Abstract:

The paper analyses relationship between the risk of a legislative change and expected profitability of subsidized projects. Introduction in risks is given in terms of their internal and external origin with focus on legislative risk within projects subsidized from public resources, which is covered by some specialized ratings. To measure the legislative risk we lean on data of the rating agency Euromoney Country Risk for the selected EU countries. The input ratings are processed to capture certainty degree of legislation stability. The certainty degree induces the possible threat of subsidy cuts of the purchase price for subsidized production here expressed as indicator of market risk. Based on this, we build and apply a statistical model for estimating expected profitability of an average subsidized project of a biofuel plant measured by E[NPV]. The results reflect differences depending on the certainty degree according to the country the subsidized production is realized. Possible reasons for non-reflection of legislative risk within budgeting cash flows and profitability calculation in business practice is stated. Here performed approach to expression and incorporation of certainty degree and from it derived market risk is an original contribution of the paper.