Assessing methods to analyse portfolios of projects and their risks procured by project finance

Project finance provides a method of financing projects, relying on the revenues generated by the project to repay lenders. Organisations utilising project finance are exposed to risk and uncertainty over the life cycle of the project. The commercial viability of such projects can be assessed in terms of their economic parameters, those being the Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period (PB) and Cash Lock Up (CLU).In both the United Kingdom and Germany under the relevant Private Finance Initiatives (PFI’s), usually on the basis of Public-Private Partnerships (PPP’s), projects now are being procured or considered in bundles rather than on an individual, stand-alone basis. For the purpose of financial analysis, bundled projects can be considered as portfolios of projects. When projects are considered individually, some may be commercially viable as stand-alone projects and others may not. However, when projects are bundled together, an overall portfolio of projects may meet a promoter’s Minimum Acceptable Rate of Return (MARR) and be deemed commercially viable.This study reviews the concepts of project finance, risk management, portfolio management and the PFI in relation to assessing the commercial viability of portfolios of projects. A questionnaire is used to determine current methods of assessing portfolios, in this study respondents from 60 organisations provided data which was duly analysed by the author.A mechanism is developed to determine the economic parameters of a portfolio or bundle of projects by assessing the worst, base and best case scenarios based on the risks associated with each individual project forming part of the portfolio.The computer software, Computer Aided Simulation for Project Appraisal and Review (CASPAR) is combined with spreadsheets to model portfolios and simulate different scenarios in terms costs, revenues, durations and financial instruments.