Risk Allocation On Project Structuring And Current Practices

2683 Words Jan 12th, 2015 11 Pages
RISK ALLOCATION IMPORTANCE IN PROJECT STRUCTURING AND CURRENT PRACTICES

I. Introduction
Project finance is best understood in terms of a risk allocation which reconciles the potentially conflicting objectives of borrowers and lenders by utilizing the long-term economic and commercial linkages between the sponsors, lenders and third party participants involved with a project. (Howcroft &Fadhley, 1998).
In theory, the basic principle of risk allocation for the project finance is “Allocating project risks to the most suitable participant whose risk preference is higher” (Xiao, 2003).
Severe consequences follow from the failure to accurately identify and allocate risks. These consequences often extend beyond the immediate parties to the project and can have political and social impacts (Medda, 2007). Hence, increasing the public hostility to future projects and impeding economic development. Risk allocation can significantly influence the behaviour of the project participants and affect project schedule, cost and quality (AlSalman & Sillar, 2013). Frequently, project participants allocate risks by aversion. Owners shift risks to the primary contractor, who in turn transfers them to the subcontractors with the purpose of escaping from, rather than managing, risk (refernce) As a result, risks are not necessarily allocated to the party that is best able to manage them in an efficient and effective manner.
Dealing with risk allocation, from both theoretical and practical…
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