Modern Economy, 2011, 2, 479-482
doi:10.4236/me.2011.24053 Published Online September 2011 (
Copyright © 2011 SciRes. ME
A New Type of Risk in Infrastructure Projects
Mihnea Craciun
Faculty of International Business and Economics, the Academy of Economic Studies, Bucharest, Romania
Received July 9, 2011; revised August 10, 2011; accepted August 18, 2011
The recent financial crisis has sparked a new debate about the risks that infrastructure projects are exposed to.
With the use of various typologies identified along the last thirty years by several authors, looking both at
project finance funding techniques and to more traditional direct investment framework, the recent financial
turmoil on global capital markets (2008 - 2010) reveals a new type of risk, this time not project, but financier
Keywords: Management, Risk Typologies, Project Finance, Infrastructure
1. Introduction
Over the past two decades, investments in infrastructure
have been decisively influenced by at least two trends
that marked their evolution with resu lts and effects to be
witnessed for the years to come.
The first trend was the increased share of investment
funding provided b y the private sector in the detriment of
the traditional, pu blic sector, historical financing pattern.
Involving the private sector represented either by com-
mercial and development banks as well as capital market
players, such as investment funds, pension or hedge
funds determined an increased complexity of the fina-
ncial products employed, along with a wide diversifica-
tion of the risk management techniques.
Although it had a positive influence over the market
for infrastructure projects in general, by paving the way
for a larger variety of funding initiatives and promoting
innovative risk management solutions, the general pra-
ctice of these tendencies (such as the increased comple-
xity and diversification of financial risk management
instruments) resulted also in the biggest global financial
crisis over the past 80 years.
This, in turn, determined the commercial banks, other-
wise traditional players financing investments in infra-
structure projects over the past twenty or thirty years, to
suddenly leave their positions under the likely threat of
their own bank ru pt cy.
And this was, in fact, the second trend: affected by the
financial crisis determined and rushed by the Lehman
Brothers’ bankruptcy, in September 2008, the banks have
manifested reluctance to assume risks inherent in their
involvement in complex infrastructure projects. 2009
figures are relevant. Project Finance International maga-
zine estimates the value of the investment projects fi-
nanced in 2009 at USD 139.2 billion, a 44% decrease
versus 2008 figures of nearly USD 250 billion [1].
Even if funding has become scarcer over the last three
years, the financing needs have not diminished. Accord-
ing to a Morgan Stanley study from the second half of
2008, over the following ten years, investments needs in
infrastructure are estimated at USD 21.7 trillion in de-
veloping countries only [2]. More than likely, many of
these projects have been, are being and will be postponed
or abandoned as they h ave or will become less profitable
under the impact of the significant increase in funding
costs combined with the general deterioration of global
macroeconomic parameters. However, since many of
these investments are considered essential, regardless of
the actual conditions of capital markets, they will have to
be started or continued.
To such extent, the empty place left on the stage by
the commercial banks will be assumed by the only other
entity which has the ability and muscle to mobilize the
same large resources: the states.
It is anticipated that the reassertion of national states in
financing infrastructure projects in vestments will have at
least three predictable effects the first two directly af-
fecting the infrastructure sector itself and the third one
with a potential influence on the entire eco nomy.
The first effect is represented by a better positioning of
investments financed by the public sector as compared to
those enjoying private support only. Being generally
aimed at investments in, or management of, public assets,
the immediate effect one could anticipate will be of a
progressively secondary role that the private sector will
play in the economy whilst the p ublic sector will witness
a dynamic growth (a phenomenon which becomes al-
ready visible through a parallel with financial markets:
an increasingly large number of commercial or invest-
ment banks is now controlled by the public and not by
private shareholders).
