Completion risk management in international project financing

Project Financing

International Project Finance: Commercial risk

Completion risk

Completion risk entails the concept of whether the project can be completed on the recommended period and within the set amount of budget

Completion risk is also known as Cost Overrun risk or the construction risk. Three common terms employed in order to allocate the completion risk. One of the concepts is cost-of construction. This entails the fact that the cost of completion tends to be fundamental to the financial liability of the project that is under construction. This is because the all the financial assumptions are dependent on the initial cost that was assumed during the start of the project. In some cases, the assumed ratios are also dependant on the cost of construction of the project. In order to try to comply with the initial objectives of the lenders will definitely need to apply various mechanisms to manage the risk. The lenders try to manage the risk only when the project company's cost tends to increase compared to the initial anticipated costs at financial close. In this case, the project company will also tend to try locking or eliminate certain costs. For example, the project company may decide to lock cost of commodities. This is mostly done as early as possible in order to limit any or further occurrence of price escalation

The other term employed in completion cost is delay. The term completion entails termination of the construction phase of the addressed project. The contractor undertaking the construction always tend to be reliable for any of the liquidate damages that may occur for late completion. This means that delay that causes failure in the completion of a project tends to have a large impact on the contractor. The third term is employed in the completion risk is known as performance. This entails the fact that lenders will always work hard to make sure that the work being done meets the set requirements

. The lenders try to merit release of the contractor from any of the delay liquidated damages liability.

The other main issue that follows is that the work will therefore be subjected to various compulsory tests. Moreover, the work will also undertake demonstration of performance capacity. All this tests occurs before the completion is achieved. In the completion risk, the project company tends to make that the initial objectives of the work can be measured objectively according to the conditions of the performance contract. Moreover, the project company always assumes that the lender does not have the right to decline proceeding with the work. In areas where the lenders owe completion to their subjective evaluation of the work, technical testing occurs. Independent experts usually perform the testing.

Moreover, the testing can be done by standard measures with the aim of trying to solve the dispute that might emerge.

Lenders tend to view the completion risks in angle that entails thy may incur unexpected costs. This is because lenders always expect that the loan proceed that is entitled to be spent on a particular building should be available in the right time

. This translates to the fact that lenders assume the loan is capable of producing sufficient cash flows after they have completed their assigned work. On this case, the completion risk entails that financiers do not take it. Therefore, other financial support is usually necessary in order to enhance completion is made on time.

Another issue is that lenders influences the completion risk where various circumstances arises and they find themselves in a position depicting they may not be in a position to complete the intend work on time. This means that the lenders try all they can to make sure that the job is completed in time but because of various practical purposes it turns to be impossible to complete the job. This makes the work to operate to the full capacity or specifications that were originally established. On this case, sponsors attempt to make sure that they are not in a position whereby they can be forced to provide more funds in order to assist in the completion of the building.

This means that sponsors tend to make sure that they do not spend any amount of money that is out of budget as expected. While trying to solve such a problem in case it occurs, the completion risk can be handled with little favor of the lender. However, if such a case occurs, the loan may be extended. The extension is made for a long period in order to because of the lower production compared to the anticipated time and financial projections that were set at the start of the construction project.

Lenders may also try to defend themselves in cases involving completion risks by the application of the concept of cost overruns. This entails the fact that the project company may decide to act in favor of the lender. This means that the project company may consider to make the advance placement of orders supposed to be employed for the completion of the building. For example, the project company may decide to advance placement of various materials such as the steel or equipments

. This contributes in lowering the likelihood of high project costs to occur. Moreover, this also contributes in making sure there is steady commodity hedging arrangements. In most case, the completion risk tends to be considered lower because of various issues that may hinder the construction process. Such issues include terrain and climate.

Operation management risk

Bankability is the description of either public or private utility utilized in the utilization and the demonstration to the existing external lenders that are normally capable of refunding the underlying debts. It normally relates in the proposal has adequate collateral accompanied by the prospect cash flow, and the high probability of accomplishment that are acceptable to the prevailing institutional lenders for financing. A diversity of the existing commercial banks accompanied exports credit agencies, insurance firms, pension finances and the other existing in the project funding via the public and the private liability replacement. The prevailing Multilateral and the development finance institutions that are in the global reach in diverse geographical locations that normally acts as the lenders. The identification of the suitable lenders within any project depends on the variety of factors that incorporate the extent commercial associations amidst the prevailing sponsor accompanied by the existing banks, the political and socioeconomic developmental significant in the pertinent project its geographical locations their existing commercial risks.

