The added value of human rights impact assessments

Effective risk management is particularly important in project finance investments; first, because this financing technique is often used for investments in politically unstable developing countries and for socially and environmentally sensitive infrastructure or natural resource extraction projects. Project participants aim at reducing the risk by spreading it between the participants. Such a project finance structure can increase the availability of loans for a project. Second, project finance is risky business due to its limited or non-recourse nature. Lenders can only look to the revenues generated by the borrowing project company for repayment of their loans. They do not have recourse to the project sponsor if the project company has difficulty repaying the debt. The decisive criterion for granting a loan to a project is therefore its future success. However, there are a variety of factors influencing the cash flows of a project that are difficult to anticipate. Moreover, project companies have often low reserves and their capacity to cover unanticipated costs can easily be exhausted.