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Project Finance Structuring: Sharing of Risks

The most common project risks that affect a project finance deal structure

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The key to structuring a project finance deal is the identifying of all key risks associated with the project and the allocation of those risks among the various parties participating in the project.

Without a detailed analysis of these project risks at the beginning of the deal, project participants will not have a clear understanding of what obligations and liabilities they may be assuming in connection with the project and, therefore, will not be in a position to use appropriate risk mitigation strategies at the appropriate time. Considerable delays and expense can be incurred if problems arise when the project is under way and there will be arguments around who is responsible for such problems.

From the lenders’ perspective, any issues that arise from the project will have a direct impact to their financial returns. In general, the more risk that lenders are expected to assume in connection with a project, the greater the reward in terms of interest and fees they will expect to receive from the project. For example, if lenders feel the project will have an increased chance of construction delays, they will charge a higher interest rate for their loans.

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Typical Types of Project Risk

All project risks have a direct cost of financing impact. The following are typical project risks at various phases of the project:

Construction Operations Financing Revenue
  • Planning/consents
  • Design
  • Technology
  • Ground conditions/Utilities
  • Protestor action
  • Construction price
  • Construction program
  • Interface
  • Performance
  • Operating cost
  • Operating performance
  • Maintenance cost/timing
  • Raw material cost
  • Insurance premiums
  • Interest rate
  • Inflation
  • FX exposure
  • Tax exposure
  • Output volume
  • Usage
  • Output price
  • Competition
  • Accidents
  • Force majeure

The task of identifying and analyzing risks in any project is conducted by all parties (financial, technical, and legal) and their advisers. Accountants, lawyers, engineers and other experts will all need to give their input and advice on the risks involved and how they might be managed. Only once the risks have been identified can lenders decide who should bear which risks and on what terms and at what price.

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