Project Management Notes:

Project: DefinitionProject is any wok that has a well defined objective or goal to the sequence of the multi activities those are interrelated required to be performed.Project Management:It is a discipline of organizing and managing resources in such a way that the project is completed within defined scope, quality, time and cost constraints.

Project Characteristics: Focus Lifespan Unique Unity of diversity: complex things people and environment. No. of sources but one end Flexibility Team Spirit

Project Management Objectives: Specific Measurable Achievable Realistic Time terminated

The 7-S of Project Management:1. Strategy: The high-level of requirements and means to achieve them2. Structure : The organizational arrangement3. System : Methods for work to be designed, monitored and controlled.4. Staff5. Skills6. Style7. Stakeholders

Process:Major difference in Process and a Project is the uncertainty and involvement of far too number of variables that can impact each activity and relative lack of control over variety of event that have finite probability of occurrence. Set of interrelated or interacting activities which transforms inputs into outputs.If a process is established & stable, one would get designed & predictable output for a known measured input. A process has five elements: Supplier, Input, Process that converts measured input into desired output, Output, Customer.A Few Examples of Projects: Construction of a new Highway or a Port, Development of a customer specific Software, Setting up a new factory, Development of a Product, Launching of a Product.

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Roles and Attributes of Project Manager: Planning and organizational skills Conflict resolving capacity Ambition for achievement Personnel management skills Communications skills Change orientation Ability to solve their problem High energy levels Ability to take suggestions Ability to develop alternative course of actions quickly

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Preparation of feasibility study/report:

Project Identification: Generation of ideas Stimulating the flow of ideas: SWOT Analysis Clear Articulation of Objectives:- Cost reduction

- Productivity improvement

- Increase in capacity utilization

- Expansion into promising fields

- Fostering the conducive climate

Monitoring the Environment:1.Economic Sector: State of the Economy, Overall rate of growth, Growth rate of primary, secondary and tertiary sectors, Trade surplus /deficits, Balance of payment situation.2.Governmental Sector: Industrial Policy, Govt. Programmes and projects, Tax framework, Subsidies, incentives and concessions, Financing norms.3.Technological Sector: Emergence of new Technology, Access to technical know-how, foreign as well as indigenous, Receptiveness on the part of the industry.

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4.Socio-demographic Sector: Population Trends, Age shift in population, Income distribution, Attitude towards consumption and investment, Employment of women.5.Competition Sector: No. of firms in the industry& market share of the top few, Degree of homogeneity & differentiation among products, Entry barriers, Comparison with substitutes in terms of quality, price, appeal and functional performance.6.Supplier Sector: Availability and cost of raw materials and sub-assemblies, Availability and cost of energy.

Corporate Appraisal: It includes, Marketing and Distribution, Production and Operations, Research and Development, Corporate Resources and Personnel, Finance and Accounting (Cost of capital, Tax situation, Relations with shareholders and creditors, Accounting and control system, Cash flow and liquidity).

Evaluation of risks:Risk to a project can be measured on two major axes: Likelihood of failure and impact of failure.Mechanism for early detection:The more likely a problem is to occur, the more risk it poses the project. Even fairly minor problems or issues can become a threat to the project if they occur so frequently that they can’t be avoided. Similarly, the impact or consequences of a problem are also important. Some problems can stop a project in its tracks all by themselves. Many systems exist for categorizing risks into different categories but the one presented in the next slide is fairly simple and adequate at the time of making a feasibility report.

In this system each risk item is qualified on two scales: likelihood and impact.

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Each scale is divided into two categories of “low” or “high” and risks are rated according to each scale.

A “critical” issue critical represents one that will stop the project in its tracks (known as a “show stopper”) and must be dealt with immediately.

“Major” risks represent a significant threat to the project because of their frequency or because of the seriousness of their impact; these threats usually have to be dealt with as soon as possible.

The third category of risks are “minor” risks which are neither likely nor particularly serious and can be left until others have been dealt with.

Minor risks however have an annoying habit of turning into major ones when your back is turned.