The second foreseeable effect is a reduced specific
risk of such projects due to a direct involvement of the
public authorities into the investment implementation,
through guarantees or direct contracting and through
local or national budg et funding. This latter trend should
lead to a third visible effect, this time extended to the
entire economy. Public investment in infrastructure,
mainly with the state as major sponsor and in vestor, will
encourage the development of key sectors such as in-
frastructure, in all its forms in both developing econo-
mies and in the developed ones. Under the current dra-
matic reduction in global demand, procurement of goods
and services by the public sector is designed to contri-
bute to national economic recovery by increasing the
demand for goods and services and employing a growing
Obviously, the above is just an attempt to outline so me
future development trends, signs of which can only be
predicted. The global economic paradigm is nowadays at
a crossroads moment, with the current financial situation
being in every respect an unprecedented one. As a result,
it can be anticipated that the future will bring even more
caution in the theoretical and practical approaches to risk
management. Regardless of this, infrastructure invest-
ments will remain in high demand and, as in a world in
constant progress, they should tend to increase.
2. Several Approaches to Infrastructure
2.1. Several Approaches to Infrastructure Risks
What are the risks to which an infrastructure investment
project is exposed? There is a large array of risks typo lo-
gies based on which these can be analyzed. Infrastructure
investment projects are, by nature, Direct Investments
(DI) (and often Foreign Direct Investments (FDI)) in
their most straightforward definition. According to
UNCTAD, FDI are defined as “a long-term relationship
reflecting a lasting interest and control from a non-resi-
dent company on a resident company” [3]. From this
perspective, the risks of an investment project in infra-
structure are up to a point common to those that affect
any FDI, and their treatment requires the same tools of
Amongst the many categories the risks could fall into,
only a few shall be mentioned therein. To such extent
one of the most well known classification belongs to
Goshal and identifies four types of risks affecting inter-
national investments [4]:
1) macroeconomic risks—those risks which compa-
nies cannot control and which include political factors
(civil wars, social unrest), natural (natural disasters) or
financial (changes in the financial environment such as
interest rates, exchange rates etc.);
2) regulatory risks—those risks which companies can
influence in some way or whose effects can be mitigated
by companies actions. These risks include changes in the
regulation of certain aspects of business such as legisla-
tion, taxation , etc;
3) risks related to competition—those risks related to
market and all the forces that influence or are themselves
influenced by the market. Elements of competition and
its results fall into this category.
4) risks related to resources or access to re-
sources—are risks affecting the company as a result of
the company’s choice for a commercial strategy which
considers such resources as being available (natural, fi-
nancial, management, etc.)
Other authors such as Miller, quoted by Horobet [5],
classify risks (or uncertainties, according to the author)
in six categories:
1) risks related to government policies;
2) macroeconomic risks;
3) risks related to resources;
4) market risks related to certain product demand;
5) risks of competition; and
6) technological risks
This classification represents in fact a breakdown of
the four main categories identified by Ghosal (from a
general to a particular standpoint): the risks associated
with general business environment, macroeconomic risks,
industry risks and business risks.
Another approach belongs to the Economist Intelli-
gence Unit (EIU) [5], which divides risks into three
categories: environmental (general risks which cannot be
influenced by the company), process risks (related to the
attainment of the company’s goals however manageable
by the same) and informational (risks related to poor
information management with consequences for com-
pany’s decisions and the achievement of its objectives).
EIU classification is very detailed, the three general cate-
gories including in turn, further sub-classification. Thus,
the process risk includes operational risk (customer sat-
isfaction, human resources, efficiency, production cycle,
environmental impact, etc.), delegation risks (related to
the management, its performance incentives or commu-
nication), information processing and the integrity of the
employees risk or the financial risk (including currency
risk issues, interest rate, liquidity risks, guarantees, etc.).
Copyright © 2011 SciRes. ME
EIU’s comprehensive approach is explained by its re-
search based on individual scenarios developed over
many years in surveys of an envelope of more than 40
global companies.
