Journal of Engineering Studies and Research – Volume 21 (2015) No.

1 30

RISK MANAGEMENT METHODOLOGY OF INVESTMENT

PROJECTS WITH ENVIRONMENTAL IMPACT

ELENA GINDU1, AUREL CHIRAN1, BENEDICTA DROBOTĂ1*,

ANDY-FELIX JITĂREANU1
1
University of Agricultural Sciences and Veterinary Medicine "Ion Ionescu de la Brad"
Iaşi, Department of Agroeconomy, M. Sadoveanu Alley, No 3, 700490 Iasi, Romania

Abstract: In projects, a strategic component is to identify all risks that might influence their
success, prevent and manage them effectively. Risk management is essential to add value to
an investment and improve results. With the economic and financial crisis in recent years,
increasingly, more companies have realized the importance of using a system of risk
management, given the multitude of variables that can influence the success of a project.
These include: legislative changes, global political and economic instability, natural
disasters, climate change, human resources, liquidity risk, environmental impact, risk of
erroneous calculation of total project costs, risk of failure into initial project schedule,
prolongation risk, the risk of failure of internal rate of return (IRR) and net present value
(NPV) etc. The study proposes a new method of risk assessment and management in the
investments projects with environmental impact and its application in a case study. The
method will take into consideration besides the economic and financial indicators, hard to
be understood by smaller investors, a set of simple and important questions that they have
to analyze before deciding to start an investment project. The new methodology will have a
comprehensive approach from identifying the investment opportunity, writing investment
project until its implementation. This will take into account macroeconomic variables and
the microeconomic environment that can influence the success of project implementation.
The main advantage of applying the new methodology are: knowing all the variables that
influence the success of a project realization; awareness of the importance of applying an
effective risks management related to investment projects with environmental impact,
increasing the quality and success of projects.

Keywords: environment, management, projects, risk

1. INTRODUCTION

The objective of risk management is to ensure that significant risks are identified and appropriate measures are
taken to manage them. That includes identifying, analyzing, evaluating and treating all types of risks, both
internal and external to the company [1].

Usually, development projects from many areas like industry, agriculture, also have an environmental impact
that also must be taken into consideration in risk assessment [2]. Among the used methodology, we can mention:
assigning a significance of each environmental component for the evaluated project an integrated method as a
combination between global pollution index and matrix of significance scale [3, 4], environmental cost–benefit

*
Corresponding author, email: benedictadrobota@gmail.com
© 2015 Alma Mater Publishing House
 Journal of Engineering Studies and Research – Volume 21 (2015) No. 1 31

analysis that refers to social evaluation of investment projects and policies that involve significant environmental
impacts [5], data envelopment analysis that uses shadow prices instead of relative prices etc. [6, 7].

Dikmen et al. [8] consider that “calculating the overall risk level of each project by multiplying the relative
impact with the relative probability of each risk and then adding the scores compares the risk of projects and
provides a relative risk score”.

Another approach to assess different risk types is the stochastic methods which dealing with duration risk or cost
risk while the risk has been seen as a synonym for variability of expected duration or estimated cost. Also,
human factors, personal experience, intuition, and judgment have to be considered in risk assessment and
management. Taroun et al. [9] propose a method to assess risk impact as a percentage of project net present
value (NPV), a common use economic project appraisal criterion to reflect the impact of damage on an
intangible objective arising from a risk.

Hillson [10] proposes assessing both threat and opportunity within qualitatively and quantitatively models
simultaneously. Dey [11] “seeks to identify the best strategy, project scenario, for managing project risk through
the expected monetary value of each risk response strategy”. Cagno et al. [12] quantify the risk load allocated to
each project element by identifying sources of uncertainty, activities affected and risk owners in monetary terms.

Ward and Chapman [13] argue that all project risk management methods have a small focus on the project
management uncertainty, because the term risk encourages a threat perspective and is associated with events
rather than a significant uncertainty.

Risk management and a presence of a risk manager with soft skills can make a very good impact on project
results, by taking into consideration the uncertainties of the project, using risk management methods and the
critical success factors of any business environment [14-16].

The study aim is to propose a new approach to assess and manage risks in investment projects, also taking into
the account the environment element.

2. EXPERIMENTAL SETUP

For this study, a number of 23 investing projects with European grants were analyzed, implemented during the
period 2004 - 2014, in agribusiness sector: farm machineries, dairy farms, cereal silos and milk processing units.

The research methodology is the qualitative research with nonstructural interviews for gathering data and data
analyze. The nonstructural component (the free discussions) gives the flexibility in the investigation and offers
the opportunity to correlate elements apparently with no connection. The interview is a simple research method,
however, requires special abilities to plan and conduct it, analyze the content, give a meaning to information,
make connections between elements (how one element influence each other), being a complex task that involves
intensive work.

The questions were related to the issues encountered in projects implementation and the variables that influenced
the project results.

