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Introduction
As you may know, Project Financing is an innovative financing technique that has been used on many high-profile corporate projects. It has been used to fund amusement parks, large-scale mineral explorations, road projects, etc.. It is the preferred alternative to conventional methods of financing infrastructural projects.

The preparer of the business proposals and the Financier should understanding the rationale for project financing, how to prepare the financial plan, assess the risks, design the financing mix, and raise the funds. In addition, they must understand why some project financing plans have succeeded while others have failed. The contractual arrangements to support project financing must be comprehensive and provide every necessary assurance.

A knowledge-base is required regarding the design of contractual arrangements to support project financing; issues for the host government legislative provisions, public/private infrastructure partnerships, public/private financing structures; credit requirements of lenders, and how to determine the project's borrowing capacity; how to prepare cash flow projections and use them to measure expected rates of return; tax and accounting considerations; and analytical techniques to validate the project's feasibility must be legitimate, adequately bolstering every project parameter.

The purpose of this document is to briefly explain the efforts toward risk minimization that lie at the heart of the project.YOU, THE FINANCIER

The risks for the Financier are great, since the loan can only be repaid when the project is operational. If a major part of the project fails, the Financier is likely to lose a substantial amount of money. The assets that remain, however, will generally not be highly specialized but will be in a remote location. If saleable, they will have value outside the project; though the extent of this value in the then current market cannot be measured. Therefore, the Financier, and his advisors, should go to substantial efforts to ensure that the risks associated with the project are reduced or eliminated as far as possible. The project Principal will provide management and actual implementation of strategies to minimize risks. Because of the risks involved, the cost of such finance will be generally higher and providing such financing will be more time consuming.

Risk minimization process
The project Principal and the Financier are and will be concerned with minimizing the dangers of any events which could have a negative impact on the financial performance of the project, in particular, events which could result in: (1) the project not being completed on time, on budget, or at all; (2) the project not operating at its full capacity; (3) the project failing to generate sufficient revenue to service the debt; or (4) the project prematurely coming to an end.

The minimization of these risks will involve three processes -- identifying and analyzing all of the risks that may bear upon the project; allocating those risks among all parties to the project; and creating mechanisms to manage the risks. If a risk to the Financier cannot be minimized, the Financier will need to build it into the interest rate margin for the loan or into the return on investment (roi).

STEP 1 - Risk identification and analysis
The project Principal has prepared a business plan that includes some feasibility observations but may also prepare a dedicated feasibility study for the project. The Financier should carefully review the business plan and/or feasibility study and may engage independent expert consultants to supplement it. He should also request that a feasibility study be made if necessary for making a financing decision. The Financier will focus on whether the Principal has properly assessed costs of the project and whether the Principal has properly calculated the cash-flow streams from the project. The Financier may analyze some risks using financial models to determine the project's cash-flow and, therefore, its ability to meet repayment schedules. Different scenarios will be examined by adjusting economic variables such as inflation, interest rates, exchange rates and prices for the inputs and output of the project.

STEP 2 - Risk allocation
The risks, being identified and analyzed, will be allocated by the parties through negotiation of the contractual framework. Each risk will be allocated to the party who is the most appropriate to bear it (i.e. in the best position to manage, control, insure against it and who has the financial capacity to bear it). Uncontrollable risks will be widely allocated and each party will have an interest in fixing such risks. Generally, commercial risks will be allocated to the private sector and political risks to the State sector, if applicable.

STEP 3 - Risk management
Risks will be managed to minimize the possibility of the risky event occurring and to minimize its consequences if it occurs. The Financier may be intensely informed about the project and will be given control, if necessary, over the project according to the borne risk, since he will take security over the entire project and must be prepared to step in and take it over if the Principal defaults. Or the Financier may opt out of the in depth involvement in the project but may closely monitor it. Such risk management will be facilitated by imposing reporting obligations on the Principal and controls over the financial accounts of the project. Such measures will not hinder the Principal's flexibility in bringing the project to fruition and will not restrict risk management mechanisms required by the financier.

1. Construction phase risk - Completion risk
Completion risk allocation is a vital part of the risk allocation of the project. This phase will carry the greatest risk for the Financier. Construction may dictate that the project will not be completed on time, on budget or at all because of technical, labor, weather and other construction difficulties. Such delays or cost increases may delay loan repayments and cause interest and debt to accumulate. They may also jeopardize contracts for the sale of the project's output and supply contacts for raw materials.

The project Principal will minimize these completion risks {before financing} by: (a) obtaining construction completion guarantees requiring the sponsors to pay all debts and liquidated damages if completion does not occur by the required date; (b) ensuring that sponsors have a significant financial interest in the success of the project so that they remain committed to it by insisting that sponsors inject equity into the project; (c) requiring the project to be developed under fixed-price, fixed-time turnkey contracts by reputable and financially sound contractors whose performance is secured by performance bonds or guaranteed by third parties; and (d) obtaining independent experts' reports on the design and construction of the project. The completion risk will be managed during the loan period by making pre-completion withdrawals of further funds conditionally based upon the issuance of certificates by independent experts to confirm that the construction is progressing as planned, if new construction is applicable.