Resolution of Risks:Once you have profiled your risk they can be ranked into an ordered list representing the various threats to the project to be dealt with. The more significant ones can then be examined and assigned an action by the project team. Typical actions are:Research- The risk is not yet fully understood. Its impact or likelihood of occurrence may be unclear or the context in which it may occur could seem unreasonable. Further research by members of the project team is warranted.Accept- The risk is unavoidable and must be accepted as‐is. This category of risks become extremely important to a project since they cannot be resolved but still represent a threat to completion. Anticipation therefore becomes the key to dealing with this category of risk.Reduce- The risk as it stands is unacceptable. The project team must act to reduce the risk and to establish contingency plans should the risk occur. The risk will have to be reviewed in future to define the threat it poses.Eliminate-The risk is unacceptable under any circumstances and must be eliminated as a possibility. The project team must put in place processes and procedures not only to ensure the immediate threat is eliminated but that it does not re‐occur in the future.Factors of Plant Location Related to,Resources: Labor availability, Labor cost, Labor Skills; Materials Availability, Material cost, material quality; Equipment availability, Equipment Cost; Land availability, Land suitability, Land cost; Energy availability, energy cost; Water availability, water quality, water cost.Market: Proximity to the firm’s market, size of the market, potential needs of the market.Infrastructure: Availability of Financial Institutions, Strength of Financial InstitutionsGovernment Stability, Government taxes, Import and Export restrictions, Transportation availability, Transportation cost and finally, Competitors’ size, strength and attitude in that region.

Steps in plant location:1.National decision (within or outside the country) : It includes, Political stability, Export & import policy, Currency and exchange rate, Cultural & economic peculiarities, Natural environment.2.Selection of the region: It includes, Availability of raw materials, Nearness to market, Availability of power, Transport facilities, Suitability of climate, Government policy, Competition among states.

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3. Selection of locality or community: It includes, Availability of labour, Civic amenities for workers, Existence of complementary & competing industries, Finance & research facilities, Availability of water and fire fighting services, Local taxes & restrictions, Personal factors like banking facility, cultural affinity, communication facility, religious and social institutions, educational environment, political stability.4. Selection of exact site: It includes, Soil, size & topography, Disposal of waste, Price of the land, Expansion potential, Commercial services, Communication.

Method of Factor Rating in Facility location decision:In factor rating method, first we must identify the Most Important Factors in evaluating alternative sites for the new facility. Then we should assign a weight between 0 and 100 to each of these factors. Each alternative location will then be rated based on these factor weights.The most weighted alternative is selected as the best alternative.

Project Planning:

6 Stages of Project Planning:1. Preliminary coordination with various parties(client,developer,govt. agency…)2. Provide detail description of various tasks involved.3. Deriving project budget.4. Work on schedule.5. Project status report.6. Project termination.

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Project’s deliverables: It is Involving client in early part of planning process; determine client’s needs and expectations. Some project starts with front ends –bidding all the way to commissioning and delivery, others may be construction on product development.

9 Key Elements of Project Plan:1.Overview: Short summary of the objectives and scope of the project.2.Objectives: Detailed statement of the goals (profit, etc ….)3.General Approach: Describes both the managerial and the technical approaches.4.Contractual Aspects: A complete list and description of all reporting requirement.5.Schedules: Various schedule and lists of all milestone.6.Resources: a)Budget. b)Cost monitoring and control.7.Personnel: Personnel requirements (subcontracting)8.Evaluation Methods: Be evaluated against the standard.9.Potential Problems: Anticipate potential difficulties.

Role of System Integration in Project Management: Integrating the technical disciplines (science or art) of the project to achieve the customer’s objectives. 3 Major Objectives of System Integration:1.Performance: System design, reliability, quality, maintainability, etc.2.Effectiveness: Design system to achieve performance in an optimal manner.3.Cost: Value engineering examines all cost trade off.

Planning Process Tools:1.Gozinto Chart: Named after famous Italian mathematician, Prof. Zepartzat Gozinto.Similar set-up like Bill of Materials. It consists of a Tree-Diagram.2. Work Breakdown Structure (WBS): Project sub-divided into hierarchical units of tasks, work packages, and work units.Each part of unit tasks, work packages and work units is budget able, in terms of money, labor hours, and other requisite resources. Project is breakdown into a group of activities. Each activity is breakdown into a task list. This task list is put into a calendar. Then, assign people, time, money and other resources.Example of WBS: “Holiday”

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3. Linear Responsibility Matrix: Show the relationship of personnel (who is responsible for what) and to identify where special coordination is necessary.

