Project Finance

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Chapter no 1


In this modern age of globalization project finance has become one of the pillars to instigate a project whether an industrial project or a factory. A project finance is the financing of a long-term infrastructure industrial project, and public services, based on a non-recourse or limited recourse financial structure, in which project debt and equity used to finance the project are paid back from the cash flow generated by the project. The debt in project finance is not based on project sponsor’s credit or any physical asset of the project rather it is based on technical and economic performance of the project.

There are two types of project finance non-recourse project finance and limited recourse project finance, former is the common project finance, which is predicated solely on the merits of the project.  In non-recourse project finance, project lender’s assessment is therefore based on the underlying cash flow revenue of the producing project contracts, independent of the non-project assets of the project sponsor. A contract in the project finance is essential form of project’s operation because if the risks are allocated in a unacceptable way from the project lender’s perspective, credit enhancement from a creditworthy third party is needed in such forms as letter of credit, capital contribution, guarantee and insurance, (which will be discussed later) forms under a contract which is enforceable and have value to the lender as collateral security. On the other hand, in a limited recourse financing, the obligations and responsibilities of the project sponsor is crucial and the financing is limited recourse (Debt). Whatever the potential risks in the project is determined by the unique risk presented in the project and the appetite of credit markets to accept the risk.


In a structured project finance, project sponsor assumes some uncertainty in the project finance, which in return for a reduction in the risk premium otherwise payable to various contracting parties is called structured project finance. The financing in the structured project finance is not without recourse to the project sponsor because lender will require that the risks not allocated to the various project contracting parties such as non-contractor or fuel supplier be retained by the project sponsor. In project commercial structure, the type of financing structure is selected for a project defines the commercial structure.

Another form of financing is balance sheet financing, in which the company uses retained earnings or short-term debt to finance the development and construction of the facility. Upon completion, when the project requires permanent financing, long-term debt, equity sales, or other corporate finance techniques are used to obtain the needed funds. Wherever, the debt is used, the lending decision is based on the overall corporate balance sheet.

Last but not least, corporate finance is the area of finance that deals with providing money for businesses and the sources that provide them. These sources provide capital to corporations to pay for structural improvements, expansion, and other value-added projects and enterprises. Capital is a good that can be used now. For this lesson, it will primarily refer to money. The purpose of corporate finance is to maximize shareholder value. There are many methods that a corporation can utilize to maximize shareholder value. The philosophy of corporate finance to qualify for balance sheet must satisfy the following criteria:

  1. Whether the corporation has access to the needed capital at reasonable debt,
  2.  whether the project feasibility study project a return on investment acceptable to the project sponsor’s internal investment criteria,
  3.  whether the project risk are satisfactory,
  4.  Whether other types of financing provide greater advantages to the project finance.


Use of Project finance:

Since the age of globalization and emerging market, project finance is the most significant solution for infrastructure, factory, industry and construction especially where the demand for infrastructure far outstrips the economic resources, it provides a financing scheme for important development.

Advantages of Project finance:

  1. Elimination of, or limitation on, the recourse nature of the financing of a project.
  2. Off-balance sheet treatment of debt financing
  3. Leverage of debt to avoid dilution of existing equity
  4. Avoidance of restrictive covenants in other debt or equity arrangements that would otherwise prevent project development.
  5. Arrangement of attractive debt financing and credit enhancement, available to the project itself but unavailable to the project sponsor as a direct loan.
  6. Internal capital commitment policy
  7. Diversification of project sponsor to eschew political risks
  8. Limiting collateral to project assets.
  9. More incentive to lender to corporate
  10. Matching specific assets with specific liabilities.
  11. Expanded credit opportunities.


Disadvantages of Project finance:

  1. Complexity of Risk
  2. Increased Lender Risk
  3. Higher Interest rate
  4. Lender supervision
  5. Lender reporting requirement
  6. Increased insurance coverage
  7. Encourages potentially unacceptable risk taking



Chapter 2

In project finance, risk is the crucial factor that determines the potential ability of project failures. Risk is defined as “Uncertainty in regard to cost, loss or damage”. The importance of risk structuring is to identify, analyze, quantify, mitigate and allocate so that no individual risk threatens the development, construction, or operation of the project in such a way that project is unable to generate sufficient revenue to repay the project debt. To mitigate the risk, it is done by contracting-out-process-allocating risk among parties in contract form. Risk in multinational project financing may be classified into two categories: transnational and commercial risk.  To understand the process of risk allocation, risk matrix is used as a tool that helps to identify the risk and provides in depth understanding of the allocation. Project finance can be nonrecourse or limited recourse, to the project sponsor, the financial responsibility for various risk in a project financing must be allocated among the parties that will assume recourse liability and possess adequate credit to accept the risk allocated.  There are four general risks in the project financing;

  1. Development Risks
  2. Design Engineering and Construction risks
  3. Start-up risks
  4. Operating risks


Development Risk: Development risks is the primary risk that triggers project sponsor and project lender. Risk during the primary stage includes government permit, public opposition to the project and weaknesses in the business framework of the deal. Risks are very high during development stage as potential rewards are high and funds at risk are relatively small, yet, they increase with each day of development.


Design Engineering and Construction Risk: The risk during design engineering and construction risk is usually high fluctuate change in work, change of price during currency inflation, construction delays, material shortage, design changes required by law and strikes. Losses in such stages can be significant particularly for construction lender. For example, if the project is unsuccessful during construction phase, it is evident that the project assets will not likely to pay sufficient debt for construction loan. Therefore, a managed risk profile is incepted during project development, which renders guaranteed completion dates, prices and performance levels. In some projects, construction lenders will require project sponsors to guarantee the availability of funds for project completion, thereby requiring limited recourse to the project sponsors for the construction loan.

Start-up Risks:

It is the most important risk period for project finance because achievement of the performance guarantees through performance tests signals at the end of the contractor risk period. Until this time, the contractor is responsible for almost all construction risks, pursuant to the turnkey construction contract. During the start-up phase, permanent lenders and equity investors, including sponsors require the contractor to prove that the project can operate at a level of performance necessary to service debt and pay operating costs.

Operating Risks:

Operating risks are the risks which instigates in preliminary operation. Each operating risk effects whether the project will perform at projected level, to produce sufficient funds to cover debt service and operating costs and provide a return on equity invested. A typical example of operating risks are decrease in demand for the output of the project, unavailability of the raw material, technical problem, inflation, foreign exchange rates and convertibility, strikes, supply risks, regulatory risks, political change, and management inefficiencies. To mitigate the risk, allocation technique is useful such as take-and pay, off-take purchaser contracts, fixed price fuel and raw material supply contracts and political risks insurance are significant.


Components of Project Finance and Participants:

  1. Project Sponsor: A project sponsor is the entity that coordinates the development of the project. There may be one project sponsor or groups or companies or joint venture companies. The special-purpose entity (SPE) is developed by the project sponsor to enter into the project contracts and own the project assets. The objective of project sponsor includes limited exposure of the sponsors other assets to a project failure by using nonrecourse or limited recourse financing, off-balance sheet accounting treatment, use of high leverage financing structure, flexible with loan agreements, internal capital commitment policies; political risk diversification risk sharing; collateral limited to project assets and etc.


  1. Construction Lender: The construction lender in project finance is concerned with the design engineering and construction risk because completion of the project is a condition precedent to the payment of the construction loan with the proceeds of the permanent financing, or if the construction and permanent loan are part one facility to the repayment of the debt from operating revenues. It is concerned primarily with construction contract including the provision of timely completion and performance at expected level. It is evident that sufficient funds should be available to complete the construction of the project on time and failure to meet the expected time will cause to pay damages or other contracting parties to terminate the contract.


  1. Permanent Lender: The permanent lender are the one which arranges sufficient debt to finance the total construction cost of the project. Permanent lender wants a risk-free project to avoid in paying damages. Permanent lender is one who makes permanent loans on real property. Contrast with construction lender or bridge lender. In the field of commercial properties, many permanent lenders include large prepayment penalties in their loan documents. Permanent lender can also provide loan financing even with a material adverse change to the economic condition of a project participants, provided that the change is temporary. It provides credit support to financing.


  1. Contractor: A contractor is one in project finance that provides available product to the project sponsor. The contractor is obliged to deliver the project at a fixed or predictable price, on a date certain, warranted to perform at agreed levels. There can be uncertainty in providing the delivering causing project to delay such as increase price, environmental risk. The main aim of the contractor is to limit risks of any change in the cost of the project, to provide excuses for delivery.


