Principal risks and uncertainties

The group’s risk management process seeks to enable the early identification, evaluation and effective management of the key risks facing the businesses at an operational level and to operate internal controls to mitigate these risks. The key risks and internal control procedures are reviewed by group personnel together with internal audit activities. Each business is responsible for regularly assessing its risk management activities to ensure good practice in all areas. Compliance with group requirements is monitored six monthly, and these assessments are formally reviewed by group personnel at least annually. The board reviews annually the risk management process and its implementation in each of the businesses. A review of the main risks facing the group is embedded within every board agenda and summarised on an annual basis. The Audit committee receives reports on internal financial control issues from management and from the external auditors and regularly reports to the board for the purposes of the board’s annual review.

The principal corporate risks as identified by each business and noted by the board are currently:

Food safety

Our businesses have a positive role to play in contributing to the quality of people’s lives by providing wholesome and nutritious foods, food ingredients and animal feedstuffs. Sugar, tea, flour, bread, cereals and meat products are part of people’s daily lives all over the world and every effort is made to ensure these are produced efficiently and to a high quality.

To manage food safety risks, manufacturing sites operate food safety systems which are regularly reviewed to ensure they remain effective, including compliance with all regulatory requirements for hygiene and food safety. Food products are made to high standards regardless of where they are manufactured and food safety is put before economic considerations.

Global economic slowdown and changing consumer demand

The economic slowdown and turmoil in the global economy has adversely impacted consumer markets, including those in which we operate. Our businesses are dependent on continued consumer demand for their products, and reduced consumer wealth may result in consumers becoming unwilling or unable to purchase our products, with clear implications for turnover and profitability.

Our strategy is aimed at delivering value to consumers, through strong brands, supported by differentiated innovation and continued product improvement. We seek to build mutually rewarding relationships with customers in order to make our products available across all relevant channels.

We have a significant number of global brands and any adverse event affecting consumer confidence or continuity of supply of such a brand could have an adverse impact in many of our markets, or in some cases affect intangible asset values.
We support our brands and their growth through competitive levels of investment in advertising and promotions. The breadth of the business portfolio and our geographic reach also help to mitigate general economic risks. We aim to protect the value of our brands through research and development, product quality and by operating in accordance with relevant laws and regulations.

These measures are aimed at extending our consumer offerings, reducing the impact of falling consumer demand or of consumers switching to alternative products, thus allowing us to compete effectively in our key categories and countries.

Input costs, supplier and supply chain reliance

Primark’s ethical trade programme has been strengthened considerably over the past year. In March, Primark appointed its first Ethical Trade Director and in the last 12 months it has doubled the size of its in-house ethical trade team around the world. Primark is visiting and working with more suppliers than ever before. It will audit more than 1,000 factories in 2009, up from 533 last year. An important and growing area of team activity is training, both internally and externally. In the first half of 2009 Primark’s buyers and key personnel received over 1,500 hours of ethical trade training, as part of a continuous programme to help them understand the impact of their actions further down the supply chain and improve their purchasing practices. Primark is concentrating on developing the support it gives to suppliers to meet its code of conduct and held supplier training sessions in India and the UK. Plans are under way for others in China, Bangladesh and Turkey to be held by the end of 2009. In addition to a new supplier management system which will help with monitoring and remediation, a suppliers’ extranet, including many practical tools to improve compliance, is due to be launched by the end of 2009.

Primark is engaging with local experts, including unions and Non-Government Organisations (NGOs), in many of the regions from which it sources. It has built solid partnerships with a number of NGOs, such as a grassroots project with SAVE in India, to understand and address the challenges faced by workers in the communities where its products are made, and in Bangladesh a project with Nari Uddug Kendra, particularly focusing on training workers on their entitlements, including wages and associated rights. Two projects on living wages, one in Bangladesh and one in China, are under way with the aim of creating long-term improvements in labour standards. Primark is an active member of the Ethical Trading Initiative and participates in a number of working groups including the General Merchandisers, Homeworking, Purchasing Practices, Reporting and China Forum. Primark launched a dedicated ethical trade section on its website in May which provides information and updates on its programme.

Profitable manufacturing is dependent on obtaining adequate supplies of production materials in a timely and cost-effective manner. Prices are significantly influenced by global economic conditions and can fluctuate, which may have an impact on margins and cash flows.

