Project Risks

Question 1

What are the two typical risk areas?

Answer 1

1) Entity Risks (Sponsor, Contractor, Host Government)

2) Transaction Risks (FX, Inflation, Liquidity, Pricing, Country, Legal, Environment, Force Majeure)

Question 2

What are typical risks in developing countries and emerging markets?

Answer 2

technical, environmental, economic and political risk

Question 3

What is meant by “project delivery methods” regarding risks?

Answer 3

risk mitigation

Question 4

Entity Risks: Sponsor: Objectives

Answer 4

• limiting further development costs
• minimizing transaction costs
• recovering development stage expenses
• long term: CF generation potential

Question 5

Entity Risks: Contractor: Objectives

Answer 5

• is concerned with difficulty of predicting events that could adversly impact the parameters of the project and avoiding them
• concerned with the underlying financing documents, including whether the sponsor has arranged sufficient financing to pay the contractor for work performed

Question 6

Entity Risks: Host Government: Objectives

Answer 6

Short term: political benefits and attracting other developers to a country
Long term: improve economic prosperity and perhaps political stability
- H.G. usually takes part of the project risks

Question 7

What are (in general) typical risk sectors?

Answer 7

• FX and Interest Rate
• Inflation, Liquidity and product pricing
• country/ political risk
• Legal Risks
• Environmental Risk
• Opposition
• Force Majeure
• Functional- &Operational Risk
• Completion Risk
• Supply Risk
• Financing Risk
• Technological Risk

Question 8

What are the three time frames PF risks can be divided in in which the elements of credit exposure assume different characteristics?

Answer 8

1) Engineering and construction phase
2) Start-up phase
3) Operations phase

Question 9

How is the Engineering and Construction Phase characterized and what are typical risks?

Answer 9

1) Risk is highest; no CFs are generated; length can vary from several month to several years
2) Siting and permitting (political risk), completion risk, building materials, cost overruns

Question 10

What are characteristics of the Start-up Phase?

Answer 10

• may last for period of many month
• banks to be satisfied
• phase is especially significant if the loan becomes “non-recourse” once the project has been completed
• potential conflict of interest

Question 11

What are typical risks during the operational phase?

Answer 11

• raw material/ supply risk
• off-take and sales risk
• technology/ obsolescence risk (technological failure)

Question 12

Mitigating construction and completion risk

Answer 12

• Turnkey contract
• fixed price lump sum contract
• cost overruns
• completion guarantee
• Liquidated damages in construction contracts

Question 13

Mitigating operational risks

Answer 13

• take- or pay contract

- take- and pay contract

Question 14

Mitigating Financial risks

Answer 14

• Futures
• Forwards
• Options
• Swaps

Question 15

What are the two other types of risk mitigation (can be applied to different types of risks)?

Answer 15

• Guarantees (Limited, unlimited, indirect, etc.)

- Insurance

Question 16

Why are project finance transaction particularly vulnerable to force majeure risks?

Answer 16

• complexity of transactions
• numerous participants in project
• physical nature of construction activity
• associated technical and performance risks
• impact of geographic distance and transport of raw materials