Project Finance - Session 7
- 1. Project FinanceSession 7 – PPP & the Legal Aspects of PF
- 2. AgendaReview – Session 6Legal Aspects of Project FinanceThe Project CompanyCredit AgreementsSecurity DocumentsProject AgreementsPublic Private PartnershipsTypes of PPP BenefitsRole of Government PPP Procurement Processes
- 3. Session 6 - ReviewThe levels of Equity, Subordinated Debt & Senior Debt contained within the SPV will ultimately be a trade-off between:Project SponsorsBanks Government & Financial Market RegulationsRefinancing aims to improve NPV & the IRR of the project on the basis of reduced risk and/or changes in market conditionsProject 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: IntroductionThe legal issues in Project Finance essentially revolve around two basic concepts: The Project Company and its economic / legal functionThe Network of Contracts that regulate the relationship between project participants.
- 6. The Project Company The Project Company usually refers to a legal entityi.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 CompanyReasons for Incorporating a Project CompanyDefensive ReasonsLiabilities deriving from or connected to the project could contaminate the assets of the borrower companyPositive ReasonsTo 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 ReportConstitutes 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 risksTerm SheetA summary of the key terms of a (loan) contract documentSponsors and arrangers negotiate the term sheet, which is the starting point for the arranging mandate
- 9. Classification of DocumentsFor 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 AgreementIs the centre of the complex system of contractsthat make up the Project Finance dealRegulates the terms and conditions of all other contracts related to the project, either directly or indirectlyLenders 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 FacilitiesEvery facility is a separate credit transaction, with a distinct purpose and contractual treatmentA project finance loan normally involves:Base Facility Stand-By FacilityTax or VAT Facility
- 12. Security InterestsA 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 InterestsCommon 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 DocumentsRepresents the protection system that is activated when the project or financing becomes unworkableTypes of Security Interests:Blanket Lien, all assets of the project company are pledged to the lender as collateral for the loanProject Contracts, the project lender will require a security interest in, or conditional assignment of, each significant contract.
- 15. Other Finance DocumentsOther documents that have associated legal obligations include: Equity Contribution AgreementInter-creditor Agreement Hedging Agreements
- 16. Project AgreementsThe Project Company is essentially a corporate shell that outsources every business function through a series of contracts Construction ContractSupply ContractsPurchase Agreements O&M Agreement
- 18. Public Private PartnershipsThe term has no precise meaning, but is used to describe many forms of arrangements between public and private sectors for providing public servicesSuch arrangements may include:Contracting out of services Joint Ventures LeasingBuild, operate & transfer (BOT) projects *
- 19. Development of PPP’sPPP’s are considered an efficient way of allocating risks in the development of infrastructureA government can facilitate the project by the provision of assets and the provision of subsidies or revenuesPPP is preferable to full privatisation because it allows the government to exercise considerable control
- 20. PPP Types
- 21. Benefits of PPPIncrease “Value for Money” spent on Infrastructure by providing more-efficient, lower-cost and reliable services. Improves allocation of government fundsFacilitates innovation in infrastructure developmentTransfers the project risks to the private sector
- 22. Criticisms of PPPBoth 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’sCreate Favourable Investment EnvironmentEstablishing adequate legal / regulatory frameworkSelecting a Suitable Concessionaire Active involvement in the Project Life-Cycle Phases
- 24. Role of Government in PPP’sPartnerships UKMaintain a database of “ALL” PPP in the UKhttp://www.partnershipsuk.org.uk/index.aspx
- 25. PPP ProcurementProcesses are generally more complicated and costly than traditional approachesMany governments adopt multi-stage tendering processes
- 26. PPP Procurement
- 27. PPP in the NewsPARIS (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 LearnedContractual 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 developmentOnly financially strong, technically competent and well managed companies are likely to succeed with PPP’sPPP’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. ConclusionsThe legal issues in Project Finance essentially revolve around two basic concepts: The Project Company and its economic / legal functionThe 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
Editor's Notes
- #8: Note: It is relatively normal for the project company to be incorporated as a Joint Venture.
- #11: 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.
- #14: 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.
- #15: The law and business of international project finance By Scott L. Hoffman
- #16: Inter-Creditor Agreement – the purpose of this contract is to regulate the relationships among the lenders who participate in the deal.
- #19: * Or the various forms thereof i.e. BOOT, BTO, DBFO etc.