The underlying aims and purpose of lenders that regard in the evaluation normally rely on the prevailing debt that is reliant on the fixed and the index connected rate of return. Nevertheless, besides the prevailing assets of the projects lenders are frequently confronted with the full risk in the case where the underlying the projects fails. Moreover, the demanded by the lenders of the projects finance within the existing credit certification they normally possess inadequate practical capability in controlling their esteem borrowers accompanied by the manage risks. The prevailing question that normally arises in the context of the project finance is the risk that pertains to the bankable, which normally reflects the need of the evaluation of risk in regards to the existing debts holders.

However, the prevailing lenders are normally motivated by wholly mercenary standards obligatory from the prevailing short-term viewpoints; projects would not be bankable accompanied by the projects finance.

Within the prevailing a project financing, diverse lenders normally possess diverse aims and priorities. The returns consideration and the supplying of the goods and services propel export credit agencies. Moreover, multilateral leaders accompanied by the development finance institutions are the greatest chief missions advertising of the economical and the social advancement within the host states. Many prevailing financial institutions that are normally concern with sustaining of the diverse kinds of credits, political accompanied by the commercial risk indemnity aids the determination of assurances and the existing indemnities or any amalgamation in the financing of the projects. Despite the prevailing export, credit agencies accompanied by the advancement of the investment institutions and the multilateral lenders, their operation is reliant on the charitable methods. The operational terms that pertain to lend, cover, guarantee that support the existing projects more favorable than the ones that are achieved via the means of the entire commercial institutions. These favorable terms are normally and positively critical to the prevailing bankability of the numerous hazardous projects. These hazardous projects are found within the international profitable downward spiral, the bankability of any existing main project that pertains within the commercial banks.

Co-financing accompanied by the complimentary financing planning amongst the existing commercial banks and the executive credit agencies ought to increase the level of their relieve. This ensures that the debt participation of the commercial banks within the financing of the existing projects. The prevailing quasi-governmental natural history of the official credit agencies may opt to provide unceremonious and typical political safeguard against either the administration expropriation or interfering with the prevailing projects.

Moreover, the application of the informal and political basis can enforce security in an attempt avoid the failure of the prevailing projects thus acting as a support of the projects. This can subsequently result as the massive benefits to the commercial contestants devoid of the incurring of the extra cost that pertaining to such commercial participants. The participation of the export credit agencies accompanied by the existing multilateral developments institutions normally results to the lofty stage of the ecological, employment and other supplementary social standards, which are extremely expensive and cumbersome to, accomplished.

The application these existing social standards are normally highly significant to these multilateral institutions concerning the outline policy perspectives accompanied by the chief structures and the existing projects.

These policies perspectives and the chief aims enhance the best practice that pertains to the execution of communications and the whole projects. Numerous leading private sponsors and the existing commercial lenders have finally commenced the process of incorporating of these standards. These standards include the equator principles and the other existing ecological requirements that are aimed at safeguarding of the existing documentation and the agreements. These rules have been introduced with the main objectives of the ensuring the compliance concerning to the life term of the loans that mainly pertain to the finance credentials. Numerous commercial banks possess a suitable finance division and thus stand as a vital tool for assessing the feasibility studies.

The approach of the banks early within the prevailing project finance cycle in the determination the interests within the existing of the projects and thus commercial banks possess an appetite for the sector in the finance projects.

Types of environmental risks

The internal environment has factors like availability of labor and management capabilities. For a firm wishing to implement a new project, it must have the ability to avail the required resources at lower marginal costs. In addition, it should be in a position to mobilize funds to finance the project all the way . If this is not possible, a firm can mobilize fund from other units using is securities from institutions like banks and its shareholders. However, if a project cannot be completed, losses are incurred on the side of sponsors since they are required to finance the deficits in situations where they acknowledge completion of the project.

The micro environmental factors refer to issues like the supply chain, distributors and competition from other firms, government interferences among other factors .Some of these factors go beyond and organization's capability to handle. A firm may careful lay out its project implementation process only to be disappointed by its rivals advertising strategy aimed at grabbing the firm's market share

.Rival firms could do this by improving their advertising strategies and reducing prices of substitute goods to lure more customers. In such a case, a firm is caught unaware and may even adopt its new born project to engage in competitive strategies to keep up with changing market needs .

The government could also affect a firm's implementation process by affecting the political and economic atmosphere through monetary policies.

For instance, the government could choose to increase bank lending rates with an intention to affect money supply. If a company's project was dependent on loans and borrowing it could be frustrated financially when a company cannot meet the demands of the increased interest rates. A government can also frustrate a projects implementation by increasing tax remittance requirements.

