The Risks of Project Finance – Based on International and Domestic Experiences

Abstract

The risk analysis of project finance and its methodology have been continuously developing over the past two decades, in response to the sharp increase in financing volume. The aim of this study is to summarise the special risk structure of projects, the approaches to risk analysis, and to present the risk characteristics of projects and lessons learned, based on market data. Using international empirical analyses as well as processing Hungarian public banking data, the most important international and Hungarian market trends, risk characteristics, bankruptcy statistics, and returns are analysed, along with all major lessons of the recent years. One of the conclusions of the study is that project finance differs from normal corporate lending in many key aspects of risk. There is a clear separation between the risks involved in the execution and the operational phases, and this separation is not emphasised by the risk models used. Hungarian data are in line with international experiences, and are proof of the higher degree of risk inherent in project finance. When compared with normal corporate loans, default statistics show a much more unfavourable picture, which has severely impacted the average default statistics of the entire Hungarian banking system.