Risk and risk management in project-related finance

This paper introduces the concept of Project Related Finance and discusses the main issues that lending banks should take into account when providing a finance package. The paper is based upon research that investigated the use of Project Related Finance for funding construction projects in The United Arab Emirates (UAE). The main areas of risk have been identified and the use of guarantees to shift specific risks to interested parties has been discussed. Based upon interviews with lending banks in the UAE, seven factors that have the most significant influence on the banks decision on whether or not to provide finance have been identified and used to provide an overall assessment. Three Case Studies were used to demonstrate the assessment process. Important aspects of Risk Management have been discussed along with a five-step decision making process for lending banks. A check list was developed and circulated as part of questionnaire to banks and contractors. The responses have been presented to illustrate the degree of acceptability of certain types of risk normally associated with construction projects. The paper concludes that banks consider many of the risks less acceptable than the contractors do. Banks were also more concerned than the contractors with respect to deficiency in working capital and adequacy of reserves. Both banks and contractors were especially concerned about uncertainty of project completion and contractual matters.