More types of risks were identified with the open questions, analyzed and categorized into main groups. For risk
identification it was considered all situations that negatively influenced the project results (decrease in economic
and financial indicators of the investments, prolongation of the project, cancelation of the project, additional
costs for investment, environmental issues etc).

3. RESULTS AND DISCUSSION

The main risk categories identified were analyzed on three levels: macroeconomic risks, business risks and
project risks (Figure 1).
 Journal of Engineering Studies and Research – Volume 21 (2015) No. 1 32

Fig. 1. The main risks categories that influence a project success.

The first category, macroeconomic risks involves: global, political and economic instability, legislative
changes, climate change and natural disasters (Table 1).

Table 1. Macroeconomic risks that influence a project success.

No. Variables Examples

1 Global, political Price dynamic (inflation rate, salaries, energy, changes goods and services
and economic prices).
instability
Demand data (population, demographic growth rate, specific
consumption, demand formation, volume of traffic, and market volumes
of a given commodity).

2 Legislative New laws, taxes, new standards in raw materials, equipment, etc.
changes

3 Climate change Heat&drought in agricultural production.

4 Natural disasters Floods, fire.

In the analyzed projects, the best impact was due to frequent changes in public procurement laws for
investments. The economic instability also had a big impact in the period 2008-2010 when most of the projects
had liquidity issues that delayed the implementation or diminish the total value of the project. Also, many
investors decided not to submit projects to be financed. The climate change factor is becoming more and more
important since the agricultural production level is very much related to climatic factors like precipitation, wind,
heat, drought, hailstone, etc. Of course, there are insurance that can cover this risk, still, the forecast income of
the project is affected and at the same time the liquidity indicators and other project indicators that must be
respected for all the implementation years (between 1 and 3 years) and also 5 years after a project
implementation, like profit rate minimum 10%, rate of return on invested capital minimum 5%, coverage rates
by cash flow more or equal 1.2, a positive NPV and cash flow etc. Failure to follow into the indicators level can
leads to withdrawal the funding from the projects.

The second group of risks analyzed are related to five business risks: development, manufacture, marketing,
finance and growth risks (Figure 2).
 Journal of Engineering Studies and Research – Volume 21 (2015) No. 1 33

Fig. 2. The main categories of business risks that influence a project success.

When the business risks as a whole are analysed as regarding a project, it raise a set of questions, like:
 can the new developed product be integrated into the existed business?
 it exists the needed capacity for the new product to be manufactured?
 can the new product be effectively sold on the market?
 can the sales generate a positive cash flow in the company?
 the positive cash flow can generate a continuous growth of the business?

Besides macro economic and business risks, the projects also have specific risks that must be considered, like:
project team, budget, technical aspects, technology transfer, financial risks, environment risk, project schedule
(Table 2).

Table 2. Project risks that influence a project success.

No. Variables Examples

1 Project team Low qualification, competencies, communication, which results in a

defectors teamwork.
2 Budget The resources are not enough; the incomes are hard to be made.

3 Technical aspects The idea/technology is not correct.

4 Technology transfer
5 Financial risks
6 Environment risk
The technology cannot be applied as planned and, therefore, the products
cannot have the forecast characteristic.
Risk of an erroneous calculation of total project costs, the risk of failure in
the internal rate of return (IRR) and net present value (NPV).
Air, water and soil pollution, environmental regulations.

7 Project schedule Prolongation of the project that determine more costs.

Every investment project brings a challenge to the manager of the company because it has to be analyzed the
impact on the whole business on long, medium and short-term. In some cases, a European projects can show
good results on short term, however, on medium or long term can be seen some hidden costs and the opportunity
of a project implementation can decrease. Some of these costs are related to:
 a long implementation term - a European project takes more time than an own financed one (2-3 years
more time);
 Journal of Engineering Studies and Research – Volume 21 (2015) No. 1 34

 the prices of equipment/construction, raw materials, increase in that period;

 change in technology – new standards arise, some materials are not manufactured anymore;
 the suppliers are chosen within a public auction mainly based on price (cannot be taken into
consideration the credibility of the supplier, after sales services, the quality of the products can be
lower);
 project score: employee number can artificially increase and also the costs;
 projects indicators must be maintain five years after the implementation.

All the risks identified for a project must be quantified by: the probability of appearance (minimum value –
maximum value), costs estimation, the impact and the effect of every known risk on the project success, the
positive risks (income resulted from the appearance of some changes like a good change in legislation).

Further, measures for each risk must be established, the risk management variants includes:
 avoiding risks, or loss prevention – ways to prevent a loss from occurring, with methods like trainings
for employee safety;
 assuming risks – by accepting that a loss can occur and be ready for consequences;
 reducing risks, or loss reduction;
 transfer the risk - insurance.

Also, an important aspect is establishing a person who will supervise the appearance of every risk, and if risk
appears, the right measures will be taken.