PERT -Project Evaluation & Review Techniques: Definition: In PERT activities are shown as a network of precedence relationships using activity-on-arrow network construction, Multiple time estimates, and Probabilistic activity times.USED IN: Project management-for non-repetitive jobs (research and development work), where the time and cost estimates tend to be quite uncertain. This technique uses probabilistic time estimates.Gantt chart:Advantages: Gantt charts are quite commonly used. They provide an easy graphical representation of when activities (might) take place. Limitations: They do not clearly indicate details regarding the progress of activities, and do not give a clear indication of interrelation ship between the separate activities.Benefits of CPM/PERT:Useful at many stages of project managementMathematically simpleGive critical path and slack timeProvide project documentationUseful in monitoring costsLimitations to CPM/PERT:Clearly defined, independent and stable activitiesSpecified precedence relationshipsOver emphasis on critical pathsDeterministic CPM modelActivity time estimates are subjective and depend on judgmentPERT assumes a beta distribution for these time estimates, but the actual distribution may be differentPERT consistently underestimates the expected project completion time due to alternate paths becoming critical

Project Organization:Types of Project Organizations: 1.The Project as Part of the Functional Organization: Advantages: Maximum flexibility in the use of staff.Individual experts can be utilized by many different projects.Specialists in the division can be grouped to share knowledge and experience.The functional division also serves as a base of technological continuity when individuals choose to leave the project.The functional division contains the normal path of advancement for individuals whose expertise is in the functional area.Disadvantages: The client is not the focus of activity and concern.The functional division tends to be oriented toward the activities particular to its function.Occasionally, no individual is given full responsibility for the project.There are often several layers of management between the project and the client.

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2. Pure Project Organization: Advantages: The project manager has full line authority over the project.All members of the project work force are directly responsible to the project manager.When the project is removed from the functional division, the lines of communication are shortened.When there are several successive projects of a similar kind, the pure project organization can maintain a permanent cadre of experts who develop skills in specific technologies.A project team that has a strong and separate identity and develops a high level of commitment from its membersBecause the authority is centralized, the ability to make a swift decision is enhancedUnity of command exists Disadvantages: Each project tends to be fully staffed which can lead to a duplication of effort in every area from clerical staff to technological support.There is a need to ensure access to technological knowledge and skills that results in an attempt by project managers to stockpile equipment and technical assistance.The functional division is a repository of technical lore, but it is not readily accessible to team members of the pure project team.Pure project groups seem to foster inconsistency in the way in which policies and procedures are carried out.In a pure project organization, the project takes on a life of its own.There tends to be concern among team members about “life after the project ends”.3. The Matrix Organization: The matrix organization is a combination of functional and pure project“Project” or “strong” matrix organization most resembles the pure project organizationThe “coordination” or “functional” or “weak” matrix most resembles the functional formThe “balanced” matrix lies in between the othersThe matrix project is not separated from the parent organization.Advantages: The project is the point of emphasis.Because the project is overlaid on the functional divisions, the project has reasonable access to the reservoir of technology in all areas.There is less anxiety about what happens when the project is completed.Response to client’s needs is as rapid as in the pure project organization.Matrix management gives the project access to representatives from the administrative units of the parent firm.The matrix organization allows a better company-wide balance of resources to achieve goals.There is a great deal of flexibility in precisely how the project is organized within the matrix.Disadvantages: The balance of power between the project and functional areas is very delicateThe movement of resources from project to project may foster political infightingProblems associated with shutting down projects can be as severe as in a pure project organizationThe division of authority and responsibility in a matrix organization is complex, and uncomfortable for the project manager.Matrix management violates the management principle of unity of command. Project workers have at least two bosses, their functional heads and the project manager.

