Question

Question
There are various types of risk factors in financing an infrastructure project (in project finance context). List and discuss any 3 risk factors.

Answer 1

Financing an infrastructure Project is very critical issue as mobilizing project finance in terms of debt financing is an sensitive issue as it involves stake of financiers and therefore requires proper allocation and timely repayment.So lenders are always required to assess the risks associated with financing those projects.

The three risk factors associated in financing an infrastructure project (in project finance context) are-

1)Financial Risk relating to Repayment of Loan:-During the initial phase of Infrastructure Project,cash flows are continuously fluctuating.To make sufficient operating revenue and to make sufficient cash flows,long duration is needed and as a result during this period, repayment of loan is a great concern for the financier.Along with that variation in interest rate and currency fluctuation risk association mainly in global infrastructure period lead to financial risk fr getting back sponsored finance.

2)Political risk: Due to political hindrance infrastructure projects becomes in operative and can result in strike,lack of experienced Labor force,political riots,sabotages etc that can disrupt any infrastructure project to continue.some times profit sharing between the parties can be an issue resulting into political sabotages.As a result there can be loss of investments and blockage of investments.since no prior quantification is available in this respect this type of risk is an important aspect for the financiers.

3)Project Performance risk: Any delay in performing infrastructure project can result in increasing in project cost un-necessarily. Any unexpected increase in construction cost due to increase in price of raw materials or increase in labor force or higher maintenance cost result in huge reduction in expected project return. So lenders are badly affected as this low performance leads to reduction in market value and thus increases the chance of loan defaulting.