Risks and its Management after Financial Crisis in Kazakhstan

According to the vice-president of “Akmola Stroi” financial crisis brought many changes in this industry”. The manager in “Sembol construction” said that crisis is “a risk for some of companies, but for another it is the opportunity”. Crisis had two effects: construction stopped, many companies go bankrupt and many workers lose their jobs, however for managers of construction companies that survived this was an opportunity for growth. “We become more wise and prudent” said the manager of “Akmola Stroi. Before to start any project they carefully analyse it. For example, now they are carefully observing the economy of neighbour country Russia, because they procure materials from that country. They with awareness sign any contracts or agreements and try to take under consideration and negotiate any incompliance in advance. Contract is conventional method to minimize risks. After financial crisis such risk as currency fluctuation become very significant since economies of Kazakhstan and neighbour countries around become unstable. For instance, financial crisis brought such event as devaluation of national currency “Tenge”. Because of that event many companies lose lots of money. Now this kind of risks construction companies try to minimize through financial instrument such as “Hedging”. According to Buzzle Hedging is a financial instrument such as options, futures and swaps that are used to minimize risks which arise from changes of the price of one currency against another. For example, graph 4.1 shows how price of US Dollar is appreciating against national currency of Kazakhstan “Tenge”. For example, when one party wants to buy another currency and he thinks that currency which he wants to buy will appreciate against his currency. To minimize the effect of those changes he can buy futures, options or swap contracts. These contracts will give right to buy a currency at initial rate.

After crisis all prises decreased. Precisely, prices for materials decreased, but in the same time the prices for housing also decreased, consequently now construction companies make less profit than they did before crisis. Managers state that now for some buildings if it is too risky but return is huge companies make joint projects, by that way they divide risk for two parties. Because of financial crisis demand for housing sharply decreased. This significantly hit companies. Managers of the companies state that it was impossible to foresee this financial crisis. However, even this event significantly affects construction companies technical risks in residential construction industry mostly stay the same, except demand for housing and economic risk like currency fluctuations.

Graph 4.1 Tendency of Currency “Tenge” against US Dollars

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Adopted from www.investfunds.kz

According to Kahkonen and Artto (1997) risk identification is the most critical and important step in project risk management process. During the secondary research it were identified various risks associated with constructions. Mainly, they were based on the research of Kahkonen and Artto (1997) and El-Sayegh (2008). Risks identified by El-Sayegh (2008) are presented in the table 5.1.

Table 5.1. Most significant risks in construction industry

Risk
1. Inflation and sudden changes in prices
2. Owners’ unreasonably imposed tight schedule
3. Subcontractors’ poor performance and management
4. Delay of material supply by suppliers
5. Change of design required by owners
6. Owners’ improper intervention during construction
7. Shortage in manpower supply and availability
8. Delays in approvals
9. Lack or departure of qualified staff
10. Shortage in material supply and availability

The table 5.2 presents the most significant risks identified in residential construction industry in Kazakhstan. Basically, these risks, as it was stated by respondents were before financial crisis and after. However, after financial crisis some risks become more significant than others. For instance, risk like currency fluctuations or changes of prices for materials are risks that become more significant after financial crisis. According to respondents these risks depend to internal and external economic condition and out of manager’s control.

Table 4.1 List of the most Significant Risks Identified in Kazakhstan Market

1	Corruption
2	Financial
3	Change of materials price
4	Change of design after work has started
5	Logistics risk
6	Communication problems
7	Poor quality of workers
8	Delays in materials delivery
9	Architectural risks
10	Weather conditions

In comparison of risks written in literature review and research findings it can be said that they are similar. Risks like change of materials price and inflation and sudden changes in prices, delays in materials delivery and delay of material supply by suppliers, change of design after work has started and change of design required by owners are mainly same.

Risk like corruption plays very important role in the industry. It directly affects the success of the construction projects. As it was stated by Macomber (2001) there are three types of risk that affect success of a project, they are financial risk, schedule risk and quality risk. Risk of corruption significantly affects all three aspects of project. For example, the money that was prepared to finance a project will go for corruption. This affects quality because managers will procure fewer materials for construction. Also this will affect duration of the construction project because a company will have to hire fewer workers. For instance, if according to El-Sayegh’s (2008) most significant risk can be change of materials or inflation, in this country the most significant risk is corruption.

Also those risks identified in Kazakhstan construction companies can be classified according to El-Sayegh’s (2008) Classification of Risks (see figure 2.1). Risks like corruption and communications with government can be classified to political risk. Change of materials price, currency fluctuations and decreased demand for apartments can be arranged to economic risk. A weather condition in the city of Astana is natural risk. Change of design, delays with funding to contractors can be classified to owner’s risks.

In comparison with the risks stated by Kahkonen and Artto (1997) it can be said that in addition to risks associated with owners it can be added corruption and problems with funding. Kahkonen and Artto (1997) argue that risk of defective design can be transferred to architect or engineer, however according to manager of “Sembol Constructions” company they face risk with architects. When an architectural firm do not possess enough experience they face risk that a project will be submitted late or with defections.

References

· How to analyse qualitative data, available at URL: http://www.emeraldinsight.com.ezproxy.stir.ac.uk/research/guides/methods/qualitative.htm accessed 27th of July

· Geography of Kazakhstan, available at URL: http://expat.nursat.kz/?3295 accessed on 14^th of August

· How to conduct interview, Anon., n.d , available at URL: http://www.emeraldinsight.com.ezproxy.stir.ac.uk/research/guides/methods/interviews.htm accessed on accessed 27th of July

· Economy watch, USA Construction Industry, available from URL: http://www.economywatch.com/sector-watch/us-construction.html accessed on 23^rd of July.