Lenders must be confident that they will be repaid, especially taking account of the additional

risk from the high level of debt inherent in a project finance transaction. This means that they
need to have a high degree of confidence that the project (a) can be completed on time and on
budget, (b) is technically capable of operating as designed, and (c) that there will be enough
net cash flow from the project's operation to cover their debt service adequately.

Thus, the lenders need to evaluate the terms of the project's contracts insofar as these provide
a basis for its construction costs and operating cash flow, and quantify the risks inherent in
the project with care. They need to ensure that project risks are allocated to appropriate
parties other than the Project Company, or, where this is not possible, mitigated in other
ways. This process is known as due diligence. The due-diligence process may often cause
slow and frustrating progress for a project developer, as lenders inevitably tend to get
involved-directly or indirectly-in the negotiation of the Project Contracts, but it is an un-
avoidable aspect of raising project finance debt.

Project finance risk analysis is based on:
 A due-diligence process intended to ensure that all the necessary information about
the project is available
 Identification of risks based on this due diligence
 Allocation of risks (to the extent possible) to appropriate parties to the project through
provisions in the Project Contracts
 Quantifying and considering the acceptability of the residual risks that remain with
the Project Company, and hence with its lenders.

The due-diligence process therefore examines the risks inherent in the project under the
different headings of commercial risks, the extent to which these are covered by contractual
arrangements, and whether remaining risks left with the Project Company are reasonable and
acceptable to lenders.

A process of "formal" due diligence is also undertaken by the lenders' legal and other
professional advisers to consider whether (I) the parties to Project Contracts have gone
through proper procedures to sign these contracts, (2) all necessary legal requirements have
been fulfilled to undertake the project, and (3) appropriate tax and accounting assumptions
are being used.
Technical Due diligence. The Lenders' Engineer reviews and reports to the lenders on
matters such as:
 Suitability of project site
 Project technology and design
 Experience and suitability of the EPC Contractor
 Technical aspects of the EPC Contract
 Construction costs and the adequacy of the allowance for contingencies
 Construction schedule
 Construction and operating Permits
 Technical aspects of any Input Supply Contract or Project Agreement
 Suitability of the Project Company's management structure and personnel for
construction and operation
 Any technical issues or risks in operation of the project
 Projections of operating assumptions (output, likely availability, etc.)
 Projections of operating and maintenance costs