Most project finance structures are complex. The risks in the project are spread between the various parties; each risk is usually assumed by the party, which can most efficiently and cost-effectively control or handle it. All investment projects involve some risk, but infrastructure projects in developing countries are perceived as unusually vulnerable to risks.
The risks associated with the revenue stream are therefore scrutinized. Equity investors may be willing to accept higher levels of risk in return for higher expected returns on their equity, but lenders typically have a lower tolerance for risk and a greater need for risk mitigation mechanisms.
Although government conducts project negotiations with the sponsors, it is the lenders behind the scenes who set risk mitigation standards and determine whether projects are financeable.
The significance of particular risks will differ from project to project, depending upon sector characteristics. Here, we analyse the major risks involved, the methods for handling these risks, the problems that can arise in each case and provide the best solution to mitigate these risks.