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JOURNAL O

OF CONTEMPORRARY DEVELOPM

MENT AND MANNAGEMENT STUUDIES [VOLUME: 01, NO: 002] 201

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JOURNAL OF CONTEMPORARY DEVELOPMENT AND MANAGEMENT STUDIES [VOLUME: 01, NO: 02] 2012

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JCDMS, a biannual journal Published by

London Churchill College

London E1 2JA

United Kingdom

Copyright @ London Churchill College


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Editorial Board:

Dr. Dababrata Chowdhury - Chief Editor

Dr. Jeffries Mvenge - Member

Dr. Mohamed Asim - Member

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Assistant Editor : Rahaman Hasan


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Editorial Note

Welcome to the 2012 Vol.1 No.2 edition of the ‘Journal of Contemporary Development and Management Studies (JCDMS) The JCDMS acts as a vehicle for the delivery of timely and thoughtful information and opinion on the current issues that involve our academics, social thinkers, business managers, and community people including students. The goal of the JCDMS is to broaden the knowledge of social thinkers, business professionals, academicians and students, and to provide valuable insights to economics, business and management-related information, research and ideas.

The current issue is embedded with both theoretical and empirical works which give significant and novel contributions in the fields of economics, management, computing and education with a particular attention devoted to recent development. All articles in the JCDMS are peer reviewed. We think that the selected articles included in this first issue constitute a representative sample of what is welcome in this journal.

This is a period of knowledge-based changes in economics, management and information technology. The JCDMS provides information on knowledge-based changes, and will continue providing a focused outlet for quality research in the ever-expanding areas of development economics, management and information technology. Readers and potential authors might be interested to know that the JCDMS is dedicated to stimulating research in the rapidly growing field of the present-day interest.

Commencing in May 2012, the JCDMS will appear as a biannual publication with welcoming contributions to its upcoming issues. We welcome original and authentic articles which are knowledge-based, fact-centred and informative that carries current-day messages. Submissions are judged on the basis of the creativity and rigor, and the journal imposes neither upper nor lower boundary on the complexity of the techniques employed.

In fine, I on behalf of the Editorial Board like to extend our grateful thanks to the contributors and the staff who helped in publishing the journal. With their efforts, eventually we managed to release this opening issue after a complex process of refereeing a quite good number of submissions.

We really hope this fist issue of JCDMS will pave the way to a long-lasting and challenging cultural adventure.

Sincerely,

Dr. Dababrata Chowdhury

Chief Editor


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CONTENTS

Sr. No.

TITLE AND NAME OF THE AUTHOR (S) Page No.

01. Do systems and complexity theories aid our understanding of poor performing general practices?

- Maria Kordowicz

01

02. The Effect of Globalisation on the Development of Underdeveloped Economy

- A K M Asaduzzaman Patwary

12

03. Small and Medium Scale Enterprises and Economic Development in Developing Countries; Nigerian Perspective

- Chisomje Ezeaku

25

04. Risk management in Oil and Gas industry

- Jumasseitova A.K. - Mustafina Zh.

35

05. Street food fad or fashion?

- Chris Davies

65

06. Guidelines to Authors

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Do systems and complexity theories aid our understanding of poor performing general practices?

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Maria Kordowicz1

Abstract The scope of this paper is to introduce systems and complexity theories as a potential framework for understanding poor performing general practices. Whilst systems theory emphasises the linear interaction and interrelationship of parts of an organisation, complexity theory concerns the study of those systems that feature non-linear dynamics. As complexity theory has its roots in systems theory, it is appropriate to explore the two theories together. The strengths and limitations of using each theory as a lens for viewing poor performance in general practice are explored. Background Before discussing the finer points of systems and complexity theories, the concept of poor performance in general practice warrants an introduction. Performance in general practice tends to take on a government policy-driven definition, inextricably linked to notions of ‘quality’. Overwhelmingly, quality is presented using policy rhetoric as something measurable that can be achieved through meeting pre-defined top-down targets. The drive for improving quality in health services through performance indicators is seen as a key feature of the Thatcherite New Public Management introduction of market incentives to improve the efficiency of public services (Walsh, 1995). New Public Management was embraced by New Labour’s White Paper “Saving Lives: Our Healthier Nation” (Department of Health, 1999) with the establishment of targets in priority areas to reduce health inequalities. Following on from this policy trend, in 2004 the Quality and Outcomes Framework (QOF) was conceived as part of the new General Medical Services Contract (nGMS) (Department of Health, 2003) and became the dominant model for monitoring the quality of general practice in England on a ‘pay-for performance’ basis, accounting for around a third of a practice’s income. General practices receive payments for QOF points’ achievement on a variety of indicators in clinical, organisational and patient experience domains – currently with a 1000 QOF points maximum. Against the policy backdrop of improving the quality of patient care through measurable targets becoming a key preoccupation within health services (Elwyn & Hocking, 2000), QOF has become synonymous with general practice performance in the language of health management and policy-makers. Indeed, there runs the risk of an overgeneralisation by labelling general practices on the basis of persistently lower than average QOF scores only as ‘poor performing’ (Peckham & Wallace, 2011), and not least publicly with QOF data not dissimilar to league tables available in the public domain. There is recent evidence that 141 general practices have continued to underperform on the QOF, remaining in the lowest 10% of QOF scorers nationally since the framework’s inception (Ashworth et al., 2010). The strongest predictors of QOF underperformance appear

1 Maria Kordowicz (BSc (Hons) MSc MRes Prof Cert Mgt HSC) is a Lecturer at London Churchill College, Director of www.akordpeople.co.uk, and a Lecturer and PhD Student at King’s College London.



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to be practices which are small and single-handed. Westland and others (1996) argue that poorly defined management structures are a feature of single-handed practices and impact negatively on performance. De Koning et al. (2005), looking at stroke prevention, discovered that on the other hand, general practitioners with a higher level of integrated organisational structures (e.g. effective record keeping) were less likely to deliver suboptimal care. However, single-handed practices, whilst not having the infrastructure to report their QOF-related activities, may offer a more personalised service and better accessibility to a named GP for patients (Van den Hombergh et al., 2005). It can be seen therefore that factors assumed to impact on the quality of a practice can be placed within the context of the practice as an organisation. Definitions of what constitutes an organisation vary depending on one’s theoretical perspective (Handy, 1999). A general definition may be simply ‘a group of people who work together’. The link between how a practice functions organisationally and the quality of the service it delivers has been made within published literature. For instance, Huntington and Gillam (2000) discuss the challenges some organisational features of general practices pose to nationwide quality improvement programmes, such as lack of technical skills and effective leadership. Organisational characteristics of a general practice can also have an impact on adherence to clinical guidelines (Wiener-Ogilvie, S., 2008). Therefore, for the purpose of this paper, poor performing general practices will be viewed as synonymous with their organisational context. Indeed, the central concerns of both systems and complexity theories are to understand the way in which organisations function. Both theories will be now be explored in turn. Introducing Systems and Complexity Theories What is systems theory? Attempts at defining systems theory have been made by numerous commentators. Systems theory is most often associated with the work of the biologist Ludwig von Bertalanffy. Bertalanffy emphasized the existence of principles common to all systems in all scientific fields. He argued that all systems are the product of the connectedness and relationships of their components (Von Bertalanffy, 1968). Furthermore, Bertalanffy’s theory called for a shift in focus from these components to the whole. In this vein, Sweeney (2006) describes one key characteristic of systems thinking as presenting systems as properties of the whole, none of these properties being held by the individual parts themselves. It follows that the properties of the system are destroyed by reducing the system to its component parts. Here parallels can be drawn with Gestalt Psychology. A system is not just any set of components, rather its essential property is that as a whole it is greater than and different from the sum of its parts (Köhler, 1929). This approach can be set up in opposition to reductionism. Jackson (2003) explained reductionism in the context of systems as a ‘traditional scientific method (which) sees the parts (of a system) as paramount and seeks to identify the parts, understand the parts and work up from an understanding of the parts to an understanding of the whole’. The key limitation of the reductionist approach is that by looking at the components of a system in isolation, the interactions and relationships between them may be missed. Jackson instead proposes that by viewing a system as more than the sum of its parts, one builds up a rich holistic understanding of that system. Indeed Poincare (1958) described the aim of science itself as ‘not things in themselves, but the relation between things. Outside these relations there is no reality knowable’.



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Yet to move beyond the realms of pure theorising, systems theory can also hold practical applications for understanding organisations. Keep (2005) described systems theory as ‘a powerful analytical construct in the study of organisations, that suggests the concept of an organisation having interrelated parts’. Systems theory can therefore be viewed as a construct for organisational analysis, one that focuses on the organisation as a system consisting of components which interact to form the organisation in its totality. Systems theory as applied to organisational study can be classified into three key perspectives – rational, natural or open system (Scott, 1992). The rational systems perspective sees organisations as formal structures consisting of clear cut rules and roles, defined so in order to meet the organisation’s objectives. The emphasis here is on properly applied control resulting in attaining an organisation’s goals. Checkland’s (1994) definition of hard systems thinking is relevant to this perspective, whereby the world is assumed to consist of a set of parts which can be systematically engineered to achieve objectives. However, there also exists a soft tradition within systems thinking, which views the world as problematic, particularly in terms of human relationships binding the parts of a system, and has an interest in the process of inquiry into these problematic situations that make up the world. Along these lines, the view of the organisation as a natural system places more emphasis on informal structures and goal complexity. The interest in the systems theory approach is in how players within an organisation act within the context of its rules and formal structures. The organisation is not seen as holding a unitary goal, rather a plurality of aims and interests, which at times can be conflicting. From the natural system standpoint, the organisation does not exhibit highly formalised social structures, but they are self-evolving adapting systems. Lastly, the open systems perspective emphasises on the other hand process over structure. Organisations are not closed systems but they are influenced by their external environment. This can be understood through von Bertalanffy’s original biological analogy when illustrating his systems theory; the dynamic interaction of the internal and external environments is likened to the selective exchange of a semi-permeable cell membrane. Therefore an organisation’s ability to meet its goals is ‘dependent on continuing exchanges with and constituted by the environments in which they operate’ (Scott, 1992). It could be argued that these three perspectives simply reflect different views about how an organisation attempts to meet its goals. There is a sense of a move away from a linear approach to studying organisations as systems to a non-linear paradigm. Within such an approach, components of a system not only relate to one another, but also adapt and evolve, at times in unpredictable ways complicating the process by which the goals of an organisation are attempted to be met. Clearly the key characteristic of an organisation in systems theory is that its constituent parts relate to one another in order to meet a shared goal or a set of goals. Indeed Deming (1989) boldly stated that ‘without an aim, there is no system’. There is no doubt therefore that a study of general practices as organisations must take into account the ways they work in order to meet their goals. And indeed to go a logical step back, what those goals actually are, for instance whether or not QOF performance features highly in the priorities of the practice. This leads onto the question of to what extent systems theory has been applied to the study of healthcare organisations, and in particular of general practice. This will be explored in the following section.



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Systems theory & health services research Systems thinking has obvious relevance to understanding healthcare organisations. In line with systems thinking healthcare can be described as ‘as a set of connected or interdependent parts or agents—including caregivers and patients—bound by a common purpose and acting on their knowledge.’ (Institute of Medicine, 2001). Indeed systems theory has an established reputation of applicability to health services research. Anaf and others (2007) proposed combining systems thinking with case study research in order to study health services in an interpretivist exploratory framework. The case of the health service therefore becomes a specific, unique, bounded system with working parts (Stake, 2003). Anaf and colleagues argue that this combined approach can yield considerable insights, particularly in studying health services quality. Thus the systems case study approach has particular relevance to this study, as it allows for gathering multiple perspectives of players within a GP practice and as Anaf and others suggest, paints a picture of the impact of both the general practice case and system on quality. Systems theory has been used in research, but also as a theoretical framework for understanding healthcare services and as a management tool in health. Hogg and others (2008) argue that primary care organisation is best viewed through the theoretical lens of systems theory. They support the aforementioned open system perspective and propose an analysis of the sociopsychological, organisational structure and ecological factors. Therefore the behaviours of individuals, the organisation’s structural features and the influence of the external environment are of key interest to enriching the understanding of primary care organisations, such as the general practice. Hogg and others also suggested that this approach had an important role to play in the study of systemic drivers towards (and presumably away from) quality in primary care. No doubt, this is of particular relevance to understanding poor performing general practices. Keep (2005) listed some specific uses of systems theory in organisational research. These are - diagnosing individual and group behaviour, examining power relations, diagnosing environmental relations and establishing systems for learning in organisations. These uses can be directly applied to a general practice setting, both as a research method and a management tool. An enquiry of poor performing GP practices could explore how the senior partner relates to his reception team for instance and in turn how power is distributed within that interaction. The Primary Care Trust or Clinical Commissioning Group could both be viewed as the external environment and the extent to which their top -down mandates infiltrate the practice semi-permeable boundary could be analysed. In the spirit of setting a solution-focus from the outset, one could develop an evidence-base for the types of systems which would be appropriate to improve the participants’ QOF scores. Research of this nature was conducted by Geboers and others (2002) with 39 general practices in the Netherlands. They used indicators to measure practice organisation, data management, quality improvement, patient satisfaction, and medical performance. Those data were then used to drive quality improvement initiatives within the practices studied, based on systems which facilitated performance within the identified domains. In fact, Rhydderch and others (2004), in a review of general practice research from a number of countries, argued that systems theory is the dominant managerial approach used to drive indicator-based quality improvement programmes. Although these authors saw the benefits of systems thinking in fixing the current way of doing things, they proposed that this approach



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created too much homogeneity. This may in part be due to the systems approach presenting the general practice organisation as a neat system which can clearly be manipulated with quality improvement initiatives in order to bring about change. Rhydderch and others instead support striking a balance between systems thinking and an approach which anticipates and makes sense of likely changes. They view the role of approaches which take account of the complexity of general practice as playing a key part in striking this balance. In fact there has to an extent been a move away from systems theory towards understanding healthcare services, in particular primary care, as complex systems (Miller et al., 1998). Before the use of complexity theory in health services research is explored however, the next section of this chapter will present the key features of this theory. What is complexity theory? Complexity theory is the study of systems that feature non-linear dynamics. Systems are adaptive, consisting of local agents whose interactions lead to continually emerging new behaviour. Change emerges as a result of interactions between players at a local level in the complex system and between the system and its external environment. Complexity can be defined as the ability of a system ‘to switch between different modes of behaviour as the environmental conditions are varied’ (Nicolis & Prigogine, 1989). In other words, complex systems are able to adapt to their environments. Within this tradition systems are seen as having the ability to form new behaviours and characteristics in order to reach their goals. Frenk (1993) claimed that whatever the goals of the organisation, as an adaptive system it will invariably move towards increasing complexity as it tries to reach those goals. Therefore complexity theory is clearly rooted in systems theory, observing the goal-oriented relationships between parts of the system, however with a move away from cause and effect modelling. The term complexity itself refers to the middle state between an ordered and linear behaviour and a chaotic one. The nature of complexity is that it is the product of a ‘myriad of facets’ (Dodder & Dare, 2000). It can be argued that one of the strengths of this multi-facetted approach is that it challenges certain assumptions about how an organisational system functions. A recent report into the use of complexity theory in health services research by the Health Foundation (2010) claims that the following hypotheses are contested by complexity thinking: that every observed effect has an observable cause, that even the most complicated things can be understood by breaking down the whole into pieces and analysing it and that if past events are sufficiently analysed, this will help to predict future events. This no doubt paints a picture of human systems, of which the health service is one, as an unpredictable complicated mass. On the other hand Sweeney (2006) described complexity as an uncertain dynamic state that conversely produces self-organising behaviour. There is therefore a tendency within complex systems for coherent behaviour to emerge from what seem to at first be random interactions. Another paradox was highlighted by Jantsch (1980) who pointed out that the more freedom there is in self-organisation, the more order there is. One could postulate from this that top-down quality improvement initiatives, such as the QOF, remove some of the freedom of self-organisation in general practice. Perhaps when the goal of the practice is not achieving high QOF scores, the potential for self-organisation around other goals is limited and chaos, rather than order, ensues. The self-organising behaviour is caused by a positive feedback loop within the organisational, or in fact any, system. Those actions that result in positive



