Financial Risk Analysis of Infrastructure Debt : The Case of Water and Power Investments

The water and power industries, including the most capital-intensive producers of goods and services in our economy, are exposed to financial risks of staggering proportions. With projects that are routinely large and require long-term planning, and with demand and supply often highly volatile, costs regularly defy prediction. Still, there has been little explicit analysis of financial risk in the water and power industries. In this work, C. Vaughan Jones provides a comprehensive discussion of financial risk and risk analysis for these utilities. Writing in clear, straightforward language, he explores the application of risk analysis to construction projects, rate-setting and price effects, and customer characteristics. In developing a method for evaluating risk, Jones brings together material from business, engineering, economics, demography, probability theory, computer simulation, and policy studies. The materials are organized around risk factors affecting costs and revenues, and support a practical analysis with spreadsheet and simulation examples. Separate chapters present findings relating to the variability of construction costs, customer demand, and population growth. Together with qualitative information about risks, these chapters offer suggestions about quantitative representation of relevant patterns of variability of key risk sources. The techniques are integrated in simulation models dealing with contract risk, the evaluation of sinking funds and amortization schedules, and long-run capacity planning. The concluding chapters summarize major findings, consider issues of reliability and validation, and discuss the way in which this analysis can be applied to a variety of infrastructure investments. Finance and investment professionals and students in business and finance studies will find this work to be a useful reference tool. For public and academic libraries, it will represent a valuable addition to their collections. Contents......Page 6 Figures and Tables......Page 8 Foreword......Page 10 Preface......Page 14 1 Introduction......Page 18 2 Concepts and Procedures......Page 34 3 Financial Risks in the Construction Period......Page 64 4 Revenue Risk—Rate and Demand Factors......Page 86 5 Revenue Risk—The Customer Base......Page 102 6 Applications......Page 114 7 Reflections on the Method......Page 146 Appendix......Page 160 Bibliography......Page 172 L......Page 182 U......Page 183 W......Page 184