  1. Operator: The uncertainty that exists between project sponsor and operator is the price and performance of the project. The project sponsor wants to ensure that the operating price is fixed and predictable to analyze while the operator wants to limit price risk. This is an operator used in adaptive control. Essentially, the projection operator makes sure that the parameters being estimated remain within a set.


  1. Technology owner:


Technology owner is not a direct participant in the project financing rather the contractor and Project Company has a license agreement with the technology owner for use of the technology. The technology owner gives guarantee to the technology performance and provides assured for the availability of the technology to the project.


  1. Supplier:

Supplier in the project finance is one that deliveries the material and product to the project where necessary. For example, fuel, raw material and other with acceptable excuses for non-delivery. The project sponsor however, seek predictable price, quality and delivery of the products at minimum price and uncertainty.


  1. Output purchaser: Output purchaser is in the same position as the project company when the project company purchase fuel or raw materials. The output purchaser desires firm price and quality with a minimum uncertainty.


  1. Host Government: The host government is one where project is situated and host government can benefit on a short-term basis from the success of the project. Short-term, the government can use the project for political benefits and for attracting other developer to a country. In long term could enhance economic prosperity. Other benefits includes new technologies and the associated intellectual property, training of the citizens in that new technology, job creation and increased tax revenue.


  1. Other Government- Export and Transit Countries:  A project might requires the cooperation of other countries, besides the host country, for the project success. For example, the fuel supply could be insufficient in the host country, requiring a supply from another country.


  1. Equity Investors: Equity investors brings investment capital to project supplementing equity invested by project owners. The equity can take various forms, including (i) Limited or general partnership, formed to the project company (ii) lessor equity in a single-investor lease transaction (iii) lessee equity in a sale-lease back transaction (iv) stock ownership of the project company organized.


  1. Multilateral and Bilateral Agencies:  Multilateral and bilateral agencies provide resources to the project. Political and governmental funding constraints drive each somewhat.




Chapter No.3


In any project financing, whether domestic or international, the project is subject to the jurisdiction of the government and its action. Thus, this can result in various risks to the project, such as success of the project, cash flows, and operating costs. There are limits on the control a project sponsor can have over the political stability surrounding project, yet, there are techniques to mitigate the risk. Following are some ways to mitigate and allocate the risks;

  1. Project sponsor support
  2. Through guarantees and other credit enhancement
  3. Host-government guarantee
  4. Political risk insurance
  5. Reserve funds
  6. Formation of joint ventures
  7. Participation by bilateral and multilateral institutions in the project
  8. Participation by local banks in financing
  9. Contractual protection (choice of law, international arbitration, offshore accounts and implementation agreements).


Currency Related Risk
The currency-related risk is present in every transnational project transaction. It is a very important risks because in long-term nature of the underlying contracts will materialize the currency related risk. For example, foreign exchange risk arises in a project finance most often because of the differences in the revenue currency and debt and expense currency. In a project, revenue paid will most likely be paid in the host country ‘s local currency. However, the project company incur debt and contractual obligations in another currency. There are three areas where foreign exchange risk instigates; unavailability of foreign exchange; transfer of exchange out of the host country and depreciation in the value of the host country currency.

  1. Unavailability of foreign currency: The risk is concerned with the ability of the currency into foreign change, as predecessor to moving money out of a country. This risk will lead project entity to unable to convert local currency into foreign country in which loan or other payments must be made. To mitigate this risk is to produce revenue in a hard currency. If the government entity is making the payment under the revenue producing contract, this should provide the convertibility assurances needed for the project. Or the project finance entity could be tied to a local export business that generates foreign currency. This is called countertrade. Also, to sign an agreement with the host country in relation to currency convertibility or obtain political risk insurance covering currency of convertibility that can be obtained from organizations such as Overseas Private Investment Corporation (OPIC).


  1. Currency Transferring: The transferring risk arises in which local currency cannot be transferred out of the host country. The government holds key to the gates of transferring the currency. For example, the central bank of the host country converts the local currency into foreign exchange on its books, acknowledges the obligation but refuses to make the transfer out of the country. Also, at times, the host government imposes burden for approvals and conversion fees to complete the transaction. To mitigate such risk in the same way as discussed above.


  1. Currency Devaluation: It is the risk which is used to describe where loan is made in a foreign currency and repayment is made by a borrower with earnings only in local currency. The risk is that the local currency depreciates to a point where the borrower is unable to generate sufficient local currency for the conversion necessary for debt service. Fluctuations in currency rate can also affect what comes into and out of a project the amount of revenue generated by a project; the price of inputs, and the return on equity. Protection against this risk is limited and not covered under insurance policies that protect a project against political risk. However, there some mitigation such as matching revenue currency to debt currency, raising debt in local currency and forward contract with banks.


Thus, in summation to minimize the risk in the project finance, it is evident for the project finance entity to provide payment in hard currency, foreign exchange risk insurance and indexed local currency payments.

Permit, concession and license risk:

  1. Permits: The project company must apply for the permit to develop, construct, start-up, operation and financing of the project. There are various risks that could be surrounded to project finance for not obtaining the permit for ownership because of the law and sovereignty of the host county. To reduce the risk of not obtaining the permit due to some uncertainty, the implementation agreement between the host government and the project finance entity must t agree to the terms as listed below:
  1. Waive all permit requirement
  2. To the extent legally obtainable
  3. Pay the project sponsor any increased cost due to delay of the failure to obtain the license.


  1. Concession and Licenses: The right granted by the host government to a foreign entity to develop, construct, own and operate in manner as the law of the host country. The concession agreement is used in a build own transfer (BOT), in which a private own entity is awarded the right to build and operate a project that would otherwise be developed, owned and operated by the host government. It is a temporary privatization in the sense that at the end of the concession, the project is transferred to the government. The concession agreement allows the host government to retain the control over the management of the project. This, however, allows the host government to regulate the facility, operate and maintain the project finance entity. IN this instance, project sponsor, project lender require certain assurance from the host government.


The risk in incorporating the project finance entity in the host country can be anomalous in terms of its laws, political circumstances and environment. Also, expropriation risks follows the path of political circumstances that are carried out in the host country. Changing in the law risk is very crucial for project finance entity because once the project is under operation, the import and export tariffs can be hurdle for the entity followed by tax laws and custom duties. To mitigate the risk, there should be nondiscrimination clause that should be included in the implementation agreement, to prevent any destabilization to the project finance entity.

In pith and marrow, the legislative and judicial laws should be analyzed before the project finance entity incorporates in a host country because contractual obligations are essential and could lead to pay liquidated damages. Environmental laws, tax laws, trade laws and sovereignty should be considered and negotiated before incorporating a project finance entity.


Chapter no 4

Project finance and Commercial Risks


Commercial risks, besides transnational risk discussed in preceding chapter, involves not only domestically but also includes in international project finance. Following are some risks that involves in commercial risks;

  1. Probability of Risk evolving into a project problem

The risk includes construction cost, completion delays, inaccurate cash flow projection, market problem, political risk and problem inefficiencies.

  1. Due Diligence

Due diligence in a project finance is an important process for risk identification. It is an interdisciplinary process of legal, technical, environmental and financial specialties, designed to detect events that might result in total or partial project failure. Participants involved are lawyers, engineering firms and fuel consultant.

  1. Feasibility study in risk identification

In many project finance, project development has progressed beyond the feasibility study, which gives details about whether the project is financially viable when lawyers are instructed to prepare necessary documentation.



  1. Categories of Commercial Risk:

There are nine categories of commercial risk that is attributable to project failure. Three causes of project failure exists during the design engineering construction phases of the project, a delay in the projected completion and resultant delay in the commencement of cash flow, an increase in capital needed to complete construction and the insolvency or lack of experience of the contractor or a major supplier. The other six risk involves in start-up and operating stages of the project; technological failure, changes in law, uninsured losses, shifts in availability or price of raw material, shifts in demand or price of output and negligence in project operation.