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outcomes will be given preference over others, establishing repeating patterns of behaviour, which manifest as stable characteristics of the system. Lastly, complexity theory can be viewed as an evolutionary systems theory whereby organisations do not achieve success because of their ability to predict and create planned strategies. They achieve success because of their ability to constantly realign with the environment (Burnes 1996). A key feature of healthcare organisations is the need to adapt to a wide range of external influences and stakeholders, be it the constant assault of new policy mandates, or the changing health needs of the populations they serve. In this vein, Janecka (2009) described healthcare services as ‘arranged in ever-expanding circles of influence’, communicating the extent to which the health service is a self-evolving and unpredictable entity. The next section will explore complexity theory applications in the field of healthcare, with some examples taken from general practice. Complexity theory & health services research Plsek (2000) is considered to be one of the key commentators on complexity theory as applied to healthcare organisations. Through his appraisal of the US healthcare system, he promoted complexity as a new paradigm to guide an understanding of how systems work in healthcare. Plsek identified certain features of healthcare which result in system complexity. These include the need for care to be based on continuous healing relationships and customised according to patient needs and values. Additionally the priority given to cooperation and collaboration amongst professionals, as opposed to preference being given to professionals’ fixed role over the system, results in non-linearity as a feature of healthcare services. Fraser and others (2003) reframed this in the context of UK healthcare. Although they coined systems in health as ‘agile’, these to a large extent mirror the qualities of complex adaptive systems. These complex characteristics of healthcare services include flexibility in roles within a team and rapid changeover (e.g. in operating theatres). These principles of agility have for example been used to redesign older people’s services in London. It appears therefore that complexity theory can not only be used as an explanatory framework but as a tool for improving healthcare services. Rhydderch and colleagues (2004) support an approach which precedes efforts to change general practice by efforts to understand it through complexity theory. The focus is on analysing processes and structures in a way that helps a team to have a sense as to what works well and what could be improved. Such a change may be brought about by focusing on the features of an organisation which pertain to specific complexity principles (Mitelton-Kelly, 2003). These are complex responsive processes (observing outcomes/’ripples’ of conversations, actions, decisions), relational dynamics (interactive dimensions including the interpersonal, social, technical, economic and global), adaptations and co-evolution (connectedness within and between systems and their environment) and self-organisation (emergent properties of the healthcare organisation which cannot be predicted in advance). A similar model has been used in primary care itself, as a methodological framework for analysing GP decision-making processes and how an evidence base is constructed by the GP (Mears & Sweeney, 2000). The suggestion here being that decisions are made a non-linear fashion and therefore complexity theory is an appropriate tool for an enquiry of this kind. In this vein, Hassey (2002) argued that complexity theory is a useful framework for understanding consultation in general



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practice, given that the dynamics between a patient and general practitioner seldom follow linear principles. Like general systems theory, complexity theory has also been used as a management tool to bring about change in the healthcare delivery both at the policy (Frenk, 1993) and organisational level (Litaker et al., 2006). Litaker and colleagues postulate that while complexity in healthcare is sometimes viewed as problematic, its presence may also be highly informative in uncovering ways to enhance health care delivery. This is particularly the case when complexity represents unique adaptations to the values and needs of people within a general practice and interactions with the local community and health care system. This implies that quality interventions in general practice should be implemented with a flexibility that acknowledges the uniqueness of and variation within primary care practices. The key is to develop a local quality improvement strategy that is acceptable to and works within the context of the specific general practice system. However, one of the limitations to Litaker and others’ study may be that the local context of a general practice in all its complexity can conversely be rather difficult to measure in order to create a tailored quality improvement initiative. The next section of this chapter will explore the limitations of systems and complexity theories in greater depth. Discussion Limitations of systems & complexity theories as theoretical frameworks Systems and complexity theories may well have their limitations as theoretical frameworks. Trochim and others (2006) identify the key limitation of applying a systems approach is the breadth of systems science and how overwhelming the vastness of the literature and the jargon within it can be to the healthcare services researcher. On the other hand the wealth of literature on this subject can equally be viewed in the positive light of a huge resource to draw on in the development of a theoretical framework for understanding poor performing general practices. The poor performing general practice, studied in the context of systems and complexity theories would be viewed as an organisational system of components interacting to achieve the goals of that practice. Although at times formalised through rules and organisational structures, these interactions are largely complex, non-linear and adaptive. Through positive feedback stable patterns of organisational behaviour are established. Boyett and Boyett (1998) argued that one of the key frustrations with systems theory is that there are no right answers about a given system, rather simply a range of actions is studied, alongside the variety of consequences they produce for the system. This implies that systems theory can be rather general, rendering it difficult to operationalize and evaluate empirically. This may be a particular problem for designing quality improvement schemes such as the QOF on a non-linear model. This does not of course mean that systems theory does not have its place in an explorative non-empirical study – one with the aim of improving understanding of poor performing general practices. Yet despite systems theory providing a conceptualisation, it may have poor explanatory power because its constructs are difficult to identify clearly and measure. However one could argue that such is the nature of the NHS itself. Robinson and Le Grand (1994) in a King’s Fund report into NHS reforms aptly wrote that ‘there are rarely simple



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answers to simple questions, usually because the questions are not actually simple’. This has implications for one-size fits all quality improvement initiatives such as the QOF, which are perhaps based on the assumption that simple questions which can be reduced to a set of measurable indicators can indeed be asked. Lastly, systems theory can be criticised for what is its subtle assumption that all parts of a system have equal power and make an equal contribution to the organisation as a whole. This suggests that in studying general practices it is important to analyse the distribution of power and relative influence of parts of the system on the whole organisation. To some extent the application of complexity thinking may overcome these limitations by viewing power as dispersed and decentralised within a system, with the overall behaviour of the system being the result of many decisions made constantly by individual agents (Holland, 1992). Yet complexity theory is not without its own limitations as a theoretical framework. One such limitation was highlighted by Levy (2000) who was writing about the practical implications of using complexity theory to further the understanding of how to improve organisational processes in general. He claimed that complexity theory, whilst furthering the understanding of organisational processes, is difficult to utilise in practice to bring about change. Yet there is some evidence that beyond the theoretical, the theory has been used to drive change in healthcare, for instance through enabling doctors to make adaptive strategic decisions (Ashmos et al., 2000) and to plan quality improvement initiatives in general practice (Litaker et al et al., 2006). Complexity theory has also been criticised for its lack of real time applicability. As it seeks to challenge the chain of cause and effect within linearity, the outcome which may emerge from the input may only be recognised post the event, in retrospect. Frenk (1993) claimed that it is crucial to develop a health system that not only has the adaptive ability to react to crises, but also has the skills to anticipate problems before they happen. Therefore the unpredictability inherent to understanding organisations though the lens of complexity theory, may render it limited in its application to understanding a range of phenomena, as well as to improving healthcare delivery. Furthermore, it has been claimed that ‘complexity’ may be an excuse for not striving to clearly understand the dynamics of a healthcare organisation (The Health Foundation, 2010). To an extent this supports the need for a theoretical framework to be a combination of linear and non-linear approaches. This suggests that organisational modelling, often quite static in nature, has the potential to offer a rich picture of poor performing general practices when combined with complexity theory. Furthermore, the players within an organisation may employ goal reaching strategies which are neither rational (linear) nor emergent (non-linear). Sweeney (2006) uses the example of gaming A&E waiting times targets to illustrate this point. It is clear that A&E departments encouraging ambulances to form queues outside and not letting patients disembark the ambulances until they were able to be seen is neither the product of rational thinking nor of feedback dependent emergence. There is a risk that through applying complexity theory as a general framework, the organisational processes of poor performing general practice may be abstracted out of its lived day-to-day reality, particularly at the individual level. Yet, perhaps this is simply the limitation of theoretical frameworks by their very definition. In defence of complexity and systems theories, research cited previously in this chapter has demonstrated their applicability



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in driving organisational change ‘at the coalface’. Furthermore, complexity theory allows for greater flexibility, not constrained by the rigidity of mapping how systems interconnect. Given the richness of general practice, complexity theory may well form a stronger theoretical framework for understanding its underperformance. Concluding Remarks To sum up it appears that the shortcomings of both systems and complexity theories centre on the difficulty of adequately measuring the phenomena of interest. There is a sense in the literature that complexity theory in order to survive as a useful theoretical framework must ‘move beyond the festival of bad metaphors’ (Axelrod & Cohen, 2001). Yet this perhaps begs the question of whether complexity can ever truly be measured in quantitative terms and that numerical quality improvement frameworks such as the QOF have only limited value in aiding the understanding of performance in general practice. Moreover, the underlying essence of good general practice may well lie in factors such as rapport, compassion and inter-personal skills to name a few (Ashworth & Kordowicz, 2010). As such targets are unlikely to capture all facets of performance, particularly in light of these qualitative meanings of quality of patient care in general practice. The drive to measure may paradoxically hark back to the reductionism that systems and complexity thinking attempts to challenge. Undoubtedly, the application of systems and complexity theories as theoretical frameworks for understanding poor performing GP practices would produce a study which moves beyond the observed components of a practice organisation to the holistic products of the interrelationships of those constituent parts. In this vein, Green (2010) argued that it is necessary to recognise that measures based on complexity science deliver answers that differ from those of linear models in meaningful ways. Yet, most importantly, the aim studying poor performing general practices is not so much to measure complexity, but rather to present a picture of it grounded in particular organisational cases. References

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The Effect of Globalisation on the Development of Underdeveloped Economy 12

The Effect of Globalisation on the Development of Underdeveloped Economy

A K M Asaduzzaman Patwary1

Abstract The existing wide disparities between the developed and the underdeveloped economies makes globalisation a tool for stultifying the industrialisation process, and by extension, retarding the growth and development of underdeveloped economies. Trade liberalisation, the cardinal instrument of globalisation ensures that industrialised countries have access to world markets, which enhances further industrialisation of industrialised countries while incapacitating the industrialisation process of the underdeveloped economies. The paper is an attempt to examine issues surrounding the paradox of globalisation and provide a framework for underdeveloped countries to circumvent the overbearing effect of globalisation in their efforts towards industrialisation, economic growth and development. Introduction Globalisation constitutes a critical motivation for development in the contemporary world of today as a result of the challenges it poses to nation states. The equation of global influence is fundamentally determined by a vibrant economy that is characterised by inherent ability to sustain a steady state growth path and development. Theories of economic growth (both neoclassical and endogenous models) converge on the fact that technology is the driving force of economic growth. The crucial factor in global economic equation is therefore technological capabilities, which makes proper utilisation of resources feasible. In turn, the utilisation of resources is a requisite process for attaining technology and generating economic growth. The current trend of globalisation underscores the critical role of industrial development in minimising the level of marginalisation associated with the prance of globalisation. The process of globalisation has given rise to greater competition towards markets and investments. Changes that are sweeping rapidly across the business world have forced businesses and nations to adapt by striving to change old economic behaviours and traditions. Industrial development has become an imperative recourse for underdeveloped economies, in that it must be seen as a key component of their development process. The role of the industrial sector in the newly industrialising countries has further intensified the appeal and the compelling urge for industrialisation for the third world countries. Considering that economic growth is a regeneration process which implies that lack of economic growth can regenerate itself, is it possible for underdeveloped economies to transform into vibrant economies for growth and development? Given the competitive edge

1 AKM Asaduzzaman Patwary is a Lecturer at London Churchill College. Mr. Patwary has undertaken depth secondary research for the completion of this article. The author bears all the responsibilities of the views expressed in the article.



developed economies have over underdeveloped economies and the tacit support for developed economies by such international global institutions as WTO, World Bank and the IMF, the task of articulating and implementing policies and strategies that could create a basis and sustain economic growth and development of underdeveloped economies have become very arduous. In recent times, the impact of globalisation on the development process of emerging economies have aroused closer and more critical examination of the vestiges of globalisation as a result of the persistent failures of such economies. The economic situation of most less developed economies have continued to degenerate and often afflicted by poverty, squalor, deprivation, frustration and insecurity among their citizenry, all of which culminates to political instability. This paper attempts to examine the effects of globalisation on underdeveloped economies and provide a framework for underdeveloped countries to circumvent the overbearing effect of globalisation in their efforts towards industrialisation, economic growth and development. The paper is organised into five sections: section one is introduction; two is a cursory analysis of the essence and imperatives of economic development; three dwells on the concept, implications and effects of globalisation on underdeveloped economies; four entails propositions on policies and strategies that could be useful to underdeveloped economies in mitigating the detrimental effects of globalisation to enhance their chances of economic growth and development and section five is concluding remarks. The Imperatives of Economic Development The current thinking in development encompasses sustainable growth, poverty reduction, human development, environmental protection, institutional transformation, gender equity and human rights protection. Development, the ultimate aspirations of modern economies, is the upward movement of the entire social system of a country. More poignantly, development is the attainment of a number of ideals of modernisation such as rise in productivity, social and economic equalisation, modern knowledge, improved institutions and attitudes, a rationally co-ordinated system of policy measures that can remove the host of undesirable conditions in the social system that has perpetrated a state of underdevelopment. Researchers and policy makers are rediscovering as we move from the decades of adjustment to a new period of reform and growth, the two most important principles of development; one being that during the early phases of development when an economy is no more than a collection of fragmented markets and region, the establishment of government institutions, the construction of infrastructure and the direct participation of the state in key areas of the economy are not only desirable but indispensable preconditions for the growth process; the second principle reflects the notion of the opening-up of investment opportunities through changes in the environment where individuals work, save and invest, in the process of which a basis for new ideas and investment opportunities are created (Gurria, 1992). Proper application of ideas is very crucial in the development process, which Romer (1992) incorporated as a factor of production and contrasted alternative development strategies based on using existing ideas and producing ideas. An essential precondition for economic development is economic growth. Kuznets (1971) defined economic growth as “a long term rise in capacity to supply increasingly diverse economic goods to its population; this growing capacity is based on advancing technology and the institutional and ideological adjustments that it demands” (Todaro, 1994). Increases



in the outputs of major sectors of an economy, such as manufacturing and natural resource, either as a result of increases in the use of inputs or improvement in technology, will lead to economic growth. Key macroeconomic indicators such as the gross national product (GNP), gross domestic product (GDP) and net national product (NNP) are used, among other economic parameters, as measures of economic growth performance of an economy. A progressive increase in the outputs of major sectors of an economy is a manifestation of the attainment of economic growth. Basically, economic growth is driven by a process that is generated and sustained by the effective utilisation of a country’s economic resources. The challenge facing countries in attaining economic growth is that of creating an enabling atmosphere for essential use and the harnessing of economic resources. This challenge has become even more intensified by an increasingly interdependent global economic dispensation that tends to undermine and marginalise indolent economies. This has given rise to disparities among countries of the world in terms of their levels of attainment of economic growth. While some countries have achieved high rates of economic growth, which have led to enhanced standard of living within such countries, other countries of the world have performed dismally, attaining little, and in some cases nothing in terms of economic growth which translates into very low standard of living of their citizenry. Some economies have witnessed a sudden and remarkably very high growth rates even above the world average. This achievement is being referred to as growth miracles. On the other hand those economies that have performed abysmally below world average are referred to as growth disasters. Real productive activities engender economic growth by ensuring a continuous improvement in the methods of production, discovery of new resources and thus creating the necessary conditions for effective utilisation of resources. A multiple sector positive performance is essential for the growth of the overall economy, but a sector of the economy that attracts higher levels of economic activities could stimulate the productive fibre of other sectors towards real production and provide the requisite impetus for sustainable growth of the economy. The various models of economic growth, which are broadly categorised into classical and endogenous growth models (McCallun, 1996), illuminate the crucial essence of the effective use of factors of production as the veritable mechanism for attaining economic growth. The significant deduction from the convergent expositions of the models is the crucial role of technology as the catalyst for economic growth based on the stimulating and complementing role of production and consumption, as a necessary condition for sustainable growth. Production is meant to provide for consumption, which originates from the urge of the household to consume to attain welfare. Since the more the better, the insatiable motivation to improve on the variety, quantity and quality of consumption leads to discoveries of more sophisticated methods of production, through which technology is derived and acquired to form the bedrock of economic growth. A coordinated institutional motivation for effective utilisation of resources is therefore a fundamental condition for generating a sustainable growth path. A synthesis of the endogenous growth models (see for instance, Sandilands, 2000) points to the fact that the existence of industrial production on one hand, and demand for the products of the industries on the other hand, creates opportunities for market expansion, competition and specialization. Through a favourable “forward linkage” effects, an endogenous self-perpetuating process of growth emerges and feeds on it almost automatically. By the prompting of internal and external economies of scale, the process of industrial production evolves into higher and more sophisticated levels of production, giving rise to further



specialization, new products and quality improvements, leading to technological acquisition and economic growth. Adaptation to a growing market, widened by international trade, stimulates industrial production and provides additional impetus to the attainment of economic growth. The dimension of international trade has given rise to the contemporary challenges posed by globalization. The export-led economic growth hypothesis is hinged on the stimulation of production as a result of larger demand arising from international trade, which induces economies of scale. This hypothesis was inspired by much earlier trade-led growth expositions by classical economists such as Adam Smith and David Ricardo. Thus, industrialization-driven resource utilization process is the key to economic growth, in that industrialization ensures production and generates positive externalities for spearheading the economic growth path. However, the process of globalization has given rise to greater competition towards markets and investments. Economic development springs-up from economic growth in that the process of generating economic growth give rise to the attainment of basic elements of development and amplifies the urge for further development. Development is like a jigsaw puzzle; it is easier to fit in a particular piece when the adjoining pieces are already in place. Once the difficult parts of the puzzle have been solved, the remaining pieces begin to fall into place almost automatically. Ohiorhenuan (200) asserts that the most striking aspect of the evolution of development thinking over the last fifty years is the growing acceptance that development is a journey, not a destination, and that the process may be more important.