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4. Mixed Organizational Systems: Divisionalization is a means of dividing a large organization into smaller more flexible units. This enables the parent organization to capture some of the advantages of small, specialized organizational units while retaining some of the advantages that come with larger size units.Advantages: The hybridization of the mixed form leads to flexibility.The firm is able to meet special problems by appropriate adaptation of its organizational structure.Disadvantages: Dissimilar groupings within the same accountability center tend to encourage overlap, duplication, and friction because of incompatibility of interests.Conditions still exist that result in conflict between functional and project managers.

Criteria for the selection of a project organization:1. Define the project with a statement of the objective(s) that identifies the major outcomes desired.2. Determine the key tasks associated with each objective and locate the units in the parent organization that serve as functional “homes” for these types of tasks.3. Arrange the key tasks by sequence and decompose them into work packages.4. Determine which organizational units are required to carry out the work packages and which units will work particularly closely with which others.5. List any special characteristics or assumptions associated with the project.6. In light of items 1-5, and with full cognizance of the pros and cons associated with each structural form, choose a structure.

Interpersonal Conflict:The focus of conflict can often be related to the stage in the project’s life cycle

When the project is first organized, priorities, procedures and schedules all have roughly equal potential to cause conflict

During the buildup phase, priorities become significantly more important than any other conflict factor

In the main program phase schedules are the most important cause of conflict followed by technical disagreements

At the project finish, meeting the schedule is the critical issue.Conflict and the Project Manager:

Most of the conflict on project teams is the result of individuals focusing on the project through the eyes of their individual discipline or department.

Conflict avoiders do not make successful project managers. On occasion, compromise appears to be helpful, but most often, gently confronting and resolving

the conflict is the method of choice, for a win-win situation.

A project evaluation appraises the progress and performance relative to the project’s initial or revised plan. It also appraises project against goals and objectives set for it during selection process. Projects should be evaluated at a number of crucial points. Purpose is to improve process of carrying out project.Evaluation Criteria:Original criteria for selecting and funding projectSuccess to dateBusiness/Direct Success

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Future PotentialContribution to Organization’s GoalsContribution to Team Member Objectives.

Project Auditing: The project audit is a thorough examination of the management of a project, its methodology and procedures, its records, its properties, its budgets and expenditures and its degree of completion. The formal report may be presented in various formats, but should, at a minimum contain comments on some specific points. It is far broader in scope than a financial audit and may deal with the project as a whole or any component or set of components of the projectPurposes of Evaluation -Goals of the System:Four independent dimensions of success of a project:

1. The most straightforward dimension is the project’s efficiency in meeting both the budget and schedule

2. Another dimension, and the most complex, is that of customer impact/satisfaction3. A third dimension, again somewhat straightforward and expected, is business/direct success4. The last dimension, somewhat more difficult and nebulous to ascertain, is future potential

A successful project evaluation can help an organization: Identify problems earlier, Clarify performance, cost, and time relationships, Improve project performance, Locate opportunities for future technological advances, Evaluate the quality of project management, and reduce costs, Speed the achievement of results, Identify mistakes, remedy them, and avoid them in the future, Provide information to the client.

Evaluation often makes recommendations that relate to ancillary, unplanned, but important contributions to the project and its parent:Improve understanding of the ways in which projects may be of value to the organization.Improve processes for organizing and managing projects.Provide a congenial environment in which project team members can work creatively together.Depth of the Audit : There are three distinct and easily recognized levels of project auditing:General audit- normally most constrained by time and resources and is usually a brief review of the project touching lightly on the six parts of an auditDetailed audit- usually conducted when a follow-up to the general audit is requiredTechnical audit- generally carried out by a qualified technician under the direct guidance of the project auditor.Construction and Use of the Audit Report: The information should be arranged so as to facilitate the comparison of predicted versus actual results. Significant deviations of actual from predicted results should be highlighted and explained in a set of footnotes or comments. Negative comments about individuals or groups associated with the project should be avoided.Information that should be contained in the audit report: 1. Introduction, 2. Current status, 3. Future project status, 4. Critical Management issues, 5. Risk Analysis, 6. Caveats, Limitations, and Assumptions

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Responsibilities of the Project Auditor/Evaluator: First and foremost, the auditor should “tell the truth” The auditor must approach the audit in an objective and ethical manner Must assume responsibility for what is included and excluded from consideration in the report The auditor/evaluator must maintain political and technical independence during the audit and

treat all materials as confidentialSteps to carry out an audit:

1. Assemble a small team of experienced experts2. Familiarize the team with the requirements of the project3. Audit the project on site4. After the completion, debrief the project’s management5. Produce a written report according to a prespecified format6. Distribute the report to the project manager and project team for their response7. Follow up to see if the recommendations have been implemented.

