INTRODUCTION TO COMMERCIAL RISKS

Besides the transnational risks discussed in the preceding chapter, commercial risks also exist in a transnational project financing. These risks are not limited to international projects but, rather, exist in both domestic and international project financings.

An exhaustive list of potential commercial risks would result in many pages of print and would doubtless miss many risks individual to particular industries. A fully developed business acumen is unnecessary to understand that identification of many risks is dependent upon an understanding of the specific project, in the specific industry, at a specific site, and so forth. The following discussion will assist both the novice and experienced project financier with more than a serendipitous approach to risk identification.

Probability of Risk Evolving Into a Project Problem

The potential for a risk actually occurring is not small. Results of a published study that 82 percent of projects financed encountered some form of trouble are perhaps the best argument for a risk identification approach to project financing coupled with a complete due diligence process. The study revealed the following problems and frequency of occurrence: construction cost overruns (71%), completion delays (59%), inaccurate cash flow projections (35%), market problems (one project), political risks (one project), and project inefficiencies (one project). Nine of the seventeen projects (53%) in the study were described by the researcher as in “severe trouble,” with two projects ending in bankruptcy and six incapable of generating sufficient cash to cover principal payments.