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Language: eng
Format: epub
Published: 2016-05-27T16:00:00+00:00

Risk assessment

Force majeure events typically occur with low probability, but have a very significant impact if they occur. For example, a major fire at a power plant might interrupt operations for a long period leading to an extended period of revenue loss. Analysis can assess the likely maximum period of interruption for different types of force majeure event informing the required level of insurance protection.

Contingency assessment

Reserving may be able to address certain limited force majeure-type events.

Contractual allocation

Force majeure events are typically allocated to insurance companies. In some cases, government counterparties are able to act as the insurer of last resort in the event that commercial insurance becomes unavailable.

Capital structuring

Debt structuring is often restricted to the covenanting of insurance requirements.

Risk mitigation and financial capacity

Ultimately, the fundamental arbiter of a project’s success or failure is the creation, through appropriate risk analysis and mitigation, of a low-business-risk vehicle, capable of sustaining financial risk to a level which will generate adequate returns for capital providers. This should not be seen as a ‘zero-sum game’, where risk is transferred away from a ‘winner’ (for example, equity) to a ‘loser’ (for example, debt or vice versa). For a project to achieve long-term operational success there must be commonality of purpose/interest among all of its stakeholders, including external parties that may not be perceived as having a direct (contractual or financial) interest in the project itself, such as regulators. Transparency and communication are the key elements necessary for the negotiation of a structure that will be stable and deliver a successful project for consumers and stakeholders alike.

Summary findings

The following bullet points serve to summarise the key findings of this chapter which has provided a financier’s view of risk assessment in major infrastructure projects:

• Efficient cost of capital and the capital structure remain fundamental to any infrastructure asset that will successfully deliver the essential services it is intended for over a period of many years. Long-term debt capital is a key constituent.

• A low-business-risk environment is a prerequisite to delivery of efficient capital, achieved through analysis and appropriate mitigation of risk.

• There are a number of stakeholders in any project, including equity investors, lenders, operators, other contractual counterparties, as well as end-users or consumers and regulators. All of these stakeholders must come together with a common interest and objective in order to achieve stable and successful outcomes.

• Transparency and communication among all stakeholders is essential to deliver infrastructure projects that will provide an essential service over many decades.

• In today’s environment, focus on the key fundamentals is greater than ever, and it differentiates true infrastructure assets from those of a more hybrid nature, impacting the availability of finance and the cost of financing.

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