INFRISK : a computer simulation
            approach to risk management in infrastructure project
            finance transactions
Few issues in modern finance have
            inspired the interest of both practitioners and
            theoreticians more than risk evaluation and management. The
            basic principle governing risk management in an
            infrastructure project finance deal is intuitive and
            well-articulated: allocate project-specific risks to parties
            best able to bear them (taking into account each
            party's appetite for, and aversion to, risk); control
            performance risk through incentives; and use market hedging
            instruments (derivatives) for covering marketwide risks
            arising from fluctuations in, for instance, interest and
            exchange rates, among other things. In practice, however,
            governments have been asked to provide guarantees for
            various kinds of projects, often at no charge, because of
            problems associated with market imperfections: a) Derivative
            markets (swaps, forwards) for currency and interest-rate
            risk hedging either do not exist or are inadequately
            developed in most developing countries. b) Limited
            contracting possibilities (because of problems with
            credibility of enforcement). c) Differing methods for risk
            measurement and evaluation. Two factors distinguish the
            financing of infrastructure projects from corporate and
            traditional limited-recourse project finance: 1) a high
            concentration of project risk early in the project life
            cycle (pre-completion), and 2) a risk profile that changes
            as the project comes to fruition, with a relatively stable
            cash flow subject to market and regulatory risk once the
            project is completed. The authors introduce INFRISK, a
            computer-based risk-management approach to infrastructure
            project transactions that involve the private sector.
            Developed in-house in the Economic Development Institute of
            the World Bank, INFRISK is a guide to practitioners in the
            field and a training tool for raising awareness and
            improving expertise in the application of modern risk
            management techniques. INFRISK can analyze a project's
            exposure to a variety of market, credit, and performance
            risks form the perspective of key contracting parties
            (project promoter, creditor, and government). Their model is
            driven by the concept of the project's economic
            viability. Drawing on recent developments in the literature
            on project evaluation under uncertainty, INFRISK generates
            probability distributions for key decision variables, such
            as a project's net present value, internal rate of
            return, or capacity to service its debt on time during the
            life of the project. Computationally, INFRISK works in
            conjunction with Microsoft Excel and supports both the
            construction and the operation phases of a capital
            investment project. For a particular risk variable of
            interest (such as the revenue stream, operations and
            maintenance costs, and construction costs, among others) the
            program first generates a stream of probability of
            distributions for each year of a project's life through
            a Monte Carlo simulation technique. One of the key
            contributions made by INFRISK is to enable the use of a
            broader set of probability distributions (uniform, normal,
            beta, and lognormal) in conducting Monte Carlo simulations
            rather than relying only on the commonly used normal
            distribution. A user's guide provides instruction on
            the use of the package.