Financial risk management refers to a practice through which the economic value of firms is established using financial risk instruments in order to prevent potential economic hazards particularly, market and credit risks. Managing of the financial risks is usually approached through the qualitative or the quantitative point of view. Through specialization of risk management, financial risk management focuses on time and methods of hedging by use of the monetary gadgets in administering costly exposures to risk. Risk Management in project finance comprises “the processes apprehensive of formulating a plan for risk management, identifying the risks, analyzing the risks, responding adequately and conducting a continuous assessment and control of the projects” (Project Management Institute, 2004, 237). Most of these processes are updated throughout the project, and its objectives are to increase the probability and impact of positive events, and decrease the probability and impact of events adverse to the project (Project Management Institute, 2004, 237)
Project financing, is the long-term financial resource allocation on infrastructure and industrial projects based on the projected cash flows of the project rather than the balance sheets of its sponsors. Developments financing is majorly non-recourse financing founded on the anticipated outcomes mainly the cash flow of the projects. Lesser developed countries are those with lower levels of technological developments, relatively low per capita gross domestic product and basically rely on agricultural produce for income generation with less than 10% of industrial contribution in the country’s GDP. In these Nations, Risk identification and management constitute key components of projects financing due to the risk volatility accompanying the low income levels among these lesser developed nations. In this respect, risk management and project financing would entail fundamental activities surrounding financial approaches and policies with regard to the potential risk, prospective projects for financing and the financial capabilities of the nation. In this study, potential risks as well as appropriate risk management strategies will be established (Project Management Institute, 2004, 237).
Research Question and Objectives
What strategic measures, theories, and principles can organizations put in place in order to manage the risks associated with project financing in Lesser Developed Countries?
What lessons can be learnt from the various studies conducted on the risk management of project financing in lesser developed countries and what areas of these studies need to be adjusted?
With these questions in mind, organizations and authorities can move towards establishing frameworks on the mitigation of risks in regard to projects financing in lesser developed countries. With the rapidly growing globalized business environment, businesses and nations are experiencing tremendous challenges in various forms. The worst hit by the challenges emanating from the growing innovative business forms are the lesser developed countries. Projects financing in these countries is marred by numerous shortfalls regarding the low resource capabilities of these nations. In respect, authorities should formulate realistic models to approach the various potential risks within the strategic planning, financing, and implementation of whatever kind of projects in these nations. The objectives of this study are to develop guidelines designed to provide detailed risk management frameworks for identification, assessment and mitigation of all forms of risks related to project financing in the lesser developed nation, and to develop contingency strategies for the continuity of the programs in the event of future project financing and risk management.
Other objectives are; identifying the resource potential of selected countries for study as well as establishing conditions for risk management within terms of focus areas, locales of expertise along with potential progress needs.
This section covers various literatures from the risk management and project financing in lesser developed countries. These literatures provide an overview on the risk management strategies and approaches implemented in project financing within the less developed countries. There are not many literatures touching directly on the risk management in project financing in less developed countries. A larger number take accounts on the project financing risks and the general risk management approaches in organizations. In respect, from the review of the related literatures of project financing and risk management, this review can establish the comparative details as well as the shortfall on the contents of the various studies. The preferred literature for review is derived from the existing project finance and risk management literature
Risk and risk management is a major concern for every organization and country around the world, particularly for the less developed countries which possess particular sensitivity to economic risks most specifically on the financing of the development projects (Alquier & Lagasse, 2006). In these less developed nations, risk concerns and management is usually the sole responsibility of the administrative arms upon establishment of the threats and opportunities with regard to the risk management (Watt, J. 2007). Although risk management principles are common to all types of organizations, the administrators of the organization’s risk perceptions and attitudes towards risk management influences the adequacy of the organizations risk management actions deployed (Ntlhane, 1995). In support of Watt’s idea, Ntlhane, 1995, Implies that in the less developed organizations, risk management is the core principle that entrepreneurial or management focus should pay more attention to at recognizing future uncertainty, deliberating risks, possible manifestations and effects, and formulating plans to address these risks and reduce or eliminate its impact on the projects of the organization. among the expertise necessary for administrators is the capability of identifying and analyzing risks so as to take advantage of the premeditated risks (Watson, 2004). According to Watt (2007), less developed organization administrators should take regard of the following steps in their risk management process
- Establishing risk strategy
- Determining the countries risk appetite
- Identification and assessment of risk
- Prioritizing and managing risks.
