Mitigating Commercial Risks in Project Finance
In project finance, risks are allocated to the parties best able to manage them. However, the risk mitigation instruments incorporated in the project's contractual and financial arrangements need not be all-encompassing to provide the securit...
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| Format: | Viewpoint |
| Language: | English |
| Published: |
World Bank, Washington, DC
2012
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| Online Access: | http://documents.worldbank.org/curated/en/1996/02/696764/mitigating-commercial-risks-project-finance http://hdl.handle.net/10986/11635 |
| Summary: | In project finance, risks are allocated
to the parties best able to manage them. However, the risk
mitigation instruments incorporated in the project's
contractual and financial arrangements need not be
all-encompassing to provide the security investors require.
Commitments may be limited in scope, amount, and duration.
This Note provides a checklist of commercial risk mitigation
instruments commonly used in project finance by private
lenders and sometimes by equity investors. The checklist is
structured around a project's development cycle: the
construction phase and the operating phase. During the
construction period, three main groups of instruments are
used to mitigate risk: contractual arrangements and
associated guarantees, contingency funds and lines of
credit, and private insurance. The instruments most
commonly used to mitigate risk during the operating period
are: contractual arrangements, contingency reserves, cash
traps, insurance, and risk compensation devices. |
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