Specifics of risk management of industrial investment projects

A consistent transition of the economy of Kazakhstan onto a path of innovational development is determined by a set of internal and external factors and circumstances.

First of all, integration into a global economy requires increase of its competitive capacity which assumes the necessity for innovation in all spheres and directions of development of economic activity. The world economic experience proves that economic and social prosperity of a country can be achieved through innovational development which in turn discovers new ways of manufacturing goods, new fields, new goods and exporters.

Second, transition of the economy from a recovery stage to more extensive growth means accumulation of real opportunities in its potential for a global application of innovations.

Third, the presence of locations and hubs of innovational development in the structure of the national economy (major regional, sub regional and transnational corporations which are competitive in the world market) turns out to be a powerful platform for engaging small and mid businesses into the sphere of their innovative activity. It also favors the propagation of their accumulated positive experience of innovation development and application into other sectors of economy and regions.

Thereupon, the recognition and activization of the innovational-investment potential of key agents of the economy of Kazakhstan becomes relevant. Such industrial enterprises focus on the development of mechanisms and managerial technologies of their strategies of development in agreement with the plans of the national economy. Scientific and technological advance and economic development acceleration in general are directly connected with competitive industrial enterprises in domestic and world markets, their innovation potential and resources to implement innovations, flexibility of intraproductive policy, ability to respond to market changes, and their ability to quickly and actively adapt to new environment.

The practice of the functioning of industrial enterprises proves that effective mass introduction of innovational technologies may have a huge social, economic, demographic, ecological and other impacts since it stimulates people to rehabilitate and get back to active labor and social activities. At the same time, monitoring of this process is not always conducted optimally. These difficulties specifically relate to enterprises that are constricted with investment opportunities which lead to a lack of investment resources for the introduction of innovational activity.

Nowadays, with the presence of the problem of restructurization of not only corporate businesses, but also small and mid businesses, the problem of development under conditions of high level of uncertainty arises when both quantitative financial, economical factors and qualitative factors’ impact are being considered (1, p.27). It is the question of the necessity of risk factors assessment which should be considered in investment projects realization.

Specifics of risk management of enterprise investment projects in Kazakhstan defines the uniqueness of projects developed by industrial enterprises and a third person within the branch sector. Investment project is not an incomplete complex of components (purposes, resources, events etc) because according to a chosen way of this project organization it may possess different characteristics. For example, inefficient consistency of events may lead to an increased period of realization i.e change of one of its most important characteristics.

Taking into account current conditions and tendencies of the economy development of Kazakhstan as a whole and industrial economy, in particular, the risk management part becomes the key component in making forecasts in developing mechanisms of protection from unfavorable consequences that come with realization of investment projects.

Risks of economic environment are the most difficult in investment projects management. Their influence becomes significant mostly at the stage of project realization, although should be taken into consideration at other stages as well (for instance, during risk assessment). Due to this, application of complex approaches to risk management of investment projects within unstable conditions of domestic industry development leads to a necessity of working mechanism and risk management activization of different levels of their regulation and control.

In contrast to other types of risks which may be avoided by a single use of such methods as insurance, guarantees, etc, economic risks require consistent analysis on all stages of investment projects realization and introduction of necessary correcting methods into the system of risk management as the need for significant changes arises. Application of static methods of management does not take into consideration changes which appear constantly and lead to negative consequences for investment projects of industrial enterprises.

Goals, resources, forms and methods of risk management consider a small portion of aspects and directions, do not examine current tendencies of domestic economy which are characterized by a significant increase of risk and undefined way of development due to changes in the world economy.

Despite of a diversity of kinds of investment projects, specifics of investment requirements of industry define a different level of urgency of some kinds of investment projects under current conditions. Besides, investment projects are differentiated by the level of risk sustainability. Due to this problem, there appeared a necessity of defining those types of projects which on the one hand mostly correspond to specifics of a contemporary level of enterprise working development, and on the other hand are most likely to become subjects to different risk types, i.e. require application of special management strategies.

A distinct character of practically all investment projects of the enterprise is a high risk level (See pic. 1). More than that, tendencies of development of leading sectors of industry which are characterized by intensifying innovational activity define displacement innovational priorities into an area of projects with high level of risk intensity.

