TABLE OF CONTENTS Project finance risks can be divided into three main categories:
Commercial risks (also known as project risks) are those inherent in the project itself, or the market in which it operates, as summarized in 8.3 and discussed in this chapter as a whole.
Macro-economic risks (also known as financial risks) relate to external economic effects not directly related to the project (i.e., inflation, interest rates, and currency exchange rates); these risks are considered in Chapter 9.
Political risks (also known as country risks) relate to the effects of government action or political force majeure events such as war and civil disturbance (especially, but not exclusively, where the project involves cross-border financing or investment); these risks are considered in Chapter 10.
Risk evaluation is at the heart of project finance. This is not a mathematical process (e.g., using Monte Carlo simulations), although financial modeling comes into the process to assess the financial effect of a limited range of scenarios (cf. 12.10). Project finance risk analysis is based on:
A due-diligence process intended to ensure that all the necessary information about the project is available
Identification of risks based on this due diligence
Allocation of risks (to the extent possible) to appropriate parties to the project through provisions in the Project Contracts
Quantifying and considering the acceptability of the residual risks that remain with the Project Company, and hence with its lenders
Of course, due diligence and risk assessment are not procedures peculiar to...