Although development has universal principles, each society (country) of the world requires adopting different approach based on its inherent peculiarities to initiate and sustain the process of development.

The fundamental convergent proposition on development is the provision of basic needs such as food, education, health, safe drinking water and shelter to the citizenry. It is also widely accepted that this task is better and more appropriately performed by public institutions. This underscores the critical role of the government in the process ofeconomic development. Public expenditure is expected to stimulate the factors of production towards effective utilization of resources, enhancement of the value-adding capacities of the factors of production and thus generating the process of sustainable growth and development of the economy. The role of public expenditure evolves in the course of development since the fiscal machinery is hinged on the changing needs of the economy, which presupposes that expansion in public expenditure reflects in the growth of the economy in consonance with the varying allocation and distribution needs of the economy. The economic and social progress of any economy depends largely on its government’s ability to generate sufficient revenues to finance an expanding programme of essential, non-revenue yielding public services (Todaro, 1994). The government activity or public expenditure version of endogenous growth model argues that various activities of government such as provision of infrastructure services, the protection of property rights and taxation policies could affect the level of baseline technology and thus affects the long-run per capita growth rate. Assuming there is no population growth, the economy can exhibit endogenous growth as a result of contingent pattern of public expenditure. This implies that public services are complementary with the private inputs in the sense that an increase in government expenditure raises the marginal products of labour and capital to individual firms. It is assumed that government purchases a portion of private output, which it uses to provide free public services that is non rival and non excludable. Firms benefit from this and thus maximises profit by equating the wage rate, which equals the after tax marginal product of labour, with the rental rate, which equals the



after tax marginal product of capital, which enhances the aggregate output of the economy. Government maximises the representative consumer’s inter-temporal utility based on the social optimal growth of the economy. Through the principle of “scale effect”, an increase in labour raises the after tax marginal product of capital and expands the social marginal product in a parallel way, which in turn, leads to higher per capita growth rates. However, congestion on government services affects production negatively and retards growth of the overall economy invariably. If a public good is used by more than necessary number of firms, congestion sets in and this leads to inefficiency of the production process. Adequate provision of basic needs of the society through the state-controlled machinery of government motivate private investments, which enhance the productivity of the factors of production and leads to growth and development of the economy. The state has a great responsibility in creating favourable conditions for the interplay of societal forces and directing the economic dispensation towards a path of growth and development. Given that development is a process not an event, the role of the state is continuous and does not end at a given level of economic development even though the scope and nature of such roles may change to reflect the intricate dynamics of society. The key to development is the continuing development of human resources and their involvement in creating and using ideas in the economic, social and political dispensation of the society. The social and material condition of individuals within the society should be paramount in policy articulation and implementation. Thus, development is an inclusive process that entails the aspirations of the people of a given society, who are more familiar with their environment; as such can more appropriately diagnose their problems, articulate their vision and design solution for any identified problem of their society. A co-ordinated institutional motivation for effective utilisation of resources is therefore a fundamental condition for generating a sustainable economic growth path that leads economic development . Concept, Implications and Effects of Globalisation on Underdeveloped Economy Globalisation is inherent to human co-existence and an integral part of human history. It is an international reflection of the interdependent nature of human co-existence. The history of the world has been associated with the process of globalization at different levels relative to conditions at different times. The economic dimension of globalise action is the most formidable and has been the driving force for the political and social aspects. For instance, European cultures found their ways into other parts of the world through the Colonisation of colonies which was spurred by the industrial revolution in Europe. The logic of the colonisation process was to create a more integrated world economy controlled by the metropolitan countries as a result of the revolutionary changes in the way production was organized in Europe that gave it a competitive edge over the rest of the world. The concept of globalisation describes the nature in which the economies of different countries of the world are interrelated and integrated into a larger economic enclave. The praxis of globalization has caught up with virtually all countries of the world today, which are faced with the realities of increased integration of world trade and capital flows? facilitated by the rapid growth of information technology and the opening up of hitherto closed economies. The trend of increased integration of national economies with the rest of the world is gradually evolving into a coherent global economy that is hinged on free markets, investment flows, trade and information. This has the tendency of shifting autonomous



economies into the global market by systematically incorporating such autonomous economies into a global system of production, distribution and consumption. Although globalisation is not a new phenomenon, the speed with which it has engulfed countries of the world as a result of fast growing information technology has generated concerns as to its effects on underdeveloped economies. The implication of globalization is embodied in the statement by Peter D. Sutherlan, the chairman of Goldman Sachs International and of the Overseas Development Council, in the IMF’s 1998 per Jacobson lecture; “The qualitatively new world economy that has emerged under globalization is characterized by an extraordinary volume and pace of international capital flows and a structure in which the production and marketing of goods and services are integrated across national borders”. The emergence and the changing structure of the world economy is the most profound implication of the globalisation process, which has altered virtually all aspects of business, industry and manufacturing. Manufacturing activities takes place in different forms at different locations with different product models to take advantage of differences in societal conditions. Irrespective of boundaries between countries and ownership profile of firms and technological wherewithal, firms can establish production units in different places across the world. Scientific and technological breakthroughs have facilitated an international information system that makes it possible for people across territorial boundaries to be aware of new goods and services, whichever country such new goods and services are produced. Firms across borders gain from externalities such as knowledge spillovers that springs from the quality-ladder process of endogenous growth model analysis. The process of globalisation has opened great opportunities for the exploitation of economies of scale and scope, making for rapid growth and conferring comparative advantage on those with access to it. A world economic system has given rise to a world capital market. The flow of capital around the world is being facilitated by the nature and dynamic operations of the international economic dispensation. The integration of the capital market ensures the movement of capital to the countries of the world where there is higher returns for capital, which enhances private capital gains. It is now widely recognized that finance capital responds rapidly to new profit opportunities on the basis of sound economic fundamentals. Trade liberalisation has been the major policy thrust that drives the globalisation process. The significance of international trade in spearheading economic growth and development process underlies the essence of establishing formidable international trading rules to sustain the dispensation of the world economy. Institutional policy instruments are used to consolidate the gains of free trade around the world. The formation of the General Agreements on Tariffs and Trade (GATT), which later metamorphosed into the World Trade Organisation (WTO), is to serve the purpose of institutional policy framework for ensuring compliance with free trade policies by countries of the world towards achieving, sustaining and consolidating the globalised world economic structure. The process of globalisation has both positive and negative effects to different category of economies of the world. Competition among firms to get a good a share of the large world market leads to; specialisation and efficiency; better quality products at reduced prices; economies of scale in production; technological and managerial improvements. World output of goods and services will increase both in quality and quantity which is expected to translate into higher living standards of the world population. Rauch and Trindade (2003) established that free information flow across countries leads to increased



international substitutability of factors of production with emphasis on labour. However, Verdier and Theonig (2003) argued that firms and countries tend to adopt the strategy of defensive-skill-biased innovation to curtail the leapfrogging of their technology by others as a result of the process of globalisation. Developed economies are the main actors of globalization since it is about the expansion of markets for goods and services. Underdeveloped countries, which are not well equipped to produce goods and services that can withstand competition with others, are not likely to be interested in market expansion. While availability of goods and services produced by firms motivates the need for wider markets, availability of markets in turn, provides impetus for further production of goods and services. Inspiration from economic growth and development analysis implies that effective use of resources, which is the critical stimulant for the process of economic growth and development, is hinged on industrial production. The most discernible characteristic of underdeveloped economies is lack of the infrastructure and motivation for the production of goods and services. This has constituted into a serious setback to industrial production in such countries, which has manifested into difficulties in meeting the basic needs of their domestic economies for goods and services. A cycle of persistent underdevelopment is emerging in these countries as a result of persistent non utilisation of their domestic resources for purposes. To meet basic consumption requirements, demand for goods and services produced by other economies becomes inevitable, but development of any society evolves from the society’s peculiar needs and the strategies towards meeting such needs by the society. Goods and services produced by other societies based on certain consideration have limitations in responding to developmental needs of another society. Due to lack of industrial production, the underdeveloped economies cannot reap the benefits of learning-by-doing and other positive externalities such as knowledge spillovers, Research and Development (R&D) and technological leapfrogging. The unutilised resources of the underdeveloped economies find their ways to the developed economies for use as raw materials for industrial production. The globalisation process sustains this trend using the overbearing rules of international institutions that are largely controlled by the industrialised countries. Competition and the benefits of competition spurred by the process of globalization is confined to countries that have taken the advantage of “first-mover” in game theory conceptualisation, but in this case forming a cluster of first mover players and making it difficult for other players of the game to make any effective move. The activities of international organisations such as the General Agreement on Tariff and Trade (GATT) later transformed into the World Trade Organisation (WTO), the International Bank for Reconstruction and Development (IBRD)-more known as the World Bank, the International Monetary Fund (IMF), the Organisation for Economic Co-operation and Development (OECD) and the G-7(8), are meant to strengthen and institutionalise the prevailing process of globalisation. Essentially, the activities of these institutions are at variance with the internal and evolutionary requisites of economic growth and development of underdeveloped economies by imposing on them policies that do not encourage industrial production. There has been a web of control around underdeveloped countries that has greatly eroded their national policy sovereignty. The rapid integration of financial markets has significant influence on national policy makers in the conduct of monetary and fiscal policies, which has tremendously undermined the achievement of macroeconomic stability of underdeveloped



economies. This has also being a source of spreading shocks and disturbances from one financial market to the other. Globalisation tends to encroach on the internal process of generating and sustaining the process of economic development by internal mechanisms of the society and eventually excludes a large section of the society from the process. The gamut of globalization ascribes roles and functions to various economies, which imposes, without consensus, an international division of labour that is lopsided against underdeveloped economies. The industrialised countries, being the key actors of the process, are very selective in the application of globalization principles. They encourage free trade and free mobility of capital but apply restrictions on the free mobility of labour. While labour mobility between developed countries is recognized as necessary for sustaining their level of economic activities, mobility of labour between underdeveloped and developed countries is restricted and controlled. International capital flows have flourished through the process of globalisation and underdeveloped countries have received a fair share of these flows. However, the flows of international capital to underdeveloped economies have not stimulated the process of economic growth and development because such flows are mainly in the form of official development finance, export credits, international bank loans, and bond issues with sort term maturity, which serves the purpose of facilitating the import dependent behaviour of the underdeveloped economies, rather than trigger a process of domestic production that could evolve into industrialization process. The foreign direct investment component of the flows are directed to the service sectors of the economy that have limited or even no linkage with the manufacturing sectors of the economy of the underdeveloped countries. International capital flows have been associated with high risk of volatility, which recently manifested in the East Asian financial crisis. The impact of the volatility of the international capital flows on the underdeveloped economies have culminated into persistent inflation, rise in interest rates, lagging wages and falling consumer demand. This has compounded the unfavourable investment climate of such economies. Uncertainties, falling demand and higher interest rates combine to cause a fall in investment, decline in GDP and rising unemployment, thereby paving the way for recession to set in (Obadan, 1999). The pattern of international flows has been in accordance with the changing directions, signals and dictates of the forces of globalisation. For instance there was a burst in global capital flows following the collapse of the Bretton Woods system of fixed exchange rate in the early 1970s. Eatwell (1996) observed that, the fluctuating rate system that replaced it stimulated capital flows with a powerful cocktail of the carrot of speculative profit and the stick of financial risk, laced with the proceeds of extensive arbitrage. Other significant factors that led to the sudden and dramatic increase in capital flows in the 1970s were the two major oil price hikes and the need to recycle the attendant petrodollars. At the onset of the debt crises that afflicted most underdeveloped countries in 1982, capital flows dropped sharply and during most of the 1980s private financing to underdeveloped countries was at a standstill. In the 1970s, aggregate net resource flows maintained an upward trend, rising from $21.1 billion in 1970 to $162.1 billion in 1980 but declined in the 1980s to $93.6 billion in 1985. In the 1990s, aggregate net resource flows to underdeveloped countries experience a rising trend, moving from $101.9 billion in 1990 to $284.6 billion in1996, increased further to $300.3 billion in 1997 against a favourable global environment marked by continued growth in demand from industrial countries, low inflation, moderately low interest rates,



continued liquidity in international capital markets and strong economic performance of major borrowers (Obadan, 1999). The worsening plight of most underdeveloped economies despite the phenomenal increase in international capital flows is indicative of the ineffective application of the flows to real productive investments that could stimulate the process of industrialization of such economies. Beside the need for appropriate macroeconomic environment to enhance the absorptive capacities of the underdeveloped economies, the strategic interest of domestic economies of the underdeveloped countries and that of owners of international capital are in conflict. An appropriate situation is when surges in capital inflows are clearly attracted by sustainable improvements in competitiveness or potential productivity growth-so that the effects on activity, prices, and trade balance are less of signs of overheating than equilibrating adjustments—the policy response could be focused on improving the absorptive capacity of the economy rather than on containing the destabilizing effects (Schadler, 1994: 21). However, if policy makers in underdeveloped countries are made to be in tandem with the dictates of globalisation, it will be difficult to create the requisite macroeconomic condition for effective utilization of both domestic resources and international capital flows. The situation has been worsened by a large quest for international capital flows by the underdeveloped economies as a major strategy of their economic development process. The rules binding international capital stifles domestic production and retards the growth of such economies. The attendant loss of policy making sovereignty has weakened the institutions of governance of underdeveloped countries and effective governance is a critical factor in motivating the domestic resources towards attaining economic growth and development. The governments of most underdeveloped countries give premium to satisfying the needs of the developed industrialised countries, while the needs of their citizenry (the electorates) are given secondary considerations. The absence of the crucial elements of responsive governance emanating from the overbearing influence of globalisation is fundamental to the lack of effective policy that could engender economic growth and development of underdeveloped countries. The interdependent essence of the ideals of globalization is not in existence. Countries that are underdeveloped have been at the receiving end of the prevailing process of globalisation. They serve the purpose of providing impetus to further development of developed countries while they continue to be poorer. The poverty level in some underdeveloped countries continues to worsen. The 1999 Human Development Report warned that globalization may actually increase human insecurity and marginalize the poor which implies that in the era of globalization, there is an increasing danger of growth actually excluding and dislocating large sections of the world population. The governance process are weak and non responsive to the fundamental aspirations economic growth and development of the countries. The lopsided effect of the prevailing process of globalization is assertively captured by Stiglitz (2002): “Today, few-apart from those with vested interests who benefit from keeping out the goods produced by the poor countries-defend the hypocrisy of pretending to help developing countries by forcing them to open up their markets to the goods of the advanced industrial countries while keeping their own markets protected, policies that make the rich richer and the poor more impoverished-and increasingly angry”. This situation is not healthy for the underdeveloped countries as well as for the global economy. The extent to which the few industrialised countries can provide the needs of the world economic system is limited by their capabilities and peculiarities. A significant proportion of the world’s population (human resources) and other resources are unutilised,



