Risk management framework for investing in India’s future infrastructure projects can be follows. Step 1:
List all risks associated with the proposed infrastructure project and then analyze these risks in order of importance. The more critical the risk, the more attention should be paid to it. Step 2:
For each risk, list corresponding mitigation measures as more as possible, and then examines the availability of mitigating measures in sequence based on their effectiveness. The more effective the measure, the higher the priority for adoption. Sometimes, a combination of several mitigating measures is needed to be adopted. Step 3:
For each risk and its mitigating measures, negotiate with Indian government and related entities to incorporate the risk mitigation measures, and fine tune the concession agreement and other agreements as much as possible to ensure that all of these risks are adequately covered. Step 4:
Allocate risks to related parties according to the principle that risk should be borne by the party most capable of controlling it. An optimal allocation of risks depends on the relative bargaining power of the parties and the potentiality of reward for taking the risks Step 5: Adopt the risk allocation and security structure and enter into financing process for the project.
1. Definition of Risk
It goes without saying that risk is a natural part of any business enterprise and project. However, it is often difficult for persons from different backgrounds to have a meaningful discussion of “risk” as there is no agreement on the definition of risk. To date, there is still not one single universal recognized definition of risk. There have been many attempts to define risk, for engineering applications, early attempts conceptually defined risk as hazard/safeguard. This approach addresses the essence of risk: No matter how much safeguards are in place, risk would not be zero unless the hazards have been eliminated. However, quantifying risk using this approach met with great difficulties. The most popular definition views risk as a numerical value that is a product of probability and consequence. Although easy to comprehend by most, this definition often obscures much of the information that is potentially of interest to the decision makers. As an example, this approach leads one to equate a low-probability-high-consequence event with a trivial but frequent event.
A more sensible approach is to view risk as an answer to the following questions: • What can go wrong?
• What is the likelihood?
• If it happens, what are the consequences?
Thus, risk can be thought to be consisting of three elements: Scenarios, likelihood, and consequence. A scenario should encompass the information of the source of threat, the vulnerability, and the transfer mechanism, the progression of the situation, failure or success of existing countermeasures, possibility of common failures, and the final outcome. Each scenario is assumed to be independent. To address risks in project management, it is therefore, necessary for one to postulate project failure scenarios of what can go wrong, and estimate the likelihood an the consequence of the scenarios in a comprehensive, systematic manner.
RISK IN INFRASTRUCTURE PROJECTS
The real estate and construction industry has changed significantly over the past several years. It is an industry driven primarily by private investors; the presence of securitized real estate has increased considerably. Not unexpectedly, the influence of institutional investors on the real estate industry is formidable. They are beginning to experience a higher degree of scrutiny by investors, consultants and analysts, and are expected to deliver "best in class" service in all areas - from property management to risk management. To be successful in this environment, where our collective "performance bar" is being raised significantly, the real estate...