Project finance convolutes billions of dollars for incorporation and the risk involves are very significant in terms of its operation. For instance, credit risk is very essential in laying the foundation of project finance as allocation of risk is worth to those creditors who have potential resources to perform their obligations in project finance. Following are some significant risk involves in project finance;


  1. Increase in construction cost of the project, which is a potential risk for the project. If the project cost more than the funds available from the construction loan, other debt sources, and equity is perhaps the most important risk for the participants in a project financing. There can be various reasons for the enhancement of the construction cost such as inaccurate engineering plans, inflation, and problems with project start up.
  2. Delay in completion:  A delay in project completion may result in an increase in project construction costs and a concomitant increase in debt service costs. The delay may also affect the scheduled flow of project revenue necessary to cover debt service and operation and maintenance expenses. To alleviate such risks the participants could allocate the risk in the following ways, such as fixed price, firm completion date, construction contract, performance bonds, project sponsor completion guarantees, selection of proven technology with which the contractor and operator have experience and reserve funds to cover the cost overrun.
  3. Force Majeure in Construction Contract: International projects includes various forms of contracts and agreements to negotiate the construction contract and other contracts to enhance the viability of the project finance. Sometimes the contracts are negotiated with various lawyers and teams resulting in uncoordinated force majeure provisions. If there is inconsistency in the force majeure clause, then the resurrection clause, be purported which includes that the contractor agrees with the project company where force majeure inconsistencies exist between the contracts, the contractor will not relief available to the project company under other relevant contracts.

The contractor and subcontractor must complete their work on time in order to eschew any liquidated damages. The building material should also be available to avoid the risk of delaying the project. This also provides the material at a reasonable price to furnish the project finance entity to avoid any cost overruns and delays. Commercial risk is very phenomenal in terms of providing resources to the project finance especially in terms of site location and technology, which renders project finance the ability to operate the project at the expected cost. The problems that can arise in such commercial risks is unavailability of site and unproven technology, which ignores the viability of using innovative technology.


The significance of commercial risks also involves shortfall in mineral reserves and raw material for the mineral projects and other could cause enormous delay to the project operation, results in cash flow delay. The off-take purchaser is crucial with regards to the operation of the facility because if the creditworthiness of the off-take purchaser should be enough to enhance the foundation of the project finance. For such production of the off-take purchaser, there are two stages for a project to generate revenue, one is to price, which is reasonable for the purchaser to buy the product, and access to the purchasers for sale of the projects output. This chain relates to all other identified risks to be allocated and analyzed in order to furnish the project revenue. Failure of the project to perform is a risk to project participants, which would results in decreased revenue and operating costs.

The operating of the project facility is essential in a long-term project’s success because the design and processing of the project entity primarily base on the operators performance. The entity operating the project must possess sufficient resources to generate the efficiency of the project at the levels necessary to generate cash flow at projected levels. General operating expenses also matters to operate a facility, for instance, if the general operating risk is greater than the estimated cost, would result in greater risk to the project participants.  For example, inexperience management, unable to obtain permits and licenses, high interest rates, inconsistent force majeure clause and environmental protection laws. 

The commercial risks are very significant in order to analyses and identify in order to mitigate the losses. The technique which is used to curtail the commercial risks are contractual obligations, equity funding must be adherent and insurance. Once all these risks are identified then and allocated then the project finance entity would be able to generate cash in order to repay the creditors.


Chapter no 5

Project finance participants and their roles:


The initiative of project finance comprises of the participants which are as follows:

  1. Project sponsor: The project sponsor is the entity or group of entity, interested in the development of the project and that will benefit, economically or otherwise, from the overall development, construction and operation of the project. It is also called developer. Project sponsor can be one or a group of companies.
  2. Project Company: A project company is the special purpose entity that owns, constructs, operate and maintain the project. There are a lot of factors that involves in Project Company such as local laws of the country, liability limitation, real property in the host country and investors participation.
  3. Borrowing Entity: Borrowing entity is same as that of Project Company which includes funding the project company. There can be a single borrower or multiple borrowers which are used to fund the project. Sometimes combination of project sponsor, project operator and owner forms a joint venture to develop the project.
  4. Commercial Lenders: Commercial lenders includes banks, insurance companies, credit corporations and other lenders to provide debt financing for project. The institutions may be situated in the country where project is based or in the host country. Commercial lenders in the host country sometimes also includes in the host country to prevent any discriminatory actions by the host government.
  5. Bond Holders: Bond Holders are the one who purchases project debt in the form of bonds, and represented by a bond trustee. It is sometimes incorporated as a financial institution that acts as the representative for the bondholders in the managing the debt transaction.
  6. International Agencies: Bilateral and multilateral agencies are also included that funds the project finance entity such as World Bank, International Finance Corporation, regional development banks and other international agencies provide significant support for project financed.
  7. Suppliers: The supplier provides raw material, fuel and other inputs to the project.
  8. Output Purchaser:  The output purchaser is the purchaser of all or some of the product or service produced at the project. In some nonrecourse and limited recourse project financings, the off-take purchaser provides credit support for the underlying financing.
  9. Contractors: Contractor is the entity responsible for the construction of the project, which bears the responsibility in most projects for containment of construction-period costs.
  10. Operator: The operator in the project finance entity is the one who is responsible for the operation, maintenance, and repair of the project. In majority of the projects, project company owners are the operators that is responsible for all the cost and operations.
  11. Financial Advisor: Financial advisor is retained by the project sponsor for the purpose of financial advice and preparation of the memorandum. Memorandum includes all the details of the project technical and economic feasibility.
  12. Technical Consultants: Technical consultants are retained by the project sponsor for the purposes of retaining advice for the project sponsor and project lenders that have limited knowledge of fuel, insurance, engineers and environment.
  13. Local Lawyers: Local lawyers in the host country typically includes for the purpose of purporting legal and political advice for the purpose of the project.



Chapter no 6

Project Finance structures:

The structure of project finance is unlimited by the creativity and flexibility of bankers and lawyers. The structure is based on three macro variables: nonrecourse financing, limited recourse financing, and project output interest financing. The former two provides debt repayment from the cash flows of the project. Output interest financing structures are centered on the purchase of an interest in the project output, which purchase price is used to finance the facility.

Commercial loan financing lends money to the project company for the construction and operation phases of the project. The type of loan is either nonrecourse or limited recourse, the lender receives security as collateral. The commercial loan has two phases, one is construction phase, in which money is advanced under construction agreement, since the project is not generating any revenue, and interest is capitalized. The other is Operation phase, in which operation lender will advance the entire amount, and amount will be disbursed soon the first day the commercial operation instigates. This commercial loan financing helps to initiate the project finance entity, and its cost. Also, there are export credit financing which includes all the cost related to import and export financing, which includes to promote the trade among the countries. Hence, there are import-export financing agencies which provides funding to the project finance entity. There are three types of lending in which export-import bank use to provide load to the project entity, direct lending, intermediary lending (Bank to Bank) and interest rate equalization.


Also, lease financing can provide colossal benefit to the project company in several ways such as control over the project, total financing, lower financing costs tax deductibility of rent, shifting of residual risk equity risk taker replaces lender. It benefits the project finance entity in a way that can take initiative to complete the project on time. Bond financing, is another type of financing which is used as commercial loan, in which the bond holder acts as the agent and representative of the bondholders.


Bot (Building own transfer) is one of the common form of infrastructure development in developing countries because host government provides a concession ( a right to build and operate the project) to the project sponsor, which agrees to build and operate the project for a specified period. At the end of the operation period, the project sponsor either transfers the project to the host government or renegotiates with the government for an extended period of operation. The benefit that host government can take from this is to provide a needed project to its citizenry without an effect on the government’s budget.

Hence, project financing structure are of many types as discussed above and other such as co-financing, production payment and forward purchase agreement which helps to invest in the project finance entity in order to materialize the project. The forward purchase agreement is similar to production payment in which the agreement is signed between the project company and a special purpose entity created by the lenders under which that entity makes an advance payment for the projects production. This advance payment is used to pay project development and construction cost. Sometimes special purpose entity provides grantee for off-take purchaser and take or pay contract for the project finance. After the completion of the project company it delivers goods and services to pay back the money to the production.


