Financial risks

When it comes to financial risks that could be involved in telecommunication projects Merna & Njiru (2002) claims that risks are usually known before because there are always two parties involved that has opposite viewpoints. The authors define financial risks as:

“The impact on the financial performance of any entity exposed to risk.”

There are several kinds of financial risks that Merna & Njiru (2002) describes, and here follows a presentation of them.

Currency risk

This kind of risk is usually seen in cross border flow of funds. When a country that wants to invest in telecommunication has to deal with foreign currencies, it normally results in some form of currency risk. A problem that can arise in developing countries is that they have exotic currencies, which means that they have a currency that not are traded on any existing exchange market, which may result in a more difficult process. The currency risk could also be a problem for foreign investors and other organizations that give money support to developing countries, which could result in big losses when the money are exchanged to a local currency.

Interest rate risk

Interest rate risk is a risk that affects both the borrowing and investing sides directly. This risk is usually classified in a short and a long time perspective. In the short time perspective the investment and its risk mainly depend on the money market. In the long time perspective the rate could be paid for example every 6 month until the loan matures.

Equity risk

The equity is usually connected with the share capital, if the shares rise or fall it will affect the equity. The risk of equity is connected with warrants and convertible bonds. If a company let investors buy warrants and bonds on the shares of a company there would be a risk involved, because the company could both win and lose on the deal, because they do not know if the share price will rise or fall in the future.

Commercial risk

Commercial risks are related to the completion, operation or input and output of the project and it could affect the financial performance. A connection to the different related factors are that the first which is completion, is a risk if the project is not finished when it was supposed to, which will result in more expenditure. The second, which is operation, could be a risk if, for example a telecommunication does not work properly or are involved in some legal issues which also result in more expenditures. The third

and final, is input and outputs. The risk in this case is that a project often are dependent of suppliers, if the supplier for some reason cannot deliver the required material, the whole project could be affected.

Liquidity risk

Liquidity risk has a connection to commercial risk. If the project does not reach its goals it could result in a liquidity risk. This risk is usually a result of that a seller is forced to sell under the market price which will result in lower incomes and volatile liquidity.

Counterparty risk or credit risk

Counterparty risk which is also called credit risk is seen in any financial transaction that involves two parties. An example could be a developing country that has signed a contract with a financial institution of borrowing money; this will be enclosed with a risk because it is not for sure that the financial institution could accomplish the deal at the right time. It could also be in diverse, when the loan is going to be paid back and the lender cannot accomplish the payments, because of some problems.

Political risk

This kind of risk follows by a publicity guaranteed loan or a loan directly to a foreign government. The definition of political risk is:

“The exposure to a loss in cross-border lending caused by events that are, at least to some extent, under the control of the government of the borrowing country.”

(Nagy, 1979)

In other words, a political risk is the risk that the investor could lose the money because of the countries political structure. Some examples of political risks are tax laws, expropriation of assets, the government repudiation to sign a contract, inconvertibility of foreign currency. Other factors that may affect the political risk in a country could be war, terrorism or civil disturbance.

Regulatory risk

Montgomery Research (2004-12-02) defines regulatory risk as the external regulatory actions and development that can impact the financial and operational performance of a company; this could include revenue requirement, cost structure and operational processes.

It is important that companies understand how the regulatory market model works and then try to lessen the effects of the regulatory risk. Montgomery Research (2004-12- 02) gives the following statement that companies should follow.

1. Assign probabilities for every potential outcome for each regulatory scenario. 2. Quantify the financial impact for each regulatory scenario to the company.

3. Finally, calculate the expected results and variance for each regulatory risk scenario. Inflation

Inflation is defined (Investorwords, 2004-12-02) as a sustained rise in the general levels of prices, which in other words means that the money loosens its value and the price for different projects could reach unlimited values.

One factor that can contribute to inflation is that the money supply in a specific country increases. There are a lot of different methods of measuring inflation and here follow a description of some of them. o Consumer price index

This method compares the prices of products at different time periods. The products that are chosen, are products that are bought by the typically consumer.

o Producer price index

This method compares the price incomes for different products to a producer at different time periods. The main difference between this method and the consumer price index is that the taxes that the consumer pays could vary from the taxes that the producer has to pay.

o Wholesale price index

Here the change of price is measured at the wholesaler. o Commodity price index

The price change of a selection of commodities is measured.

o GDP deflator

This is measured by the total amount of money spend on GDP. This method is the broadest measure of price levels. (Investorwords, 2004-12-02)

A small amount of inflation in a country usually has a positive effect on the economy, but when the inflation increases it could have dramatically effects on the economy. A British economist called A.W. Phillips found a relationship between inflation and unemployment. When the inflation is high, the unemployment is low and vice versa, the Phillips curve is shown in the following figure.

6.4.1 Other typically risks in telecommunication projects

Merna & Njiru (2002) describes some other risks that may affect, for example an investment in telecommunication.

Technological risk

This is a risk that could be seen in all technological projects, for example in a telecommunication network. The risks contain temporarily shut downs of the network for some reasons, it can also be because of an upgrading of the network.

Operating risk

These risks are involved in commercial risk and it covers these scenarios. 1. The risk that the project cannot run at the predicted efficiency. 2. The risk that the project gets too expensive to run.

3. The project could be delayed, for example the suppliers could not deliver the needed material. 4. Natural disasters may arise that disturb the projects, for example fire and flooding.

High transaction costs

This is a part of operating risk, which contain the risk that the cost of using a network gets too high. Transaction cost also covers the risk that the business deals are too