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Project Finance - Session 7
 

Project Finance - Session 7

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Legal Aspects of Project Finance & Public Private Partnerships

Legal Aspects of Project Finance & Public Private Partnerships

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  • Note: It is relatively normal for the project company to be incorporated as a Joint Venture.
  • In Europe, it is common practice for the credit agreement to be subject to English Law.A common example of several liability is in syndicated loan agreements, which will normally provide that each bank is severally liable for its own part of the loan. If one bank fails to advance its agreed part of the loan to the borrower, then the borrower can only sue that bank, and the other banks in the syndicate have no liability.
  • a lien is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation.
  • ‪The law and business of international project finance‬ By Scott L. Hoffman
  • Inter-Creditor Agreement – the purpose of this contract is to regulate the relationships among the lenders who participate in the deal.
  • * Or the various forms thereof i.e. BOOT, BTO, DBFO etc.

Project Finance - Session 7 Project Finance - Session 7 Presentation Transcript

  • Project Finance
    Session 7 – PPP & the Legal Aspects of PF
  • Agenda
    Review – Session 6
    Legal Aspects of Project Finance
    The Project Company
    Credit Agreements
    Security Documents
    Project Agreements
    Public Private Partnerships
    Types of PPP
    Benefits
    Role of Government
    PPP Procurement Processes
  • Session 6 - Review
    The levels of Equity, Subordinated Debt & Senior Debt contained within the SPV will ultimately be a trade-off between:
    Project Sponsors
    Banks
    Government & Financial Market Regulations
    Refinancing aims to improve NPV & the IRR of the project on the basis of reduced risk and/or changes in market conditions
    Project Bonds are an alternative source of funds where there is a broader base of potential investors i.e. pension funds that specialise in investing in infrastructure projects.
  • Legal Aspects of Project Finance
  • Legal Aspects: Introduction
    The legal issues in Project Finance essentially revolve around two basic concepts:
    The Project Company and its economic / legal function
    The Network of Contracts that regulate the relationship between project participants.
  • The Project Company
    The Project Company usually refers to a legal entity
    i.e. has the legal capacity to enter into agreements or contracts, assume obligations, incur and pay debts, sue and be sued in its own right, and be held responsible for its actions.
    The company (or SPV) is “born” with the project and does nothing but develop, build and operate the project.
  • The Project Company
    Reasons for Incorporating a Project Company
    Defensive Reasons
    Liabilities deriving from or connected to the project could contaminate the assets of the borrower company
    Positive Reasons
    To protect the project company against any possible external interference that might jeopardize the economic, financial or legal management of the project.
  • The Contract Structure
    Before receiving finance …
    Due Diligence Report
    Constitutes the basic document of analysis for the project and for its feasibility on a without-recourse basis.
    Includes a description of the legal context and an analysis of the associated risks
    Term Sheet
    A summary of the key terms of a (loan) contract document
    Sponsors and arrangers negotiate the term sheet, which is the starting point for the arranging mandate
  • Classification of Documents
    For the purpose of legal classification project finance documents fall into three categories:
    Finance Documents, including the credit (or facilities) agreement (drawn up by the lenders’ lawyers)
    Security Documents, create a system of security interests (under the jurisdiction where the assets are located)
    Project Agreements, are the project company’s operational contracts
  • The Credit Agreement
    Is the centre of the complex system of contractsthat make up the Project Finance deal
    Regulates the terms and conditions of all other contracts related to the project, either directly or indirectly
    Lenders are severally liable to make financial resources available to the project company
  • The Credit Agreement (Cont.)
    A project finance loan is always divided into different credit lines, called Credit Facilities or simply Facilities
    Every facility is a separate credit transaction, with a distinct purpose and contractual treatment
    A project finance loan normally involves:
    Base Facility
    Stand-By Facility
    Tax or VAT Facility
  • Security Interests
    A Security Interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation, usually the payment of a debt.
    Keeping the project operational must be the aim of any action taken by the lenders in case of project company default.
    Security interests are the primary instrument for achieving this aim.
  • Security Interests