Mentioned conditions caused the essence of application of protection mechanisms from risks during investment projects realization. Taking into consideration the fact that the effective risk-management is based on understanding the essence of risks and application of analytical procedures that guarantee high level of forecasts reliability, the article provides the results of a research made by an author, i.e there have been emphasized those risks which cause the development of investment projects of industrial enterprises of the Republic of Kazakhstan.

Depending on sources of risks of projects it has been suggested to divide them into the following categories: technological risk, market and operational risk, financial risk, risk of political and regulation instability, legislative and lawful right, ecological risk, risk of conditions of insuperable force effect (2, p. 185).

Considering tendencies of development of the domestic economy in general and industry in particular this group of risks plays a key role in forecasting and development of protection mechanisms from unfavorable consequences of investment projects realization.

Direction (general purpose):

- Projects focused on technological and technical renovation of equipment, fixed assets replacement, modernization of equipment for quality and efficiency improvement of produced goods and production;

- Projects directed to increase the volume of production and nomenclature of produced goods for a better demand satisfaction, market expansion, increase of revenues;

- Projects directed to goods and services penetrating market, creating new market segments.

Picture 1 - Classification of investment projects

In most cases investment projects of current industrial enterprises have to do with modernization of production processes and due to those following types of projects should be considered: transition to less cost inducing technologies, replacement of depreciated equipment, production of goods new to the enterprise, staff training. However, these investment projects are not alternative in a classic way - for instance, production of goods news to the enterprise will most likely be followed by equipment replacement and switch to other technologies; staff training will have to follow each of mentioned directions. Therefore, it is better not to mention alternative projects, rather alternative directions of investments - it is unlikely for a full investment to happen in all directions at once due to scarce resources.

Major tendencies of risk management of investment projects include the following.

First of all, reduction of a life cycle of innovations due to acceleration and strong dynamics of scientific-technical progress, adds creativity to activities of many managers, which deals with risks since a creative process is characterized by specifics of introduction of innovations into practical life.

Second, work activity of both managers and staff workers has been obtaining more and more entrepreneur traits. This causes unclearness and uncertainty in getting an expected final result, and therefore, the level of risk increases, since market - is a strong system which requires one to be physically and intellectually strong.

Third, due to transformation of economy enterprises found to be in a very unfavorable situation due to a long period of stagnation in renewal of major funds. Financial position of enterprises aggravated due to balancing beyond the point of make-out, ignorance of the need for serious marketing researches for support of production of new products.

Fourthly, presence of current global problems raises a question of essence of a global risk of investment projects. Here we may include a risk of business globalization both globally and inland. The consequence of this is the loss of control over strategic directions of development.

Research on current trends of risk management of investment projects of enterprises showed the following: only the combination of different techniques and approaches to risk management will lead to successful accomplishment of investment projects with a nominally high level of risk and receive an income not lower than predicted.

Procedures of mechanism formation of organization of interaction of major participants of investment projects in their risk management consist in a consistent accomplishment of the following procedures:

1. Setting a goal which should be accomplished as a result of a research made using a reason-consequence method (for instance, assessment of efficiency of interaction of major participants of investment projects can be a goal)

2. Development of criteria which describe the examined category in the best way. For instance, this might be the assessment of the final status of major participants of the investment project, competitiveness and efficiency of the object for investment for the enterprise. After that, we can graphically show the initial version of a diagram “Reason - consequence”.

3. Further it is recommended to apply the “brain attack” method, during which experts suggest choices of second level criteria.

The expert assessment of criteria, removal of criteria that were not supported by the majority of experts, classification of approved ones which influence the efficiency of major participants of investment projects interaction in their risk management the most represent procedures of the next step.

This way, this mechanism of major participants of investment projects interaction in their risk management can be used for project assessment when risks and uncertainty are present. This suggestion should be used as one of the existing methods of investment strategy realization. Major directions of this strategy realization include increase of competitiveness and stability of the enterprise activity due to the use of new science intensive and resource-saving technologies, producing new goods and services with a paying capacity demand, development of industry diversification, etc.

A specific trait of government regulation and control of investment activity of the enterprise for a higher efficiency of project risk management is a transition from distribution of budget allocation between branches and regions to selective financing of objects thus forming the structure of objects on the basis of competition.

