Module 5 : Risk Management

Lecture 24: Risks Associated with Various Infrastructure Projects

The output from the power project is sold to a public entity unlike other sectors such as highway where the infrastructural services is consumed by several users. However, the multiplicity of IPPs in a country also creates the problem of volatility of power prices since keen completion may lower tariffs. There may also be chances of refusal by the public entity to buy the power in spite of entering into power purchase agreement if the power generated does not meeting the agreed specification.

The power plants are often subjected to technical and environmental risk where careful consideration is necessary. The construction process of power plant is often complex resulting in completion risk. Besides the technical complexity, the project sponsor need to set up adequate transportation facility from the point of production of raw material such as coal, and gas to power plant to ensure uninterrupted supply for continuous generation of power in case of fuel/gas fired and thermal power plants. In addition, other major risk that may be evident in case of power sector is the fluctuation of the production due to variation in cost and availability of fuel where IPP is committed to a take-or-pay fuel supply contract. In case of take or pay contractual agreement, one party agrees to purchase a specific amount of another party's goods or services or to pay the equivalent cost even if the goods or services are not needed.

Transport sector: Transport industry includes road transport (i.e. highways, tunnels, and bridges), railed transport (i.e. railway subway, and light rail transit systems), airport and ports. Even within the transportation sector, the risk profile varies with the mode of transportation. For instance, highway construction is relatively less complex then tunnels and bridge, but they are exposed to risks that come from competing facilities and issues like toll collection and user pattern need to be taken into account while evaluating the viability. These may even hold true in case of rail transport if not identical but are quite different when considered in the case of airports and ports in terms of risk exposure in these parameters like toll collection.

Risks in Road Transport: In case of road projects, the investment made by the private investors is recouped using the toll collection from users. As a result, the most critical risks in road transport are mostly due to fluctuation of actual traffic from the forecasted traffic volume. In general, the traffic volumes are forecasted with certain level of subjectivity and takes economic growth, traffic induction, modal split (change of mode from say bus to monorail), individual values of time, vehicle ownership and the behavior of people with respect to tolls i.e. their acceptance levels into account. Any deviation of the forecasted traffic from the actual traffic or inaccurate forecast due to poor workmanship may cause deficiency in cash flows which are difficult to cover or cope up unless a certain level of guarantees are ensured by the host or the government so that the investments of investors and debt of lenders are secured.

Cost overruns and delays are other major sources of the risk due to the constraints such as geographical disadvantages while constructing in difficult terrains such as hilly terrains or may be due to delay in the land acquisition, where especially for a road project it is both expensive and can be slow. The right of way disputes also hamper the work progress leading to cost overruns. The foreign exchange risk is one of the risks encountered in case of tunnel and bridge projects which use sophisticated technology with important equipment.