RISK

What is risk? It has been defined as “uncertainty in regard to cost, loss, or damage.” Uncertainty is the important aspect of the definition. Project finance abhors it.

An important part of the successful closing of a project financing is the risk structuring process. It is during this process that risks are identified, analyzed, quantified, mitigated, and allocated so that no individual risk threatens the development, construction, or operation of the project in such a way that the project is unable to generate sufficient revenues to repay the project debt, pay operating expenses, and provide an attractive equity return to investors. This is done primarily through the contracting-out process – allocating risks among parties in contract form. In the following chapters, which make up Part 2 of this book, the risk structuring process will be examined.

Risks in a transnational project financing may be classified into two general categories: transnational and commercial. Subclassification is made for each risk in these two categories in the chapters dedicated to them. Beyond this classification system, risks can be examined at the participant level, identifying the risks most important to each.

By itself, risk identification is only a starting point. The processes of risk analysis and management are important next steps in structuring a successful project. The methods available to manage these risks (transfer to another participant by contract; mitigating the risk by sharing equity ownership with an entity that can reduce the risk; risk minimization and loss prevention; and credit enhancement), singularly or in combination, are discussed in the following chapters.