Chapter no 7

Selecting of Project finance ownership structure:


Selecting the type of structure for project finance is very critical because it impacts diverse area of the project finance entity in terms of project operation, for example, Project Company will have different rules to operate. To organize a project company is also of a concern because under the laws of the host country or the project sponsor’s organization is to determine the viability of the project finance. There are some pre-development activities that generally begins to full development of a facility. For a pre-development activities, the development agreement must be signed if more than one project sponsor is interested in project feasibility. In the agreement the project sponsor concedes on how to proceeds with an analysis of project feasibility, and how the project will be developed if it is to be proceeds. The development agreement contains some provisions as follows:

  1. Definition of project
  2. Exclusivity
  3. Roles and Responsibilities
  4. Tasks and Schedule
  5. Cost funding
  6. Management and Voting
  7. Withdrawal
  8. Abandonment
  9. Confidentiality
  10. Antitrust and Restrictive Trade Practices


The type of a structure that project finance entity can adopt needs to be determined through some factors that may be considered in determining the entity for project finance as


  1. Need for leverage
  2. Grade of Investment
  3. Tax law and treaties
  4. Project Management
  5. Lender preferences
  6. Transferability of Equity Interests

To avoid any interference of parent company, usually special-purpose entity is created as subsidiary for the purpose of investment and other project activity.

Special Purpose Entity:

Special Purpose entity is created to own the project and no other assets. As a consequences, unrelated, non-project risk is segregated from the project financed. To maintain such protection, there should be special documents that needs to be protected for the purpose of maintaining special purpose entity. There are some restrictions on the entity’s powers to undertake activities other than the project; debt limitations; restrictions on mergers or reorganizations; and maintenance of separateness for purposes of both avoiding piercing the corporate veil and substantive consolidation”.


After fulfilling all the prerequisites as stated above, the project finance entity may choose any structure to best suitable that accommodates the project finance;

  1. General Partnership: A general partnership is a business entity created by and operated pursuant to contract, statute, or both, in which all partners share proportionately in the management and income of the business undertaken.  The liability of the partnership is joint and several liability and does not afford nonrecourse or limited recourse liability.
  2. Limited Partnership:  A limited partnership is similar to a general partnership except that it has both general partners and limited partners. This form of organization of a business entity is available both in the United States and in England. The liability of partner is to a limited to limited partners.
  3. Limited Liability Company: it is similar to limited partnership, liability of the members of the company is limited to the extent of their capital contribution.
  4. Joint Venture: A joint venture is a combination of entities to achieve a common purpose. It is a flexible form of business enterprise that allows the member companies great flexibility in how the venture will be managed and controlled.
  5. Development Consortium: It is similar to joint venture. A consortium is the term typically applied to a group of large, well-capitalized corporations that collectively develop a project. The relationship of the members and regulate day-to-day activities.
  6. European Economic Interest Grouping: It is relatively a new concept for business to enhance economic corporation in the European Community.  EEIG is a business organization of other entities formed under the laws of member states of the European community and that are subject to administration in different member states.



The single-purpose corporate subsidiary is the most common project financing structure. In this structure, the sponsor incorporates an entity, frequently wholly owned, solely to develop, construct, own, operate and maintain a particular project at a specific site. This allows the owners to enjoy limited liability and liability can be forfeited. Although a loss of this liability protection, called a piercing of the corporate veil, is relatively limited in England, and more troublesome in USA. A legal concept that separates the personality of a corporation from the personalities of its shareholders, and protects them from being personally liable for the company's debts and other obligations. This protection is not ironclad or impenetrable. Where a court determines that a company's business was not conducted in accordance with the provisions of corporate legislation (or that it was just a façade for illegal activities) it may hold the shareholders personally liable for the company's obligations under the legal concept of lifting the corporate veil.


Chapter no. 8

Feasibility study is an analysis and evaluation of a proposed project to determine if it (1) is technically feasible, (2) is feasible within the estimated cost, and (3) will be profitable. Feasibility studies are almost always conducted where large sums are at stake. Also called feasibility analysis. Feasibility study is for the project sponsor, who allocates resources pursuant to proposed projects for limited development funds. The study contemplates overall description of the project and its location including surrounding topography, weather, drainage, major landmarks, population, water, access to transportation and housing. The participants in feasibility study and assessment includes contractor, operator, supplier, off-take purchaser, local and central government of the host country and other major participants. Moreover, feasibility study also includes the type of technology that should be used for the purpose of the project and all other sources of infrastructure needs and its availability.

The assessment of the project is very crucial because project sponsor and project lenders can evaluate the project’s risks and potential return in order to pay back the creditors loan.

Economic information is very significant for the purpose of project’s expected construction, operating, and financing expenses. This also purports the estimate of credit enhancement for the project if the project potentially deteriorates the pecuniary measures. The assessment also includes the host government’s risks with regards to political and environmental risks, which estimates the derogatory remarks for the project.

Needs assessment is particularly important for off-take purchaser in order to determine the viability of the product and service that needs to be provided by the project. Further, independent engineer is retained by the project lender to review technical feasibility, which includes;

  1. Engineering and Design
  2. Construction
  3. Start-up
  4. Operation and maintenance
  5. Input supply
  6. Off-take production
  7. Financial projection

Chapter No 9


Environment of the host country is very important to instigate a project finance entity because higher the risk, lesser would be the viability of the project to operate in a situation which involves political risks, social and human rights conditions, economic conditions and legislative conditions. If all such mentioned conditions are at the lowest ebb, then the potential of the project to operate and negotiate with the host government is ignoble. It is evident that complete stability is, of course, utopian. Political stability is subject to institutional and electoral influences. Political stability includes the following;

  1. The degree of stability
  2. Government attitude towards the foreign investment and its needs.
  3. The extent of government involvement in the economy of the host country.
  4. The economic projections for the host country.

Social and human rights violation is crucial for the success of the project because if the violation of political and social groups are at peak, then the success of project finance would dwindle because there would be high atrocities, which could defame the project structure in the long-term.

Besides predictable political stability, project finance requires the establishment of a legal framework for ongoing business. The framework must include the basic legal provisions to accommodate the project needs and fulfill predictable issuance of permits, enforcement of contracts, and reasonably efficient dispute resolution through arbitration.


Chapter 10

The purpose of Economic feasibility study (EFS) is to demonstrate the net benefit of a proposed project for accepting or disbursing electronic funds and benefits, taking into consideration the benefits and costs to the agency, other state agencies, and the general public as a whole. The project sponsor must analyze the financial information necessary to decide whether the proposed project is viable. The economic feasibility includes the following;

  1. Construction budget: the construction budget is the combination of development costs, site acquisition, the construction contract price, construction permit costs, start-up cost, including fuel and other inputs needed to conduct performance testing at the end of the construction period.
  2. Operating Budget:  It is the estimate of the cost necessary to operate the project. These costs include management cost, fuel, raw material, operators fuel, labor costs, insurance, disposal costs, and similar other operating expense.
  3. Debt service cost:  This type of cost includes interest, fees, and other amounts payable to the lender. The economic analysis will provide a general summary of expected debt terms, including, principal amount, fees, interest rate and etc.
  4. Working Capital: A project financing is based on the ability of the project to generate sufficient cash flows to repay the debt. It is evident that at the early stages of the operating stage of the project, no revenue will be generated, might cause 60 day delay between the time, the product is produced or the service is provided. Therefore, economic feasibility study will provide analysis about the funds available until the revenues are generated.


Thus, economic feasibility study is based on the assumption made in the financial projections. Increase in interest rate, inflation, foreign exchange rates, price for fuel, and raw material available to instigate the project in the economic projection could deter.  The economic assumption renders viable sources to evaluate the project’s predictability based on the economic assumption.


Chapter 11


The environmental issue is one of the main issue in project finance entity because as we can see that the World is experiencing some rising temperature and making things difficult to furnish. For example, 2016 is experienced to be the warmest year, rising in global temperature causes heat waves and this leads to countries enact new legislation to curb carbon dioxide from the air and also dwindle the transportation leverage for the people. The significant one is the issue of amending legislation or new laws that might limit the project’s performance and operation, thus, would result in unavailability of the funds to pay the debts. Increased in project construction and operation costs, capital costs related to equipment and maintenance to satisfy new laws and standards of the host country would have significant effects on a project and its sponsor.

In many states, local government and central government are increasingly protective of the environment, particularly in the areas of air, water and pollution to purport protective regulatory authorities, which would indirectly also impact project finance entity. Multilateral and bilateral agencies such as African Development Bank, Asian Development Bank and the Inter-American Development Bank consider protection of the environment a necessary component of their activities.

