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Project finance schemes could mask real risk to investors

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PROJECT FINANCE structures for major privately financed projects could be hiding construction risk and leaving investors exposed, a City credit rating agency warned this week.

Standard & Poor's has launched an investigation into whether project finance structures have reduced construction risk or simply hidden it.

It is concerned that tight contractural conditions aimed at protecting investors from delays and cost overruns could in fact expose them to risk by damaging contractors.

This in turn could delay projects and undermine their financial viability.

'Deal structuring techniques such as project finance may be masking risks which, although currently insulating sponsors and their financiers, continue to cause problems at the contractor and subcontractor level, ' said Robert Bain, a credit analyst with the agency's Infrastructure Finance Ratings team.

'Just because there have been few debt repayment defaults in the rated infrastructure sector globally doesn't mean that the risk of signifi cant construction cost or schedule overrun has disappeared, he said.

'And the risk landscape continues to evolve in response to exacting contractual obligations, sophisticated penalty regimes, and the use of new materials, innovative construction techniques and leadingedge technologies.

This is precisely the level of detail that our research has been designed to examine.' INFOPLUS To contribute to Standard & Poor's construction risk research, contact Robert Bain on (020) 7176 3520 or email robert_bain@sandp. com.

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