projectfinancesession02-12589062188884-phpapp02

7/31/2019 projectfinancesession02-12589062188884-phpapp02

1/25

Project FinanceSession 2 Project Risk Management


2/25

Agenda

Revision Session 1

Project Risk Management

Risk Management Processes

Identifying Project Risks

Risk Allocation with Contracts

Role of Advisors

Legal

Independent Engineer

Insurance

2009Project Finance - Session 2 2


3/25


4/25

Revision Session 1

Current Trends in Project Finance

Overall Project Finance market down 61% (3rd Qtr)

Shift in Market Dynamics

Developing Countries

Banks

Types of Projects

The Future of Global Infrastructure $ Billions to Maintain current living standards

Power, Roads



5/25

Session 2 Risk

Management


6/25

Project Risk Management

From a Project Finance perspective

Proper Risk Management helps to ensure consistent cashflows throughout the life of the Project, thereby reducinglikelihood of default on debt servicing requirements.

From a Project Management perspective

Risk Management helps to ensure that the probability & impact

of Positive events are increased (negative events aredecreased), thereby optimizing profitability of the venture.



7/25

Risk Management Standards

Globally Recognised Standards include:

AS4360: Risk Management

COSO ERM Framework

IRM: Risk Management Standard

OGC: Management of Risk

PMI: Risk Management Standard

All documents have a similar methodology for theidentification, analysis & treatment of Risks



8/25

Risk Management Processes



9/25

Identifying Project Risks

Pre-completion Phase

Activity Planning

Technology

Construction

Post-Completion Phase

Supply Risk

Operational Risk Market Risk


Common Risks

Interest Rate Risk

Exchange Risk

Inflation Risk

Environmental Risk

Regulatory Risk

Legal Risk Credit / Counterparty

Risk

Risk Breakdown Structure (RBS)


10/25

Indentifying Project Risks

Level 0 Level 1 Level 2

Project Risk

Planning

Feasibility

Master Planning

Design

Execution

Scheduling

Procurement

Construction

Controlling

Scope Control

Finance / Cost Control

Operations

External

Economic

Market

Political



11/25

Risk Measurement & Analysis


Forecast: Journey time to work

0

20

40

60

80

100

25 40 60

Time (min)

Cumulative

(%)

0

20

40

60

80

100

120

140

160

180

Frequency%

47 minutes


12/25

Risk Allocation with Contracts

The Project Company normally allocates risk through theconfig. of prelim. contracts before soliciting funds.

However, Bank Analysis may reveal further risks, inwhich case:

Financing is postponed

Additional covenants are included in the loan agreements



13/25

Construction Risk

The price paid to the contractor is usually the largestcapital expenditure incurred by the project company.

The contract is also the most likely source of significant

cost overruns.

Turnkey / EPC Contract

Is usually fixed price, the contractor taking the risk of any

fluctuations in the cost of labour or materials

FIDIC / NEC / Bespoke



14/25

Turnkey / EPC Contract

Features:

(Fixed) Price

Completion Date

Handover, Testing & Commissioning (FAC)

Plant Performance (Minimum Standards)

Liquidate / Make Good

Guarantees & Warranties

Damages (Liquidated)

Force Majeure



15/25

Supply Risk

Put-or-Pay Agreements

Supplier Sells @ Pre-agreed Prices

If supply is lacking, the Risk lies with the Supplier i.e.

Compensates the Project Company


InputSupplier

ProjectCompany

AlternativeSupplier

Indexed Payments

The Input supplierbears the price risk

on finding analternative supplier

either directly orindirectly

Supply of raw materials fromAlternative Source


16/25

Operational Risks

O&M Agreements

Fixed Price Contract: The Operator assumes risks relating tothe fluctuations in operating costs

Pass-Through Contract: The Operator receives a fixedpayment and performance bonuses

*Step-In Right: Lenders may request the right to remove theoriginal operator and substitute with another.



17/25

Market Risk

Offtake Agreements:

Long-term contracts where the Offtaker agrees to purchasenominated volumes/quantities of a good or services from theProject Company

Take-or-Pay: the offtaker is obligated to pay even if it does notactually take the good or service i.e. PPA

Shadow Toll System: payment is made by the Public Admin. onthe basis of the volume of traffic & service level. Shadow refersto the fact that the end user does not actually pay the toll.



18/25

The Role of

Advisors

2009Project Finance - Session 2

18


19/25

The Role of Advisors

Each project finance deal has a critical minimum-sizethreshold below which structuring costs become

excessive in relation to its forecasted income and cashflows.

Although efficiency is questionable, the role of advisors isessential to the closure of Project Finance Deals

Legal Advisors Independent Engineers

Insurance Advisors



20/25

Legal Advisors

Usually the first Advisors to be appointed by both Sponsors& Lenders

Address specifics of International Legal Systems i.e. Civil Vs

Common

Activities involved in, include:

Incorporation of the Project Company (SL)

Due Diligence (AL)

Legal Opinions (AL)

Project Contracts (SL)



21/25


22/25

Insurance (General)

Insurance is an important risk mitigation tool that must be

properly coordinated and linked to the projects contractual

structure.

Insurance should be used when the Project Companys cost of

risk mitigation using insurance policies is less than the premium

for risk expressed in the interbank interest rates requested bybanks if no coverage exists.



23/25

Insurance Advisors

The scope of work for an insurance advisor includes:

Preliminary Insurance Report

Identifying analysis of contractual documentation &recommendations for risk coverage

Final Insurance Report (Construction)

Issued at the time of Financial Close typically constitutes acondition precedent for disbursement (drawdown).

Conformity of Insurance Program

Finance Insurance Report (Operations)

Issued before start-up of Operations



24/25

Typical PF Insurance Products

The most common forms of coverage used are:

Construction / Contractors All-Risks

Transport Policy

Material & Damage All Risks

Force Majeure

Key Man Insurance



25/25

Summary

Project Risk Management is an extremely important tool inthe identification, analysis and mitigation of Project Risks.

Advisors (Legal, Engineering & Insurance) play a crucial role

in the mitigation of risks through:

Specialized Expertise

Due Diligence

Structure / Viability of the Project

Monitoring


projectfinancesession02-12589062188884-phpapp02

Documents

Transcript of projectfinancesession02-12589062188884-phpapp02