which implies that the world economy is operating far below its capacity, resulting into mass unemployment and attendant economic, social and political disequilibria of the world economic system. The intuition of the “scale effect” means that economic growth and development is dependent on the creation of new ideas, derived from human capital drawn from a pool of population. Ideas do not automatically emanate from population. Certain processes are needed to trigger the inclination towards ideas. If a large chunk a given population are not made active to participate in the process of creation of ideas, the volume and variants of innovation that could spring up from the process is reduced. The arguments of semi-endogenous economic growth analysis emphasize the fact that seemingly policy invariant parameters, such as population could be significant source of generating the process of economic growth and development. Economic growth, the imperative requisite to development, is tied to increase in productivity, which, in turn, depends on new ideas (designs) through R&D, which is dependent on an exogenous variable, the labour force or population. The spill-over effects of the negative externalities of the underdeveloped economies have crippling effects on the developed economies and leads to suboptimal operation of the larger world economy. Policy Strategies for Development The challenges of economic development for underdeveloped countries in the face of growing assertiveness of the forces of globalisation are arduous. Considering that economic development is attained through the utilisation of available resources to enhance the social and economic well-being of the society, it is only the people in any society that can generate and sustain economic development. Countries are expected to provide essential services to the large spectrum of the society in a regenerating process of discovery and widening the scope of its dispensation towards an integrated and cohesive national economy in which linkages between various sectors and regions are entrenched such that every member of the society is given a fair opportunity to advance his/her material condition. It follows that industrialisation is a necessary step towards attaining economic development, which requires a sound and encompassing macroeconomic policy implementation to flourish. However, globalisation infringes on the ability to implement internally cohesive macroeconomic policies for developing countries since they are to adhere to the basic rules of the international economic system. There is therefore the lack of policy autonomy as a result of policy autonomy is critical to the size of policy multipliers. There are therefore two main sources of the challenge to economic development that underdeveloped countries are contending with; one is to identify the needs of their society and motivate the society towards providing these needs in a sustainable industrialisation process; second is to meet the needs of the global economy by adhering to its principles and rules. These two are incompatible as such the adoption of a strategy of convergence between them that can effectively lead to the success of attaining economic growth and development requires a combination of political and economic tools. Stiglitz (2001) averred that globalisation has a large potential for the world economy and can be of huge benefits to underdeveloped countries and even a viable elixir for the development of underdeveloped economies of the world, suggesting various reforms of the international economic and financial institutions (WTO, The World Bank, IMF) and a fundamental transformation of the governance process of especially underdeveloped countries as a necessary condition for a positive impact of globalisation on the development process of underdeveloped countries. However these reforms are contingent on the developed economies that are satisfied with the way and manner globalisations is being conducted and have been very active in sustaining it. It must be recognised that the rule of the game of



globalisation is self first, as such the industrialised countries do not conceive a catch-up of other economies as favourable to their interest. The artificial construction of the world economy by the industrialised countries is meant to serve the purpose of economic and political dominance of the group of industrialised countries, over other countries, but they needed to establish a convergence among them in order to minimise the likely effects of undermining each other. Conclusion The process of globalisation has submerged the growth and development potential of underdeveloped economies by establishing rules and principles that are in conflict with the requisite conditions of their evolutionary process. Globalisation tends to ascribe functions to various economies thereby creating an international division of labour that accentuates the disparity between the most developed (industrialised) countries and the underdeveloped ones. This has been detrimental to the effective use of economic resources of the underdeveloped economies and regenerating a cycle of underdevelopment and its concomitants such as poverty, famine, health hazards, and insecurity, among others. Lack of effective use of resources by underdeveloped countries means they cannot provide the basic needs of the society through domestic production that could generate positive externalities such as learning-by-doing, spill-over effects and technology acquisition that could trigger a process of industrialisation, economic growth and development. The negative effects of this situation can spill over to the larger world economy which operates at suboptimal level. The growth and development of the underdeveloped economies could be of tremendous benefits to the world economy but globalisation encourages the self-first principle of competition. However, underdeveloped countries can initiate grassroots production through the promotion of SMEs to meet their basic domestic needs and tailor their participation in the process of globalisation along serving the purpose of this initiative. This will, if properly established and sustained over the time, generate production externalities that could spearhead industrialisation, economic growth and development for a virile and prosperous economic future for the underdeveloped countries of the world, which will inadvertently; strengthen their status within the confluence of globalisation. References

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Small and Medium Scale Enterprises and Economic Development in Developing Countries; Nigerian Perspective

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Chisomje Ezeaku1

Abstract This paper discusses the contributions of SME to economic development and the challenges faced by the SME’s in realising their full potentials with particular reference to Nigeria. SME’s lead to growth in employment rate, enhances competition and leads to increase in efficiency, innovation and aggregate productivity. Despite the contributions of SME’s to economic development in developing countries, their development is largely hindered by a lot of challenges which includes; poor infrastructure, lack of relevant technology, poor access to medium term and long term finance, poor managerial skills, access to international markets, regulatory controls, bureaucratic bottle necks. The paper made recommendations for different stakeholders like the governments and entrepreneurs on policies and programmes to introduce and effectively implement in order to achieve the full potentials of the SME’s towards economic development. Introduction The history of small businesses in economic development has stirred up divergent views in the world. In the past, small businesses were seen as a hindrance to economic growth by attracting scarce resources from their larger counterparts (Audretsch et al, 2000) while large corporations capitalising on economies of scale has been seen as the driving force behind economic growth and development (SBA 1998). Recently, the importance of small and medium enterprises to economic growth in both developing and developed countries is well recognised and established in literature. Millineux (1997) states that SME’s rather than multinationals are the largest employers of labour. SME’s account for about 95% of firms and 60%-70% of employment in OECD economies (OECD 2000) and 90% of businesses & between 50%-60% of employment worldwide (Raynard and Forstater, 2002). In Africa, SME’s represent over 90% of private businesses and contribute more than 50% of employment and GDP (Abor and Quartey 2010). Small and Medium Enterprises occupy a place of pride in virtually every country or state. Because of their significant roles in the development and growth of various economies, SME’s have been referred as the ‘engine of growth’ and catalyst for socio-economic transformation of any country (Ogbo and Nwachukwu 2012). SME’s therefore have a special role in stimulating growth, reducing poverty and increasing employment in developing countries especially Nigeria. In Nigeria, governments in the past have shown much interest in ensuring adequate development of the SME’s by establishing various schemes and

1 Chisomje Ezeaku is a lecturer in Business Economics at London Churchill College. Before this, he has worked as a Business Analyst and Consultant in a few small and medium sized firms. His research interests are on businesses, poverty and development in developing countries. He is a graduate of Nnamdi Azikiwe University Nigeria and City University London.



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specialised financial institutions to provide funds for the sector (Sanusi 2003) though some of these schemes did not really achieve their desired objectives. We will have a closer look at some of them later. The rest of the paper will be divided into; definition of Small and Medium Scale Enterprises, SME’s in developing countries, SME’s and economic development, the Nigerian government and SME, challenges faced by SME’s, policy recommendations and conclusion. Small and Medium Scale Enterprises (SME); Discussion There has not been a consensus definition for SME’s. Different authors, groups or even countries have defined SME’s in different ways. It has been defined with market capitalisation, number of people employed, turnover etc. The European commission for example has defined SME’s largely in terms of the number of people employed by the firm which are as follows; Micro Enterprises; 0-9 employees Small Enterprises; 10-99 employees Medium Enterprises; 100-499 employees Lopez and Aybar (2000) and Michaelas (1999) consider firms with fewer than 200 employees and sales below € 15 million as small. United Nations Industrial Development Organisation (UNIDO) in its own part defined SME’s based on the number of employees but had different cut off for developing and developed countries. For developed economies, it is given as follows; Small Enterprises; less than 99 employees Medium Enterprises; 100-499 employees Large Enterprises; more than 500 employees For developing countries, it is given as follows; Micro Enterprises; less than 5 employees Small Enterprises; 5-19 employees Medium Enterprises; 20-99 employees Large Enterprises; more than 100 employees. In the Nigerian context, (Udechukwu 2003) described SME’s as follows; Micro Enterprise; less than 10 employees, Small Enterprise; 11-100 employees Medium Enterprise; 101-300 employees Large Enterprise; more than 300 workers Though the definitions are different, we can observe a lot of similarities with them which will guide the author of this research in the work. SME in Developing Countries SME’s are a very heterogeneous group and are found in a wide array of business activities, ranging from an artisan producing agricultural implements for the village market, the coffee shop at the corner, software firms selling in overseas markets, and a medium-sized automotive parts manufacturer selling to multinational automakers in the domestic and



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foreign markets (OECD 2004). Fisher and Reuber (2000) enumerated a number of characteristics of SME’s in developing countries under the broad headings; labour characteristics, sectors of activity, gender of owner and efficiency. In terms of activity, they are mostly engaged in retailing, trading or manufacturing which varies from country to country as well as whether the firm operates in the urban or rural area, the consumption patterns, access to international markets and availability of raw materials. Most SME’s are one person businesses and make up more than half of the SME workforces in developing countries while their family members who are mostly unpaid, make up another quarter of the workforce (Abor and Quartey 2010). They mostly have labour intensive production processes, centralised management and limited access to long term capital (Udechukwu 2003) and revolve around owner managers, dispersed throughout the country and closely attached to the products that launched them (Olorunshola 2004). In Nigeria, according to Onwumere (2000), SME’s are characterised by the following, poor managerial skills due to their inability to pay for skilled labour, poor product quality, absence of research and development, over dependence on imported raw materials and spare parts, lack of succession plan, lack of access to international market, high production costs due to inadequate infrastructure and wastages as well as lack of adequate financial book keeping. Measuring efficiency in SME’s varies both within and across industries. Most studies in developing countries indicate that smallest firms are the least efficient and there is some evidence that both small and large firms are relatively inefficient compared to medium scale enterprises (Little et al 1987). Acs et al (1999) states that many small firms bring innovation to the market place though the contribution to productivity takes time putting the larger firms with more resources at an advantage to adopt and implement the innovations. SME’s and Economic Development SME’s has been agreed by many researchers to be important to both economic and social development of developing countries while many others still oppose the view. Biggs (2002) challenged the assumptions of pro SME views and argues that large firms may exploit economies of scale and more easily undertake the fixed costs associated with research and development (R&D) with positive productivity effects. Another set of researchers challenge the validity of considering the size of firms as an exogenous determinant of economic development. They argue that industrial organisation literature posits that natural resource endowments, technology, policies and institutions help determine a nation’s industrial composition and optimal firm size (Kumar et al 2001). Another view which Beck et al (2003) termed business environment view, doubts the crucial role of SME’s but instead stresses the importance of the business environment facing all firms big and small like well defined property rights and effective contract enforcement that encourages competition and commercial transactions. Despite these sceptical views, SME’s provide numerous benefits (World Bank 2004). In many industrialised countries, more than 98% of all enterprises belong to the SME sector. 80% of total industrial labour force in Japan, 50% in Germany, and 46% in USA are employed in smaller firms (Udechukwu 2003). SME’s create jobs, enhance competition and entrepreneurship and thus have external benefits on economy wide efficiency, innovation and aggregate productivity (Beck et al 2003, 2005 and Ezeaku 2007). Their business activity is generally performed closer to stakeholders, allowing them to be firsthand recipients of expressed needs which by sheer proximity, are continuously confronted to participate actively



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in the development of their environment (Sachdeva and Panfil 2008).SME’s seem to have advantage over their larger scale competitors in that they are able to adapt more easily to market conditions and withstand adverse economic conditions because of their flexible nature (Kayanula and Quartey 2000). SME’s equally contribute to economic development through the utilisation of local raw materials and help in the transformation of indigenous technologies. They lead to the promotion of even development and reduction of income disparities due to their regional dispersions and their high labour intensive nature (Salami 2003). Looking from another angle, the SME’s are not just suppliers but consumers as well thus their demand for industrial and consumer goods will equally have a multiplier effect on the activities of their suppliers thus increasing productivity and growth further. The Nigerian Government and SME’s Having seen the importance of SME’s, successive Nigerian governments have introduced different programmes and policies to encourage the development of SME’s in the country. Specifically, the government has been active in funding and setting up of industrial estates to reduce cost, establishing specialised financial institutions like Nigerian Industrial Development Bank, facilitating and guaranteeing external finance by the World Bank, African Development Bank and other financial institutions, establishment of the National Directorate of Employment-which initiated the setting up of new SME’s, establishment of National Economic Reconstruction Fund to provide medium and long term loans to SME’s particularly those located in the rural areas and provision of technical training and advisory services through industrial development centres (Sanusi 2003). Some have been successful while some did not meet their objectives. In this section, we are going to look at some of the policies and programmes after which we will then look at some of the factors that generally hinder the success of the SME’s. Industrial Development Centres (IDC’s) The government has established various IDC’s in the past with the first one being set up in Owerri in 1962 with subsequent ones being set up in different cities across the country. The implementation of the IDC’s was poor and the desired results not fully achieved because they were inadequately equipped and poorly funded. Financial Institutions Various specialised financial institutions have been set up in the past with the aim of boosting the growth of businesses in general and SME’s in particular. Nigerian Bank for Commerce and Industry (NBCI) was established in 1973. It operated as an apex financial institution for SME’s and also administered World Bank loans to the SME’s. It suffered from operational challenges which led to its insolvency in 1989 and absorption into Bank of Industry in 2002. Another financial institution is the Nigerian Industrial Development Bank. It was established in 1962 with the mandate of providing medium and long-term loans for investments in industrial activities. Due to financial and other constraints, it was merged with other institutions like NBCI to form the Bank of Industry. National Directorate of Employment (NDE) This was established in 1986 and operates two credit guarantee schemes complemented by an entrepreneur development programme. The two schemes operated by NDE are Graduate Job Creation Loan Scheme GJLS) and Mature People’s Scheme (MPS). Loans under the two schemes are repayable over a five year period with low interest rates.



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National Economic Reconstruction Fund (NERFUND) This was set up in 1990 as a result of the Structural Adjustment Programme embarked by the Nigerian government in 1986 which led to the tightening of monetary policy thus making it very difficult for the SME’s to secure finance for their activities. The main mandate of the fund was to offer medium and long term loans at a concessionary rate of interest to the SME’s. Its major challenge was the devaluation of Naira which worsened the effect of debt servicing. It was merged with other institutions to form the Bank of Industry Challenges to SME Development Despite the enormous benefits that SME’s contribute to economic development, a lot of challenges affect their ability to realise their full potentials. SME development is hindered by a lot of factors like poor infrastructure, lack of relevant technology, poor access to medium term and long term finance, poor managerial skills, access to international markets, regulatory controls, bureaucratic bottle necks etc (Gockel and Akoena 2002). Poor infrastructural development tends to increase costs enormously and lead to increased inefficiency due to reason that the firms try to provide the basic utilities like electricity and water for their business. On the part of the technology, many of the SME’s don’t have access or cannot afford to purchase relevant technologies that might help in boosting their business performance. In many of the developing countries, technologies like internet are still not easily available. For example, in Africa, the internet penetration rate is 15.6% compared to 78.6% in North America (see table below)



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Adequate financing is another challenge faced by SME’s. Cook and Nixon (2000) states that notwithstanding the recognition of the role of SME’s in the development process in many developing countries, their growth is always constrained by limited availability of financial resources to meet a variety of operational and investment needs. Many a times, the SME’s have poor project proposals, inadequate collateral and inadequate financial documentation which make the banks see them as high risk ventures thus unwilling to make credits available to them. From the table below, we can see that the percentage of credit to small businesses compared to total credit available to private firms has been reducing for most of the years falling from the highest percentage of 27.04 in 1992 to 0.40% in 2011

Period Commercial Bank Loans to SSE’s (% of Total Credit)

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

27.04 17.41 14.32 15.86 16.60 13.12 11.53 10.43 7.58 6.21 8.68 7.49 3.62 2.54 0.99 0.85 0.17 0.17 0.15 0.40

Commercial Bank Loans To Small Scale Enterprises in Nigeria Source; Central Bank of Nigeria Statistical Bulletin

The lacks of managerial know how, places significant constraints on SME development. Even though they can attract motivated managers, they can hardly compete with large firms (Abor and Quartey 2010). Some of the reasons for poor managerial know-how might be from lack of finances to hire the services of trained and competent professionals, limited or no training, desire to keep the whole business in the family among others. Regulatory controls and bureaucratic bottle necks is another factor that causes a lot of challenge to SME development. High start up costs for firms including registration and licensing costs can increase the burden on the SME’s. For example, the World Bank Doing Business Report for 2013 shows many developing countries ranked low in their ease of doing business with Nigeria ranking 131 out of 185 countries. The report shows that it takes average of 34 days to start a business in Nigeria in contrast to average of 12 days for the OECD countries.



