Corporate Risk Management, 2nd Edition

5

Financing Projects, Their Risks and Risk Modelling

5.1 INTRODUCTION

It is important to understand the difference between corporate and project finance. Corporate finance is traditional finance where payment of loans comes from the organisation, backed by the organisation’s entire balance sheet, not from the revenues of projects. Lenders look at the overall financial strength or balance sheet of an organisation as a prerequisite for lending for a project (Merna and Njiru 2002). In project finance, projects are undertaken by a special project vehicle (SPV), owing to the fact that the project is an off-balance-sheet transaction. Lenders have no recourse to the main organisation’s assets.

In this chapter the main sources of finance are discussed. It then briefly describes the major stages of risk faced during the management process, namely identification, analysis and response. The risks affecting financial options are outlined along with how these risks can be managed. The chapter also outlines the uses and benefits of risk management software and modelling.

5.2 CORPORATE FINANCE

Corporate finance is the specific area dealing with the financial decisions corporations make and the tools and techniques used to make the decisions. The discipline as a whole may be divided between long-term capital investment decisions and short-term working capital management.

Figure 5.1 summarises the corporate finance process and illustrates the three categories of corporate financial decision ...