During the research process there have been distinguished types of enterprise behaviors depending on structure and use of its risk management system:

1) Active risk management type which determines the accumulation of reliable resources on a current investment activity status and certain ways which minimize the loss of risk and stabilize the enterprise profitability.

2) Reactive risk management type which is characterized by the delay of reaction of management with the start of rational activization on preventing risks. Usually, in this case the loss will be greater than with active risk management and accordingly will demand a better investment guarantee for financing instruments of risk project localization.

3) Planned risk management type uses non-extra polar forecast of technologies, structural changes and scenarios of possible deviation exposures development. Forecast results provide with information which helps the enterprise to finish the activity until possible threat can cause damage. This type of risk management is preferable for industrial enterprises and should be considered when choosing the system of risk management.

The system of risk management is formed according to hierarchical principle. The process of risk management operates on two subordinate levels - executive and coordinative. On the executive level two major functions are being performed: first of all, consistent control of risk level emerging during the process of investment risks realization which is related to decision making on all levels and correction of strategy development of the enterprise. Functions of executive level guarantee performance of certain risk analysis procedures during realization of accepted decisions on investment strategy realization and creating conditions for a long-term enterprise development in terms of a risk management system application as well as during making new important decisions.

The core of a risk management system is a “risk management service” which fulfills the planning and organization in terms of localization and forecasting of investment activities’ risks of the enterprise.

The risk management system does the following:

- Maintenance of interconnection between the management of the enterprise and other structures;

- Defines the periodicity of conducting checkups of the enterprise operation risk control;

- Defines the structure of checkups of a control and management cycle (defining the “type” of risk analysis, ways of securing results);

- Defines a start point of a trial solution risk analysis checkups;

- Organizes interconnection of executive and informational groups of the enterprise.

Modeling of risk situations and formation of effective risk management of investment projects technologies should be based on methods of existing economical-mathematical apparatus of mathematical modeling, analysis of theoretical and methodological developments on risk issues, application of logical and comparative analysis principles, experimental and actual calculations’ results of investment activities of industrial enterprises (3.p. 206).

The major criteria of risk situations modeling and development of effective risk management technologies is its efficiency in goal accomplishment - potential loss minimization. Therefore development of risk situation model is based on the main point of “investment project risk”, which proposes us to two major categories:

- Potential loss minimization which happens due to risk event (for instance, when choosing alternative investment projects with different risk level that has to do with a different level of instability of project environment);

- Susceptibility of enterprise risk events (for instance, investment stability decrease).

It is not recommended for industrial enterprises to use five major technologies of effective risk management and take into account five major foundations which would let them find the most optimal way of modeling risk situations and effective risk management approaches (see table below).

Table - Foundations and technologies of risk situations modeling and effective risk management technologies formation

Foundations

Technologies

The complex of all factors which influence explanations and choices of decision making

Based on refusal from high-risk projects, search for new guarantees

Systematic unity of methodological foundations of an aggregate of chosen methods and decision making models considering risk level; role assessment of each of them in final results achievement. A choice of alternative methods of risk assessment of investment projects according to methodology of risk management process should not only explain chosen models which assist in alternative decision making, but also determine the influence of each of them on the investment potential of the enterprise.

Based on collaboration with specialized structures, development of new units for new high-risk projects accomplishment.

Modularity of development of information technologies tools. For every alternative decision there is an imitational model which is formed from a given aggregate of basic standard mathematical, heuristic modules and corresponding relationships between them. This helps form a derivative model depending on a decision making goal and level of environment stability of the industrial enterprise. Application of module principle helps form a dynamic developing imitational foundation of the investment process.

Based on diversification of management zones, investment diversification, and distribution of the investment risk in time.

Compatibility, i.e. presence of the unity of informational, mathematical, linguistic, program and technical compatibility on all levels of the enterprise situation’s risk model choice and explanation

Based on the system of goal-oriented monitoring and marketing

Invariance and simplicity of application which assume universality of models and methods for solving problems of the same type when choosing and explaining solutions taking into account investment projects’ risks of the industrial enterprise

Based on insurance of separate parameters of investment activity