This document discusses the key legal aspects of project finance, including the project company, credit agreements, security documents, and project agreements. It then covers public-private partnerships (PPPs), describing the types of PPPs and their benefits and risks. PPPs involve sharing risks between public and private sectors for infrastructure projects. The role of the government and PPP procurement processes are also examined.

1. Project Finance Session 7 – PPP & the Legal Aspects of PF

2. 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

3. 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.

4. Legal Aspects of Project Finance

5. 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.

6. 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.

7. 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.

8. 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

9. 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

10. 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

11. 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

12. 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.

13. 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.

14. 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.

15. Other Finance Documents Other documents that have associated legal obligations include: Equity Contribution Agreement Inter-creditor Agreement Hedging Agreements

16. 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

17. Public Private Partnerships (PPP)

18. 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 *

19. 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

20. PPP Types

21. 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

22. 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.

23. 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

24. Role of Government in PPP’s Partnerships UK Maintain a database of “ALL” PPP in the UK http://www.partnershipsuk.org.uk/index.aspx

25. PPP Procurement Processes are generally more complicated and costly than traditional approaches Many governments adopt multi-stage tendering processes

26. PPP Procurement

27. 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

28. 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.

29. 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