Impact of socio-political risks on project finance deals : South African case study

Abstract

The failure to address socio-political risks leads to a lack of infrastructure investment, which is largely supported by project financing. The purpose of this research study is firstly to identify the key socio-political risks associated with project finance deals in South Africa and their effects and, secondly, to identify and recommend mitigating measures or strategies for the identified risks. To gain deeper insights, an exploratory qualitative study was conducted using semi-structured interviews with thirteen participants (project finance experts and practitioners). The key socio-political risks identified within South Africa were found to originate from Government and Intrastate. Research findings show that Political Risk Insurance as a mitigation measure or strategy is gaining relevance within the South African context. Interestingly, there were no mitigations implemented to address the effects of the sovereign credit downgrade. There were concerns highlighted regarding the effectiveness of a government guarantee and the value of community shareholding as mitigations to socio-political risks within the project finance structure. Future research studies are recommended; firstly, regarding mitigation measures to address the effects of the sovereign credit downgrade and secondly, a study that focuses on the effectiveness of government guarantees to mitigate political risks.