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Indicator Nigeria Africa OECD Procedures (Number) 8 8 5 Time (Days) 34 34 12 Cost (% of income) 60.4 67.3 4.5 Paid in Min Capital (%of income per capita)

0.0 116.0 13.3

Source; World Bank Doing Business Report for 2013 All these challenges have negative effects on the development of the SME and thus require policies and programmes by the government and other organisations to tackle them in order for the SME’s to have easier conditions to achieve their full potentials. Recommendations Having seen the importance of SME’s in economic development, some of the past policies in Nigeria and challenges faced by the SME’s, the following recommendations are being made in regards into tapping into the full potentials of the SME’s to accelerate economic development. Infrastructural Development Poor infrastructures hinder the growth of the SME’s and increase their cost of production unnecessarily. Upgrading and building of new infrastructures like roads linking the rural areas to the urban areas should be embarked upon by the government. Electricity supply and proper security should be provided as well. This will go a long way in promoting SME’s and significantly reduce the costs associated with their business. Finance Lack of access to proper finance has been attributed as a major factor hindering the development of SME’s. Governments should introduce and properly implement policies and measures to encourage availability of capital to this subsector. The development banks, fiscal incentives and loan guarantee schemes should be properly managed to achieve their mandates and unnecessary bottle necks in the activities of these institutions and programmes should be eliminated. Private capital industry should be encouraged as well. The government can do this with fiscal incentives and training that will enhance the skills of the people involved in undertaking this task. The financial institutions should be encouraged to develop and implement profitable lending programmes like being more flexible in what they accept as collateral and the use of their expertise in monitoring the loans to make sure they are profitably utilised by the firms. International Markets Having access to international markets will go a long way in boosting the profitability and efficiency of the SME’s. The government should pursue programmes and policies that will expose the SME’s to international markets with favourable conditions. The government can negotiate for bilateral and multilateral trade agreements with foreign countries and make sure that the terms of the agreement are favourable to their own firms instead of leading to their exploitation. They can also sponsor programmes, trainings and business support functions that will help the SME’s to understand how the international markets work and how best to succeed in them. Some of the business supports services that the government can undertake include sponsoring research and market analysis of foreign markets and establish policies that



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enhance stability in exchange rate. The government can also develop a strategy cutting across the whole geographical zones on export development and promotion. Management Skills Poor managerial know how has been observed to be one of the numerous challenges faced by SME’s. The government should introduce or work more on programmes that will enhance the managerial ability of these small firms. Such measures can be subsidising or sponsoring training programmes introduce and properly monitor policies that will maximise the spillover of management techniques and knowledge from the bigger more established corporations to the smaller ones. Security and Macroeconomic Stability Uncertainties generally affect all businesses whether large or small but definitely have more impact on the small and medium enterprises. Developing countries like Nigeria which has security challenges and unstable macroeconomic policies have adverse negative effects on the activities of small firms. Government should provide adequate security for life and property and stable macroeconomic policies as this will go a long way in ameliorating the challenges faced by the SME’s. Clustering The issue of clustering should be given proper attention by developing countries. Clustering can lead to economies of agglomeration and inter firm networks (Humphrey 2003). Government should introduce and properly execute policies that will encourage clustering like tax free incentives for firms if they establish within the cluster. The firms clustering in the same area will encourage each other to share ideas, minimise costs by embarking on joint ventures and partnerships and even increasing demand for each others product. Conclusion Small and Medium Scale Enterprises has been described as an engine of growth for both developed and developing economies. The paper looked at the different definitions of SME and their characteristics. It also looked at the different ways that SME’s contribute to economic growth and development through such measures as job creation, increased efficiency and entrepreneur development as well as the challenges that hinder the SME’s from utilising their full potentials in contributing to economic development. The paper made some recommendations that will lead to development of SME’s in order to take full advantage of their potentials towards economic development. The suggestions made are infrastructural developments, increasing the availability of finance to the small and medium firms, exposing the SME’s to international markets, increasing their managerial ability, improving and maintaining security of life and property, promoting macroeconomic stability and using different effective measures to increase clustering. References

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• Abor, J and Quartey P. Issues in SME Development in Ghana and South Africa. International Research Journal of Finance and Economics. Issue 39

• Audretsch . D, Carre A, Van Stel J and ThurikR 2000, Impeded Industrial Restructuring: The Growth Penality, Research Paper, and Center for Advanced Small Business Economics, Erasmus University,and Rotterdam, Netherlands.

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Bank.


Risk management in Oil and Gas industry 35

Risk management in Oil and Gas industry Jumasseitova A.K. PhD1 and Mustafina Zh.2

Abstract Risk management has always been an integral part of Oil and Gas Industry activities. The presence of large volumes of toxic and flammable materials, the use of high pressures and temperatures, the high capital cost of plant and equipment and the potential for off-site impacts up to kilometers beyond plant boundaries, has meant that risk management has been an essential strategy for the industry's survival. High levels of complexity for capital projects and turnarounds in the oil and gas industries have historically led to some of the highest project losses. The application of traditional risk-models and management principles has proven insufficient to prevent a high rate failure in this sector. Empirical evidence collected for various oil and gas related projects and plant turnarounds suggests risk categories, which, if left insufficiently managed, can lead to severely negative project impacts. The purpose of this paper is to provide an overview of some of the key aspects of risk management as practiced from a safety point of view in the Oil and Gas Industry. Key words Gas industry, Oil industry, Project management, Risk management, Domestic and foreign investors, Sources of risk, Managerial entrenchment, Free cash flows, Corporate governance, Calculations, Drilling engineer, Probability, The financial activities of enterprise, Corrosion, Neutralization, Qualitative analysis. Introduction Oil and gas complex of Kazakhstan is an essential element of the economy and a significant portion of a global energy supplying system. Oil and gas companies give more than a quarter of the industrial output of the RK and over a third of all tax payments, some other revenues to the budget system, more than a half of the country's export benefits. Capital investments in the oil and gas sector include one-third of the total investment taking into account different financing sources. Long-term operation of oil and gas (COG) in the framework of the global financial crisis and reduction of prices on oil is one of the key factors of national economic securities, dynamic development of international relationships and economic situation in Kazakhstan. Effective use of mineral resources and work of COG could be improved if we take into account systematic management of risks. Oil and gas industry is influenced by different kinds of risks that have a negative impact on economic activity of the subject and require a special management. Design and development

1 Jumasseitova A.K. is an assistant professor of "Economic and management" Department at Kazak British Technical University. Jumasseitova has research interest in Petroleum Economics, Economics and Management of Oil-gas industry under the umbrella of Globalization. Jumasseitova is author of the 20 scientific publications. 2 Mustafina Zh. is a lecturer of Post-graduate department at Kazak British Technical University. Mustafina’s research interest is in; Risk Management in Oil and Gas industry, Petroleum Economics.



of deposits is often accompanied by the typical risks during the sustainable activities of enterprises, which are typical for economic subjects and oil companies as a whole. Nowadays, risk management is an important issue for different enterprises and decisions made by them. The problem and the formation of an effective system of risk management become an independent theoretical and important part of the theory and practice of management in the market assessment. Most management decisions are made in framework of risk that is caused by several factors: the lack of information, existence of controversial tendencies, the elements of chance and many others. It is known that the success of oil and gas companies depends crucially on the appropriateness and validity of the chosen business strategies. The probability of critical situations should be taken into account. Solving different problems and their upgrade are possible in the case of alternatives. Therefore, a prerequisite is the freedom of the enterprise and selective methods of economic activities in their diversity. In order to survive in the market, we need to be addressed in the technical innovation and non-trivial actions that can increase the risk. Therefore, it is necessary for us not to avoid risk, but be able to assess the risk and manage risk to reduce it.

• the analysis, systematization and generalization of scientific publications on the issues of the analysis, evaluation and management of risk show the following factors:

• there is no generally accepted definition of a notion "risk"; • there is no formalization that is suitable for various theoretical and practical cases,

allowing us to generalize factors of risk; • there is no scientific recommendations on defining the notion "acceptability" of a

definite level of risk in an analyzed situation; • there is no developed legal concept that allows us to form norms and rules based on

quantitative assessments of risks; • indicator system on risk of oil enterprises is not defined that shows the quality of

services of insurance companies. These and other factors are topical and necessary for conducting the research aimed at estimation, management and risk insurance of oil enterprises, and analysis of ways on upgrading the system of risk management. It should be noted that risk assessment is valuable not by itself but in the connection with decision made in definite situations.

Theoretical Background According to our opinion, a number of myths that define views on the feasibility and effectiveness of the identification, assessment and risk control should be noted in the history of the contemporary theory and practice of risk assessment. From a historical point of view, these myths have always been unfounded due to the huge scientific progress in this area. Firstly, they are associated with the concepts of uncertainty and risk analysis of investments and the role of intuition in making investment decisions. Secondly, they relate to the value of measurement of risk in investment management, and application of methods on evaluation of risk in the investment practice.



Events for investment in tangible and financial assets are continuously accompanied by risk. Therefore, investors with their investments should be considered at risk level with a view to augmenting the role. Investors are changing the structure of their assets based on business strategy and changes in economic conditions, and they are expected to mainly a long-term income. The risk of investment is identified with the potential level of threat or the chance of obtaining the expected results of the investor. Consequently, the risk can be considered as a risk of the investing effect that does not meet expectations (an unpleasant surprise – the losses), or in a better case as it can be expected (a pleasant surprise – a big profit). Presently, there are evident ways of risk identification and application of methods of empirical verification. The possibility of risk quantification is one of the major achievements of the past 30 years in development of the science of money management. The concepts of equal importance of two main criteria evaluating the investment are clearly dominated in the contemporary theory and practice of investment, i.e. investment returns and associated risks. According to Mr. Markowitz, the investment strategy is important to fix the expected return as a desirable outcome for the investor and the spread of this value as an undesirable phenomenon. It should be noted that the term "risk", that Mr. Markowitz uses, is identified with undesirable outcomes that should be minimized. As a result, risk is defined as dispersion or a measure of possible deviations from the expected values. It can be argued that an environment is dominated by modern authors and who have similar views on the definition of risk and its measurement. Methodology of quantifying the risk of investing is described in details in the literature. Fundamentally, there are three classical measures of the risk: measures of variability, sensitivity and magnitude [4]. The measures reflect the variability of investment, from the average number and probability of rejection (for example, coefficient of variation, standard deviation) and, consequently, the average risk. At the same time the results of research show the impact on profitability of the various risks. Therefore, if the profitability is more sensitive to changes in its determining factors, the greater risk is. As a result, the use of measures of sensitivity depends on the number of analyzed risk factors, which form the basis for calculating critical values and determine the boundaries of the risk-free investment. Substantial and well-known measures of the investment of sensitivity returns are considered as a beta coefficient (B), used as a measure of market risk. This ratio reflects the degree of influence on the market returns on investment. This variable risk factor can have a single change in the immutability of other risk factors. However, in practice, the investment is a significant assumption of ceteris paribus that are often various. In addition, it is necessary to emphasize the fundamental differences between the concepts of variability and sensitivity measures. Variability measures are aimed only at measuring the effects of risk, which manifest depression returns, and these measures allow us to estimate the sensitivity of the risk factors, the risk magnitude is the most important (English: Value at risk – VaR). It is a risky value, i.e. the maximum rate that can be lost by investing with a specific time for the given expectations. The other measures of risk are: semi variation and standard semi derivation; therefore, we should take into account only negative deviations from the expected value of profitability, as well as the probability of loss (failure to reach the required level), i.e. receiving a negative or zero returns. In particular, estimation of the total losses is also applied for game theory (in the face of uncertainty with a focus on worst-case scenario) among the methods for assessing the level of risk.



The risk, that accompanies the investment activities in Kazakhstan, is now significantly higher than in the activities undertaken in countries with developed economies. In the first case a predetermined risk level of the global economic conditions is associated with the relative instability of the national economy, as well as with changes in the intensity and direction of change of its structure and form of the ownership. The views of various researchers on the problems of diversified risk management, in general, are rather similar, the differences and peculiarities are the result of a clear understanding of what constitutes an investment market (physical investment, as well as the stock market and derivative instruments). However, the authors of scientific publications clearly and consistently describe a complex and active process of risk management following the main sequence: analysis of risk – risk management – risk control (in terms of investment strategy) [5]. Risk analysis includes the identification and measurement of risk, as well as an imitation of its impact on investment. It forms a variety of investment strategies and uses the appropriate safety procedures as a part of risk management. In its turn, the risk control is identified with the continuous monitoring of the level of risk. The significance of the investment management process, especially the increased risk, is the result of globalization. This phenomenon is processed due to functional constraints and the increasing association in a single interactive unit of the various national markets: financial, investment and production, labor and marketing. The result of this is a new problem associated with the identification of global investment risk and its quantification, in support of optimal investment decisions. Currently, globalization is creating the conditions for competition and cooperation in investment markets all over the world, and it increases dramatic struggle for the minimization of investment risk. Professional management of risk requires the correct qualitative and quantitative risk assessment (Table1).

Table 1 –Uncertainty and risk investment

Uncertainty Risk We identify different possibilities, but we cannot determine the probability of their realization

There are opportunities to determine the probable effects of any situation and any results of activities

The use of uncertainty and risk to assess the effectiveness of investment Qualitative risk assessment (types of risk)

Quantitative risk assessment (types of risk)

The choice of the uncertainty – risk – return as characteristic features of investment decisions

Note – compiled by the author



Investment decisions are based on economic calculations, taking into account the economic analysis of heterogeneous environment (Figure 1):

Figure 1 – Sources and types of risk of the investment project

(Source: Ostrovskaya, 2004)

There are three groups of factors that are taken from the sources of the risk solutions: macroeconomic (global), mesoeconomic and microeconomic. The first part of these groups is associated with the globalization of economic processes, as well as general economic analysis of the national economy and international relations. It is associated particularly with the state of the economy (recession, market conditions), the size of GDP, the level of national demand, inflation, monetary (monetary and exchange rate), customs policies and legislation. The second group of factors is related to the sectoral analysis that has a specific character in terms of threats to potential investors that support their capital in this sector. The third group is based on a situational and financial analysis of companies which identifies the specific operational and financial activities, mainly in the respect of providers, recipients, and financial institutions. Multi-objective identification of risks is an essential part of the possibility standpoint and we should take it into account when we calculate the efficiency of investment. In accordance

SOURCES OF RISK

MACROECONOMIC FACTORS

MICROECONOMIC FACTORS

MESOECONOMIC FACTORS

TYPES OF

RISK

AT

ESTIMATING THE

EFFICIENCY OF

Risk - zero - hidden - clear - certain

Risk - operational - financial

Risk of - the region - the country - international (global)

Risk of - the investment project - enterprise - owners of the enterprise market -sectors

Risk - systematic (non-diversifiable, or market) - non-systematic (diversifiable, or specific)



with the criterion of geographical diversification of capital associated with the spatial (geographical) movement of capital, the risks can be identified as: regional, national and international (global). Regional investment risk depends on the socio-economic and environmental situation in the region, including the state of natural resources, transportation and infrastructure conditions, as well as the ability to attract labor. Domestic and foreign investors will also assess the level of the main indicators and preferences of the regional government, as these characteristics play an important role in competitive environment rates. General government investment risk has an impact on decisions of foreign investors. It depends on the socio-economic (strikes, power stability, inflation, budget, labor costs), the socio-legal (transparency and stability of legislation, unemployment, and public sentiment), and the situation in the country. The infrastructure of the state (for example, telecommunication networks and banks, the plumbing system) is of a particular importance. As a consequence, the national risk level is identified with the country's investment attractiveness of foreign capital. Evaluation of investment risk of a particular state has a direct impact on economic growth. International investment risk is a global trend of internationalization and liberalization of the economy, i.e. globalization. This risk is becoming increasingly important for foreigners and foreign investors, international and domestic financial institutions, as well as local and central authorities. Evaluation risk as a subject provides the correct orientation at the global level of investment activity of one or more countries and states, united in the international community (EU, OECD), or located in a particular region, such as in the Central and Eastern Europe. The identified risks can reflect the effects of investment decisions in the global strategy of the enterprise (or sector) in accordance with the following criteria: investment project of a company, the market risk of the owners of the enterprise, as well as the sector. The risk of an investment project is associated with the degree of loyalty to the technical, financial and economic principles of the project (for example, the same efficiency in the experimental conditions and the organization of an industrial scale). It is estimated independently, regardless the effects of other investments, as well as managers and owners of the company who are responsible for its basic strategy. Therefore, the type of investment project becomes a carrier type of risk. It is believed that the largest relative terms are accompanied by risk investment activities with a view to recruiting new markets and / or offering new products. At the same time the least risks are characterized by modernization and renewal investments. In this case, the investor has proven knowledge of the conditions on the investment project. According to E.F. Brigham (E.F. Brigham), the analysis of individual risk of a specific project ignores the fact that this project represents only one of the assets in the portfolios of many investors. The measure of this risk is considered to be a volatility of expected return of an asset, which serves the project. The risk of companies intending to implement the new investment is generally not equal to the risk of these investments. The risk of the enterprise depends on the ratio between the income received as a result of this project, and revenues from the exploitation of resources



available to the company. These relationships may be processed due to the organizational, technical and economic interdependencies between new investments and previous experience of the enterprise. The measure of enterprise risk is considered as an internal project impact on the variability of profits, since it has been estimated as the risk of the investment portfolio of the company without shareholders' portfolio diversification. In the case of fluctuations in the profits from the investment activities, or when the total failure of internal risk is allocated to other projects, it can mitigate the threat to the enterprise. In this case, the fundamental importance is the selection of the assets with different risk levels, which requires in-depth knowledge and experience of the investor. In addition, the implementation of numerous investments requires the accumulation of substantial funds, which often have only a large company with a stable financial situation. In practice, companies often are unable to compensate the possible losses from the profits earned from other investments. Owners of capital are associated with a systematic risk, as well as the inclinations and preferences of the owners for the placement of equity in various companies. Owners may not be interested in high-risk enterprise development through diversification of production is observed due to problems related to the effective use of the property and labor. Within the boundaries of personal risk, they may prefer diversifying the financial investment, for example, a method of portfolio investment. In this case, the risk will be associated with a portfolio of financial investments (stocks, shares, bonds), because each owner can have the securities of several companies with different levels of domestic risk. As a consequence, four types of risk are discussed in the connection with each other. The risk of individual investment projects is reflected in the risk business, which affects the market risk of the owners. In this turn, the sum of the risks of individual companies (investors) belongs to a particular sector of the economy and determines the probability of obtaining the expected return on investment (capital investment). It should be noted that the implementation of a specific investment project may not have a significant impact on the risk of the company and its owners due to the effect of the securities` portfolio. Analysis of the operational and financial risks is very important for an investment strategy. These risks are highlighted by the effective selection of an investment project (Figure2).

