Financing of Infrastructure Projects:
The Role of a Project Finance Counsel
Presentation by
Mohit Saraf
Partner
Luthra & Luthra
Law Offices
Overview
•
•
•
•
•
•
What is Project Finance?
Role of a Project Finance Counsel
Public Private Partnership
Financing
Risk Matrix
Project Finance Requirements Requirements
L&L/NLS
2
What is Project Finance ?
• There is no strict definition but as per the international
practice the definition below could be used
• Project Finance is financing the development or
exploitation of a right, natural resource or other asset
where the bulk of the financing is not be provided by any
form of share capital and is to be repaid principally out of
revenues produced by the project in question
L&L/NLS
3
Role of a Project Finance Counsel
• Risk allocation and mitigation through Negotiation and Documentation
among the project participants
• Minimizing residual risk with the SPV
• Balancing conflicting interests of various project participants
• Achieving successful Financial Closure by ensuring fulfillment of
Project Finance requirements
L&L/NLS
4
Role of a Project Finance Counsel
(Cont’d)
• Structuring of Project Vehicle
• Tax Structuring
• Ensuring regulatory and statutory compliances
L&L/NLS
5
Public Private Partnership
• Structures
– Build Operate Transfer (BOT)
– Build Own Operate Transfer (BOOT)
– Build Transfer Operate (BTO)
– Build Own Operate (BOO)
– Design, Construct, Maintain & Finance (DCMF)
– Design, Build, Finance & Operate (DBFO)
– Disinvestment
L&L/NLS
6
Financing
• Project Financing vs. Balance Sheet Financing vs. Asset
Financing
• Project Financing
• Source of Finance
–
–
–
–
Commercial Banks
Financial Institutions
Export Credit Agencies & Multilateral Agencies
Capital Market
L&L/NLS
7
Finance Risks
Market Risks
Promoters
Shareholder’s
Agreements
Supplier
Lenders
– Credit Agreement
– Security
Documents
Supply
Agreement
Offtaker
Offtake
Agreement
Insurances
Insurers
Project company
– Concession
Agreement
– Consents
Construction
Contract
Operating and
Maintenance
Agreement
Government
Construction &
Operation Risks
Contractor
L&L/NLS
Operator
8
Risk Matrix
•
•
•
•
•
•
•
•
Completion Risk
Technological Risk
Supply Risk
Market Risk
Financial Risk
Political Risk
Environmental Risk
Force Majeure Risk
L&L/NLS
9
Project Finance Requirements
• Hate surprises; will not accept risks which are either
incapable of proper assessment or which are potentially
open-ended in their effect
• No change in law risk
• No discriminatory taxation
• Minimise “risk-dumping” on project company
• No liability for consequential loss
• Contracts must survive enforcement of Banks’ security
L&L/NLS
10
Project Finance Requirements Consents
• Consents must last for duration of project
• Regulators should not be able to vary the terms of consents
unduly
• Consents should inure to project and not just to project
company
• Government Support Agreements
L&L/NLS
11
Project Finance Requirements Promoters
• All equity contributions to be provided up-front
• Promoters to provide cover for cost overruns
• Promoters to provide cover for gaps in undertakings
including insurance.
L&L/NLS
12
Project Finance Requirements Concession Agreement
•
•
•
•
•
•
Terms of concession fixed for life of project
No unduly onerous terms on project company
Extension of term for force majeure
Compensation for termination must repay debt
Concession should survive enforcement of security
Transferability of concession on security enforcement
L&L/NLS
13
Project Finance Requirements Construction Contract
• Turnkey fixed price contract
• Fixed completion date
• Force majeure, price increases and completion must back
to back with concession agreement
• Adequate liquidated damages for late completion
• Performance Guarantees
L&L/NLS
14
Project Finance Requirements Operation & Maintenance Contract
• Proper incentives to run project properly and profitably
including penalties for failure to meet targets
• Ability to remove operator for poor performance
L&L/NLS
15
Project Finance Requirements Supply Contract
• Security of supply and remedy for interruptions
• Take or Pay obligation
L&L/NLS
16
Project Finance Requirements Off-take Agreement
• Full pass-through of capital and variable costs
• Foreign exchange protection
• Take or Pay obligation
• Credit enhancement including Government Guarantees
L&L/NLS
17
Security
• Why Security?
• Security Package
–
–
–
–
Key contracts
Physical assets
Revenue
Insurance
• Direct Agreement
– Cure & Step in Rights
– Substitution
L&L/NLS
18