Dupre, 2009 on the other hand, in his “The application of risk management principles to smaller enterprises,” (p, 109) asserts that, the fact that most of these risks are beyond the ability administration, does not form reason for stopping to anticipate the risks and develop risk management strategies to reduce the impact of risk occurrences to achieve the intended projects. The executives in the less developed countries require extensive education on risk management strategies and techniques of curbing majority of risks concerning the financing of projects. Conversely, reflection ought to be made on the implementation of the strategies since the models vary from nation to another. Some others vary depending on the level of developments of the countries (Dupre, 2009, 109).
The less developed countries are on the other hand faced with the challenge of complexity in determining the components of total risks in projects financing as a result of the difficulty in separating property from management (Watson, 2004). As Watson reiterates, due to resource constraints, many lesser developed organizations and countries are risk aware and they focus their risk actions. Control procedures taken into account for countering the risks are less effective provided that most of the procedures are reactive and non-automated (Ntlhane, 1995). Apart from, national risks, politically instigated, financial, credit and the primary agency risks, the literature materials account for relationship of project financing to project-specific risks but to a an inadequate extent. There is a lack of holistic view focusing on how exactly project finance improve project risk management. Therefore, this study will examine the link between project financing and risk management in lesser developed countries, and establish a comprehensive view of risk management on project financing in lesser developed countries. Burger et al, 1998, in the ‘Coping with Drought in Zimbabwe: Survey Evidence of Responses of Rural Households to Risk’ stresses the fact that there is relatively lower utilization of formal credit risks or coping. This is because households do not own assets, which would suitably be used as collaterals or the creditors would not rely fully on the well functioning legal institutions for credit contracts backed by any collaterals (37).
While the Studies provide varied aspects of the same title for discussion, Artto (1997, p.9) suggests that contracts can be used as risk management vehicles to transfer the inherent construction risk. Hough (1997, 171) agrees that risks can easily be minimized through distribution of the risks across various companies involved in the projects. These risks, as well as the proceeds of the financed developments are enormously felt across the entire business environment affecting the sponsors equally as the different investors in the economy including equity holders, credit institutions, and Quasi-equity investors. In order to make equitable arrangements, which are suitably attractive to all participants, much effort is expended in putting together a contractual model to tie the parties together in a mutually acceptable manner. While the project guarantors are capable of retaining full control over the diverse project activities, through non- risk sharing approach, the risks and the risk management of the project financing is their sole responsibility (Hough, G. 1997, 174). From the perspectives of project sponsors, or the principal, risk-sharing arrangements directly reduce the scale of investment required, and hence the exposure and investment cash flow are reduced. The studies are faced with significant limitations. Majority of them have no significant information regarding risk management in lesser development countries especially with regard to projects financing but establish arguments on the basis of lesser developed organizations in comparison to the larger economy. This does not give the entire picture of the actual situation in a national spectrum. There is much similarity in the opinions of many authors regarding the state of the risk management idea in the various organizations studied.
As mentioned earlier, the purpose of this study is to establish realistic guidelines designed to provide detailed risk management frameworks for identification, assessment and mitigation of all forms of risks related to project financing in the lesser developed nation, and to develop contingency strategies for the continuity of the programs in the event of future project financing and risk management. Risk management research can either be qualitative and quantitative depending on the context of the intended research. In accordance to this, the research may involve systematic quantitative data collection and analysis. This entails use of formal, objective and systematic processes in establishing the causes, effects and models of risk management in projects financing in lesser developed nations. Through literature review, a comparative analysis would be conducted to review the differing models used as well as the quality of statistics used by various researchers. The comparative approach would generate a descriptive model to define the terms involved in the study, identify and establish the actual sources of the identified risks and to conduct typical analyses in effort of establishing the most appropriate risk management models. In respect of the descriptive research, surveys are administered to the selected samples from specific populations of the less developed countries. Samples would incorporate a number of sections of project financing respondents from different less developed countries. These would be directors in large Parastatals, project managers and various other administrative employees in various arms of these governments (Project Management Institute, 2004, 237).
The survey research here would include utilization of questionnaires or interviews. The variation in the methods used would be dependent on the cost incurred, target population, complexity of the research statistics required as well as the accessibility of the respondent. General information could be collected using various modes of the survey research such as online based or mobile based collection methods while sensitive information would require face to face respondent interaction. These would in most case the administrative arms of the said countries’ governments who are directly involved in the projects financing. Surveying research method is simple to use, relatively accurate and is widely acceptable among many countries of varied categories. On the other hand, the use of questionnaire is a cheap form of data collection as compared to many other forms. For higher level of accuracy, ethical practices such as self determination, anonymity, confidentiality and informed consent are taken into serious consideration. Ideally, developed questionnaire will be distributed among the identified sectors of the sample population (Hough, G. 1997, 174).
