

Risk Risk Description Ranking Risk Mitigation Risk Holder

Strategy
Project Credits The client pay in Very High Ensure fund availability Finance
Payment later, with risk they during the tender Director
can become default process and request
to payment fund sufficiency
guarantee
Projects in Remote Low productivity Very High Prepare material Director of
Area and shipment risks delivery schedule based Operation
due to the remote on needs, monitor the
location of the material shipping and
projects execution take several efforts to
area support material
shipping
Volatile Economy Due to volatile Very High Maintaining effective Finance
Condition economic condition, internal policies and Director
the financial organizational
condition will be at structure,
risk
Buying New land/ Risks that came High Ensure construction Business
Property along purchasing license and land Develoment
new land/ property ownership status are
such as ownership clear prior the project
issue. started
Co-working with sub- Risks of being victim High Use database at SMKV
contractor of proud and the and SMKM
 vendor incapability
on their work
Lack of good Risks on low Medium Organize training, Operational
relationship with productivity level coaching and gathering Director
employee regularly, socialization
of corporate quality
standard regularly
New Material Risk on Technology Medium Ensuring the technology Business
technology development update always followed Development
by updating all related
technology continuously
Buying Material Risk of fraud by Medium Ensure the company Business
vendor were having business Development
with have license on
their specialty, making
contract with business
partners
New Design Risk due to unclear Medium Regular design Operational
designing process coordination, record director
from the project every loss due to the
manager. changing design
New Regulation Risk due to the Low Ensure to coordinate Operational
unknown or just before the new Director
release regulation regulation is out to fully
understand the new
regulation
Bad environmental, Risk of Low Environment and social Operational
social, weather environmental coordination and record director
condition condition become weather condition
 an obstacle that during the execution
slow down the
productivity
Internet disruption Risk due to Internet High Ensure the internet well Operational
disruption which can maintain and do disruption
disturb the coordination in real life
communication continuously