Understanding and Managing Risks in Hydro Power Plants Projects
Posted: 31 Jul 2008 Last revised: 29 Jul 2010
Date Written: August 1, 2008
Project finance is the method of raising long-term debt financing for major projects through 'financial engineering' based on lending against cash flow generated by the project alone; it depends on a detailed evaluation of a project's construction, operation and revenue risks, and their allocation between investors, lenders, and other parties through contractual and other arrangements (Esteban, 1999). Project finance as we may say is a relatively new financial discipline that has developed rapidly over the last two decades. In 2003, some $390 billion of investments in projects around the world were financed using project finance techniques (World Bank). "Project finance" is not the same thing as "financing projects," because projects may be financed in many different ways. Traditionally, large-scale public sector projects in developed countries were financed by public-sector debt; large companies raising corporate loans financed private-sector projects (Institute of International Finance, 1995). In developing countries, the government borrowing from the international banking market, multilateral institutions such as the World Bank, or through export credits, financed projects. These approaches have changed, however, as privatisation and deregulation has changed the approach to financing investment in major projects, transferring a significant share of the financing burden to the private sector (Yescombe, E.R 2002a).
Risk is the possibility that events, their resulting impacts and dynamic interactions may turn out differently than anticipated (Leland, 1998). While risk is often viewed as something that can be described in statistical terms, while uncertainty applies to situations in which potential outcomes and causal forces are not fully understood we refer to both as risks. Risks are multidimensional and thus need to be unbundled for clear understanding of causes, outcomes, and drivers. Nevertheless, since their impacts depend on how they combine and interact, reductionism must be avoided (Hertz, 1983). Managing risks is thus a real issue. Successful projects are not selected but shaped with risk resolution in mind. Rather than evaluating projects at the outset based on projections of the full sets of benefits, costs and risks over their lifetime, successful sponsors start with project ideas that have the possibility of becoming viable. Successful sponsors then embark on shaping efforts to influence risk drivers. The seeds of success or failure are thus planted and nurtured as conscious choices are made. Successful firms cut their losses quickly when they recognize that a project has little possibility of becoming viable (Kahkonen, 1997). Risks also differ according to types of projects. Hydroelectric-power projects tend to be moderately difficult insofar as engineering is concerned, but very difficult in terms of social acceptability.
Keywords: Hydro Power Plant Project, Project Management, Risks in Projects
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