Specifics of risk management of industrial investment projects
Table of contents: The Kazakh-American Free University Academic Journal №1 - 2010
Author: Aubakirova Gulnara, Karaganda State Technical University in honor of E. Buketov, Kazakhstan
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
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.
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
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
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
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
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
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
- 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
- Susceptibility of enterprise risk events (for instance, investment
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
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
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
Based on diversification of management
zones, investment diversification, and distribution of the investment risk in
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