Project Risk and Risk Allocation

Summary

In project finance, risk is typically defined as uncertainty with respect to cost, loss, or damage. Risk is contrary to two of the most important principles of project finance, namely certainty and predictability, so the risk allocation and mitigation strategies in a project are of tremendous importance. During the life of a project financing transaction, substantial time is devoted to risk—risk is basically the focus of the due diligence process. During this process, risk is identified, analyzed, quantified, mitigated, and allocated. To the extent possible, the lenders will want risks mitigated with additional credit support or insurance.