We are also dependent on suppliers and global supply chains as a means of producing and supplying our products. As a result we are exposed to business interruption from natural disasters or catastrophes and through additional risks of changes in local legal and regulatory schemes, labour shortages and disruptions from environmental and industrial incidents.

In the current climate we also face a risk that our suppliers may fail to meet their contractual obligations. Active monitoring of suppliers and the supply chain is in place, and regular supplier counterparty risk analysis is undertaken to mitigate this risk.

We actively monitor our external environment, review and revisit our business continuity and disaster recovery plans, and continue to adapt our internal cost structures to deliver products at competitive prices.

Competition rules

The penalties for failing to comply with the 1998 Competition Act, the 2003 Enterprise Act, relevant EU law and all relevant competition legislation are recognised as risks to be managed within the group. Clear policy direction, which includes compulsory awareness training and close support from the in-house legal department, has reduced the likelihood of the group breaching these regulations.

Environment

We recognise the impact that our businesses have on the environment. Therefore, as a minimum, we comply with current applicable legislation of the countries in which we operate and our operations are conducted with a view to ensuring that:

• emissions to air, releases to water and land filling of solid wastes do not cause unacceptable environmental impacts and do not offend the community;
• significant plant and process changes are assessed and positively authorised in advance to prevent adverse environmental impacts;
• energy is used efficiently and consumption is monitored;
• natural resources are used efficiently;
• raw material waste is minimised;
• solid waste is reduced, reused or recycled where practicable;
• the amount of packaging used for our products is minimised, consistent with requirements for food safety and product protection;
• products are transported efficiently to minimise fuel usage, consistent with customers’ demands, production arrangements and vehicle fleet operations;
• accidents are prevented so far as is reasonably practical; and
• effective emergency response procedures are in place to minimise the impact of foreseeable incidents.

Particular attention is paid to recently acquired businesses to ensure they operate in accordance with the standards we expect of the group's businesses.

The principal environmental risk is the use of energy and the resultant emissions of carbon dioxide, a gas involved in climate change. The efficient use of energy is a major element of our environmental policy. Indeed, all sites which are subject to the EU’s Pollution Prevention and Control regime are also under a statutory requirement to minimise energy consumption by use of best available techniques.

Our manufacturing operations in the UK participate in the UK Government’s Climate Change Agreement Scheme in which energy intensive businesses receive an 80% discount from the Climate Change Levy in return for meeting energy-efficiency or carbon-saving targets. The sugar sites in the UK and Poland participate in the EU Emissions Trading Scheme. These schemes allow the sites to reduce energy consumption and therefore reduce emissions of carbon dioxide cost-effectively.

In addition to the consumption of energy we generate surplus electricity from highly efficient Combined Heat and Power (CHP) plants and sell this electricity to other companies. All UK CHP plants participate in the UK Government’s CHP quality assurance scheme and qualify for a full exemption from the UK’s Climate Change Levy.

Carbon dioxide is emitted directly from the combustion of fossil fuels to create steam, heat and electricity at our factories, and indirectly by the power stations from which we buy our electricity. The use of bagasse (sugar cane fibre, which is a renewable resource and hence carbon neutral) as a fuel in the cane factories eliminates the need to use coal and other fossil fuels to provide energy to our boilers.

Other significant environmental risks include the handling and disposal of waste and the treatment of waste water. The principal legal risk is regulatory action for non-compliance with licence conditions and statutory requirements. All of our businesses have named senior executives and responsible managers accountable for waste and the management of the physical and legal risks, for which they employ specialists, is included in their annual objectives.

We use Environmental Resources Management Ltd (ERM) to continue our rolling programme of audits of the management of environmental risks at a representative sample of our businesses. The sites audited are selected on the basis of materiality with regard to the range of issues as well as the contribution to the health, safety and environment performance of the group as a whole. ERM also carry out a sample data verification process on the group’s data to check completeness and accuracy. Each year the board reviews the verified results and provides strategic direction. Businesses are required to develop action plans as appropriate and progress is monitored by the group health and safety manager.

Details of our environmental performance are published in a separate health, safety and the environment report.

Health and safety

We are committed to providing a safe and healthy workplace in line with local regulations to protect all employees, visitors and the public insofar as they come into contact with foreseeable work hazards. We consider health and safety to be no less important than any other function. We require our businesses to build a culture of sustained improvement.

