Risks and how to manage it

How to market CDM Projects

Risks

• The further the project, the lower the risk– Off the shelf buyer faces no risk– Financer risk is limited by contract and insurance– Equity investor shares risk of success of project

Stages of Risk I - Country• Country status

– Stability• Environmental, labour, institutional

– Infrastructure• Presence of approved OE• Suitable local expertise (technical, legal, financial)

– Certainty of contracts and of ownership • Lawlessness • Litigiousness

Produce country Assessment Report– But the Japanese are already interested

Stage of Risk II - Approval• DNA Status

– Is the DNA in existence– Will the DNA be biased to some sectors seems not in SA– Are the DNA criteria clear, stringency– Is the DNA efficient or causing delays

• SD Status– Will the Project contribute to Sustainable Development

• Is the project an SSN project SD criteria met• Is the project a gold label project SSN projects probably are

• Approval Status– Has the project already been approved

Produce Approval Certificate, Gold Label endorsement, or Assessment Report

Stage of Risk III - Validation

• Methodology– Is the baseline methodology approved– Is the project additional

• Validation– Has PDD been validated by an approved OE

Produce validation certificate, or Assessment Report

Stage of Risk IV: Feasibility

• Feasibility Study– How far is implementation? – Is there a good rate of return iro CERs as against the capital cost of the project– What portion of the bigger project is the CDM component– How liquid is the Project Participant in relation to the timing of the production of

CERs– To what extent are the proceeds of bigger project already contracted for (e.g.

methane collected)– How additional is the project– What are the transaction costs– How viable is the bigger project – What are the profit margins in respect of the CERs– What is the state of the CER Market: what are the parameters

Produce auditor’s Assessment Report

Stage of Risk V: Market Indicators

• Is the KP ratified• Has the CER Market matured• What prices do CERs fetch at the moment• What factors will affect the CER Market

– How do these factors impact on the specific project• What is the future of the CER Market

– When should project be marketed?? Produce an market appraisement Report

Stage of Risk VI - Technology• Is the project technology reliable/ tested / the best available

– Has the technology been tested by developer/ in same country/ in same situation

– What factors affect the technology being successful in the host country – How complicated is the technology

• How expensive is the technology (including maintenance)– Are royalties payable– What possibility is there for technology proliferation/on-selling

• What is the relationship between the technology and the baseline• What provision is there for ongoing training and maintenance• What likelihood is there for take-up of the technology Produce Assessment Report against a set of performance indicators

Stage of Risk VII: Insurance• Is there insurance in place iro performance by PP• What grade of risk is there in respect of each assessment

of risk identified iro the project• Is there insurance in place for each stage of risk• How adequate is this insurance• What consideration is there for points of conflict to arise• What provision is there for the resolution of each

identified conflict Produce insurance certificates or insurance potential

report iro each identified risk

The Project Prospectus

• Packages the Project for Marketing

• Is presented to top brass• Is like a company

prospectus/ annual report • Includes Risk, Status and

Evaluation Reports• Shows Price to Risk in

graph format:

Confidentiality

• What detail of Internal Rate of Return to include:– Higher IRR, less risk to investor/buyer– Lower IRR, lower offers?

• How much information must be exposed in PDD– Conservatism

• High scenario proves additionality• Low scenario proves baseline

Risks to Seller/PP

• Same as buyer in respect of the success of the project • Opposite to buyer in respect of degree of buyer

involvement• Choosing optimum time iro risks, cash flow needs and

potential for maximising profit• Choosing the right buyer (and the buyer’s ability to

perform)• Identifying the right technology and the right project• Negotiating in a weak/uncertain market• International competition to sell into the market• Negotiating with top-flight international dealers• The right contract, the right forum for enforcing

performance/ claiming damages