Environmental Impact:

Before executing the project, project feasibility report renders the environmental consideration for the project finance. In some countries, laws relating to project finance are very diverse, for example, environmental impact and its effects could deter the success of the project finance. To mitigate the losses, there must be structured plans and agencies in the jurisdictions to curtail the effect of environment. The type of information required as follows:

  1. Site
  2. Air
  3. Water
  4. Plant and Animal Habitat
  5. Health Hazards
  6. Noise
  7. Aesthetics
  8. Historic and Cultural Significance
  9. Transportation, Public service and Utilizes
  10. Indigenous people


After purporting all the pros and cons primitive to above mentioned points with regards to environment, then comes the permits, which is essential for a project finance to operate. The environmental feasibility report also contains the identification of all governmental permit necessary to conduct and operate the project. The permit required for the project varies with the type of project, for instance, raw material used, discharges and emissions. Examples of permits that could apply include permits for air emissions, wastewater discharges, ash disposal, hazardous waste disposal and landfill construction and operation.

On the other hand, public opposition can also become obstacle for a project finance entity because public might deteriorate the success of the project finance and opposes for the entity to obtain the permit. Multilateral agencies also put pressure to project sponsors to control the environmental effects of a project, by conditioning guarantees or loan availability on compliance with minimum environmental standards. Consequently, World Bank is under pressure to enhance the environmental conditions in developing countries through its lending and investment activities.

It is very important to analyze the site of the project finance before taking initiative of the project finance. It must be understood thoroughly including historical documents, land documents, and similar information. Developing countries sometimes lack the type of environmental laws commonplace in the industrialized country, whereas the country will enact more stringent environmental protections, at the insistence of its population or through World Bank requirements, is too speculative to answer.

Last but not the least, equator principle, is a risk management framework, adopted by financial institutions, for determining, assessing and managing environmental and social risk in projects and is primarily intended to provide a minimum standard for due diligence and monitoring to support responsible risk decision-making. The guidelines is further divided into three categories such as assessment, management, and documentation.


Chapter no 12


Project Documents include project charter, statement of work, contracts, requirements documentation, stakeholder register, change control register, activity list, quality metrics, risk register, issue log, and other similar documents.  The sponsor will see and approve the project management plan. Generally, contracts are the king in project finance. Documentation is essential in order to trace project finance deals and contracts. With regards to transnational project finance following are some documentation which is crucial primitive to enforcement throughout the world;

  1. Governing law: In some counties, law prohibits selection of any governing law other than the local law.
  2. Forums: Equally important is the selection of the method by which disputes can be resolved and where those disputes will be resolved. The provisions in the forum must make it clear the party’s intention in relation to solving the dispute.
  3. Contract formation: formatting the contract is equally important as governing law because the contract with the supplier and other participants of the project finance will furnish the project utilities in general. Every country has different law with regards to contracts and it varies from country to country, that is why governing laws are very crucial in formatting the contract.
  4. Contract Structure and Validity:

It is evident that many international contracts look identical, local laws determine the element is necessary to ensure validity. The analysis of local lawyers are very essential before executing it to the parties.

  1. Formalities: The reviewing of the local laws are essential and its procedural requirement must be obtained before executing the project finance. Almost every country in the world requires procedural requirement to be sustained before contracting the parties.
  2. Enforceability of Risk Allocation: the most important mistake that team of transnational project finance makes is the allocation of risk and remedies. Liquidated damages payable primitive to delay in completion of the project or any sort of damages may not be enforceable in some counties. Therefore, the review of these provision is essential.
  3. Currency Issue: As discussed currency would devalue the currency of the host country.
  4. Government Action: Unpredictable risks can ignite during the action s of the government and control the project finance entity.
  5. Term: the terms of the contract is sometimes governed by local laws.
  6. Language: The parties should concede on the language they use in the contract and execute it. Although it will be helpful for the parties to choice one language that can be understandable by both the contracting parties.

Moreover, the type of documents are important in a nonrecourse or limited recourse project financing such as;

  1. Organizational document
  2. Agreement with host country
  3. Real property agreement
  4. Construction Documents
  5. Operation and Maintenance documents
  6. Fuel Supply documents
  7. Utility Documents
  8. Off-take revenue agreements
  9. Transportation Documents
  10. Financing Documents

To protect the interest of the project sponsor, it is crucial that the project documentation should be negotiated will satisfy the requirements of the lending community. In this instance, financial cooperation clause shall be incorporated to agree with reasonable demands of a project lender that it imposes conditions to financial closing. Similarly, terms documents contain brief summary of the contracts and its condition including supply for input that helps to negotiate with the host country’s requirement. Completion is another clause that should be incorporated in the contract agreement in relation to the time taken to complete the project, if any delay arises then the obligation to pay liquidated damages also arises regardless of the construction and operation phase of the project.

Moreover, the contract must contain take-or-pay contract where the obligation of the purchaser to pay the contract amount even if no good or service is produced by the project company. It is also called hell or high water. Lastly, the Force Majeure should also be incorporated in the contract because any unforeseeable circumstances that prevent someone from fulfilling a contract. Inconsistent force majeure clause can be cured with resurrection clause, in which the contractor agrees with the developer that where force majeure inconsistent exist between the contracts, the contractor will not receive relief greater than the relief available to the developer under the other relevant contract.

Thus, the clauses above is very important primitive to contract, and any breach of contract clause will result in liquidated damages, or damages. Internationalization is a recently coined term that places its interpretation and enforcement in international arena.


Chapter no 13                                                                          

Representation and Warranty plays an important role in the project financing especially in relation to the project contract. In a contract, facts are traditionally memorialized in the representations and warranties section.

A representation is a statement by a contracting party to another contracting party about a particular fact that is correct on the date when made. A representation can be made about the past or present facts but never a future fact. A warranty, on the other hand, is the duty created in the contract. A representation induces a party to enter into contract and can exist though no valid contract is created. Historically, breach of warranty could be breach of contract and can lead to pay for damages. The remedy for breach of warranty is damages.

The purpose of representation and warranty in project finance contract is to set forth in the contract the factual basis under which each of the contracting parties is prepared to enter into the transaction. Each contracting party sets their goal in the contract deal of the project finance in the representation section of the contract.

The role of representation and warranty is based on the merit of the project finance, representation and warranty section particularly, in the project finance loan agreement provides a checklist of essential elements of project finance. Each element of the project finance is determined and verified, in order to accommodate project finance. When the parties make representation in the contract, the warranty stipulates the viability of the service and its completion. Mechanics of representation and warranties are as follows:

  1. Affirming the Basic Assumption: This includes the formation of the contract in writing between the contracting parties.  This also includes Legal Status and authority to enter into transaction.
  2. Additional Facts Received in Negotiation Process: During the negotiation process the representation and warranties are refined as the contracting parties disclose facts that may present potential problems.
  3. Date Reprenstation and Warranties Are Made: Representation and Warranties are made on the date when the contract is executed, some of the contracts include loan agreements, provide that one contracting party is executed from taking a specified action, such as making further loans.
  4. Materiality and Knowledge Limitations in Representations and Warranties:


The materiality limitation the contracting party accepts from the scope of the representation and warranty those facts that are immaterial in effect. The knowledge limitation, the contracting party limits the statement to only those facts now known, if it later becomes untrue no breach of representation warranty occurs. A materiality limitation is sometimes requested when the contracting party represents and warrants that it is complying with all laws and governmental obligations or that it is in no breach of any agreement.



There are various samples that render ambience to representation and warranty primitive to contract in project finance. The preamble of representation and warranty section announces the representations and warranties made by one contracting party to another party in various contracting clauses such as in formalities agreement, corporation agreement, power and authority agreement, in debt agreement, force majeure clause, project contract, permits, compliance with laws, and completion agreement.  Thus, all such agreements provide representation and warranty in relation to the project finance entity.


Chapter no 14

For a transnational project the involvement of government is crucial in order to regulate the project and satisfy the demands that project needs. It is also important to cherish the economy of the country and take advantage to the extent it benefits both the parties. Preliminary-host country agreement is an agreement through which project finance entity plans with the government to take initiative for the project. The purpose of government patronizing the project with agreement for reform, such as through privatization and enact legislation needed for a project.

Bidding program is a competitive process undertaken by a government that allows for the efficient selection of provider of goods or services in transnational manner, based on selection criteria formulated by the government, for the purpose of selecting a low-cost provider best capable of project completion and operation. Project sponsor do not always look favorably on bidding processes. Although bids limit renegotiation of the contract and also not very successful to achieve their goal. The advantage of bidding process is that it can encourage private sector. The disadvantage is that as this process gets harms by nonpublic opening for bids.