The respondents are then segmented in various categories depending of the information required, that is those with perceived sensitive information as the executive arms and those with general information. In each segment, the administered questions are structured differently and in turn would be analyzed separately using different methods of data analysis. The respondents would be required to provide weighting information basing arguments on the intensity of the risks and the potential sources of the risks. These categories could be rated as No Risk, Fairly Risky, Risky, Very Risky and Extremely Risky in respect to the already established risk factors surrounding the projects financing in the less developed countries. The questions developed in the questionnaires should be simple to understand and have precise terminologies, and should avoid making non substantial assumptions. They should avoid the use of questions that ask more than one question but provide for just a single response by the respondent, the questionnaire should use appropriate response formats that are easy to understand and the questions should be pretested to establish their viability in the research. This form of categorizing the responses, would help in the in determining the risk intensity thus establish the most appropriate risk management strategies for the same (Hough, G. 1997, 174).
The collected data would be organized and analyzed through descriptive statistics. Being of broad spectrum, a section of the data containing closed-ended questions were analyzed using the SPSS Computer programme while the other bit analyzed using descriptive statistics. In this case measures of central tendency would be used using frequency tables and charts. The quantitative content analysis is used to quantify the emerging features and concepts behind the risk management models in the study. The analysis incorporates the collectively analyzing the responses collected from the various sources. Grouped data is used in this case to calculate the measure so as to formulate figures representing with the extents of risk factors and the management strategies. The only anticipated limitations in achieving the purpose of this study are the mostly reliable sources of information. Information derived from the government officials many at times would be largely politically inspired thus might provide wrong or biased information concerning the political inclination. Another major challenge would be gaining access to the government officials for the interviews or administering the questionnaires. Also acquisition of information from more than one country would prove extraordinarily expensive. This may impel the use of other modes of conducting the data collection such as internet based and the mobile methods, which would also be much more costly. Generally, limitations exhibited in survey research of this nature are vast. However, the study requires numerous resource allocations in terms on finances, social support as well as the administrative permissions in order to acquire the relevant information. Ethical considerations such as confidentiality that had earlier been discussed in this study are quite prudent in strengthening the source, reliability and validity of the contents of the research (Project Management Institute, 2004, 237).
The research findings should be treated with a lot of keenness addressing each identified issues independently using the most effective approach. Essentially, considering the resource constraints of the less developed countries, strategies such as relocation of investments from one segment to the other, or shifting the entire project to other location or more stable economies, is an effective initiative towards the stabilization of an economy weakened by risks such as political instability. This approach is normally called Capital Flight. The other effective approach in managing the risks associated with projects financing is the currency devaluation, which triggers large scale capital flight. Effects of currency devaluation on the outputs and employment as well as the trade balances in the small, under developed open economies are significantly displayed and are prudent models for cutting down on the potential risks (Project Management Institute, 2004, 237).
In conclusion, several articles and other print material are general proponent to the benefits of project financing and encourage stringent measures of risk management and risk reduction in the development initiatives. In the trending economy into globalization, major transformations are taking place and project financing is becoming largely incorporated into the administrative and investment processes of various nations. Most literatures are positive about the ability of project financing to mitigate certain risk within the projects thus improves project risk management. Project financing is a crucial developmental aspect of the lesser developed countries. On the other hand, it is liable for a number of features promoting or limiting the success of the projects. Through research, these factors can be established and strategies formulated to manage the risk factors involved in the case. Comparative analyses are vital for determining the best practices from other stakeholders and to establishing reliable frameworks for the risk management initiative. Methods of data collection and analysis also have separate challenges hence they require acquisition of skills to tackle the entire process.
Project Management Institute., 2004. A guide to the project management body of
knowledge (PMBOK® guide), third edition. Newtown Square, PA: Project Management Institute
Artto, K. A. 1997. Fifteen years of project risk management applications – where are we going?. In Kahkonen, K. and Artto, K. A. ed. Managing Risks in Projects. 1st edition. London: Thomson. pp. 3-15.
Burger, K. et al., 1998. `Coping with Drought in Zimbabwe: Survey Evidence of Responses of Rural Households to Risk’, World Development, vol. 26, 1998, pp. 89-110.
Watt J., 2007. Strategic risk management for small businesses. [In: Reuvid, J. (ed.). Managing Business Risk 2nd Edition – a practical guide to protecting your business. London – Philadelphia: Kogan Page].
Watson GEH., 2004. A situational analysis of entrepreneurship mentors in South Africa. A dissertation submitted in fulfilment of the requirements for the degree Masters of Commerce in Business Management at the University of South Africa
Hough, G. S., 1997. Risk sharing partnerships. In search of best practices in risk management. In Kahkonen, K. and Artto, K. A. ed. Managing Risks in Projects. 1st edition. London: Thomson. pp. 171-181.