The Audit/Evaluation Team: The choice of the audit/evaluation team is critical to the success of the entire process. The size of the team will generally depending on complexity of the project. For a small project, one person can often handle all the tasks of an audit, but for a large project, the team may require representatives from several areas. The main role of the audit/evaluation team is to conduct a thorough and complete examination of the project or some prespecified aspect of the project. The team must determine which items should be brought to management’s attention. The team is responsible for constructive observations and advice based on the training and experience of its members. In order for the audit/evaluation team to be effective, it must have free access to all information relevant to the project. Most of the information needed will come from the project team’s records or from various departments such as accounting, personnel, and purchasing. Some of the most valuable information comes from documents that predate the project.

The Project Audit Life-Cycle:1. Project audit initiation: Focus and scope of audit; assess methodologies, team members required.2. Baseline Definition: Determine the standards against which performance will be measured.3. Establishment of Audit Database: Gathering/organizing pertinent data, focus on what’s necessary.4. Data Analysis: The judgment phase, comparison of actual to standard.5. Audit Report Preparation: Present findings to PM first, then, prepare final report.6. Audit Termination: Review of audit process, disbanding of team.

Types of Project Termination: 1.Project Extinction: project activity suddenly stops, either successfully completed or high expectation for failure.2.Termination-By-Addition: becomes a new formal part of organization3.Termination-By-Integration: becomes standard part of operating systems4.Termination-By-Starvation: a project in name onlyDecision is taken by broad based committee of senior managers. Termination process should be specified in project plan.

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Software for Project Management:Project management Software becomes very useful for planning and monitoring projects and provides a strong basis for review as well as reporting the progress to stakeholders.Use And Limitations Of A Software In Project Management:

1. A software such as MS Projects is very useful for planning and monitoring even a complex project

2. Large amount of data can be incorporated and updated so as to present a comprehensive real time picture about the status vis‐à‐vis plan (called baseline)

3. One is able to gtmany user friendly views including the Gantt chart, PERT chart, critical path, resource utilization status etc.

4. It is however no substitute for the project management skills and by itself does not assure success –it is only a tool.

What is MS Project 2007 ? Microsoft Project 2007 will not guarantee that you will run a successful project or be a great manager but it will increase you possibilities of understanding and work more efficiently with the project management software. It is essential to understand that you as a project manager are responsible and accountable for the success of the project(s) that you manage. To assist you in this task you have a number of different tools such as Resources, Budgets, Plans, Contracts and maybe Project Management software like Microsoft Project 2007 (MS Project 2007). This tool will assist you in the decision making process, nothing else. Software like MS Project 2007 and similar are often called “Project Management Software” but it would be more appropriate to call them “Project Administration Software” because they will not manage the project for you but it will support you when it comes to administrative tasks in the project.

MS Project 2007 Standard Edition would help one with the following;• Task administration. You are able to plan and administrate all the tasks you have in the project. You can via views look upon the tasks from different angles that provide information in different ways.• Resource administration. You have extensive possibilities to administrate the resources in the project, both human and material resources.• Reporting. The tool has useful reports that you easily can produce.• Budgeting. Use Microsoft Project to define the budget for the project and also follow up against the budget.• Follow up of progress. Does the project follow the plan? Define the : baseline and you can measure the progress against it.