4. CONCLUSIONS

The main aspects necessary to be analyzed when deciding to implement an investment project with European
grants are:
 a market study (the market where the business must have a growth potential);
 a business study – can actual business support a new investment? Can the business be profitable without
the project? The project must be seen as a part of the business that can grow it faster.
 which are the hidden costs of the project?
 what positive results can bring a change in the plans?
 everyone involved in the investment process should consider the risks and be involved in this process;
 significant barriers to risk management: lack of human resources/expertise; complexity of the processes;
potential benefits are not clear; resistance to change at the executive level; existed technology is not
inadequate; lack of financial resources;
 proactive risk management is better than a reactive one – being prepare for unlikely events is the most
important lesson from the recent crisis;
 how much money should be invest on prevent the loss that might never happen?

By taking into account an effective risk assessment and management, when an investment project is considered
to be implemented, the companies can register an increase in competitiveness in their business.

For the success of the projects, a project risk manager is recommended to be assigned, with strong business
development (that can understand the business as a whole) and also soft skills (stress, time and change
management, interpersonal relationship skills, leadership) that can prevent the appearance of negative events,
conflicts and take appropriate measure when a risk appear.

REFERENCES

[1] Jardine, C., Hrudey, S.E., Shortreedb, J., Craigb L., Krewskic, D., Furgald, C., McColle, St., Risk
management frameworks for human health and environmental risks, Journal of Toxicology and Environmental
Health, Part B, vol. 6, 2003, p. 569–641.
[2] Popiţa, G.E, Varga, I., Gurzau, A., Bence F., Yuzhakova, T., Haţegan, R.M., Redey, A., Popovici A.,
Măruţoiu, C., Environmental impact and risk assessment in the area of “Pata Rât” landfill site, Cluj–Napoca,
Environmental Engineering and Management Journal, vol.13, no. 2, 2014, p. 435-447.
[3] Macoveanu, M., Methods and Techniques for Environmental Impact Assessment, 2nd Edition, EcoZone
Press, Iasi, 2005.
 Journal of Engineering Studies and Research – Volume 21 (2015) No. 1 35

[4] Gavrilescu, M., Risk assessment and management, Ecozone Press, Iasi, Romania, 2003.
[5] Ackerman, F., Heinzerling, L., Priceless: On Knowing the Price of Everything and the Value of Nothing, The
New Press, New York, 2004.
[6] Kuosmanen, T., Kortelainen, M., Valuing environmental factors in cost–benefit analysis using data
envelopment analysis, Ecological Economics, vol. 62, no. 1, 2007, p. 56–65.
[7] Lee, J.D., Park, J.B, Kim, T.Y., Estimation of the shadow prices of pollutants with production/environment
inefficiency taken into account: a nonparametric directional distance function approach, Journal of
Environmental Management, vol. 64, 2002, p. 365–375.
[8] Dikmen, I., Birgönül, M.T., Arikan, A.E., A critical review of risk management support tools, Conference
Proceedings, 20th Annual Conference of Association of Researchers in Construction Management (ARCOM), 1-
3 September, Heriot Watt University, UK, vol. 1, 2004, p. 1145-1154.
[9] Taroun, A., Yang, J.B., Lowe, D., Construction Risk Modelling and Assessment: Insights from a Literature
Review, The Built & Human Environment Review, vol. 4, no. 1, 2011, p. 87-97.
[10] Hillson, D., Extending the risk process to manage opportunities, International Journal of Project
Management vol 20, 2002, p. 235–240.
[11] Dey, K.P., Decision Support System for Risk Management: A case study, Management Decision, vol. 39,
no. 8, 2001, p. 634-649.
[12] Cagno, E., Caron, F., Mancini, M., A Multi-Dimensional Analysis of Major Risks in Complex Projects,
Risk Management, vol. 9, 2007, p. 1-18.
[13] Ward, St., Chris, Ch., Transforming project risk management into project uncertainty management,
International Journal of Project Management, vol. 21, 2003, p. 97–105.
[14] Rabechini, R, Carvalho, M.M., Understanding the Impact of Project Risk Management on Project
Performance: An Empirical Study, Journal of Technology Management & Innovation, vol. 8, Special Issue
ALTEC, 2013, p. 64-78.
[15] Zwikael, O., Ahn, M., The effectiveness of risk management: an analysis of project risk planning across
industries and countries, Risk analysis, vol. 31, no 1, 2011, p. 25-37.
[16] Ackerman, F., Heinzerling, L., Priceless: On Knowing the Price of Everything and the Value of Nothing.
The New Press, New York, 2004.
Copyright of Journal of Engineering Studies & Research is the property of Alma Mater and
its content may not be copied or emailed to multiple sites or posted to a listserv without the
copyright holder's express written permission. However, users may print, download, or email
articles for individual use.