To curb the burden in the bidding process, pre-qualification process should be followed. The process called Request for Qualification (RFQ), which includes qualifications of the bidder, experience, performance in similar project, financial creditworthiness, technical expertise, technology type, and non-financial resources, such as financial experience of managerial, professional and technical staff. The advantage for RFQ is that it limits the number of bidder in the bidding process and refines the process.

Then comes the process of Request for Proposal (RFP)


A request for proposal (RFP) is a document that solicits proposal, often made through a bidding process, by an agency or company interested in procurement of a commodity, service, or valuable asset, to potential suppliers to submit business proposals.  It is usually evaluated on the basis of evaluation and scoring, self-scoring, non-self-scoring, model contract, bid meetings, security, promotion of public bids by agencies, and bidding in the project finance context.

Letter of intent is usually a written expression of getting into agreement with the host country at a later date. The negotiation of letter of intent is also called memorandum of understanding. It is a non-binding agreement.

Concession and Licenses:

The concession agreement is right to develop, own, construct, and operate a project under the authority granted by the host government. The term concession agreement, license, service contract, and development agreement are sometimes used interchangeably. The concession agreement is basically between the project sponsor and the host government, which describes the project and render the terms of the governmental license for project ownership, development, construction, operation and exploitation. The concession agreement contains, terms of the concession, description of project company’s rights, permissible equity structure for the project company, management of the project company, restrictions on foreign ownership and control of the project company, and fixed rate of return on equity permissible for the project sponsors, the manner by which the host government will be compensated for granting the license.  The concession agreement also includes dispute resolution, Example of BOT structure, where private entity is awarded the right to build, own, and operate a project that would otherwise be developed, owner, and operated by the host government. It is a temporary privatization in the sense that at the end of the concession, the project is transferred to the government.


Implementation Agreement:

It is an agreement between the host government and the project sponsor that addresses financial and political elements necessary in a project financing that are absent, or at least predictable in the host country. In this agreement, it is necessary for the host government to provide support and assurance necessary for project development, financing and operation. Thus, implementation agreement is to curtail the risk and foster development effort, capital investment and development in an uncertain environment. Implementation agreement addresses any or all of the following uncertainties:

  1. Sovereign Guarantee
  2. Expropriation
  3. Permits and other governmental Approvals
  4. Currency Concern
  5. Tax Benefits and Customs Relief
  6. Legislative protection
  7. Authorization to do business
  8. War, insurrection, General Strikes
  9. Exclusive Right to Develop Project
  10. General Cooperation for Project Development
  11. Good Citizenship
  12. Enforcement and Dispute Resolution
  13. Constitutionality Consideration of Implementation Agreement
  14. Damages
  15. Stabilization Clause

In support of the above mentioned agreement, host government may also require some additional agreements from project sponsors such as the following;

  1. Infrastructure Development: Land/Air, Transportation, availability, cost, Cabotage
  2. Product or Service
  3. Completion Dates: three types Calendar, Counting and Sunset
  4. Expansion Right or Requirements
  5. Social Program Support
  6. Option to Acquire Raw Materials in the Host country
  7. Importation of Construction Equipment
  8. Price Regulation
  9. Government Owner natural Resources
  10. Local Restrictions on Sale
  11. Export Restrictions
  12. Import Restrictions Employees

Risks that may incur in the future:

Political risks arises in the host government in the form of change of government, change in laws and regulations could deter the progress of project finance entity. In this instance, political insurance risk is provided to a project by an organization such as multilateral Insurance Guarantee Agency, approval must be obtained from the host country. To alleviate the risks involved, the agreement should be binding to the government, if for instance, the new government comes in, has to remain prudent in terms of project finance regulations. Also, the new government should follow the actions of predecessor government.

Waiver of Sovereign Immunity:

By an agreement with the host country, a sovereign immunity waiver is required, which stipulates that Sovereign immunity prevents an allegedly wronged party from brining cause of action, valid as it may be, against a government unless the government consents. This doctrine incepted from England, and no court was above the sovereign of the country. In United States, Foreign Sovereign Immunities Act 1976, allocated to the courts the determination of sovereign immunity. Similary in UK the State Immunity bAct of 1978 contemplates.

Act of State Doctrine:

The act of State Doctrine provides that U.S courts will not consider whether the official acts of a foreign government carried out in its own territory are actionable


Chapter no. 15

Construction Contract:

Construction contract in an internatinal project financin serves to give the project company fully completed and equipped facility. It delievers the product with specified criteria for a fixed or predictable price. The contract requires the contractor to provide all enginerring and construction work including equipment and supplies, and start-up costs.

The contract in a project finance typically includes; a detailed contract,all-inclusive scope of work, a fixed price for all the work necessary to complete the project, performance gurantees and warranties, liquidated damages for failure to satisfy the demands of the project, performance tests to confirm completion, and assurance of financial creditworthniess of the contractor.

The allocation of risk betweent the project company and the contractor is essentail beccause construction cost in the project financing must be allocated to a creditworthy contractor, the risks involves the following;

  1. Increase in construction cost
  2. Delay in Completion
  3. Performance Guarantees
  4. Force Majeure International Construction Contracts
  5. Experience, Reputation and Resources of Contractor
  6. Building Materials
  7. Raw Materials Supply and Utilities
  8. Coordination

It is evident that to alleviate all the risks associated with construction contract, would only be effective if the contractor is creditworthy. It must have sufficient financial resources, both at the time of contract execution and during performance, to undertake the obligations in the contract.  There are four types construction related contracts;

  1. Engineering contracts: it provides special assistance in project design, bidding and review, and administration of the work.
  2. Procurement Contract: It provides for the orderly procurement of work and supplies for a project. The contract includes architect/engineer to establish bidding procedures for machinery, equipment, material, and supplies to perform an economic analysis of the bids and administrating accounting records.
  3. Construction Contract: it governs the complete construction of the contract.
  4. EPC Contract:  the Engineering, procurement, and construction) contract combines the three stages of construction under one contract. It is sometimes called a fast-track contract, in that it enables progress on a project to proceed on an overlapping basis, at a faster pace than if the three stages followed in series.

 The type of contract also varies, it could be fixed price contract variable price contract. The latter contract is usually when there is an inflation in the host country, while the former one is based on a fixed sum to construct a project. Cost plus fee Contract, is the contract where Project Company pays the contractor the costs of construction, plus a fee. While the construction company is more likely to receive a lower construction cost. Cost PLUS fee Contract with incentive is another type of contract, which purports that the modified version of contract by adding a maximum price and an incentive fee payable to the contractor based on their performance. Provisions in the contract are included that limits the contractor to keep the cost low. If the cost increases, the contractor usually absorbs the cost.

Typically provision of the construction contract includes scope of the work, a detailed listing of each of the contractor’s and the project company’s responsibilities, compensation and payment terms, subcontracts, acceptance and performance testing, changes in the work, rejection of work, warranties, title to work, remedies for breach, performance and warranty bonds, insurance, dispute resolution, indemnification, assignment, suspension of work and termination and force majeure clause.


Chapter 16

Input Contracts


Input contract is essential for project finance in order to generate cash from the entity. Contracts that represent the cost of fuel, supply of raw material and other inputs to the project company are of a particular importance because these contracts affect cash flow. In some projects, long-term contracts is not necessary because supply and transportation are widely available. But where needed, supply or pay contract is often the structure used, in which, supplier agrees to provide goods, such as fuel, or services, such as fuel transportation. If it cannot provide the available goods and services, then supplier either manages to provide from alternate sources at its expense or pay damages to the project finance company. In some projects as discussed above, that it is not necessary for a contract because availability of the goods and services. Some important risks that might give rise to the project company from input contract are as follows:

  1. Increase in Input Costs
  2. Delay in Completion Transportation
  3. Availability of Supply
  4. Disruption in Transportation
  5. Force Majeure in International Input Contracts
  6. Experience and Resources of Input Supplier
  7. Quality

As discussed above the risks that can be involved in input contract, there are number of input contracts depending on the type of Project Company Entity;

  1. Fixed Amount: In this type of Contract, the supplier agrees to provide services at a fixed amount and the Project Company agrees to purchase the product at a specific amount agreed. This gives no party any uncertainty for the change of amount.
  2. Requirement Contract: This type of Contract allows the project company to only purchase those supply and transportation service that it requires.
  3. Output Contract: An output contract requires the supplier to supply and sell to the project all of its production or output from a specified sources, but there is no assurance for the project company that the output will be sufficient to provide the requirements for the facility.
  4. Spot Contract: Under Sport Contract, the project company agrees to purchase the services on the terms available in the market at the times of purchase.
  5. Dedicated Reserves: In certain circumstances, where project feasibility is sensitive to input costs, supply or transportation availability, the supplier is required to set aside input reserves for use only by the project. For example, coal, gas reserves.
  6. Firm versus Interruptible: Firm contract requires an input, such as fuel, be supplied and transported to the project without interruptions in favors of other customers. Interruptible contract favors the needs of contract holder.
  7. Subordination of Project Costs to Debt Services:  It is a technique where supplier to the project input, such as fuel, may be asked to forgo the receipt of a portion of its payment in certain negotiated scenarios. These subordination costs would be pain, if at all, in the further when debt service payment are no longer in jeopardy.
  8. Commodity of Supplier as Project Partner: In this type of Contract, the supplier in the project company is the partner, can greatly reduce input price risks.