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Project Finance Project finance is the long-term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of its sponsors. Usually, a project financing structure involves a number of equity investors, known as 'sponsors', as well as a 'syndicate' of banks or other lending institutions that provide loans to the operation. In project financing, the project, its assets, contracts, inherent economics and cash flows are separated from their promoters / sponsors in order to permit credit appraisal and loan to the project independent of the sponsors. The assets of the project serve as collateral for the loan and all repayments are made out of cash flows of the project. They are most commonly non-recourse loans, which are secured by the project assets and paid entirely from project cash flow, rather than from the general assets or creditworthiness of the project sponsors. Project lenders are given a lien on all of these assets and are able to assume control of a project if the project company has difficulties complying with the loan terms. Generally, a special purpose entity is created for each project, thereby shielding other assets owned by a project sponsor from the detrimental effects of a project failure.

As a special purpose entity, the project company has no assets other than the project. Capital contribution commitments by the owners of the project company are sometimes necessary to ensure that the project is financially sound or to assure the lenders of the sponsors' commitment. Project finance is often more complicated than alternative financing methods. Traditionally, project financing has been most commonly used in the extractive (mining), transportation, telecommunications industries as well as sports and entertainment venues. The traditional form of financing is the corporate financing or the balance sheet financing. In this case, although the financing is apparently for the project, the lender looks at the cash flows and assets of the entire company in order to service the debt and providing security.

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Project Financing Arrangements

Build-Own-Operate-Transfer (BOOT): BOOT is essentially an extension of the project financing concept. It is designed to attract private participation in financing, constructing and operating infrastructure projects. In BOOT projects, a private project company builds a project, operates, it for a sufficient period of time to earn adequate return on investment and then transfers it to host government or its agency. BOOT projects are either solicited or unsolicited. When the projects are solicited, the project is identified and formulated by the government and private sector is submitted to offers for participation. Private companies or group of companies can submit unsolicited proposals on their own accord. BOOT projects are generally in areas like roads, ports, railways, power, and telecommunications.

Build-Own-Operate (BOO): The issue of transfer in the BOOT projects is usually unclear since most of the BOOT projects under operation have transfer dates quite far away. One alternative to transfer that has been suggested is for the foreign shareholders is to divest themselves of their equity either entirely or up to some negotiated percentage at the end of the stipulated time period. Such a structure is termed as build-own-operate arrangement. Such projects are funded without any direct sovereign guarantee, thereby implying limited recourse financing. Unlike in BOOT arrangements, in the BOO structure, the project is not transferred to host government, rather the owner will divest his stake and seek investments in capital market, which facilitates availability of finances. Both, the BOOT and BOO arrangements are essentially similar except that in BOO, the sponsor preserves the ownership. See below figure for the BOOT/ BOO structure.

Build-Lease-Transfer: In BLT structure, the control of project is transferred from the project owners (shareholders) to a lessee. The shareholders retain the full ownership of the project, but for operation purpose, they lease it to the lessee. The host government agrees with lessee to buy the output (for example, electricity in the case of power project) or service of the project. The lessor (special purpose entity) receives lease rental guaranteed by host government.

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Risks involved in project management

Financing infrastructure projects, especially in developing countries, entails a formidable set of risks. It is the role of the project finance advisor, the project sponsor and other participants to structure the financing in such a manner that mitigates these risks. Lenders and investors always are initially concerned about financing immobile assets in distant, politically-risky areas of the world. The project finance advisor’s role is to carve out the risks, assigning them to the party who is best suited to be responsible for controlling them. The purpose of this section is to provide a checklist of the risks that a project finance transaction faces rather than a strict taxonomy of these risks.1.Country Risk:

Country risks cover the political economy. Examples of country risk include civil unrest, guerrilla sabotage of projects, work stoppages, currency controls, monetary policy, inflationary conditions, etc. The country risk in some cases serves as the ceiling for a project’s risk rating.

No project, despite its particular circumstances, can have a higher credit rating than the country’s credit rating.

S&P credit rating agency limits specific project ratings by the sovereign credit rating that the agency assigns the country.

2.Political Risk: These risks cover changes within the country’s political landscape, ie. change of administration, as well

as changes in national policies, legal and regulatory frameworks, environmental laws, energy policies and tax policies are important areas to be dealt under project risk management.

Infrastructure projects in developing nations face significant political risks mostly in subtle forms, like price regulation, restrictions on working permits for foreign managers, renegotiation of contracts.