Figure 2 – Operational, financial and total risk in investment decisions Return Overall risk Financial risk Operational risk Expected return 0 Time




Operational risk is associated with changes in the structure of assets, i.e. changes in the elements of fixed and working capital, assets, and, particularly, the elements that affect the operating profit of the company. This risk arises from changes at the level of influence on the formation of sales operating profit. It causes the uncertainty of future price changes for raw materials and released products, production technology, competition, marketing activities and consumer preferences, the elasticity of modern management and market opportunities of the enterprise. The basic tools are of great importance and they can cause significant fluctuations in profit margins in the case of change of return (the so-called "operating leverage effect"). Transaction costs are important in addition to this, lack of which can reduce the cost-effectiveness of the project. Operational risk for the industrial enterprises is much greater than for service industries, which is associated with more stable demand for the services of the latter. Financial risk has a different character and it affects the ways of financing investment activities. The indicators are changing the structure of liabilities of the company, i.e. horizontal and vertical structure of its balance sheet. This may be changing the proportions in the capital structure or the obligations and requirements. As a rule, it requires large investments, in addition to their own, and attracted external funds (bank loans, bonds, leases, and etc.), which aggravates the company costs for the use of foreign capital (i.e. interest). A large proportion of debt in the capital of an enterprise leads to the fact that his work is associated with a large financial risk. Systematically, declining investment income may be not significant in relation to existing financial obligations, which leads to the loss of financial stability of the company (the so-called "leverage effect"). Therefore, operational and financial leverage is used to assess the operational and financial risks. The lever describes the effect of changes in costs, prices and sales volumes in the profits of the enterprise in managing the company operating. At the same time the financial lever characterizes the effect of debt on growth in profits and market value of the company. As an addition to the criterion for the classification of investment risk, it can be considered as sources of funding for investment, especially foreign, for example, a bank loan or issue of securities. In terms of it, revenue-needed capital is essential to identify and calculate the value of zero, covert, explicit and specific risks. Zero risk is presented at the sale of financial investments in the form of loans guaranteed by, for example, the state (in the case of prestigious investment). This risk relates to investment of credit risk, if investors get this loan with an unknown reputation. Hidden risk relates primarily to the stage of project preparation (preparation of investment opportunities and threats, as well as pre-selection), i.e. the period of receipt of the first signals of the development of negative tendencies, such as reducing the financial stability. Therefore, a loan is accompanied by a careful analysis of the borrower. The risk of this type arises in a situation where a specific project is considered to be risky, but the Bank has no reasons (signals) to estimate its potential losses. This risk takes place when the probability of loss is less than the probability of their absence. At the same time a clear risk arises when the probability of loss is greater than the chance to avoid them. This is the case of long-term and negative trends of characteristics of latent risks. The lender must be prepared to lose part of its financial capital, because it provides a very risky loan.



Some risks, i.e. the risk of insolvency of the total investor, have the loss of their ability to service its obligations. Typically, in this situation, the probability of service credit is equal to zero, so the bank loan is considered to be irrevocable. The financial activities of the company in all their forms are associated with numerous risks, the degree of influence that is the result of this activity increases significantly with the transition to a market economy. Risks associated with these activities are highlighted in a special group of financial risks, which play the most significant role in the overall "portfolio risk" venture. Increasing the degree of influence on the financial risks and financial performance of companies are associated with the rapid variability of the economic situation and financial market conditions, expansion of financial relations, and its "emancipation," the emergence of new business practices for our financial technologies and instruments, and many other factors. Financial risk of company management is a specific area of financial management, which in recent years was allocated in a special area of expertise – "risk management". For professionals working in this area, there are special qualifications, in particular, knowledge of economics and finance companies, mathematical methods, principles and application of statistics, staff, insurance, and etc. The main function of these specialists ("risk managers") is a financial risk management company. Risk management is one of the most important areas of modern management, associated with a specific activity of managers in uncertain and complex choices of administrative actions. Risk management and the concept of this are very wide, encompassing a variety of problems associated with almost all areas and aspects of management. The organization of work to identify and reduce risk is at the heart of risk management. All financial risks can be divided into a series of exhaustive groups: market risk, credit risk, liquidity risk and operational risk. 1) Market risk is the possibility of losses due to unfavorable movements of financial markets. Market risk is macro-economic nature, i.e. sources of market risk are macroeconomic indicators of the financial system – market indices, interest rates, curves and etc. The main types of market risk are: Currency risks are risks of loss related to adverse changes in exchange rates. Currency risk is the risk of loss associated with adverse changes to the organization of exchange rates. Exposure to this risk level is determined by the size of assets and liabilities in any currency (open foreign exchange position – AFP). Thus, the foreign exchange risk as a whole represents a balance sheet risk. Currency risk can also be a subject to take control over certain types of operations, primary, or secondary purpose is directed to profit of favorable changes in exchange rates. First of all, these operations are speculative operations with currency conversion. Sources (factors) of currency risks are "spot"-currency exchange rates, and forward rates. Interest rate risks are risks of loss related to adverse changes in interest rates. The following sub-types of interest rate risk that are depending on the nature of changes in interest rates are the following:



• the risk of general changes in interest rates is the risk of rising or falling interest rates on all investments in one or more currencies, regardless of their maturity and credit rating;

• the risk of changes in the structure of the curve of interest rates is the risk of changing interest rates on shorter investment compared with longer (or vice versa), it could not be associated with a change in the general level of interest rates;

• the risk of changes in credit spreads is the risk of changes in interest rates on investment with certain credit ratings compared with the rates on investments with different ratings, it could not be associated with a change in the general level of interest rates.

Interest rate risks (for companies involved in its activities with the involvement and / or placement of funds – loans, or loans on which the interest rate is floating (this is especially common in the output of enterprises in the western capital markets – Bank lending program), are a quite serious problem. Price risks are risks of loss related to an unfavorable change in price indexes for commodities, corporate securities. At its core, this type of risk is identical to currency risks. Price risks for companies involved in the production / consumption of goods / raw materials that are analogues of the stock, the volatility of the past can have a significant impact on the profitability of the company as a whole. 2) Credit risk is the risk of default debtor or counterparty of the transaction of its obligations to the organization, i.e. the risk of default of the debtor or counterparty. As a rule, a default of the organization refers to the inefficiency to timely fulfill obligations (i.e. total or partial inefficiency to pay). Despite the simplicity of this definition, formal description of the default practice should be described in details. According to this definition, the carriers of credit risks are primarily direct transaction and direct lending (direct risk) and the purchase / sale of assets without the payment of the counterparty and guarantees of payment from the third parties (settlement risk). Accordingly, in a broader interpretation of the credit risks these are not only loans but also corporate securities (stocks, bonds, promissory notes) and other financial instruments for which the payer cannot be regarded as absolutely reliable instrument. It should be noted that although the source of credit risk is the debtor or counterparty, the risk is associated primarily with the specific operations performed by the organization. So, the same debtor due to internal causes may refuse to repay the loan on time, but regularly he/she can carry out payments on promissory notes. The two main end-assessments of credit risk are expected and unexpected losses. In the classical approach to the management of credit risk covers expected losses that is formed in accordance with the expense of reserves and covering unexpected losses on credit risk should be done at the expense of the organization`s funds or capital. Evaluation of credit portfolio risk is reduced to the calculation of similar indicators:



• the total amount at risk (with credit rating system it can be grouped by individual values of the rating);

• the expected loss; • the distribution of unexpected losses.

Honors of credit risk portfolio on market risk is that if a stable macroeconomic situation, the correlation of credit risks of individual components of the portfolio can be neglected, but it should be taken into account that in stressful situations, however, the correlation of defaults and the defaults for individual operations increase substantially. 3) The liquidity of risk refers to two quite strongly different types of risks. The risk liquidity of funding (raising funds) is associated with decreased ability to fund the position taken by the deals when it's time to eliminate them, cash resources to cover the requirements of contractors and the requirements of security – that is, with a decrease in the solvency of the bank or the organization. Funding risk liquidity is closely connected with the interest of rate risk; and an inefficiency to raise funds can be seen as a sharp rise in interest rates on attracted resources. Also, indicators of interest rate risk can serve as an indirect estimation of the liquidity risk of funding. Funding liquidity risk is assessed using the types of liquidity. The calculation also takes the amount of funds that the bank can draw as soon as possible for the funding of its obligations. Liquidity risk assets are closely related to the inability to liquidate assets in the various market segments. The liquidity risk of assets is associated with certain instruments (articles of selected active balance) and, in principle, it can be quantified in terms of losses. Liquidity risk assets are highly dependent on the ratio of position of size to the size of the market (daily turnover in the market). 4) Operational risks are defined as the risks of direct and indirect losses caused by errors or imperfections in the processes and systems of the organization, errors and lack of qualified personnel in the organization or unfavorable external events of non-financial nature (such as fraud or a natural disaster: fires, robberies, terrorism, and etc.). Therefore, the activity of the enterprise in all its forms is associated with numerous risks, the degree of influence that the results of this activity are significantly increasing in the market conditions. The degree of risk influence on the performance of companies is connected with rapid variability of the economic situation and market conditions, expansion of economic relations, the emergence of new technologies in risk management and many other factors. For the procedure of choosing the optimal method of risk estimating of the investment project is of great importance to the availability of correct information, i.e. its sources and streams are significant, as well as reliability. For risk analysis, it is necessary to calculate the probability distribution and occurrence of uncertain events (basic units) that are responsible for the results of calculation efficiency. So, the accurate determination of the initial investment cost, revenue streams and expenses (together with their probabilities) are important, as well as derived indicators such as sales, cost of production factors (prices on raw materials, production, wage rates, and etc.). In addition to this, it is important to determine the payback period of investment in the operation, as well as the duration of the life cycle of products, created through the implementation of investments. This variability depends mainly on the flow of borrowed resources (material, financial and labor) as well as



price stability and the different tendencies in the interpretation of their growth in terms of income and expenses. It is of the interest to associate it with this interpretation of the level of interest in the aspect of the inflation problem. We suggest the following procedure of risk evaluation, which is applicable for the resolution of specific investment management that is focused on the adoption of optimal solutions (Figure 3), and above all the primary target is to exclude the risk of investment misuse in the light of the company and its socio-economic environment.

The use of more sophisticated methods of risk assessment is warranted when the uncertainty (risk) of socio-economic status of the project environment has a significant impact on the cost-effectiveness of the project. An example of it is the lack of confident formation in the



market demand and sales of the investor and the need to assess the strength of influence on the effectiveness of a particular project. Therefore, the selection and use of these methods depend on the preferences of decision makers, with respect to two outcomes: a chance to profit by the investment project, the risk of making a mistake (the threat of loss) due to wrong investment decisions. Methodology Oil and gas industry is a system that is characterized by a number of specific features that distinguish it from other branches of a material production. The most significant ones in terms of risk assessment are the most dependent criteria of cost-effectiveness of natural conditions, the level of use and recoverable hydrocarbon resources are proven, the dynamic nature (variability in time), environmental factors, the statistically distributed nature of most of the technical and economic indices of oil and gas fields, changing the structure of reproductive investment across the industry in the direction of increasing its shares allocated to compensate the falling production at older fields, large duration of the oil and gas projects, high capital intensity of oil and gas, the need for large initial investments, long-term recovery of the initial capital and etc. These characteristics of the oil and gas industry influence on the formation of the risks that are classified by us in the following way (Table 2):

Table 2 – Classification of risks in the oil and gas industry Classification criterion

Types of risks

GENERAL Scope of display Political, social, industrial, commercial, financial, environmental The stage of manifestation

Pre-operative, operational

Principles of inception

Functional, money, inflation, liquidity risk and etc.

The consequences of manifestations

The risk of discontinuation of activities, the risk of variation and etc.

SPECIFIC The stage of searching

The risk of non-field discovery; The risk of opening uneconomic deposits.

The stage of exploration

The risk of deviation from the optimal strategy of discovery

Stages of development

The risk of losses caused by inaccurate determination of the amount of reserves and the coefficients of oil and gas extraction; The risk of building facilities (wells) with characteristics of low quality; The risk caused by changing conditions for oil, gas and refined products in the market; The risk of force majeure.

(Source: Andreev, 1997)

In addition to this, the specific risks for the oil and gas industry are: the risk of undiscovered deposits, the risk of opening uneconomic deposits, the risk associated with inaccurate determination of the geological characteristics of the object for commercial development (the



amount of reserves, the level of oil and gas extraction, the amount of recoverable reserves, the dynamics of hydrocarbon production, etc. ), the risk associated with the completion of the project, the risks associated with market conditions of oil, gas and petroleum products, the risk characterized by the qualities of the project participants, the risk caused by the increased probability of force majeure. All factors that could potentially affect the increase the risk should be divided into two groups: objective and subjective. Among the objective factors are factors that do not depend directly on the companies' activities: political and economic crises, competition, inflation, economic conditions, customs duties, the presence or absence of MFN. Subjective factors characterize the internal environment of the organization. These factors include the production capacity, the level of technical equipment, subject and technological situation, labor organization, the degree of co-operative relations, labor productivity, the type of contracts with investors, customers and etc. Empirical Studies Identification and analysis of risk are very important and necessary stages of decision making in the oil industry, which is the essence of risk identification, determination of their specificity, highlighting the features of their implementation, including the study of the size of the potential economic damage. The study of risk changes is a serious problem, as well as the degree of relationships between different risk factors. We cannot fulfill an effective and meaningful risk management without this analysis. The risk assessment is to give potential partners the necessary information for management decision-making and to take measures to protect it against possible financial losses. It is primarily determined by the criterion of efficiency evaluation while selecting the optimal method of estimating risk. The criterion of selective method of risk estimation should be taken into account. Risk assessment is carried out by enterprises according to quantitative and qualitative risk analysis. Qualitative risk assessment involves identification of the risks in the implementation of the proposed solutions, determination of the quantitative structure of the risks and to identify the most dangerous areas in the enterprise. It is proposed to use a table of qualitative analysis to implement this procedure. The following aspects are analysed in the table: algorithms for decision making and the analysis of risk prevention.



Therefore, the construction of oil wells, risk assessment could be analysed in the following way (Table 3).

Table 3 –Qualitative Risk Assessment The algorithm of a decision making

Types of risk

Reg

iona

l N

atur

al

Tran

s por

t Po

litic

al

Legi

slat

ive

Or g

amiz

atio

nal

Pers

onal

Pr

o per

ty

Cal

cula

ted

Mar

ketin

g Pr

oduc

tion

Cur

renc

y

Cre

dit

Fina

ncia

l

Inve

stm

ent

Preparatory work for construction of wells

+

+

+

+

+

+

+

Construction and dismantling of surface facilities, installation and dismantling

+

+

+

+

Drilling of wells: - purchase of materials; - wages for personnel; - exploitation of drilling equipment; - transportation; - power plant

+

+ +

+ + +

+

+ +

+ +

+ +

+

+

+

+

+ +

+

The test of wells for the productivity

+ + +

Field and geophysical work + + + +


A qualitative analysis of the risks in the implementation of this decision is conducted after compiling this table. The main objective of this evaluation phase is to identify the main risks affecting the financial and economic activity. The advantage of this approach lies in the fact that at the initial stage of the analysis of plant manager can visually assess the degree of riskiness for the number of risks and at this stage there is a refusal to give an effect and make a decision. Quantitative risk assessment is based on data obtained in their evaluation of quality, i.e. it would be evaluated only in the case if risk is observed in the implementation of the specific operation of the algorithm decision. The table is based on the data obtained from statistical, scientific, and periodic sources and personal experience of the leaders for each recorded risk assessment. The data in the Table of risk assessment are compiled to determine the components of the risk factors. Using this approach we observe a high efficiency of financial and qualitative assessment of business enterprises. The problem of subjectivity in the assessment can be eliminated using the Delphi method.



