project finance law

project finance law

An In-Depth Analysis of Project Finance Law: Principles, Practices, and Perspectives

1. Introduction to Project Finance

In 2005, we are delighted to update and extend these publications further by bringing together a worldwide team of distinguished legal practitioners, experts, advisors, bankers and financiers in the launch of a new book, which analyses the principles, practices and perspectives of project finance in the current global business environment and covers a portfolio of both traditional and innovative sectors.

In the early nineties, these references mark a concrete period in the history of project finance as a separate body of knowledge within banking and finance. With the collaboration of its esteemed Practitioners’ Board, the Hornbook Advisory and Editorial Boards, staff, sponsors and editorial advisors, the ppp-intelligence has made a significant contribution to the study of project finance – not merely by preparing, publishing, distributing and updating various Hornbooks on project finance and concessions, but also by contributing to increased understanding and knowledge of the subject in various ways that support greater efficiency in the management of risk on project financed and public private partnership projects.

Project finance is the most valuable creation in the field of knowledge. When the promissory note has no value, oil can be nothing more than a mere slippery liquid unworthy of any mention.

2. Key Legal Principles in Project Finance

Legal concepts involve key rights and restrictions, which structure lenders’ and other contractual counterparties’ behaviors after the project operates. Legal principles are created to reach a desired commercial effect, regardless of the resulting underlying contracts’ names. Interposed companies, replacing specific contracts with general concepts such as “step-in right,” “operations and maintenance,” or “collateral package,” all are examples of how general principles of law interact to produce an efficient package of project finance legal relationships. The principles of project finance have been codified over many years, such as how lenders may take security in assets exist in the project in ways that are most commercially advantageous to potential lenders. Other legal principles recognize the financial power behind project finance’s various structures and sources, including limited recourse, off-balance sheet treatment of special purpose vehicles, and varying operational assumptions to isolate project risk, credit, and operational risk segments for various substantively different financial and risk instruments. Finally, these general principles are grafted into project finance’s operational structure, which can involve layering subsequent, even sovereign lenders with different risk and contractual agreements such that each separately optimizes its own financial and risk profile. This uniquely efficient asset pricing and funded organizational structure has long been at the heart of successful project finance developments.

For the most part, a project finance transaction requires exclusive legal concepts. These legal concepts have been created in common law jurisdictions over many decades. As the central business terms of a project finance transaction are also limited and typically common in all transactions, such as the revenue streams of the project, the required sources of security for lenders, and the cash flow waterfall, etc., the commercial terms can be agreed by parties from different jurisdictions by reference to these established legal principles. While the radical independence of project finance’s legal principles has never existed in a vacuum, the relatively insulated and isolated world of international project finance has provided for tremendous legal internationalization and workability across countries, regions, and their vastly disparate legal systems.

3. Structuring and Negotiating Project Finance Deals

From a structuralist perspective, a project sorties outside the system, breaking down complex participation into independent components. Each participant is thereby able to assess independently not only the robustness of the venture but also the nature of the relationship in approaching the venture. Instead of contemporaneously and continuously negotiating, participants identify critical transactions and ex ante price, coordinate, and define their risks through a web of contracts, the sum of which shifts and shapes post-formation disputes. The strength of the project delater consolidation of power is illusory within this context, since the robustness of any given part is assessed by independent other parties. Such assessments will use the judicial system among other tools to advance their viewpoints.

Project financing is all about creating a world, both legal and commercial, that harnesses the robust nature of a hard asset capable of independent existence. Though the success of any project finance deal hinges on numerous details and their interaction, abstraction to the particular matrix of interests and constraints charting a workable “deal,” with attention to all aspects of that deal against a rubric of best practices and economics, allows sorting out solutions.

4. Regulatory Framework and Compliance in Project Finance

In addition to tender screening standards, industry-specific and well-defined regulatory parameters need to exist and function. These parameters clarify concerns such as standards, format, and contents of establishable services, the interplay of rights and obligations between the private parties and the commercial and regulatory police, evolving and updating at required intervals modality and flexibility of enforcement, terms of commercial engagement between the parties to the project, and project economics.

The governing authority has historically marked its regulatory role principally through ensuring the private sector’s compliance with laws, regulatory standards, lender specifications, best practices, and social policy imperatives. This entails both legal obligations for the project sponsors and financial or economic inducements for private sector participation in the venture. The state primarily fulfills its oversight function by working with well-defined regulatory agencies corresponding to the various services or utilities involved in the project. This is done through the necessary mechanics-integrated procurement, tendering, and bidding qualifications necessary for the selection of well-qualified technical, engineering, and construction professionals, long-term suppliers of the project output, project sponsors, and the pool of project lenders, investors, and strategic partners.

Project finance is characterized by its capital-intensive and highly regulated nature. It is a transaction that requires navigating through government regulatory and compliance standards that continue to evolve over time to keep pace with the rapidly-changing economic landscape. Regulatory red tape and bureaucratic challenges inherent in infrastructure development and long-term project partnering enjoin a collaborative venture between the private sector and the governing authority to facilitate the realization of shared objectives.

5. Emerging Trends and Future Directions in Project Finance Law

An interesting and important the wide-ranging derivation application relates to the law and project finance. It is clear to even the casual observer that the extraordinary growth in project finance, which has been the hallmark of the past few decades, has been mirrored by equally rapid growth in project finance law – indeed, perhaps more so, given the increasing levels of legal documentation, detail, complexity, and regulation that often make project finance a challenging exercise for even the most sophisticated participants. The implications of this growth for the scope and substance of project finance law are increasingly being appreciated by those who have occasion to be involved with project financings, whether as lawyers or as investors, corporate owners, or lenders to project companies. Many of the most recent offerings in the field purport to expound the current doctrine, to analyze certain aspects of the field in greater detail, or to provide new perspectives or approaches to solve particular problems pressingly faced by the practitioners of the field.

As we have demonstrated throughout this book, project finance has experienced explosive growth over the past few decades. Consistent with this trend, project finance law has recently blossomed as a rapidly accelerating field of legal doctrine. In view of these developments, it should probably not be surprising to find that project finance law is now also spawning numerous derivative issues that have hitherto shown little development. In this chapter, we identify and examine some of the most important of these nascent principles, practices, and perspectives that will undoubtedly shape the development of project finance in the years ahead. While this book captures many of the key developments in project finance law and discusses the new and emerging perspectives in the development of legal doctrines, it is almost certain that other issues will also develop, particularly as the types of project and the legal environment change. The identification of these issues – and the development of pragmatic and workable legal principles and practices to address them – is ultimately the best measure of the maturity of any area of law.