3.Industry Risk: Competitive forces within the industry represent significant risks to the project. It is necessary for project sponsors to analyzes the potential risks that their particular project faces vis-à-

vis global and local industries. The prices of substitute products, inputs and outputs are critical factors in determining the economics of

the project.

4.Project Risk: Project risk is generally associated with the adequacy and track-record of the concerned technology and

the experience of the project’s management. The most important factor in these areas is the selection of contractors, developers and operators who

have proven track records. Independent consulting engineers can play a role in assessing the technical feasibility of projects by making technical risks transparent to lenders.

5.Customer: The risk with customers is that demand for the product declines or widely fluctuates. Given the high fixed

costs of infrastructure projects, it is difficult, if not impossible, for these projects to reduce costs to match lower demand. The most critical success factor to ensure risk mitigation is to enter into an off-take agreement, i.e., a contract which guarantees purchase of the throughput.

Essentially, a project company agrees to sell a large share of its output (minerals, electricity,

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transportation services through a pipeline, etc.) to a customer or group of customers for an extended period of time.

The price per unit of output can be fixed, floating or adjusted for inflation or other factors. The customer benefits from this arrangement by securing a long-term, guaranteed source of supply for the output, but generally forfeits a certain amount of flexibility in sourcing. The project company benefits by eliminating or substantially reducing its marketing risk.

6.Supplier: The general issue here is with securing supplies for the project – electricity, water, etc. - and, again, long-

term agreements that guarantee that the project will have access to critical inputs for the duration of the project’s life are the chief instruments used to mitigate the risk.

The three critical dimensions of supply are quality, quantity and availability. Does the input meet the necessary quality requirements of the project? Can the project get enough of the input? Is the supply reliable or are interruptions likely?

7.Sponsor The project sponsor is typically an entrepreneur or consortium of entrepreneurs who provide the

motivating force behind the project. Often, the project sponsor is an entrepreneur without sufficient capital to carry out the project.

In other cases, the sponsor might have the necessary capital but is unwillingly to bet the parent corporation’s balance sheet on a high-risk venture.

The primary risks with sponsors revolve around the sponsor’s experience, management ability, its connections both international and with the local agencies, and the sponsor’s ability to contribute equity. Investors and lenders can mitigate these risks by carefully evaluating the project sponsor’s track record with similar transactions.

8.Contractor The principal construction risks are schedule delays and budget overruns. Mitigating these risks involves scrutinizing the contractor, specifically the contractor’s experience with

similar projects, reputation in the field, backlog of other projects and cash flow. The primary method of putting the burden of successful completion on the contractor, as opposed to on

the lenders and investors, is a turnkey contract. A turnkey contract essentially binds the contractor to finish construction by a specified date for a fixed amount.

The completed project must also meet the agreed upon technical specifications as certified by an independent engineer before payment is made.

9.Operating risk. The operator is the company or entity charged with the responsibility of maintaining the quality of the

assets that generate the project’s cash flow. Of course, lenders and investors want to make sure that the assets remain productive throughout the life of the project, or more importantly from their perspective, the life of the loan or investment.

Hence, operating risks center around the efficient, continuous operation of the project, whether it is a mining operation, toll road, power plant or pipeline.

10.Funding. The funding risk is that the capital necessary for the project is not available. For example, equity

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participants might fail to contribute their determined amount. Or, the underwriters might not be able to raise the target amount in the market.

Another funding risk is re-financing which occurs if the duration of the initial funding does not match the duration of the project. Funding risks can also relate to the division between local and foreign currency funding.

11.Currency. There are two currency risks facing project companies. The first risk is exchange rate fluctuation, i.e.,

devaluation erodes the value of a contract or payment in the project company’s home currency, or the currency in which it must service its debt.

The second risk is currency controls, i.e., the sovereign government limits the project company’s access to foreign exchange or curtails its ability to make foreign currency payments outside of the country.

12.Interest rate. Interest rate fluctuations represent a significant risk for highly-leveraged project financing. Arranging for

long-term financing at fixed rates mitigates the risk inherent in floating rates. Furthermore, projects can enter into interest rate swaps to hedge against interest rate fluctuations.

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