Generally, in United States Courts hold parties responsible for their contractual obligations Lowa Electric light & Power Co v Atlas Corp, the court requires a supplier of uranium to perform the contract it has entered with a utility, thought the price to the supplier had increased substantially. If the price has increased as predicted or the contract is a long-term contract the reliability of creditworthiness is extremely important. It is evident that before the execution of the contract, sufficient financial resources should be analyzed. If there is no alternative of credit enhancement is available then supplier or transporter must be substituted.  


Chapter no 17

Operation and Maintenance Agreement:

A project sponsor has two options either to operate the project itself or retain a project operator to operate the project. Self-operation can only be successful if there is one project sponsor with operating facility to the project.  This requires Operation and Maintenance agreement, which is similar to construction contract as discussed above. The Operation agreement must provide its facility to the project sponsor that it requires to operate even in international project company. The agreement is based on the performance criteria and operates at a fixed or predictable cost. There are certain risks associated with operation and maintenance agreement as well, for instance, if the estimated budget exceeds funds available from project revenue, then there will be a significant risk in a project financing. In this instance, the potential credit resources must be analyzed before executing the agreement. The operation and maintenance agreement includes the provision such as detailed scope of work, fixed or variable price for all of the work necessary to operate the project, performance guarantee, liquidated damages for failure to satisfy performance guarantee, and a showing of creditworthiness of the operator because creditworthiness determines the strength of the contractual undertaking as a risk mitigation instrument.

There are certain risks that would instigate during the operation and maintenance agreement as mentioned below;

  1. Increase in Operating Cost
  2. Performance Guarantee: If not then liquidated damages payable, which is the estimated payment by the operator and Project Company of the consequences of deficient operation by the operator of the project. Liquidated damages compensate the project company for increased operating costs.
  3. Force Majeure in International Operation Contracts: If the operator is excused from operating the facility under force majeure clause but the project company is not excused if its obligation to deliver under an off-take agreement, the project could lose its revenue stream. Inconsistent force majeure clause can be cured with so-called resurrection clause. In which the operator will not receive relief greater than the relief available to the project company under other relevant contracts, particular off-take contract.
  4. Experience and Resources of Operator: If operator has low commitment to the industry must be substituted.
  5. Raw Material Supply and utilities: Must supply the raw material within the acceptable range of the project company. Responsibilities lies with the operator.
  6. Coordination: Even if the contract is completed the operator must coordinate its operation activities with other activities at the site, such as at a site used by a manufacturing company. Without coordination, the risk of construction delays and operating costs overruns increase.

To curtail the risk, the only factor to take into account before executing the contract is the operator is creditworthy or not to undertake the contractual obligation. There are certain of operation and maintenance contract as discussed below:

  1. Fixed-Price Contract: This is very rare in project finance to operate it in a fixed sum
  2. Cost-plus fee Contract: under this contract, the owner pays the operator the actual costs of project operation incurred by the operator, plus a fee. In this instance, the owner is most likely to receive the lowest operating costs.
  3. Cost-plus-fee Contract with incentive fee: This contract is modified by adding a maximum price and an incentive fee payable to the operator based on cost or budget performance. In this instance, the operator is required to keep the cost at the lowest ebb possible. If the cost exceeds the maximum price guarantee, the operator absorbs the cost.


Chapter 18

Project Finance Off-take Sales Contract:

The off-take sales contract is the agreement that provide the revenue flow to a project. These are the agreements, in which Project Company sells its product or services. In a long-term contract creditworthiness is essential but not necessary in nonrecourse or limited recourse project financing. There are six types of off-take sales contract as discussed below;

  1. Take or Pay Contract: It refers to contractual obligation between a purchaser of a facility and a project company, in which purchaser agrees to make payments to the project company for the goods or services produced at the facility. Under this structure, off-take purchaser makes payments for capacity whether or not the project company actually generates the good or service at the purchaser’s request. The price can be fixed or variable.
  2. Take and Pay Contract: Under this contract, the purchaser is required to take and pay for the project output or to pay the project company as if it did take the output. However, the buyer is only obliged to pay if the project company has actually produced and delivered the product or service. If the purchaser does not want the output, it is not required to do so.
  3. Blended Contract: Under this contract, the payment of the purchaser are required in specified cases of service interruption. Such payment can be loan or advance payment, which is the project company then credit against service provided later.
  4. Long-term Sales Agreement: In a long-term contract between the project company and a purchaser agrees to purchase specified quantities of the project’s output. The term of the agreement usually five years.
  5. Spot Sales: It is the contract to sale at the market price existing at the time of sale. Such sales are sometimes pursuant to a contract or purchaser order.

The usefulness of the contract to both the project company and the lender depends upon enforability, the fundamentals of contract law that must be applied. There are certain risks that could rise and deteriorate the productivity of the contract as mentioned below:

  1. Commercial Impracticability: It is important to note the distinction between impossibility and frustration (often called impracticability or commercial frustration). Impossibility involves cases in which a party is unable to perform due to a supervening event occurring after execution of the contract. The doctrine is embodied in U.C.C 2-615 provides the performance under a contract will be excused if the party has not assumed the risk of some unknown contingency.
  2. General Contract theories: General mistake, basic assumptions and unconscionability.
  3. Output and Requirement Contract: Sometimes the off-take purchaser is frustrated based on the services provided by the project company. A requirement contract is an agreement in which the project company promise to sell and deliver all the buyer’s requirement of specified goods, and the buyer promises to refrain from buying comparable goods from any other supplier.


Chapter no 19

Power Sales Agreement:

In a power project, Power sales agreement or power purchase agreement is usually refers to the purchaser calls it, is the linchpin of an energy project financing. It sets the obligation of the project company to produce power for sales and for the power purchaser to buy it. The funds will not flow unless the power purchaser is creditworthy, therefore, before executing the contract, the purchaser must have potential resources to purchase the power from the project company. Of course, for fuel supply and transportation negotiation has to take place between project company and project contractor. There are some ingredients to fulfill the performance criteria of power project contract as discussed below:

  1. Completion milestone: to complete the project on time is crucial and to meet the power needs of a power purchaser by a date certain are important to power purchaser. Condition of precedent must be conceded before executing the contract such as energy tariff negotiation, rate of approval, securing important permits, execution of construction, fuel, and operating agreements, evidence of insurance, financial and equity closings, construction completion, and satisfactory facility testing and necessary documentation.
  2. Approval of Project Contract: It is one of the most important aspect of the project finance, that the approval from host government is crucial before executing the project. Reviewing the terms of the agreement before executing is essential because if the agreement is for long-term contractual relationship, there is a probability that of fluctuating the terms of agreement because the condition of the host country, may not be the same.
  3. Financial Closing: Financial closing is important for power project to instigate the construction of the project finance. Because project construction will not proceed until financial closing has taken place and the project lender advances funds for that purpose.
  4. Penalties for Missed Milestone: If anyone of the milestone is missed it is important for the parties to report it to the power purchaser about the missed milestone and the course that will be followed, of course, for the milestone missed there is a special remedy to be paid which is monthly damages payment. For missing milestone will be delay entry into commercial operation, shortfall in nameplate capacity and failure to conduct facility.
  5. Commercial Operation: The ability of the power project to produce safe, reliable power to the power purchaser.
  6. Force Majeure: In an event where there is none ability for the power purchase agreement to perform its function, which would cause delay in the project, in this instance, power purchaser should have ability to provide through other sources of power where there is no delay.