Should however the scope of research be restricted to
the scope of infrastructure, thus to investment projects
pertaining to this area, classifications become increa-
singly more specific. An approach like that of Grimsey
and Lewis [6], researchers of public-private partnerships
funding structures, identifies new risks that affect each
and every investment in infrastructure projects:
1) technical risks, such as those related to design and
2) construction risk due to faulty workmanship, poor
raw materials quality and execution delays
3) operational risks, due to operating and mainte-
nance costs exceeding estimates
4) risks impacting the income such as insufficiently
well regulated price and demand vo latility
5) financial risks from inadequate financing structure
or hedging transactions
6) the risk of force majeure, including events such as
wars or natural disasters
7) regulatory risks, arising from changes in the insti-
tutional environment and adverse effects of the regula-
tory bodies rules
8) environmental risks, the negative effects the in-
vestment project may have on the environment
9) the risk of defaulting on the obligations which
may come from any combination of the above risks.
An even more pragmatic definiton, belongs to a prac-
titioner, Yescombe [7], who tends to simplify somehow
the risk approach, thus classifying the same into three
broad and flexible categories:
1) commercial risks—or project risks directly related
to it, to the market in which the project operates and, in
general, the effect the project has on the elements it
enters in contact with (from raw material suppliers, to the
communities, local authorities, customers, environment).
They are, in general, project risks the consequences of
which can be to some extent kept under the control of the
investor and sponsor.
2) macroeconomic risks—or financial risks are those
related to external factors over which there will be little
influence and control. It is the case of inflation, the over-
all level of interest, the exchange rate.
3) political risks—or the country risks, are risks re-
lated to the effects of government actions or having force
majeure characteristics (such as wars, s o c ia l u nr e s t , etc . ) .
2.2. An Analysis of the Approaches and a New
Type of Risk
To the above three risks it see ms appropriate to intro du ce
a fourth one, manifested especially in the latest years:
the risk of financing. The global financial crisis that
affected, 2008-2010, a significant part of the world econ-
omy, including the U.S., EU or Japan, gave birth to a
new type of risk, one that initiators of investment pro-
jects had not witnessed before. This risk is determined b y
events which can lead to loss of project funding opportu-
nities. So far, usually, the inability to finance a project
has been due for the most part, to the project itself. Either
this did not meet the requirements of po tential lenders or
providers of capital, or was confronted with a number of
risks whose costs and whose ownership was deemed too
expensive. Whether talking about political risks, envi-
ronmental, or simply commercial risks, those risks were
determined by the project initiation, development or its
operation. The direction of manifestation of these risks
was always from the project to the lenders, never vice
Currently, to the classic definition of project risks, a
new one appears as appropriate: the risk th at a good pro-
ject might not be able to continue to the implementation
phase because of lack of funding sources. The cause of
this new type of risk is the international financial situa-
tion, particularly affecting traditional providers of fund-
ing: banks. In a crisis of confidence and global liquidity
it is difficult to find financial resources, as traditional
syndicated loans markets no longer seem to work. In
these circumstances, the banks abandon structuring and
syndicating transactions, becoming more attracted to
hybrid solutions that insulate them from the risk of tak-
ing projects onto their balance sheet. In an analysis pub-
lished in Euromoney [8], it is estimated that during the
2008-2010 financial crisis, there were very few syndi-
cated loans in the market. Transactions were engi- neered
as club loan, at prices, tenors and financial cove- nants
not confirmed by lenders competition in the market, but
rather accepted by customers because there was no al-
ternative. Euromoney’s report even quotes projects sup-
ported by sovereign guarantees which had to undergo the
same implementation mode. Liquidity providers, banks
in this case, favored financial transactions orga- nized as
club loans as this business was more lucrative than tradi-
tional syndicated loans. Besides the higher costs of lend-
ing, these transactions were done over a longer period of
time, due to difficulties inherent in ne- gotiations with
several parties. Another effect of finan- cial crisis is that
the average loan value was reduced. Financing invest-
ment projects is, historically, a long- term funding, usu-
ally two or even three times longer than corporate loan
financing. According to Euromoney esti- mates, the av-
erage duration of loans to finance invest- ment projects
currently dropped from 10 to 7 years. Fur- thermore, if
before 2008, the gearing could have reached 80%-90%
Copyright © 2011 SciRes. ME
Copyright © 2011 SciRes. ME
of the project value, during the financial crisis it no
longer excee ded, 60% - 7 0 % .
