Question

Is it reasonable to assume that project risk will remain static throughout the project life cycle? What is good practice when dealing with risk throughout the project life cycle? What methods could be applied?

Answer 1

In any given Project, risk form an integral part. Certain risks are incidental to a Project which may not be completely eliminated but can be taken in control while there are few other risks that can be mitigated completely. Therefore, it cannot be actually reasonable to assume that Project risk will remain static throughout the Project life cycle. Few risks that are out of our control may remain static because it can impact the Project at any point of time while few other risks that can be eliminated during the Project Life Cycle, shall not remain static at all times owing to our power of control over it.

Hence the good practice when dealing with risk throughout the Project Life Cycle would be to essentially undertake the Risk plan in order to identify the risks associated with the Project and how could it be best managed with.   Hence Risk plan helps in identifying the risks, quantifying the same to understand the gravity and impact of such risks associated in the Project and to undertake the measures to overcome the same. Accordingly, it shall be necessary to understand what is risk, how can it be identified, measured and mitigated.

Risk means deviations from Expectations and is measured in terms of variability of returns. The expected return reflects the benefits an investor anticipates from investment and the Required return reflects the return an investor demands for assuming risk. Hence, when expected return matches required return in all scenarios, the project risk is considered low. In order to deal with it, there are various methods that could be aptly applied:

For example,

Quantitative theory

• Calculus , probability distributions, mathematical statistics
• Econometrics , Business research methods
• Financial engineering techniques-numerical methods
• Process analysis methods-operational risk
• Multivariate statistics
• Technical analysis
• Mathematical modeling
• MATLAB, MAPLE, SPPS, EVIEWS, STATITICA
• PROWESS,CLINE, BLOOMBERG,
• KONDOR+,REUTERS, META STOCK etc…

PROJECT MITIGATION TECHNIQUES

• Supply/Inputs Risk Mitigation
  • Proper due diligence
  • Controlling the source, availability of alternatives
  • Enforceable contracts
• Market Risk Mitigation
  • Market study
  • Good economics
  • Sales contracts wherever “necessary”
  • Industry/sector expertise
• Infrastructure Risk Mitigation
  • Proper Feasibility study
  • Ensure necessary infrastructure
• Environmental Risk Mitigation
  • Proper Environmental Impact Assessment
  • Address various issues
    • Regulatory Issues
      • Site Clearances
      • Ministry of Environment & Forests Clearance Under Environment Protection Act, 1986. Notification issued in 1994 and modified from time to time
      • CRZ clearances
  • Environmental Norms used
  • Issues with Local Population
  • Long term effect issues
    • Soil Contamination
    • Health problems
  • Fire / Explosion / Plant outage hazards
• Ensure compliances with norms
• Environmental Risk Mitigation
  • Environmental Impact Assessment (EIA)
    • Preliminary EIA done using standardized checklist & to determine factors that would need detailed analysis during second phase of assessment
    • EIA in second phase consists of identification & evaluation of environmental impacts resulting from the project
    • EIA in 3rd phase consists of the preparation EI Statement. It brings out mitigation measures that would make the project environmentally acceptable
    • The purpose of EIA statement is to bring out environmental consequences of the project & its compliance with the statutory requirements
• Political Risk
  • War, insurrection, civil disturbance
  • Nationalization
  • Currency inconvertibility/transfer problems
  • Contract frustration
  • Change in Law, etc.
• Mitigation
  • State Support Agreement
  • Direct Agreement
  • Good economics
  • Force Majeure clause
  • ECA/MIGA/World Bank (Partial Risk) Cover
• Force Majeure
  • Natural - Insurable
  • Political - Direct/Indirect - Relief from contractual obligations, indemnity from the government
• Forex
  • Hedging
• Syndication/Funding
  • Select reputed financial advisor
  • Select reputed financial advisor
  • Attempt underwritten deal
  • Have a reputed anchor lender
• Legal Risk
  • Select reputed Legal Advisor
  • Negotiate contract terms carefully
  • Ensure compliances
  • Select applicable law and venue of jurisdiction carefully