The last component of the risk of the business environment is macro factors .Macro factors expose a project's implementation to risks occurring form the external environment like demographics and industrial policies. Another major problem in many countries is inflation.

Developing countries like those in Africa are most prone to these issues. Lenders or creditors to firms have to examine all external and internal factors relating to a firm to assure themselves a value for their money is given. Risk and potential are coupled and projects that deemed very risky are normally the ones carrying a lot of potential to generate substantial returns. Every creditor has varying views on the aspect of risks and returns and care must be taken before coming up with a good investment strategy.

Risk management

Lenders are different and have varying ways of associating with risks.

Some creditors are risk neutral and prefer investing when the possibility of risk is high. Risk adverse lenders on the other hand, given in to some considerable degree of risk. Risk management in projects financing is essential as it marinating shareholders value through decreased cash-flow instability. It also helps individuals and firms in adoption of loss control procedures.

All these measures of risk control are all aimed at ensuring firms operate within manageable cost limits. Risk control helps occurrence of any unexpected events in the event of project evaluation and seeks to establish that projects meet the purpose for which they were established.

Revenue risk

Bankability involves the value that one places to an item that they perceive to be worth a certain amount from a monitory perspective. Since the conditions that govern the contract that is to be undertaken basis on concession, there is a high guarantee that there will be risk factors that will arise from the agreement. To avoid the possibility that risk will occur, the use of different factors applies in the concept of bankability to curb the problem. To understand fully how the concept of bankability works and how it affects the terms of an agreement between the borrower and the lender, the application of a construction contract is used under the parenthesis of a private finance initiative project and construction project agreement.

From a revenue assessment approach, a bankable contract is one that contains terms whose nature is agreeable to the lender who is providing for the finances of the project. The term bankability is used to describe the exciting contract between the lender and the borrower with inclusion of all contracts that are used in the terms of the agreement.

The term bankability is used in a situation where the borrower is not in a place to get a loan from the lack of accruable assets that can guarantee a loan. The condition is true from the fact that if the borrower had the capacity to secure a loan they would simply purchase security on the target property. The use of bankability applies to the borrowers' satisfaction that they will receive profit from the loan and that the lender in turn will earn interest for issuing the loan. The eventuality that risk will occur is subject to careful consideration on the lenders part to ensure that they have all their bases covered mostly to avoid the possibility of debt. With this in mind, the application of a contract assessment is used. A contract assessment is a contract that defines the terms agreed between two parties indicating obligations between the two parties to the rights that govern the terms of the contract.

Hedging contract

A hedging contract is a contract that offers a default price for the value of a product mostly to imply to energy without respect to the value that the product will have at the time of delivery as specified by the customer of the good. The contract is used to differentiate between the costs of a product at the time it was purchased to the time that the product will be delivered to the customer therefore, assuring the customer that the price that they receive at the purchase period will remain constant until the time of delivery. The contract is used in bankability where the two parties agree on the terms that will define their terms of sale. The contract includes the initial agreement between the lender and the receiver such that they are both assured that the terms that they agree to before the agreement of a contract is viable before and after the contract is in application. This assures that the lender agrees to terms that are indicated in the contract and is willing to keep them at a constant until the contract gains maturity for application. Contract for differences

Contract for differences can be described as a direct opposite of the hedging contract considering that they both vary in context of application by default of their application time line. Contract of differences (CFD) implies that the difference between contracts before it is applied to the time that a contract is used is catered for by the buyer of the contract.

The terms of the contract applied to the contract value the cost of an asset at the time the contract is brokered to the time the contract is in use. The terms of the contract are applied in banking capacity in the parameters, that they define the difference between equity of a contract for both parties, as the difference between the terms of the contract may be positive or negative with reference to the prevailing condition of the market. In case of a positive difference, the borrower is obligated to ask for the difference between the current and the default value from the lender, but in case of a positive difference then the lender asks for the difference from the borrower.

Price and volume risk

Price and volume risk are associated with market risk. This risk indicates the eventuality that is likely to occur if the company is not in a position to gain returns on services that it has offered with inclusion of the operating risks. The risk also occurs if the company cannot return funds to investing companies.

Volume risk is specific to speculation that the amount a company will receive is not up to purr to the invested value to a project. The chance that volume risk will occur has to be considered in consideration to terms of bankability, as the eventuality that it occurs cannot be refuted. Price risk borders more on the production of energy where a company that produces energy has to ensure that efficiently is adaptable to the shifting prices of its product. This is mostly in case of companies that have a variety of investors therefore, it has to ensure that it can run the company and still be in the position to provide compensation to its investors.

