Risk mitigation through contacts in project finance
"This study researches the ability of contracts to reduce risk in project finance and to explore the effects of rule of law on these contracts. Agency theory is used to determine which contracts can be used. Institutional economics outlines the effects rule of law can have on contracts. Hypotheses are that five different contracts will differ in effect due to the level of rule of law in a country. A cross-sectional study using ordinary least squares regression is used to test these relationships in 580 projects. Results show that purchase agreements are present in projects with lower risk. Government guarantees, sponsorship experience, retaining ownership and multilateral support do not have a relationship with risk. This indicates that the risks of these contracts are already accounted for in the credit agreement. Arguing from this perspective, the relationship of purchase agreements with less risky projects is because purchase agreements are sometimes left out of the agreement. The credit agreement is not efficient in purchase agreements implying the off-taker is not always known beforehand."
Faculteit der Managementwetenschappen