4 Project Risks

Subject(s):

Credit risk — Capital markets — Financial stability

This chapter discusses various project risks (e.g. completion risk, operating risk, currency risk, political risk, etc.). The business of project financing is founded upon the identification, assessment, allocation, negotiation, and management of the risks associated with a particular project. Indeed, as project finance lenders look to the revenues generated by the operation of the financed project for the source of funds from which that financing will be repaid, the whole basis for project financing revolves around an understanding of the future project revenues and the impact of various risks upon them. Projects face a variety of risks, and not all of these risks can be easily identified, mitigated, or contracted away. However, such risks can be assessed, allocated, and managed so that a project is commercially reasonable. The first step is to identify the material risks and the second is to decide how they should be addressed.