3- project risk analysis

7/21/2019 3- Project Risk Analysis

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shyam Ji Mehrotra1

Project Risk Analysis

Saturday, January 2, 2016



GLSSAR!Loan syndication

Loan moratorium

An"el #n$estors

Pri$ate %&uity

'inancial closure

January 2, 2016Shyam Ji Mehrotra2



Reca()hat are key (roject (arties*

)hat are di+erent (hases o (roject*

-o. lender satisy itsel that (roject is/anka/le*

)hat is the (ur(ose o ecolo"ical anden$ironmental im(act analysis o the(roject*

January 2, 2016Shyam Ji Mehrotra



)hat is risk*

ncertainty a/out rains, i"ht delayed, income

not "enerated

)hen such e$ents ha((ens, it could result into

loss3

4his is R#S5

January 2, 2016Shyam Ji Mehrotra



Risk mana"ement de7ned)e may de7ne risk as uncertainties resultin" in

ad$erse outcome, ad$erse in relation to(lanned o/jecti$es or e8(ectations3

'inancial risks are uncertainties in ad$erse

$ariations o (ro7ta/ility or outri"ht losses3ncertainties associated .ith risk elements

im(act the net cash o. o /usiness orin$estment3 nder the im(act o uncertainties,

$ariations in net cash o. take (lace3 4hiscould /e a$ora/le or una$ora/le3 4heuna$ora/le im(act is R#S5 o the /usiness3




Project risk analysisProject 7nance entails ormida/le set o

risks

'inancial ad$isor role is to structure 7nanceso that risks are miti"ated to "reater e8tent

:ar$e out risk in di+erent cate"ory andassi"n them to (arties .ho can handle it/est




Risk mitigation pyramid

January 2, 2016Shyam Ji Mehrotra;



ASSESSING PROJECT RISKEconomic RISK

)hen a (roject is not a/le to "eneratesu<cient cash o.

Also kno.n as de/t ser$icin" risk

=ue to >a? decline in (rice o out (ut or >/?

increase in cost o ra. material or other in(utsRisk miti"ation

+ take a"reement at (re78ed (rices or (roject (eriod> PPA or (o.er (rojects or toll or road (rojects ?

=o sensiti$ity analysis to determine economic $ia/ility/eyond dou/t


Shyam Ji Mehrotra@



ASSESSING PROJECT RISKEconomic RISK

%conomic Sur$ey 2019 su""ested thatgiant power projects which company wonwith unviable bids must be allowed to failto enforce discipline and penalize reckless

biddingSur$ey says that some /idders assumed

that they can rene"otiate contracts ineeded thus settin" a /ad (recedent


Shyam Ji Mehrotra



ASSESSING PROJECT RISKFINANCIAL RISK m/rella risk that co$er $ariety o risks relatin" to

7nance

=eault risk > /uyer una/le to honor commitment?

#nterest rate risk > increase in interest rates?

=eault Risk miti"ation PPA .ith "o$ernment com(any

Su((lies /acked /y letter o credit

#nterest rate risk miti"ation 4raditional method'i8ed rate de/t

-ed"in" #nterest rate deri$ati$es like interest rate ca( contracts ,

#nterest rate s.a(s


Shyam Ji Mehrotra10



ASSESSING PROJECT RISK

CURRENCY RISK Ser$icin" o orei"n de/t%8chan"e rate $olatility o #ndian currency

:urrency control /y host "o$ernment

:ross currency s.a( cost is &uite si"ni7cantand $ery oten distur/ the $ia/ility

Risk Miti"ationRaisin" o Bonds in #ndian Ru(ees

Auto hed"in" or e8(ort oriented (rojectsBorro.in" in orei"n currency to match cash outo.

o currency

:urrency s.a(s


Shyam Ji Mehrotra11




POLITICAL & SovereignRISK

Embargo in internationa obigation! "Sanction b#UN

C$ange in government %oic# #m(ose ne. ta8 or le$y retros(ecti$e ta8 #m(ose restrictions in transer o ore8

ab$o %o'er %ro(ect b# Enron a! J) o* GEC an+ ,ecteEnter%ri!e o* -./0 12 'it$ %ro(ect co!t 3-45 biion 6 a*terinve!tment o* 3 5.. miion 1a$ara!tra government cancee+t$e %o'er %7rc$a!e agreement 8PPA9

)o+a*one ca!e: intro+7ction o* Genera Anti Avoi+ance R7e8GAAR9

Greece Cri!i!; /45 ,iion +e*a7t to I1F on J7ne <.= -./04F7rt$er <40 biion E7ro %a#ment +7e in en+ J7#= /04 Greece i!!$7t o7t *rom >nancia mar?et no'4 It i! *eare+ t$at it mig$tcreate goba >nancia !$oc? even $ar!$er t$an Le$man bro!4-..54


Shyam Ji Mehrotra12



Codaone case e8am(le o(olitical riskFebr7ar#

-..@

)o+a*one bo7g$t @B7t !ta?e in 7tc$

E!!ar *or 3/4/ biion

Se(tem/er200;

'indin" -utch has /ound u( /usiness in #ndia,ta8men demand Rs3 11000 crores ta8 rom Codaonear"uin" that it should ha$e deducted 4=S

