What Are the Different Types of Project Finance Risks?

Project financing risk is the risk brought by a new financing method introduced by the international financial market after the 1970s.

Project financing risk

The main types of project financing risk performance are the following: credit risk. The credit risk faced by financing refers to the risks associated with the project's participation in the expected operating standards. The completion risk of a project exists in the project construction phase and trial production phase, and it is one of the main core risks of project financing. For the project company, the completion risk means an increase in interest expenses, an extension of the loan repayment period and a missed market opportunity.

It is mainly applicable to infrastructure construction projects such as mining, power generation, highways, airports, ports and other large-scale construction projects with expected stable returns. It assumes external debt repayment obligations based on the project's own expected income and assets.

The main types of project financing risk performance are as follows: 1.

1. Credit risk. In project financing, even if there is a certain recourse against the borrower and project sponsor, the lender should evaluate the credit, performance and management skills of the project participants, because these factors are the guarantee of the success of the project that the lender relies on.

2. Completion risks. Overrun risk, delay risk, and quality risk are the main risk factors affecting project completion. The methods for controlling them are usually used by project companies using different forms of "project construction contracting contracts" and loan banks using "completion guarantee contracts" or "commercial completion standards." Come on.

3. Production risk. Reducing this type of risk can be implemented through a series of financing documents and credit guarantee agreements. Design different contract documents for different types of production risks. Energy and raw material risks can be prevented and eliminated by signing long-term energy and raw material supply contracts. The resource risk caused by resource projects can be controlled by using the minimum resource coverage ratio and the minimum resource reserve guarantee. For technical risks in production risks, loan banks generally require that the technology used in the project is a mature production technology proven by the market, which is successful and reasonable and has a successful precedent.

4. Market risk. Market risk runs through the project. During the project planning stage, investors should do a good job

1. Political and legal risks. The political risks of the project can be divided into two categories: one is national risk, such as the collapse of the existing political system in the country where the borrower is located, state ownership of the project, or embargo on the project product, joint boycott, and termination of debt repayment. The other is the risk of national political and economic policy stability, such as changes to the tax system, adjustment of tariff and non-tariff trade barriers, changes in foreign exchange management regulations, and so on. Legal risk refers to the risks to the project caused by changes in the laws of the host country. 2. Risks from the financial environment. Financial risk is mainly manifested in two aspects: interest rate risk and exchange rate risk. Interest rate change risk refers to the risk that, during the project financing process, the value of the project will be reduced or the benefits will be lost due to changes in interest rates, either directly or indirectly. Foreign exchange rate risk refers to the risk of loss due to exchange rate fluctuations and the loss of expected benefits.

3. Risks from the project itself. Mainly include: the completion risk caused by the project being unable to complete, postponing completion, or failing to meet the expected operating standards after completion; due to factors such as technology, resource reserves, energy and labor supply of raw materials in the project trial production stage and production operation stage Production and operation risks; whether the product quality and output can be maintained as planned at a certain cost level, and the market risk (mainly including price risk, competition risk and demand risk) caused by fluctuations in product market demand and market prices.

In view of the project financing risks from different sources and the problems in China's project financing risk management, active precautionary and management measures should be adopted.

1. For political and legal aspects

As a new financing method, project financing has many advantages such as improving and increasing the economic strength of the project and the debt carrying capacity of the project, reducing the investment of the project investor s own funds, and increasing the return on investment of the project. Very strong vitality, especially for the vast number of developing countries. Since many major projects in China's economic construction have limited input funds, they can actively use project financing to raise funds to ensure that construction projects proceed as scheduled. At the same time, project financing is a very complex activity that integrates multiple disciplines and expertise and analytical techniques, especially for some large projects. Due to the long completion period of the project, unexpected changes in the external economic environment and internal project operations All will bring great risks to project financing. Therefore, how to evaluate and analyze the risks in project financing, ensure the rationality of financing decisions, and formulate the most favorable financing arrangement plan have a pivotal role, which is also the direction for further research in the future. ^[1]