Such resource risks are minimized by: (a) experts' reports as to the existence of the inputs or estimates of public users of the project based on surveys and other empirical evidence (e.g. potential venture patrons); (b) requiring long-term supply contracts for inputs to be entered into as protection against shortages or price fluctuations (e.g. supply agreements); (c) obtaining guarantees that there will be a minimum level of inputs (e.g. governmental guarantees that a certain number of people will use services); and (d) "take or pay" off-take contacts which require the customer to make minimum payments even if the product cannot be delivered.

Operating risk
Operating risks are general ones that may affect the cash-flow of the project by increasing the operating costs or affecting the project's capacity to continue to generate the quantity and quality of the planned output over the life of the project (especially during the period of the Financier's involvement). They may include the level of experience and resources of the Principal/owner/operator, inefficiencies in operations or shortages in the supply of skilled labour. The Principal will minimize operating by employing reputable and financially sound managers, assistants, overseers, operators, teachers and salespeople whose performance is secured by performance bonds. Operating risks will be managed during the loan/investment period by providing detailed reports on the operations of the project. Control of cash-flows by requiring that product sales revenue be paid into a regulated financial account may be instituted to ensure that funds are used for approved operating costs only.

Market / off-take risk
The loan can only be repaid if the product/service that is generated can be turned into cash. Market risk is the risk that a buyer cannot be found for the product at a price sufficient to provide adequate cash-flow to service the debt. The mechanism for minimizing market risk is an acceptable forward sales contract entered into with financially sound purchasers.

3. Risks common to both construction and operational phases
Participant / credit risk
The participant/credit risks are associated with the Principal, sponsors and other managerial participants themselves. They must have sufficient resources (time, transportation, pre-start-up seed funds) to manage the construction and operation of the project and to efficiently resolve any problems which may arise. Credit risk is also important for the sponsors' completion guarantees. To minimize these risks, the Principal will demonstrate the existence of the necessary human resources, experience in past projects of this nature and/or a vested interest in the project and minimal access to capital, credit or smaller investors that may be necessary for injection into an ailing project. An adequate labor force will be compiled from industry. The Principal(s) of any project or sponsored project are entrepreneurs with an understanding of international affairs and/or their project's markets and have lifelong dedications to their ventures. Smaller investors are welcome to demonstrate an interest in participating in any project.

Technical risk
The risk of technical difficulties in the construction and operation of the project's plant and equipment, including latent defects, will be minimized by the use of tried and tested technologies rather than new, unproven technologies. Expert reports as to the proposed technology will be prepared and a maintenance retention account will be maintained to receive a proportion of cash-flows to cover future maintenance expenditure.

Currency risk
Currency risks include the risks that: (a) a depreciation in loan currencies may increase the costs of construction where significant construction items are sourced offshore; or (b) a depreciation in the revenue currencies may cause a cash-flow problem in the operating phase. Mechanisms for minimizing currency risk include: (a) matching the currencies of the sales contracts with the currencies of supply contracts as far as possible; (b) denominating the loan in the most relevant foreign currency; and (c) requiring suitable foreign currency hedging contracts to be entered into, if applicable.

Regulatory / approvals risk
These are risks that government licenses and approvals required to construct or operate the project will not be issued (or will only be issued subject to onerous conditions), or that the project will be subject to excessive taxation, royalty payments, or rigid requirements as to local supply or distribution. Such risks will be reduced by obtaining legal opinions confirming compliance with applicable laws and ensuring that any necessary approvals are a condition precedent to the drawdown of funds.

Political risk
The danger of political or financial instability in the host country caused by events such as insurrections, strikes, suspension of foreign exchange, creeping expropriation and outright nationalization, and avoidance of contractual obligations by a government through sovereign immunity doctrines. Mechanisms for minimizing political risk may include: (a) requiring host country agreements and assurances that project will not be interfered with; (b) obtaining legal opinions as to the applicable laws and the enforceability of contracts with government entities; (c) requiring political risk insurance to be obtained from bodies which provide such insurance (traditionally government agencies); (d) involving financiers from a number of different countries, national export credit agencies and multilateral lending institutions such as a development bank; and (e) establishing accounts in stable countries for the receipt of sale proceeds from purchasers.

Force majeure risk
The force majeure risk includes events which render the construction or operation of the project impossible, either temporarily (e.g. minor floods) or permanently (e.g. complete destruction by fire). Mechanisms for minimizing force majeure risks include: (a) conducting due diligence as to the possibility of the relevant risks; (b) allocating such risks to other parties as far as possible (e.g. to the builder under the construction contract); and (c) requiring adequate insurances which note the Financiers' interests to be put in place.

Conclusion
This risk minimization document regarding any project or sponsored project gives a brief overview of the possible risks and methods of risk minimization that may be employed by the project Principal and the private or governmental Financier. Each project is different. It will give rise to its own unique risks and, thus, poses its own unique challenges. All involved Principals and those advising them need to act creatively to meet those challenges and to effectively and efficiently minimize the risks embodied in the project in order to ensure that the project financing will be a success.  We anticipate you working with us!  DIPLOMATIC GATEWAYS