An investment that is not bankable will definitely chase potential investors from taking interest therefore, the case of this risks occurring will depreciate its viability for expansion or increased revenues.

Long-term contract

This is a contract that is agreed between different companies with reference to time. The application of a long-term contract between two different companies has to be applied by the two companies with great reference to the time that it will take to complete a task that is offered. For a contract to be bankable, it has to be agreed upon in reference to the returns that the contract will have over the period of time it is applied. If a contract is long-term then factors of depreciation and working force have to be critically considered

Work cited

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Cambridge: Massachusetts Institute of Technology, Department of Civil and Environmental Engineering. Pages 21-234.

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Publishing Press 2011)

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Yescombe, E.R. Principles of project finance. (Amsterdam: Academic Press 2002).

Vinter, G. Project finance: A legal guide. (London: Sweet & Maxwell 2005).

Fight, a. Introduction to project finance. (Oxford: Elsevier 2006).

Nevitt Peter & Frank Fabozzi. Project Financing. (Euromoney Books publishing 2000

Nevitt Peter & Frank Fabozzi. Project Financing. (Euromoney Books publishing 2000

Dewar John. International Project Finance: Law and Practice. (Oxford: Oxford University Publishing Press 2011)

Fight, a. Introduction to project finance. (Oxford: Elsevier 2006).

Dewar John. International Project Finance: Law and Practice. (Oxford: Oxford University Publishing Press 2011)

Vinter, G. Project finance: A legal guide. (London: Sweet & Maxwell 2005).

Nevitt Peter & Frank Fabozzi. Project Financing. (Euromoney Books publishing 2000)

Yescombe, E.R. Principles of project finance. (Amsterdam: Academic Press 2002).

Yescombe, E.R. Principles of project finance. (Amsterdam: Academic Press 2002).

Fight, a. Introduction to project finance. (Oxford: Elsevier 2006).

Fight, a. Introduction to project finance. (Oxford: Elsevier 2006).

Fight, a. Introduction to project finance. (Oxford: Elsevier 2006).

Nevitt Peter & Frank Fabozzi. Project Financing. (Euromoney Books publishing 2000)

Nevitt Peter & Frank Fabozzi. Project Financing. (Euromoney Books publishing 2000)

Fight, a. Introduction to project finance. (Oxford: Elsevier 2006).

Nevitt Peter & Frank Fabozzi. Project Financing. (Euromoney Books publishing 2000)

Nevitt Peter & Frank Fabozzi. Project Financing. (Euromoney Books publishing 2000)

Dewar John. International Project Finance: Law and Practice. (Oxford: Oxford University Publishing Press 2011)

Dewar John. International Project Finance: Law and Practice. (Oxford: Oxford University Publishing Press 2011)

Dewar John. International Project Finance: Law and Practice. (Oxford: Oxford University Publishing Press 2011)

Dewar John. International Project Finance: Law and Practice. (Oxford: Oxford University Publishing Press 2011)

Dewar John. International Project Finance: Law and Practice. (Oxford: Oxford University Publishing Press 2011)

Dewar John. International Project Finance: Law and Practice. (Oxford: Oxford University Publishing Press 2011)

Dewar John. International Project Finance: Law and Practice. (Oxford: Oxford University Publishing Press 2011)

Dewar John. International Project Finance: Law and Practice. (Oxford: Oxford University Publishing Press 2011)

Al-Jassar Ahmed & Massachusetts institute of technology. 2005. International project finance. Cambridge: Massachusetts Institute of Technology, Department of Civil and Environmental Engineering. Pages 21-234.

Dewar John. International Project Finance: Law and Practice. (Oxford: Oxford University Publishing Press 2011)

Dewar John. International Project Finance: Law and Practice. (Oxford: Oxford University Publishing Press 2011)

Dewar John. International Project Finance: Law and Practice. (Oxford: Oxford University Publishing Press 2011)

Dewar John. International Project Finance: Law and Practice. (Oxford: Oxford University Publishing Press 2011)

Nevitt Peter & Frank Fabozzi. Project Financing. (Euromoney Books publishing 2000)

Nevitt Peter & Frank Fabozzi. Project Financing. (Euromoney Books publishing 2000)

Dewar John. International Project Finance: Law and Practice. (Oxford: Oxford University Publishing Press 2011)

Yescombe, E.R. Principles of project finance. (Amsterdam: Academic Press 2002).