In some cases, it is proposed to determine the value of risk on a ten point scale. The corresponding graph is an arbitrary mark (+) after selecting the value of its risk level that is higher than 0.8. The final stage of filling the table columns is stamped values of the quality of information upon which decisions were made. In conclusion, the table is supplied as the final quantification of the average of the indices of all components of risk. As an illustration of the proposed organizational risk assessment table is based on a real situation (Table 3). The decision is final and the most demanding procedure in the risk assessment of the enterprise. The "decision-specific solutions are appropriate to distinguish and highlight specific areas (risk areas) in developing the strategy and behavior that depends on the level of the possible (expected) losses". The scope of the risk zone is called a total loss, within which losses do not exceed the limit of specified level of risk. Five areas of risk are taken into account while calculating the overall level of risk that is based on capital adequacy ratio of the oil company. The coefficient of risk – Cr is called the assessing capital of adequacy using the maximum amount of share capital and total capital ratio limit to the amount of assets. Risk areas are differentiated depending on the magnitude of the coefficient of risk: the risk-free area (Kp = 0, is guaranteed as a minimum for the purpose of obtaining the estimated profit) minimal risk region (K = 0-25%, is guaranteed to obtain the main part of net income), high-risk area (K = 25-50%, in the worst case it will be produced covering all costs, in the best case, it receives a small part of the profits) of the critical area of risk (Kp = 50-75%, the losses exceed the amount estimated earnings, but they are in the range of gross profit) is invalid domain risk (Cr = 75-100%, the losses are close to the size of own funds).



Table 4 – Summary of organizational risk assessment (details) Components of risk Risk Asses

sment Value

0,8 The quality of information

1 2 3 4 5 The depth of the planning activities of the organization: - planning is not carried out; - during the day; - for a week; - for a month; - for one year; - more than a year

0,9 0,8 0,7 0,6 0,3 0,2

0,3

0,8

Detail planning: - degree of elaboration of plans is very high, adjusted and refined sub-goals, efforts and formalized control over operations; - degree of plan elaboration

0,4

Necessity to determine intermediate goals and the final result; - no details

0,2 0,9

0,9

+

0,9

The presence of the company planning scenarios: - the development of solutions is usually considered as a scenario of action; - the development of solutions is usually considered according to two of the three scenarios; - the number of scenarios can be large, depending on the importance of a decision

0,5 0,3 0,1

0,3

0,7

Note – compiled by the author Therefore, summarizing the results of research, conducted by many authors on the problem of quantifying the risks of financial and economic activities of enterprises, has been developed and proposed an empirical scale of risk that can be used when quantifying (Table 5). The decision consists of three stages:

Stage 1 – preliminary decision: a preliminary decision is made on the basis of the arithmetic mean value of a particular type of risk and quality of information separately for each operation algorithm of the decision. Stage 2 - analysis of the critical values. At this stage, the analysis estimates the risk of those elements which values exceed the critical value (in our analysis, this quantity is equal to 0.8). The necessity of this action consists in the identification and selection of those components for which the probability of risk is very high, which can lead to loss of all invested funds and bankruptcy.

≥



Table 5 – The empirical scale of risk The value of risk/(quality of information)

Enumeration of risk gradation

Characteristic features

0,1 – 0,2 (0,9 – 1,0)

Minimum The probability on occurrence of adverse effects is extremely low, there are no factors affecting the activity of the company. (The information is of a very high quality). The decision is made.

0,2 – 0,3 (0,8 – 0,9)

Small The probability on occurrence of adverse effects is small (negligible), there are no factors affecting the activity of the company. (Information is of a high quality). The decision is made.

0,3 – 0,4 (0,7 – 0,8)

Average The probability on occurrence of adverse effects is negligible; the factors affecting the activity of the company are shown. (The information is of a good quality). The decision is made.

0,4 – 0,6 (0,5 – 0,7)

High A significant probability of adverse effects, actually there is a limited number of factors affecting the activity of the company. (Details of a satisfactory quality). The decision is made after a detailed analysis on minimizing and neutralizing the negative factors.

0,8 – 1,0 (0,3 – 0,1)

Critical The probability on occurrence of adverse effects is very high (critical), there is the maximum number of factors affecting the activity of the company, a real loss of invested funds and bankruptcy. (No information). The decision is not made.


Stage 3 – The final decision. The final decision is made on the basis of the preliminary determination and analysis of critical values. As an example of a decision made at stages 1 and 2 fragments of a table are analysed and the results are based on decision-making process of the oil and gas companies in the oil and gas production (Table 6).



Table 6 – Risk assessment in the decision made (details) Types of risk The average

number (risk / information)

The critical values of the components of risk (value 0.8)

regional 0,35/0,72 - availability of real-destabilizing factors; - complex

production 0,47/0,57 - cash reserves of oil and gas, the pace of delivery; - stability and reliability of production at different stages of the process chain

market 0,46/0,7 - prices on crude oil; - interest rates, exchange rate; - margin of oil production and transportation of oil and gas

ecological 0,47/0,56 - consequences of anthropogenic impacts on the environment

financial 0,35/0,70 - tax rates and exemptions; - regulation of dividends; - export and import duties

Total: 0,42/0,65 Note – compiled by the author

A special attention should be paid to the quality of information in the phase of uncertainty. In this regard, our propositions the risky information system (Figure 5) which is compiled on the basis of the final results obtained in testing the proposed method on one of Kyzylorda region oil and gas companies. It shows the highest risk assessment for transportation (0.5) and organizational (0.83) risks, the most dangerous operations acquire materials for the construction of wells, the highest risk of loss (damage) of a business arise in the implementation of operations for oil transportation (0.5), the lowest level of risk in the implementation of power plant (0.39). Risk is located in one area, which means careful planning and sorting out a decision. At the same time we draw attention to the lack of information when considering the regional, industrial, investment and credit risks. If we use better information on these types of risks from the region with a high risk, we move to the area with an average risk. Overall assessment of risk solutions is 0.44, which corresponds to the proposed scale of gradations of risk indicator "high". In reality, there are limited numbers of factors affecting the production activities of the enterprise. A significant occurrence of adverse effects can be eliminated after a detailed analysis to minimize and neutralize the negative factors or using other methods of risk management.



Figure 5 – Risk Information on System Decision Risk Information

0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8 0,9 1,0 0,1 0,2 0,3 Regional

Manufacturing loan Investment

0,4 In lit. Pers. With nature.

Possession Market

Calculation

0,5 Trans- portation Organization

0,6 0,7 0,8 0,9 1,0

Minimal risk Insignificant risk Average risk

High risk Maximum risk The risk that is higher than the critical one

Note – compiled by the author Most of the technological facilities of the main oil pipelines are classified as hazardous production facilities. Therefore, the analysis of hazards and risks of possible accidents is one of the important problems of industrial safety. The calculation of the frequency of accidental leaks from oil pipeline is carried out taking into account the factors of influence, there are some experts and empirical ways that can be combined into the following groups: corrosion, the quality of the production of pipes, external anthropogenic impacts, the quality of construction works, design and technological factors, natural effects; defects in metal pipes and welds, operational factors. We use the method of quantitative analysis to estimate the risk of industrial accidents in the oil and gas industry: sensitivity analysis of risks, using the criterion of internal rate of return ( IRR ).



Sensitivity analysis is in the "sequence unit" which is recalculated and based on the new value of the used criterion (for example, the criterion of net present value NPV ). Then the estimated percentage changes in the criterion compared with the base case and sensitivity index that is calculated representing the ratio of the percentage change in the criterion to change the setting to a one percent (the so-called elasticity of changes in index) The response factor is determined by the formula: Кч= (Δ IRR / IRR) / (ΔФ/Ф) = (Ф/IRR) (Δ IRR/ΔФ),

(1)

Where чК - coefficient of sensitivity (elasticity) is a basic value of the internal rates of return and the test factor; - Estimated change in value of the internal rates of return and the decision changing the value, the test factor. As a result of calculations of the sensitivity of conducting expert there are ranking factors and expert`s judgment of predictability in order of importance (high, medium, low). The next step is to build a matrix of sensitivity, which allows us to allocate the least or most risk factors. The base value of the criteria on of internal rate of return on the calculation:

15)1415(2,1735,4064

5,4064144 ≈−⋅−

+=IRR %,

where 14,15 -the value of interest rates in the discount factors; 4064,5; 173,2 – present value for the corresponding values of interest rates.

Relative changes of the parameters are given in Table 7 in the response to the sequential changes in value of IRR.

Table 7 – Indicators of sensitivity (importance) and the predictability of the factors

Factors

Sensitivity The possibility ofpredicting

Elasticity of IRR

The critical value of IRR

Price on oil transportation high

high

0,475

19,5 %

The volume of transportation

high

high

0,475

19,5 %

Capital investment average

average

0,4

11,7 %

Operating costs low

low

0,4

11,7%


Most of all there is a necessity to the price sensitivity of transportation, because a certain percentage of change in price causes a significant percentage decrease in net income. Different changes of sensitivity are shown in comparison with the operating costs, although all the costs are still recoverable if they increase. The list of factors in descending order of their rating, and the calculated values of the elasticity of IRR are shown in Table 7, allowed for matrix sensitivity (Table 8).



Table 8 - The Matrix Sensitivity and Predictability of the Factors Predictability Sensitivity

high Average low

Low Average High

I

I The price of transport (II)

I

П Volume transport (W)

Operating costs (L) Ш Ш

Note: I – further verification, P – monitor closely; W – set and get. Source: compiled by the author

The study of changes in risk over time is a serious problem, as well as the degree of relationships between different risk factors. We cannot provide an effective and meaningful risk management without such an analysis. Features of the market economy, as well as the ever-changing conditions of external and internal environment of the oil and gas industry and individual companies are continuous improvement of assessment methods and risk analysis. The first task has to be solved for risk assessment in stages, as mentioned above, it is a compilation of a list (specification) risks. The second problem is determination of specific gravity of each of the risks in their entirety. This estimation can be made on the basis of expert assessments. Each expert, working independently, provides a list of risks at every stage of the manufacturing process and invited to assess the probability of their occurrence with the following rating system:

0 – non-existent risk; 25 - risky situation is not likely to occur; 50 – the possibility of occurrence of risk situations cannot show the definitive result; 70 – risky situation is likely to occur; 100 – risky situation will occur definitely. The nature of two rules is subjected to the testing evaluation:

1) The maximum permissible difference between two estimates of the experts on any factor should not exceed 50, which eliminates the allowable differences in the estimates of experts, the probability of an individual risk is:

50max ≤− ii ba , (2)

where ii ba , are the evaluation of two experts. 2) For the entire set of risks it is necessary to take into account opinions of all experts, if the opinions of experts vary widely, the differences are summed up and the result is defined by the number of risks. Table 9 – shows the expert evaluations of the risk of drilling oil wells enterprise.



Table 9 – Step of wise risk assessment Simple risk

Experts The average number, iV

Priority,iP 1 2 3

Preparatory stage: 1. The attitude of local authorities; 25 30 25 25,67 2 2. The availability and infrastructure development (arrangement);

35 30 25 30,00 2

3. The problem of land acquisition; 25 50 25 33,33 1 4. Dumping of temporary or permanent access roads.

20 25 15 20,00 2

Drilling and discovery: 1. Not detected productive horizon; 35 40 30 35,00 2 2. Getting the casing cross-flow; 45 50 45 46,67 1 3. Breakthrough of the bottom water; 50 50 50 50,00 1 4. Accidents of various kinds with the most drilling (drill pipe breakage, scrap bits, stuck pipe, and other types of accidents).

50

50

50

50,00

1

Operation The financial and economic risks: 1. The instability of the demand; 25 0 25 16,67 2 2. The growth of VAT and other taxes; 70 100 70 80 1 3. Reduced prices for the products on the market; 50 50 25 41,67 1 4.Termination of investment 30 50 20 33,33 3 Social: 1. The change of leadership; 5 45 25 25,00 3 2. The delay in the wage payment; 5 35 25 21,67 3 3. Poor social living standards; 25 50 25 33,33 2 4. Inadequate wages. 25 50 25 33,33 2 Socio-threatening risks: 1. Terrorism 25 45 25 31,67 1 Technical 1. Lack of reliable technology; 25 30 25 26,67 2 2. Low-quality technical equipment; 25 25 25 25,00 2 3. The danger of corrosion; 50 50 50 50,00 1 4. Errors in the design and construction documents;

25 25 25 25,00 2

5. The error in the length of penetration. 25 25 30 26,67 2 Environmental: 1. The risk of oil spills; 25 30 50 35,00 1 2. Current risk of contamination; 50 25 25 33,33 2 3. Leak of gas (nitrogen). 15 20 25 20,00 3 Note – compiled by the author

The priority assessment of risk is shown in the last column of the table. Analysis of the data in the table shows that the geologist gives a more optimistic assessment than an economist.



The range of estimates for some items is quite high (accidents of various kinds of estimations at 25 points, and the drilling in 50), but both the rules of peer review are analysed according to all stages. There was a necessary participation of three experts for the estimation of the probable risk: the chief engineer on drilling (N1), the Chief Economist (N2) and Geologist (N3). We carry out analysis on compliance with the rules of their contradictions. For example, the experts give the following assessment of the preparatory phase:

1 - (25; 35; 25; 20); 2 - (30; 30; 50; 25); 3 - (25; 25; 25; 15). Comparison of the second rule of (31) gives the following result: 1-2 = (| 25 - 30 | + | 35

- 30 | + | 25 - 50 | + | 20 - 25 |) / 4 = 10.00. We define the similarly 1-3 = 2-3 = 3.75 and 11.25. Oil and injection wells occupy the largest share in the fixed assets of oil and gas

companies and affect the efficiency of oil extraction. Currently, many oil companies face with the challenge of "drilling-in" wells in the fields with a view to remaining reserves and to achieve the approved values of oil recovery factor. Another reason for the drilling is a lack of financial resources. Construction of new wells is expensive. The average cost of a well in 2006 prices is about 35 million tenge. These high costs, of course, must be supported by accurate economic calculations, taking into account all the risks of non-profits. Activities require a significant investment that should commensurate with the income to be received in the future. The next stage of the calculation is analysed on the same principle, the test results are shown in Table10.

Table 10 – Test results on the inconsistency of estimates Pr

epar

ator

y st

age

Dril

ling

Operation

Fina

ncia

l an

d ec

onom

ic

Soci

al

Soci

ally

da

nger

ous

Hyg

iene

Envi

ronm

enta

l

1-2 10,00 2,75 18,75 30,00 20,00 1,00 11,67 1-3 3,75 3,75 8,75 10,00 0,00 1,00 20,00 2-3 11,25 3,75 27,5 20,00 20,00 2,00 8,33


At all stages of evaluation the experts follow the abovementioned rules. Thus, we can take them as a basis for risk analysis. Issues such as the attitude of local authorities in this process and the issue of land allocation and the preparatory phase should be taken into account. In the test analysis, all three experts disagreed, that it proves the materiality of such risks. In assessing the risks it is not only the stage of development drilling engineer revealed an understandable concern that drilling can cause problems such as getting the overflow of the casing, the breakthrough of bottom water and accidents of various kinds,



but also a geologist and economist. It is for these positions where there is consistency of experts' opinions: the first rule gives a minimum value while comparing the views of Drilling Engineer (N1), economist (N2) and Geologist (N3). As a group of financial and economic risks in the operation stage, there is great fear of economist about what will happen in the nearest future, the growth of VAT and other taxes. Other experts have the same opinion, but their estimations are less economic. In the third type of financial and economic risks of convergence of the two experts there is a fact that their awareness of the possible decline in market prices for the products, as well as about possibilities are to reduce the level of risk, carrying out various activities to improve the quality and competitiveness of the oil produced. Considering the risk of termination of investment is in production of the following drilling of wells and the corresponding increase in profit, which is important for the investor. A greater concern for drilling engineer (N1) is shown, suggesting the possibility of unforeseen circumstances during the drilling that could lead to the cessation of investment. Fears of an economist (N2) lie in the fact that not all performance measures meet the requirements of the production yield. The assessment of social risks among expert is a great difference of opinion. For example, an engineer on drilling is confident in his leadership and satisfied with the social policy of the company. A geologist and economist suggest the possibility of difficulty in changing direction and are not satisfied with social policy and the level of wages in the enterprise. Analyzing the risks at the local level we should take into account the political situation in the country, assessing the risks associated with terrorism. The data demonstrate a high level of concern of experts in the assessment of these risks. Technical risks, according to the experts, rated almost equally. This is a dangerous thing as gas emissions, as well as the possibility of an oil spill is quite likely in the operation of the well. However, ongoing preventive measures gave rise to the assessment of these risks as unlikely. After determining the probability of a simple risk assessment integrated project risk. To do this, we should make an assessment for each of the stages of pre-calculating a simple risk. For example, we should operate the financial and economic, technical, social, socio-economic and dangerous situations. The next step is to assess the risk of an investment portfolio based on risk assessments of individual stages. To solve these problems, we have to develop a system of priorities for each prime risk and then determine the weight with which each is a simple risk to the overall risk. In this case, the condition is non-negative weights and their sum is equal to unity (normal condition). Its own system of weights should be developed for each risk. It is assumed that all risks with the same priority have the same weight. In this process, priorities are ranked from 1 to 3, with the number 1 that corresponds to the maximum, and number 3 is the minimum value of the weights. The weights, corresponding to intermediate priorities, are calculated as average values, depending on the chosen formula of averaging. Let the ratio of the weights corresponding to the first and third priority is 10. Then a simple risk weight in the first priority will be 10X, the second will be X (10 +1) / 2 = 5.5 X.



