Factors determining project risk

The risks applicable to a project vary from sector to sector and project to project, but they will likely depend on the following:

Nature of the project

Project financing techniques are used in several core sectors, including energy, infrastructure, oil and gas and mining. The technical details of projects differ hugely even within a sector.

For example, contrast the different technologies used by, and regulations applicable to, nuclear and wind power projects, or hospitals and transportation projects. However, there are also significant areas of commonality within and across sectors. Almost all projects require governmental approvals or licences, rights to use a variety of other assets, ranging from real property (particularly in the extraction industries) to intellectual property, with the complexity of a project from a technical perspective being a key risk consideration.

Location of the project

A project located in a less economically developed country, possibly one with unreliable infrastructure (including inadequate utilities, transportation options and social factors), an untested legal regime (raising questions over, amongst other things, the enforceability and value of collateral security) or an unstable political climate (potentially undermining the reliability of core host government agreements and relationships, including the concession agreement, other consents and taxation arrangements), or a combination of all of these, will likely pose greater risks than a project located in a more economically developed country. However, more economically developed countries will likely pose different challenges to a project, which can include regulatory risks (the imposition of new or amended requirements in a variety of areas such as financial, tax and environmental regulation) and non-legal scrutiny / public relations issues (examples in the European Union would include protests against hydraulic fracturing (or “fracking”) research and development, and the perennial divisions over the merits and concerns relating to nuclear power).

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For project finance transactions, which take place largely in developing countries that are subject to unstable environments, special attention is required in the drafting of project agreements. In th