Pugh matrix

The Pugh matrix technique (also called the grid analysis or decision matrix) is built upon weighing different factors, which affect the situation. It is used to evaluate and choose between several alternatives. It is applied for making a choice in the situations where many factors must be taken into account. The matrix will help to understand and analyze the situation and to see how will develop and to which outcomes the country will come. For the purpose of this dissertation, the Pugh matrix is applied to understand which oil price scenario brings better results in the end. It is also important that this matrix allows for a simple sensitivity analysis to be performed. As the preparation of Pugh matrixes is a team-based procedure, the exercise was conducted with the help of two Kazakh government employees, who formed a team with the author. Based on their experience they helped to compile

potential outcomes for each scenario, the lists of consequences and to assign points to each of it under each scenario. The most valuable part of their participation in this exercise is their experience and the knowledge of specific procedures employed when strategic decisions are taken. This work started with the compilation of the Initial Pugh matrix (Table 12 below) and assigning points to each consequence. Then the Initial matrix was converted into other matrixes shown below.

Based on the work done in this dissertation and upon consultations with the above-mentioned governmental employees, it was decided to start the exercise with the traditional three pillars of sustainability, namely economic viability, environmental protection and social sustainability. All the consequences are divided into short-, medium and long-term because this approach helps to better understand the situation and its potential developments. Short-term in this context means for the period up to 5 years, medium-term means the period from 5 to 15 years and long-term means the period exceeding 15 years. The assignment of points was done in a usual straightforward way without giving weight to any point. The initial matrix is presented in Table 12 below.

Medium-term environment al

1 5 3 3 2 2 1 1

Long-term environment al

1 5 4 4 2 2 1 1

Short-term

social 1 5 1 1 2 2 3 3

Medium-term social 1 5 2 2 2 2 2 2

Long-term

social 1 5 4 4 2 2 1 1

Total 45 22 21 22

Explanations to the points assigned:

Economic consequences: Expectedly low oil prices negatively affect the country’s short-term economic outlook and vice versa. This is the reason why points 1, 3 and 5 were assigned to low-, medium- and high-price scenarios respectively. With regard to the long-term outlook, the consensus was that even though the low oil prices will help to reduce the dependence on oil revenues, promote the development of non-oil sectors and result in a better overall performance, there is a certain pessimism over the country’s ability to adapt to the low oil price environment, which resulted in assigning 4 points to the low oil price scenario as opposed to 5 points of short-term considerations of high price scenario. Similarly, the high prices cannot be considered in a negative way only as they constitute a very significant source of government revenues.

This was reflected in assigning 2 points. Henceforward, the medium-term outlook occupied an in-between position.

Environmental consequences: In the short-term, low oil prices will result in smaller government revenues and oil companies’ profits. It means that there will be less financing for environmental activities. In the longer run, low prices will result in curtailing oil production and less environmental degradation.

Social consequences: These consequences are very similar to the environmental ones. In the short-term, low oil prices will result in smaller government revenues and oil companies’ profits. That means that there will be less financing for social activities. In the longer run, low prices will result in better preparedness of the country and its population to the life without oil revenues.

Summary: The application of this straightforward approach results in almost the same results for every scenario. In this case, the government does not see any reason for adapting the country for future changes because disadvantages and advantages are basically counterbalanced.

It is interesting to see what happens if we will take into account short-term consequences only. The matrix will look this way:

Table 13. Reduced Pugh matrix

The government employees also suggested to include the following consequences:

1. Political as this factor is playing a very substantial role for the country’s development; and

2. The development of education, science and technology (DEST). The reason is that DEST has been declared a national priority.

They advised that the inclusion of these two factors into consideration will significantly increase the interest of high-level government employees in this work. The result is shown in Table 14 below.

Table 14. Expanded Pugh matrix

Medium-term DEST 1 5 3 3 2 2 2 2

Long-term

DEST 1 5 4 4 3 3 2 2

Total 75 39 39 41

Explanations to the points assigned:

Political consequences: Low oil prices negatively, but not dramatically affect the points assigned under short-term Scenario 1 and expectedly positively affect the Scenario 3 because the substantial inflow of budget revenues in the periods of high prices enables the government to follow less stringent social policies. However, in the long run, accepting the low oil price scenario as a basic one allows the government to avoid potential crises caused by negative oil price shocks.

DEST consequences: in the short run, the high oil prices provide more financing for the development of education, science and technology. However, in the long run, the decrease of oil revenues creates more enabling environment for DEST.

Summary: The results are very similar to those shown above. Moreover, the high oil price scenario received slightly more points. This happened because of inclusion of political consequences. Again, the government does not see any reason for adapting the country for future changes and as often happens in OECs short-term political considerations prevail.

The situation changes completely if we prioritize the consequences assigning bigger weights to medium and long term ones (2 and 3 respectively).

The findings clearly show that in the long run the low oil price environment enables Kazakhstan to develop in a more sustainable way.

Table 15. Expanded matrix with differentiated weights

Scenario 1

(low-price)

Scenario 2 (medium-price)

Scenario 3 (high-price)

Consequenc

The results received through the scenario analysis exercise much better reflect the need to achieve the ultimate goal of this scenario analysis – to ensure

the better preparedness to the long-term, sustainable, well-balanced development of the country minimizing potential negative consequences. The results clearly show that the Kazakh government should adopt the low oil price scenario as the main one to make the country better adapted for future changes in the long run. The optimal and partly implemented solution in this case is the development as if there is no oil revenues in the country. Obviously, the medium price scenario has the larger probability and it is obvious that the results received in this chapter do not mean that there is a need to loose opportunities provided by the periods of high oil prices. Understanding consequences of each scenario will help the Kazakh government in economic and financial planning. The optimal and well-proven solution is the accumulation of oil revenues in the National Fund while creating an enabling environment for SME development, FDIs and pursuing very strict financial policy, which rules out any attempt to use oil revenues for financing current government expenses or mismanagement of these revenues. These matters will be developed in more details in the next chapters.

Finishing this chapter it is essential to reiterate one more time that the oil era will not last forever. It is imperative to make the country fully ready for future changes. This is why it is of utmost importance to be fully committed to sustainability as the country’s main development priority assigning greater importance to medium and long term consequences. Failing this will result in the unpreparedness to future crises, not necessarily caused by oil price plunges.