People’s health and safety at work is a prime responsibility for all those who manage and supervise. All employees and those working on behalf of the Company have a responsibility for the health and safety of themselves and others who may be affected by their actions. We ensure that they are well informed, appropriately trained and are consulted on matters affecting their health and safety.

The principal health and safety risks relate to the potential for serious injuries, fatal accidents and regulatory action for non-compliance with statutory requirements.

As with environmental risks, all the group’s businesses have named accountable senior executives who employ specialists to manage these risks, which form part of their annual objectives.

We use ERM to audit a representative sample of our operations to understand how the businesses manage their risks and to verify the data. Businesses are required to develop action plans as appropriate and progress is monitored by the group health and safety manager.

Details of our safety performance are published in a separate health, safety and the environment report.

People

The group’s performance targets require it to have the right calibre of people at all levels. We must compete to obtain capable recruits for the businesses, and then train them in the skills and competencies that are needed to deliver profitable growth. At a time of substantial change in the businesses, there is a particular focus on creating alignment and energetic leadership.

Financial and commodity risks

Treasury operations are conducted within a framework of board-approved policies and guidelines to manage the group’s financial and commodity risks. Financial risks essentially arise through exposure to foreign currencies, interest rates, counterparty credit and borrowings. Commodity risks arise from the procurement of raw materials and the exposure to changes in market prices. Liquidity risk arises from the availability of internal and external funding to enable the group to meet its financial obligations as and when they fall due.

Sufficient funding is maintained by way of external loans and committed bank facilities to meet our expected needs. An extended period of constraint in the capital markets, where availability of funds from the bank loan and public debt markets was limited at a time when cash flow was under pressure, might compromise our ability to implement current long-term strategies.

Credit risk is the risk that a counterparty will default on its contractual financial obligations resulting in a loss to the group. Credit risk arises from cash balances, credit exposures to customers including outstanding receivables, derivative financial instruments, and financial guarantees. Credit risk is managed at both a group
and business level according to internal guidelines, with businesses responsible for their exposure to customer credit risk. Financial transactions are dealt through financial institutions with a credit rating of A or better.

Details of the group’s accounting and risk management policies with respect to financial instruments and the associated quantitative and qualitative disclosures are set out in note 25 on pages 90 to 102 of the Annual Report and Accounts 2009.

Taxation risks

Tax benefits are not recognised unless it is probable that the position taken is sustainable. Management reviews each material tax benefit to assess whether a provision should be taken against full recognition of the benefit on the basis of potential settlement through negotiation and/or litigation. Any interest and penalties on tax liabilities are provided for in the tax charge.

The group operates internationally and is subject to tax in many different jurisdictions. As a consequence, the group is routinely subject to tax audit and local enquiries which, by their very nature, can take a considerable period to conclude. Provision is made for known issues based on management’s interpretation of country specific tax law and the likely outcome.

Loss of a major site

The group operates from many key sites the loss of which, for example as a result of fire, would present significant operational difficulties. Our operations have business continuity plans in place to manage the impact of such an event and group insurance programmes to mitigate the financial consequences.

Major projects

The group undertakes a number of major capital investment projects, each of which carries the risk of overspending initial cost estimates, overrunning construction timelines and failing to meet design specifications. All major projects are managed by dedicated teams who work in close liaison with business management.
Initial project plans are reviewed by group management and, for the larger projects,by the board. Updates on progress are provided throughout the project.

Management succession

The devolved nature of the group requires us to pay particular attention to the strength of the various management teams around the world, with specific focus on succession planning. The status of each division’s succession plan is reviewed with group management twice a year, and with the board annually. Development of our senior managers is co-ordinated by the Group HR Director and Head of Executive Development. In addition, a small number of executive search companies have been briefed to introduce us to talented executives from other companies who could add value to the group.

Regulatory and political environment

Our businesses are subject to a wide variety of regulations in the different countries in which they operate because of their diverse nature. They may also be affected by political developments in the countries in which they operate. These uncertainties in the external environment are considered when developing strategy and reviewing performance and we remain vigilant to future changes. We engage with governments and NGOs to ensure the views of our stakeholders are represented and we try to anticipate, and contribute to, important changes in public policy wherever we operate.

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