Se(tem/er

2010

Bom/ay -i"h :ourt ruled in 4a8men a$our and

Codaone "oes to Su(reme :ourt January2012

Su(reme :ourt rules in a$our o Codaone

May 2012 4hen 'inance Minister Prana/ Mukherjee amended#4 Act to im(ose retros(ecti$e (ro$ision to ta8

Codaone -utch like deals'e/ruary201

Codaone "ets another notice demandin" Rs3 200crores alle"in" that it under(riced its shares issuedto Mauritius /ased (arent com(any

A(ril 201 Codaone 7led international ar/itration a"ainst #ndia

under #ndia Deatherland /ilateral in$estment treaty January 2, 2016Shyam Ji Mehrotra1



Retro 4a8 :A#RD %D%RG!#SS%/<4.<4-./0

Crain In+ia receive+ an or+er*rom Income TaD e%t4 !ee?ingR!4 -.=0 crore *or aege+#*aiing to +e+7ct 'it$$o+ing

taD on %7r%orte+ ca%ita gainma+e in -..:.@ to it! *ormer%arent Cairn UK o+ing Lt+4

193032019 :airn ener"y ad$ised that it is 7lin"

notice o dis(ute under the 5 #ndia/ilateral in$estment treaty a"ainstthis order3





POLITICAL & SovereignRISK

Ri!? mitigationBilateral a"reements /et.een "o$ernment to

sae"uards such risks

Political risk insurance throu"h %:G:

#nternational ar/itration

Remo$al o sanction

Bail out /y international 7nancial system


Shyam Ji Mehrotra19




Environmenta RISK A""ressi$e lo//yin" /y en$ironmental acti$ists to

(rotect en$ironment

ten $oiced throu"h (olitical (rocess

'orcin" "o$ernment to (ut restrictions on minin" andother inra (rojects to take orest, (ollution,en$ironmental or ecolo"ical clearances

%8am(le LACASA (roject in Pune E alle"edly /ye (asseden$ironmental and ecolo"ical norms @90 :rores loan o /anks /ecame DPA

Risk #ncrease in (roject cost or cost o o(erations due (roject

redesi"n or hu"e cost o dis(osal o /ye (roducts or in

e8treme cases a/andonin" o (roject


Shyam Ji Mehrotra16




INUSTRY RISK :om(etiti$e orces .ithin industry (osessi"ni7cant risk

Analysis is done rom local and "lo/al(ers(ecti$e

Prices o su/stitute (roduct, in(ut and out(ut

Risk Miti"ationF

#m(act study (resent and (ros(ecti$ecommodity (rices and su((ly (osition 'or.ard (rice a"reement or (urchase

a"reed or lie o the (roject

January 2, 2016Shyam Ji Mehrotra1;




Com%etion Ri!? :ontractorsF 4urn key (rojects, Perormance"uarantee

:ost structureF Pro$ision o contin"ency

=elay risk and contact itemsF :a(acity to /ear

time an cost o$er run 4echnolo"y riskF 4erms o technolo"y transer

Miti"ation o com(letion risk=ue dili"ence o contractors

Share com(letion risk to su((liers throu"h turn keycontracts, contractual "uarantees o manuacturesand (erormance "uarantee

Pro$ision or contin"ency


Shyam Ji Mehrotra1@




Com%etion Ri!? ut o 1@ me"a (rojects > o$er 1000 crores?at the end o 2011E12, @6 .ere e8(eriencin"time o$er run and 6@ su+ered cost o$er run

4hese (rojects are /ein" im(lemented in

(u/lic sector in (o.er >9?, (etroleum >?,rail.ays >?, road and hi"h .ays >21?, coal>?, Steel >6?, Shi((in" and (orts >6?, Atomicener"y >9?

#nitial cost o these (roject .ere Rs393@6 lakhcrores and no. raised to Rs3 63@ lakh croresim(lyin" 193 o$er run


Shyam Ji Mehrotra1




Tec$noog#Non avaiabiit# o* ra' materia orre!o7rce! !a# ra+iation !$ort *a *rome!timate+ va7e!

Tec$noog# *ai7re

Ri!? mitigationPro(er due dili"ence o natural resources

:om(rehensi$e .arranty /y su((lier o technolo"yor e8(ected le$el o (erormance

Loss com(ensation /y technolo"y (ro$ider


Shyam Ji Mehrotra20



#m(lication or (roject7nancin"Risks may e8ceeds 7nancial ca(acity o (roject

s(onsor

Lender .ould like that /usiness or economicsrisk are (ro(erly miti"ated /eore they a"ree to

7nanceLender may a"ree to /ear 7nancial risk /ut

.ould like to com(ensated /y .ay o hi"herinterest rate

As an alternate, lender may like the host"o$ernment to (ro$ide the "uarantee .heresocial /ene7ts justiy cost or do the $ia/ility "a(undin"




Risk Allocation

A critical a((roach is to do risk sharin" .ithall (arties o (roject throu"h contractualarran"ement at lo.est ultimate cost to the(roject

Allocated amon" (arties .ho are mostca(a/le to /ear

5no.n as assem/lin" the transaction




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3- project risk analysis

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