Essay on "International Project Finance"

Essay 15 pages (5068 words) Sources: 10

[EXCERPT] . . . .

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.

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