14 International Projects—Sector Focus

This chapter discusses the key features of project financing in the following sectors: oil and gas mining, conventional power, renewable energy, and nuclear power. The chapter is organized as follows. Section A on oil and gas covers project structuring, sales contracts, key risks in an oil and gas project, and financial considerations. Section B on mining covers environmental and social impact, completion risk, reserve estimates and market risks, resource nationalism and political risk, terms of a mining financing; and steaming agreements, royalty agreements, and other alternative finance options. Section C on conventional power covers the IPP model, an overview of power markets, IPP risk allocation and contractual structure, key risks in an independent power project, and financing considerations. Sections D and E cover renewable energy and nuclear power projects, respectively. Section F focuses on the development and financing of public infrastructure and public private partnership (PPP) projects.

8 Official Funding Sources: Export Credit Agencies

This chapter focuses on export credit agencies (ECAs). ECAs are government-backed suppliers of financing and other credit support. As enablers of government policy and ‘soft diplomacy’, they possess a variety of tools that are not available to commercial financial institutions alone. Among the most important of these tools is the ability to offer financial terms that are more competitive than those available in the market. ECAs are able to provide financial liquidity in challenging times, making them attractive market participants in all types of credit environments. ECAs are an essential source of capital for the financing of cross-border trade, including for the financing of major infrastructure projects worldwide. In the coming years ECAs will likely continue to play a pivotal role in the financing of global energy, natural resources and infrastructure projects.

6 Insurance

This chapter discusses the importance of project insurance. Financiers take an onerous approach to insurance in project finance transactions, requiring a comparably more robust insurance programme than would be adopted in a project that is financed on balance sheet alone. This reflects the fact that until the project company has established a reliable revenue stream, it will have a low level of capitalization and be highly leveraged. The primary function of insurance is to act as a risk transfer mechanism. In return for a known cost (the premium) the uncertainty associated with both the frequency and severity of loss is transferred to the insurer. The discussions cover insurance programme design, project company control, the breadth and scope of the insurance programme, legal and commercial influences on procurement, and insurance risk itself and lenders’ clauses.

3 Sources of Funding

From the very beginning of the development process relating to any specific project, the project’s sponsors will continually assess and analyse the best available sources of capital for the project. The sponsors will seek to obtain funding at the lowest achievable cost; they will seek to minimize as far as practicable the sponsors’ equity contribution and will look to achieve the longest-possible debt tenors. This chapter discusses a variety of sources potentially available to sponsors pursuing a project finance funding plan. These sources include equity, equity bridge loans, subordinated shareholder debt, mezzanine debt, bank debt, Islamic project finance, capital markets, public sector lenders in project financings, export credit finance, multilateral agencies and development finance institutions, and leveraged and finance lease arrangements. The chapter concludes with an overview of the reasons for entering into, and a description of the role of, term sheets, letters of intent, commitment letters, and mandate letters.

2 Project Participants and Structures

Project financing is characterized by financial and legal advisers assisting their clients to allocate rights and obligations between the project participants, spreading risks and responsibilities to those best suited to bear them, to create a bankable project. In so doing, complex structures evolve. Thus, an understanding of the objectives and goals of the key project participants is absolutely critical to the successful negotiation of a project financing. This chapter provides an accessible and general overview of project financing. The first part examines the key project participants by addressing the following simple questions: (i) who are they, (ii) what are their roles, and (iii) to a lesser extent, what are their key motivations? The second part gives an overview of typical structures employed for a project, in terms of both the ownership structure employed by the sponsors of a project and also the underlying structure of the project as a whole.

13 Project Finance in Civil Law Jurisdictions

Until recently, project financing of public infrastructure projects in France, as in other civil law jurisdictions, was limited to concessions. This evolved in the early 2000s with the emergence of partnership agreements between public authorities and sponsors. Nowadays, project financing of public infrastructure projects is structured around two distinct contractual frameworks: concessions and public-private partnerships. The two main differences between public-private partnerships and concessions lie in (i) the way the project is designed and (ii) the remuneration of the private company. This chapter discusses public projects and tender offers, creating and perfecting security interests, daily assignment and pledges over business concerns, direct agreements and step-in rights, issues arising from secured lending, and the influence of the civil code in African countries.

5 Allocation of Risks in Project Documentation

This chapter discusses the allocation of risks within the project’s contractual architecture. Stakeholders and potential stakeholders in a project will typically approach risk allocation from one of two perspectives. The first perspective will be as a potential contract counterparty negotiating its involvement in the project document structure—i.e. such a counterparty will be directly involved in the risk allocation process itself. The second perspective will be as a potential lender (or sometimes equity investor) performing due diligence to assess the risk allocation under an existing or proposed project document structure so as to determine whether the project is bankable (or, in the case of a potential equity investor, whether the risk allocation justifies the making of an investment in the project).

1 Approaching Legal Issues in a Project Finance Transaction

Project finance is at its core a form of secured lending. It entails lenders extending a large amount of credit to a newly formed, thinly capitalized company whose principal assets at the time of closing are not physical but rather merely contracts, licences, and ambitious plans. There is a broad commonality of legal and commercial issues to be considered across virtually all projects, and the reliability of the approaches customarily used by project finance professionals in analysing those issues has been tested and proven through decades of complex transactions. How those methods are applied to individual transactions may vary, but the issues to be assessed remain consistent across industries, jurisdictions, and financial structures. This chapter considers both those methods and their application in specific contexts.

Introduction

This introductory chapter discusses the definition and characteristics of project finance. Project finance deals with the financing of a specific asset in which lenders look principally to the revenues generated by the operation of that asset for the source of funds from which loans will be repaid. Project finance is commonly deployed in the development of large infrastructure projects (e.g. power generation, toll roads, and telecommunications), social infrastructure (such as hospitals and schools), and the exploitation of energy and other natural resources, but it can be used to finance a broad range of assets and services. Common characteristics of project finance include project development through a separate—and usually single—purpose, financial and legal entity; separation of the debt of the project company from the sponsors' direct obligations; and project assets (including contracts with third parties) and revenues being generally pledged as security for the lenders.

16 Dispute Resolution in Project Finance Transactions

In the project finance context, dispute resolution mechanisms are a means of enforcing the allocation of risks among a project’s many participants—sponsors, lenders, contractors and subcontractors, service providers, offtake purchasers, and others. To the extent that a dispute resolution mechanism is swift, flexible, reliable, final, and enforceable, the project’s intended allocation of risks can be maintained. This chapter identifies various dispute resolution mechanisms that are available to project participants and discusses their suitability for the maintenance of a project’s intended risk allocation. It first addresses the options for the resolution of disputes about commercial risks. It then considers options for resolving disputes about political risks. Finally, it discusses the enforcement of arbitral awards and domestic judgments.