Risks Inherent in Project Finance and Its Mitigation

The critical element of project financing is the identification of all risk elements and the process of apportionment of these risks among different stakeholders involved in the project. It is very pertinent for the sponsors to identify and monitor these risks and pass on the risk to parties who will be able to manage and monitor these risks effectively than the sponsor. Infrastructure investment faces complex risk on account of the nature of investment. Risk spreading is critical for project financing since they provide the legal basis for transferring critical project risks to various stakeholders. Guarantees are issued by governments and financial institutions to address political, policy, credit and currency risks. Government Support Agreement sets the general framework for the project and provides guarantees of non-discrimination for the construction and operation of the project on an exclusive basis. Risk mitigation can be achieved through letters of credit, guarantees and insurance contracts in private sector. Political risk insurance is of much significance particularly for projects undertaken in countries with weak political system or inadequate laws. Concession agreement is an important part of the security structure. It basically bestows the right to the project company to build, use and operate the project.