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Flashcards in Project Risks Deck (16):
1

What are the two typical risk areas?

1) Entity Risks (Sponsor, Contractor, Host Government)
2) Transaction Risks (FX, Inflation, Liquidity, Pricing, Country, Legal, Environment, Force Majeure)

2

What are typical risks in developing countries and emerging markets?

technical, environmental, economic and political risk

3

What is meant by "project delivery methods" regarding risks?

risk mitigation

4

Entity Risks: Sponsor: Objectives

- limiting further development costs
- minimizing transaction costs
- recovering development stage expenses
- long term: CF generation potential

5

Entity Risks: Contractor: Objectives

- is concerned with difficulty of predicting events that could adversly impact the parameters of the project and avoiding them
- concerned with the underlying financing documents, including whether the sponsor has arranged sufficient financing to pay the contractor for work performed

6

Entity Risks: Host Government: Objectives

Short term: political benefits and attracting other developers to a country
Long term: improve economic prosperity and perhaps political stability
- H.G. usually takes part of the project risks

7

What are (in general) typical risk sectors?

- FX and Interest Rate
- Inflation, Liquidity and product pricing
- country/ political risk
- Legal Risks
- Environmental Risk
- Opposition
- Force Majeure
- Functional- &Operational Risk
- Completion Risk
- Supply Risk
- Financing Risk
- Technological Risk

8

What are the three time frames PF risks can be divided in in which the elements of credit exposure assume different characteristics?

1) Engineering and construction phase
2) Start-up phase
3) Operations phase

9

How is the Engineering and Construction Phase characterized and what are typical risks?

1) Risk is highest; no CFs are generated; length can vary from several month to several years
2) Siting and permitting (political risk), completion risk, building materials, cost overruns

10

What are characteristics of the Start-up Phase?

- may last for period of many month
- banks to be satisfied
- phase is especially significant if the loan becomes "non-recourse" once the project has been completed
- potential conflict of interest

11

What are typical risks during the operational phase?

- raw material/ supply risk
- off-take and sales risk
- technology/ obsolescence risk (technological failure)

12

Mitigating construction and completion risk

- Turnkey contract
- fixed price lump sum contract
- cost overruns
- completion guarantee
- Liquidated damages in construction contracts

13

Mitigating operational risks

- take- or pay contract
- take- and pay contract

14

Mitigating Financial risks

- Futures
- Forwards
- Options
- Swaps

15

What are the two other types of risk mitigation (can be applied to different types of risks)?

- Guarantees (Limited, unlimited, indirect, etc.)
- Insurance

16

Why are project finance transaction particularly vulnerable to force majeure risks?

- complexity of transactions
- numerous participants in project
- physical nature of construction activity
- associated technical and performance risks
- impact of geographic distance and transport of raw materials