INSTITUTE –University School of

Business
DEPARTMENT -Management
MBA
Project Finance and Financial Modelling
: 22BAT-736
MSC: Dr. Rakhi Arora
Assistant Professor
Chandigarh University

DISCOVER . LEARN . EMPOWER

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 Common Risk

Course Outcome
Course Description Blooms
Outco Taxonomy
me Level
1 To understand the basic project financing framework, Understand/ Will be covered in this
concepts and process of project finance, Remember lecture
2 To apply the necessary qualitative and quantitative Apply
tools and techniques for mitigation of the project risk
3 To evaluate different project financing analysis Analyze
techniques to compare the outcomes of different
projects
4 To structure and appraise financing for large & Evaluate
medium projects
5 To utilise the understanding of financial modelling to Design/Create
develop financial models for projects
https://www.expertmile.com/
Types of risk in project
finance
 Risks & Projects
● Risk is the possibility of loss or injury.
● Project risk is an uncertain event or condition that, if it occurs, has an effect on
at least one project objective.
● Risk management focuses on identifying and assessing the risks to the project
and managing those risks to minimize the impact on the project.
● There are no risk-free projects because there are an infinite number of events
that can have a negative effect on the project.
● Risk management is not about eliminating risk but about identifying,
assessing, and managing risk.

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 Types of risk in project finance
• Construction risk
• Operational risk
• Supply risk
• Repayment risk
• Currency risk
• Political risk
 a) Construction risk
• Ensuring the proper and timely construction of the project is therefore an
absolutely fundamental consideration for all of the parties.
 Related concerns include:
• Can the project be completed and operated according to the agreed
standards and specifications?
• Can the project be completed on budget?
• Can the project be completed on schedule?
 b) Operational risk
• To ensure that the project operates at the level required to generate the
revenues forecasted and needed to repay the loans, project participants
must, among other things:
 Related concerns include:
• Engage a competent project operator
• Obtain insurance
• Agree to extensive reporting obligations and inspection
 c) Supply risk
• Many projects rely on raw materials or commodities for the project to
work. For example, a coal or natural gas fired power plant requires access
and rights to an uninterrupted supply of coal or natural gas. The prices of
these commodities can be volatile and their availability for the life of the
project is not assured
 How to manage it
• Executing a long term supply agreement
• Selecting a qualified supplier
 d) Offtake risk
• An important consideration for the parties is whether the project will
generate the expected revenues or, at least, sufficient revenues to service
the debt and pay the project company’s expenses
 How to manage it
• Execute a secure offtake agreement
• Select a creditworthy offtaker or marketer
• Enter into hedge agreements
 e) Repayment risk
• Obtain appropriate insurance coverage
• Set up a debt service reserve account
• Ensure tax obligations and other payments that may have priority over the
lenders
 f) Currency risk
If the project output agreement (for example, the power purchase
agreement or the gas transportation agreement) is in a currency different
from the loan, the project participants must also consider currency
devaluations and currency inconvertibility. The primary risks are:
• Interference in the ability to convert the local currency into foreign
currency (generally US dollars).
• Transference of the foreign currency out of the country.
 g) Political risk
• Some of the main risks a project located in a less economically developed
country faces are political risks (also known as country risks), which
includes war or civil disturbance, expropriation, exchange controls or other
types of currency transfer limitations.
 How to manage the political risk
• Governmental assurances
• Bilateral investment treaties (BIT)
 h) Authorisations risk
Certain projects depend on the obtaining and the continued availability of
governmental approvals, permits or licences to construct or operate the
project.
 These include:
• Environmental permits.
• • Drilling permits.
• • In the case of a foreign investor, permits to own property, employ
expatriate labour or operate the project.
• • Approvals to import goods into the country or to transfer funds out of the
country.
Assessment Pattern

Components HT-1 HT-2 Assignment Surprise Business Quiz GD Forum Attendance Scaled
Test Marks
Max. Marks 10 10 6 4 4 4 2 40

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References
•Text Books:
•1. Edward Yescombe, Principles of Project Finance, Yecombe Consulting Ltd.,
Academic Press
•2. Michael Rees, Principles of Financial Modelling: Model Design and Best
Practices Using Excel and VBA , The Wiley Finance Series)

•Reference Book:-
•1. Edward Bodmer, Corporate and project finance modeling, Wiley Finance Series

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THANK YOU

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