    Common Law Countries, provide that a lien may be taken for collateral purposes over all assets.
    Civil Law Countries, generally enact statutes to govern creation, protection and priority of security interests.
    Developing Countries, much less certainty over the treatment of security interests.
  • Security Documents
    Represents the protection system that is activated when the project or financing becomes unworkable
    Types of Security Interests:
    Blanket Lien, all assets of the project company are pledged to the lender as collateral for the loan
    Project Contracts, the project lender will require a security interest in, or conditional assignment of, each significant contract.
  • Other Finance Documents
    Other documents that have associated legal obligations include:
    Equity Contribution Agreement
    Inter-creditor Agreement
    Hedging Agreements
  • Project Agreements
    The Project Company is essentially a corporate shell that outsources every business function through a series of contracts
    Construction Contract
    Supply Contracts
    Purchase Agreements
    O&M Agreement
  • Public Private Partnerships
    (PPP)
  • Public Private Partnerships
    The term has no precise meaning, but is used to describe many forms of arrangements between public and private sectors for providing public services
    Such arrangements may include:
    Contracting out of services
    Joint Ventures
    Leasing
    Build, operate & transfer (BOT) projects *
  • Development of PPP’s
    PPP’s are considered an efficient way of allocating risks in the development of infrastructure
    A government can facilitate the project by the provision of assets and the provision of subsidies or revenues
    PPP is preferable to full privatisation because it allows the government to exercise considerable control
  • PPP Types
  • Benefits of PPP
    Increase “Value for Money” spent on Infrastructure by providing more-efficient, lower-cost and reliable services.
    Improves allocation of government funds
    Facilitates innovation in infrastructure development
    Transfers the project risks to the private sector
  • Criticisms of PPP
    Both the public and private sectors lack the knowledge and skills to implement such long-term projects.
    Competition is limited due to the high tendering costs, thus limiting the concept of “Value for Money”.
    Often delayed due to political debate, changes in government and complex negotiation processes.
  • Role of Government in PPP’s
    Create Favourable Investment Environment
    Establishing adequate legal / regulatory framework
    Selecting a Suitable Concessionaire
    Active involvement in the Project Life-Cycle Phases
  • Role of Government in PPP’s
    Partnerships UK
    Maintain a database of “ALL” PPP in the UK
    http://www.partnershipsuk.org.uk/index.aspx
  • PPP Procurement
    Processes are generally more complicated and costly than traditional approaches
    Many governments adopt multi-stage tendering processes
  • PPP Procurement
  • PPP in the News
    PARIS (Dow Jones)--French construction and concession company Vinci SA (DG.FR) Thursday said its 30% owned unit Synerail has signed a public private partnership contract with French railway network ReseauFerre de France, or RFF, for a digital telecommunications network.
    MAIN FACTS:
    The first public private partnership contract in the French rail sector is for 15 years and worth around EUR1 billion, Vinci said.
    Synerail is 30% owned by Vinci, 30% by Vivendi SA's (VIV.FR) SFR, 30% by French insurer Axa (AXA).
    The works, worth a total of about EUR520 million, will be executed by a company in which Vinci Energies has a 60% equity holding. They will take five years to complete.
    Operation and maintenance of the GMS-R system will be carried out by a specially formed company owned 40% by Vinci Energies. These activities represent EUR430 million in total.
    The project financing consists of shareholders' equity of EUR58 million, an RFF contribution of EUR160 million and a non-recourse bank loan of EUR520 million.
    Source: Wall Street Journal, FEBRUARY 18, 2010
  • PPP & Lessons Learned
    Contractual complexity and long concession periods tend to create a high level of uncertainty (low likelihood of success)
    The ability & competence of the government plays a critical role in PPP infrastructure development
    Only financially strong, technically competent and well managed companies are likely to succeed with PPP’s
    PPP’s require clear consideration of how risks are allocated between public & private sectors.
    Financial Incentives & stable revenue streams are critical to attract private investments.
  • Conclusions
    The legal issues in Project Finance essentially revolve around two basic concepts:
    The Project Company and its economic / legal function
    The Network of Contracts that regulate the relationship between project participants.
    Public Private Partnerships (PPP’s) involves the sharing of risks and responsibilities between public & private sectors.
    Success ultimately comes down to the ability (skills & experience) of the government in managing the related processes and the financial incentives offered to attract private enterprise