Table 11 shows the calculation of the weights of risk groups according to the method of simple arithmetic average. From these data it follows that the probability of risk for the preparatory phase is equal to 7.49%.

Table 11- Calculation of risk weighted groups

Simple risks

The average number , iV

Priority,iP

Weight,iW

ii WV *

1 2 3 4 5 Preparatory stage: 1. The attitude of local authorities; 25,67 2 0,055 1,41 2. The availability and infrastructure development (arrangement);

30,00 2 0,055 1,65

3. The problem of land acquisition; 33,33 1 0,1 3,33 4. Dumping of temporary or permanent access roads 20,00 2 0,055 1,10 The average estimation of probability 7,49 Drilling and discovery stage: 1. Not detected productive horizon; 35,00 2 0,055 1,93 2. Getting the casing cross-flow; 46,67 1 0,1 4,67 3. Breakthrough of the bottom water; 50,00 1 0,1 5,00 4. Accidents of various kinds with the most drilling (drill pipe breakage, scrap bits, stuck pipe, and other types of accidents)

50,00

1

0,1

5,00

The average estimation of probability 16,60 Operational stage: The financial and economic risks: 1. The instability of the demand; 16,67 2 0,055 0,92 2. The growth of VAT and other taxes; 80 1 0,1 8,00 3. Reduced prices for the products in the market; 41,67 1 0,1 4,17 4. Termination of investment 33,33 3 0,01 0,33

The average estimation of probability 13,42

Continuation of Table 11 1 2 3 4 5 Social: 1. The change of leadership; 25,00 3 0,01 0,25 2. The delay in the wage payment; 21,67 3 0,01 0,22 3. Poor social conditions of life; 33,33 2 0,055 1,83 4. Inadequate wages 33,33 2 0,055 1,83 The average estimate of probability 4,13 Socio-threatening risks: 1. Terrorism. 31,67 2 0,055 1,74 The average estimation of probability 1,74 Technological: 1. Lack of reliable technology; 26,67 2 .055 1,47



2. Low-quality technical equipment; 25,00 2 0,055 1,38 3. The danger of corrosion; 50,00 1 0,1 5,00 4. Errors in the design and construction documents; 25,00 2 0,055 1,38 5. The error in the length of penetration. 26,67 2 0,055 1,47 The average estimation of probability 10,70 Environmental: 1. The risk of oil spills; 35,00 1 0,1 3,50 2. Current risk of contamination; 33,33 2 0,055 1,83 3. Release of gas (nitrogen). 20,00 3 0,01 0,20 The average estimation of probability 5,53 Note – compiled by the author

The stage of drilling and development has a higher risk than preparatory one. The possibility of drilling in dangerous events is referred to the earlier stage that could jeopardize the timing of the object delivery.

The average probability of occurrence is 16.6% from the results of the calculation of the financial and economic risks, primarily due to the risk of VAT growth and other taxes. The establishment of a fixed rate of VAT is justified. Chance of a social risk is 4.13%, which proves dissatisfaction with experts in the social policy of the enterprise. Socially dangerous risk is 1.74%, which implies that the threat of terrorism is unlikely, but delete it from the list of risks it would be imprudent. Among the technical risks, as one would expect, the greatest concern is the danger of corrosion.

One of the major issues is an increasing turnaround time well, reducing the number of repairs. We know that it might be environmental problems implementing various activities in order to avoid additional costs, so the environmental risk is estimated at 5.53%.

Therefore, the risks are identified for each position. However, before proceeding to a comprehensive risk assessment, it is necessary to consolidate the risks under the operation (Table 12).

Table 12-Risks of the operation phase, % Types of risk Risk Financial and economic 13,42 Social 4,13 Socially dangerous 1,74 Product 10,70 Environmental 5,53 Total: 35,52

Note – compiled by the author From Table 12 it follows that the risk is almost 60%, which means the probability to get a practice that is conceived, is 60%, so a portfolio can be considered quite risky.

Table 13- Risks in stages,% Stage Risk Preparatory 7,49 Drilling and discovery 16,60 Operation 35,52 Total: 59,61




The risk of the portfolio as a whole is associated primarily with a small number of highly dangerous risks. Therefore, when planning an investment portfolio we need to analyse all significant risks (e.g., greater than 3%) in a separate table in order to take measures to neutralize their manifestations (Table14). In general, these seven items represent more than half of the risk on portfolio.

Table 14 – The largest share of the risk on the investment portfolio, %

Types of risk % The problem of land acquisition 3,33 Getting the casing flow 4,67 Breakthrough of the bottom water 5,00 Accidents of various kinds during the drilling 5,00 The growth of VAT and other taxes 8 Reduced prices for the products on the market 4,17 Risk of corrosion 5,00 The risk of oil spills 3,50

Note – compiled by the author Conclusion Theoretical conclusions, practical recommendations and proposals for risk management in the petroleum industry in the market conditions that are analysed in the thesis are very relevant, and the results are summarized in the following way:

1. A large proportion of the risk lies in the choice of methods and criteria for measuring and assessing the risk probabilities and magnitudes. The logical formation of risk considered shows a more systematic assessment of each type of risk where management is extremely important. The complexity of risk classification lies in their variety and diversity of risk situations requiring its organization and management. Nevertheless, it is a qualitative classification of risk management that is largely determined by the effectiveness of risk management and its capability.

2. Analysis of theoretical research in the field of effective risk management leads to the conclusion that in these studies a number of issues is neglected and the underestimation of the practical use of the results on theoretical investigations can show an incomplete or incorrect assessment of the impact of various factors on the appropriate risk. In this regard, it should be analysed that the formation of risky factors can influence the specific types of risks. The proposed classification of risky factors is determined according to the main directions of the risk assessment;

3. Qualitative analysis of risk involves the following factors: identifying sources and causes of risk phases of work, under which a risk can take place, the establishment of areas of potential risk identification of all possible negative consequences. In the process of qualitative analysis, there are not only different types of risks that threaten the functioning enterprises, but also the possible loss of resources that accompanies the risky events is identified. The results of qualitative analysis are an important source of information for quantitative analysis. Quantitative risk analysis involves the numeral determination of the individual risks that are identified in the course of the numeral values of the probability of risk events and their consequences. A quantitative assessment of the degree of risk is determined according to the particular situation of the risk



level. The project faced with the large group of risks in the process of selected qualitative analysis. The probability of each type of risk is different due to the amount of damages that they may cause.

The risks inherent in oil and gas companies are highlighted in several groups: financial, social, political and environmental. The financial activities of enterprises in all their forms are associated with numerous risks; the degree of influence can be the result of this activity that is significantly increasing in market conditions. Risks associated with these activities are highlighted in a special group of financial risks (market, credit, liquidity risk, interest rate, and operational), which play the most significant role in the overall "portfolio risk" venture. The calculated values of financial stability of the oil companies (the coefficient of financial risk, the coefficient of investment, the coefficient of independence) suggest the fact that firms are independent from the borrowed funds and can pay for their expenses. Analysis of business activity and profitability is based on a study of levels and dynamics of these factors that determine the ability of oil companies to the financial survival, to attract funding and to reduce financial risks. The evaluation of environmental risks of oil and gas companies in the region is identified with major violations of environmental safety (possible oil contamination of land and emergency flaring, inefficient sewage treatment plants and emergency gas flaring); therefore, necessary measures should be taken for the purpose of the environmental protection. Conducted analysis of a comprehensive risk of oil and gas companies, has allowed evaluating each type of risk qualitatively and quantitatively. Each elaborated table of risk assessment is based on data obtained from statistical, scientific, periodic sources, and a personal experience of the leaders and experts. The problems of subjectivity in the risk assessment are eliminated by using the Delphi method. The values of each type of risk are the following: Regional – 0.35, Production – 0.47, Market – 0.46; Environmental – 0.47; Financial – 0.35. Overall, assessment of risk solutions is 0.44, which corresponds to the scale of gradations of risk indicator "high". Evaluation of financial, economic, social and environmental risks of drilling oil wells enterprise is carried out by experts. The average probability of financial and economic risk is 16.6%, primarily due to the risk of VAT growth and other taxes. Occurrence of a social risk is 4.13%, which proves the dissatisfaction of experts in the social policy of the enterprise. Socially dangerous risk is 1.74%, which implies that the threat of terrorism is impossible. The danger of corrosion is of a great concern among the experts who analyse the technical risks. Environmental risks of the oil company are estimated at 5.53%. In reality, there are limited numbers of factors affecting the production activities of the enterprise. A significant possibility of adverse effects can be eliminated after a detailed analysis on minimization and neutralization of the negative factors or use of other methods of risk management.

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Street food fad or fashion? 65

Street food fad or fashion?

Chris Davies1 There is a growing trend in the UK for high quality and a great array of street food in the streets of every Town in the country. Small mobile stalls are popping up serving anything from wood fired pizzas to Mexican burritos and tacos along the more traditional sizzling sausage and ubiquitous burger. There is also a growing trend for pop up cafes to appear in such places as universities for graduation and in short term buildings where the lease or tenancy is about to run out. Is this a new fashion or a passing fad? A question I have recently asked myself many times and something I am going to look at. I believe we in the UK generally follow the USA ten year rule, that is foods that are popular in the USA normally turn up on our shores ten years after it has in the States. However with the way modern communications are moving the ten years has now shrunk to two years. Food and Food programmes are now very fashionable and our TV screens are full of cookery programmes with a number of dedicated food channels. Indeed there is a programme called “Andy Bates Street food “which highlights the excellent street food available in the UK and USA. They would have you believe that street food is a new and exciting innovation in the food business but is it really or is it just something that has regained its popularity with new modern twists. We in the UK have been offering street food in many different guises since the middle ages when hot food was offered at the local jousting tournaments or archery competitions’ a pig was often spit roasted over an open fire and served to the large crowds that flocked to the events. The world famous Goose fair has been in Nottingham since 1284 where it started of life a trade event to showcase local high quality cheese. No doubt it gained its name as a resting place or collection point for the thousands of geese that were driven from Lincolnshire for sale in Nottingham. As time progressed regional specialities were often found at fairs and markets throughout the land. The North of England had hot meat pies; the West Country the Pasty and London was famous for its pie mash and liquor. The early Jewish immigrants popularised fish and chips served in the open air from market stalls throughout the UK it was only in the late 19th century that shops opened selling fish and chips. The Industrial revolution brought many changes to the working population and no more so than in their eating habits, the women folk were no longer staying at home and providing food for the bread winners, they were in many cases the breadwinner as jobs for woman became prevalent. So good cheap hot food was required and so many fast food shops and bakeries opened their doors to the working population. Businesses like my Grandmothers “shilling dinners that provided hot meat pie, veg and mashed potatoes to the dock workers of Middlesbrough. There were very few employees who had good welfare policies which provided food for their workers although companies such as Cadburys, Frys, Rowentrees.Lever brothers and Coleman’s were developing their employee welfare policies.Colemans provided Pork to their 1 Chris Davies is employed as a Senior Lecturer at London Churchill College in the Hospitality Management department. Chris recently published his book named “Food Service Management” considered to be very useful for students and managers in the field of hospitality.


Street food fad or fashion? 66

workers for their Christmas dinners, and had subsidised flour when flour prices were beyond their reach. Levers provided a cooperative store for the community, gave girls dinner for one to four pence, maintained a cooperative catering hall and ran a special dining room for women. These were the green shoots of today’s industrial/contract catering industry (Heller, 1980). Many of the working population did not have proper ovens so they would prepare food and take it to the local bakers to go in their oven once the bread had been baked and in some cases there employers kitchens. So there was quite a demand for cheap hot food and many local markets provided hot food from their street stall where they had barbeques and open fires to serve their hot food from. I was told that just as you go over London Bridge and in to King William Street a market stall sold SPO; Sausage Potato and onion from vast enamel vats to hungry workers and commuters, the smell must have been wonderful. Although permanent shops like these were growing at a good rate we still had good quality street food in our markets, fairs and sporting venues throughout the UK. My aunt told me about the saucers of peas with vinegar that were served when Peg leg Pete arrived to dive from a platform and into a tank of water, anywhere there was a crowd. Toffee apples, candy floss, whelks and winkles, pork pies and many others were available from our streets throughout the nineteenth and twentth century. It was only after the Second World War that the hot dog and burger became popular during what I call the rock and roll years, the smell of fried onions and grilled meat wafting through our streets. For the next fifty years that was pretty much the only street food available to us often sold from scruffy carts on the street. We were slow on the uptake and our sense of food fashion was just as slow. The recent popularisation of street markets and their traders has been described in some quarters as a revolution in eating. Street food has been a consistent feature in the UK for thousands of years; it is the variation and quality that has changed like any other fashion throughout the years. The modern UKK street food reflects today’s modern multi cultural with varied and refined tastes, but it’s not just any food — messy cheeseburgers served barbecue-scorched in freshly baked buns. Vietnamese baguettes overflowing with griddled garlic pork and fiery spices. Guacamole-slathered steak burritos that are so big you need two hands and a workbench to eat them. Like those growing lines of people, the list goes on (Short List, 2012). The popularity of street food is also a reflection on the economy, when times are hard the population have to become more imaginative and resourceful. Many people just can’t afford the high prices of restaurants and eateries; street food has become the food of the modern working class. In conclusion I believe that Street food in the UK is definitely a fashion rather than a passing fad. Long may it continue! References

• Heller, R. 1980. Food at Work. Herts: Abacus Press.

• Short List, 2012. Britains best street food. [Online] Available at: <http://www.shortlist.com/instant-improver/food/gourmets-take-to-the-streets> [Accessed 01 December 2012]


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4. References

• References should be listed in alphabetical order. Each listed reference should be cited in the text, and each work cited in the text should be listed in the References. Basic formats are as follow (Harvard Referencing):

4.1 Journals and Periodicals

For Single Author

Cox, C., 2002. What health care assistants know about clean hands. Nursing today, 12 (1), pp.647-85.

For Double Authors

Cox, C. and Hasan, R., 2002. What health care assistants know about clean hands. Nursing today, 12 (1), pp.647-85.

For Multiple (more than four) Authors

Grace, B. et al., 1988. A Factor Analytic Study on the Validity of a Union Commitment Scale. Journal of Applied Psychology, 12(1), pp. 129–136.

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Mittal, K.C., Singh, G., Kaur, N. and Dangwal, R.C., 2004. Globalization and Firm Competitiveness – Selected Case Studies of Local Exporting Companies in Malaysia. Proceedings of The 8th South Asian Management Forum. London: Association of Management Development Institutions in South Asia. pp. 330-340.

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Mitchell, T.R., and Larson, J. R., 1987. People in Organizations: An Introduction to

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Keene, E. ed., 1988. Natural language. Cambridge: University of Cambridge Press.

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Slapper, G., 2005. Corporate manslaughter: new issues for lawyers. The Times, 3 Sep. p.4b.


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In general, when writing for a professional publication, it is good practice to make reference to other relevant published work. This view has been supported in the work of Cormack (1994).

Making reference to published work appears to be characteristic of writing for a professional audience (Cormack, 1994).

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Smith (1946) and Jones (1948) have both shown …

Recent research (Collins, 1998; Brown, 2001; Davies, 2008) shows that

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Green, et al. (1995) found that the majority …

Recent research (Green, et al., 1995) has found that the majority of …

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