Risk Identification and Risk Assessment in Project Financing

Abstract

Risk management techniques for project finance transactions consist of a combination of five different but interrelated steps. First, all risks affecting a particular project must be duly identified and understood at an early stage by project participants (risk identification). Second, risks must be quantified and assessed to determine their magnitude (risk assessment). Third, risk reduction techniques must be applied to reduce the overall risk facing project participants to the lowest possible level (risk reduction). Fourth, risks must be distributed among the various project participants in a way that is mutually acceptable for them (risk spreading). Finally, each participant may individually choose to further reduce its allocated risks through additional risk spreading mechanisms such as political and commercial insurance and derivative instruments (hedging and insurance).¹