Some ways in which investors sought to reduce the
effects of this new type of risk have reflected a capacity
to adapt quickly enough to the situation (and it is antici-
pated, only circumstantial). Many investment projects
have been divided into smaller projects or were deve-
loped in stages. Other investors were able to persuade
governments to take an increasingly greater role in pro-
jects, by guarantees or other forms of support (contract
commitments for a certain period, to pay credit facilities
or equity participation in the project company).
3. Conclusions
Financing investment projects is, as was noted above, an
area exposed to a wide range of risks. Some of these
risks are associated to investors (sponsors). But the pro-
ject is usually a stand alone one, individualized and iso-
lated from other assets of the investors who initiated it,
so it should be judged only by its ability to be able to
generate support and cash. On the other hand, infrastruc-
ture projects have a large social impact and entail risks
associated with public sector and its actions. Finally,
with significant impact on the environment, investment
projects face substantial risks on the environmental con-
sequences of operations.
The manner in which the effect of these risks can be
mitigated are diverse: in many cases, risks are being
transferred to external partners such as customers, sup-
pliers and insurance companies and international guar-
anteeing entities. A substantial part of them, however,
remains in the project company—this means that, ulti-
mately, funding risks are still extremely high. Risk man-
agement associated with investment projects has evolved
over the past twenty years and continues to evolve as the
market for such products is evolving as well. The global
financial crisis has led to increased funding costs for all
projects and effects will be seen over many years, so
there are expectations that the number of completed pro-
jects will decline substantially in the near future. This
situation could however be an opportunity for investors,
seeking financial innovations to lead to greater flexib ility.
A signal in this direction is the involvement of national
states in addressing issues directly related to public sec-
tor actions—capitalization of banks, improvement of in-
stitutional support. However, such involvement from the
public authorities should not mean a return to traditional
financing from the budget. Rather, it is time for a new
paradigm in how to manage investment projects; by bet-
ter understanding the risks, the state will beco me more of
a partner in the investment, its role being enhanced by its
ability to provide on request financial support, in the
absence or inadequacy of private funds. The future will
show whether this emphasis on the role of states is, in the
long term, a benefit or a hindrance onto financing in-
vestment projects.
4. References
[1] Project Finance International, 2009, League Tables, “Not
too Bad-PF in 2009,” No. 424, 13 January 2010.
[2] Dore and Lucia, “Emerging Markets Infrastructure
Spending to Reach $21.7 Trillion,” Khaleej Times Online,
Dubai, 16 January 2008.
[3] UNCTAD “The United Nations Conference for Trade
and Development,” Balance of Payment Management,
5th Edition, Washington D.C, 1993.
[4] Horobet, Alexandra “Sumantra—Global Strategy: an
organizing framework,” Strategic Management Journal,
Vol. 8, 1987
[5] Horobet, Alexandra, “Managementul Riscului in Investi-
Tiile Internaționale,” All-Back, Buchane rt, 2005.
[6] Grimsey, Darrin and L. Mervyn, “Public Private
Partnerships, the Worldwide Revolution in Infrastructure
Provision and Project Finance,” Edward Elgar Publishing
Limited, Northampton, 2004.
[7] E. R.Yescombe, “Public Private Partnerships—Principles
of Policy and Finance,” Elsevier Ltd., Oxford, 2007.
[8] Euromoney Magazine, “The 2009 Euromoney Guide to
Infrastructure Funancing,” Euromoney, London, July