Identifying and Managing Project Risks

Abstract

As we have seen, project finance is concerned with the quantification and management of project risks. According to the more traditional view of project finance, risk management lies at the core of sponsor interest in favouring this over rival debt structures. Project risks can be identified precisely, carved out and allocated to third parties best able to bear them. Sponsors are thus able to shed risks that they are either unable or unwilling to bear. Without such arrangements lenders would require investors to cover any residual risks that might impair the project’s ability to meet debt service obligations, in effect transforming a limited recourse loan to something more closely resembling a secured financing.