The key exercise in any investment decision is to properly assess a project’s risks (and returns). In project finance, usually key risks that are being looked include:
- Market Risk
- Will the power station sell enough electricity at a price sufficient to meet expected returns?
- Will enough cars use the toll road at the right times of the day or the week?
- Will each passenger spend the forecast amount at the airport’s retail outlets before boarding a plane?
- Completion Risk
- What happens if project completion is delayed or runs over budget (for greenfield projects)?
- Operating Risk
- Does the operator have the adequate experience?
- What happens if one core system breaks down?
- Input / Supply Risk
- What are e.g. the coal supply arrangements for a power station?
- Interest Rate Risk
- What is the base rate movement expected to be over the short- and long term? Do interest rate swaps provide sufficient risk mitigation?
- Political Risk
- Are payments received from the government under e.g. a PFI scheme?
- Are revenues derived under a government concession (e.g. toll road)?