The delivery point and interconnection between the power purchaser and the power project shall be facilities with delivery point, interconnection facilities, and power of eminent domain, land rights, and wheeling. On the other hand, price for the power must be adequate in a way that the contract signed between both the parties must be take-or-pay contract or take-and-pay contract for the purchase of electricity. Further, there shall be capacity of the power purchase structure to produce sufficient energy for the purpose of the agreement. It is evident that the power purchaser and the project company have the capacity to produce energy payment.

Capacity payment is the payment which allows project sponsor to pay debt service payments and fixed operating costs. The variables of capacity payments are fixed or variable cost, floor, front-loaded, back-loaded, levelized.

Security and Commitment of Project Sponsor:

The revenue for a project company is crucial for its success, it is evident that if both the power project and the power purchaser cannot pay the required amount as in the contract, then creditworthy is important such as letters of credit, performance bond, and cash escrow accounts. Following are some mentioned essential factors that needs to be considered before executing the project;

  1. Security for performance
  2. Project-based Security: it’s a lien of project company
  3. Minimum Equity Undertaking
  4. Cash and Letter of Credit

Payment method also contain procedural provisions for the billings and payment of amount due under the agreement. There is also incorporation of Terms and termination of the agreement between the power purchaser and the power project which ceases at the remedies. There are some technical standards which includes safety and reliability of the power purchaser’s facility. Also, there are metering, operational procedures, regulatory out, insurance, power purchaser responsibilities.

Following are some risk allocation;

  1. Construction.
  2. Cost overrun
  3. Delay failure to perform standard
  4. Operating
  5. Fuel
  6. Market

In some projects, the power purchaser is responsible for fuel delivery to the facility. Once, the fuel is delivered, the Project Company is then required to produce energy with the fuel, and sell the energy to the power purchaser. This is called tolling agreement.


Chapter No. 20

Credit Enhancement

In project financing, credit enhancement is obligatory as it is to improve the most severe equity and lender risks in a triage of project financing risks identified. In order to use particular form of credit enhancement, the utility of each type of credit enhancement device must be considered in relation to several factors, including the term of the device selected, the cost, and the difficulty of and time necessary for, enhancement. The purpose of credit enhancement is essential to satisfy a lender or equity investor that a risk is covered varies based on the financial community’s perception of risks at any given point in time.

  1. Guarantees: It is a guarantee is a mechanism that permit the entity to invest capital without becoming directly involved in the operation of a project. It depends upon the creditworthiness. The Guarantee has further divided with sponsor, third party, contrast to Put Options, Collateral.
  2. Transnational Guarantees: It includes Varying Interpretation of Terms, Payments and Currency Risks, Tax Implications.
  3. Foreign Law: A choice of law provisions is critical to the enforceability of the guarantee.
  4. Limited Guarantee: This type of Guarantee includes: Limited Guarantee is an amount or time can be used to provide the minimum enhancement necessary to finance the project. Claw-back guarantee is provided by the project owners, including the project sponsors and any passive equity investors. It requires that they return cash distributions to the project company to the extent required by the project for such things as debt service, capital improvements, and similar needs. It also has cash deficiency, completion, the risk with unlimited guarantees.
  5. Indirect Guarantees: It is based on the credit of none of the project participants. It has take-or-pay contract, Take-and-Pay Contracts and other forms.
  6. Implied Guarantees: it is important to provide assurances to the lender that the “guarantor” will provide necessary support to the project, underlying credit. It is generally not binding. Second is Comfort Letter: In this the Guarantor addresses a risk concern to the lender.
  7. Letter of Credit: It is a device of credit enhancement, which is an agreement that substitutes the payment obligation and creditworthiness of a mores solvent party, usually a bank, for the payment obligation and creditworthiness of a less solvent party, such as insufficient to pay the project company. It protects the project company’s failure to perform some obligation, such as a payment or performance obligation.
  8. Commercial Insurance: Commercial insurance is an important credit enhancement tool in a project financing. It also includes, Loan payee, reinsurance, waiver of subrogation, collateral Security and other insurance issues. The type of Commercial Insurance includes: Contractor’s All risks, Advanced Loss of Revenue, Marine Cargo, Marine Advanced loss of Revenue, Operators all Risks Operator’s loss of revenue, third-party Liability, Employers Liability Compensation, finite Risk, Trade Disruption.


Political Risk Insurance, B loan Programs, and Guarantees:

There are many ways to mitigate political risk as discussed in chapter 3, such as capture hard currency revenue streams offshore, thereby reducing currency transfer and convertibility risk. There are some solution through international and national agencies to reduce the host-government interference with a project’s ability to repay private-sector debt. Another option to repay the loan is by a bilateral or multilateral agency to repay the loan.

  1. Multilateral Investment Guarantee Agency: It includes Multilateral Investment Guarantee Agency (MIGA) which fosters the flow of investment for productive purposes among member countries, supplementing the activities of the International Banking.  It encourages the foreign investment in member countries by producing insurance yet it renders limited insurance against currency inconvertibility and transfer, expropriation, war, and civil disturbances and breach of undertakings by the host government. It covers equity/debt. It also provides currency inconvertibility risk coverage for losses due to the inability to convert local currency into foreign currency.
  2. International Finance Corporation: It is affiliated with World Bank to promote private enterprise in the developing world. It also provides losses to inconvertibility of the currency, IFC provides “B Loan” program some protection against the currency inconvertibility and currency transfer risk. A B Loan is a loan made by the IFC, or any other multilateral agency, that is participated out to other lenders but administered by multilateral agency.
  3. World Bank: it provides loan made by commercial lenders to the private sector in certain developing countries. It also provides losses to currency inconvertibility and currency transfer, expropriation, war, revolution and civil disobedience, breach of undertaking by Host government.  
  4. Inter-American Development Bank: It also provides the same benefits as above.
  5. Overseas Private Investment Corporation (OPIC)
  6. United States Export-Import Bank


Indemnification Obligation: It is a contractual Obligation which allocates may be liable for a loss, as contrasted to placing this responsibility with a court. In the absence of indemnification in project finance contract does not necessary relieve party of indemnification liabilities.

Sovereign Guarantees: It is a guarantee within the host governmental control must sometimes be addressed through a sovereign guarantee. The host government provides guarantees to the project company that if certain events do or do not occur, the government will compensate the project company. The scope of a sovereign guarantee depends on the unique risks of a project. The sovereign guarantee section in an implementation agreement may take various forms including (i) direct undertakings to the project company, such as a guarantee of an off-take purchaser’s obligations under an off-take agreement (ii) political risk buy-outs (iii) comfort language, indicating the host government’s support for the project (iv) commitment to reform law and regulations to support private energy development (v) setting tariffs that permit recovery of cost.

Implementation Agreement: It is an agreement between a project developer and a host government that, in an effort to reduce risk and thereby encourage development efforts, capital investment and debt, primitive to sovereign guarantee, expropriation, permits and other governmental approvals, currency concern, tax benefits, legislative protection, war, insurrection and general strikes, authorization to do business and general cooperation.


Chapter No. 21

Financing Sources for the Project

The project finance entity should have various sources to furnish the requisite requirements for the purpose of contract, construction and operation. In this instance, the project sponsor and host government constantly monitor the availability of debt and equity as affected by the unique goal and risks involved in particular. It is sometimes prudent for project sponsor to pursure alternative financing schemes for the same project, such as commercial bank financing with bilateral or multilateral support. In a nutshell, all financial availability shall be consulted before implementing the project, for instance, equipment of supplier, multilateral agencies, bilateral agencies, which may provide financing as guarantee.

  1. Banks and Institutional lender: Commercial and institutional lenders are an obvious choice for financing need. Domestic banks are less suitable to patronize the project because interest rates are very high.
  2. The Equity market: Equity market is often raised in the stock market, where buyer and seller meet together. It has two branches Domestic Equity market, which has access to significant amounts of funds for infrastructure projects. Potential sources include sales of equity interest and issuance on stock market, sale of equity interests to institutional investors and sale to individual investors. The other one is International Equity Market, which provide access to significant amounts of funds and limited to large, multinational companies. There might be some limited access to developing countries because of legal restriction. Private placement of equity is relatively easier, in US SEC rule 144A allows qualified institutional investors to buy certain securities not registered with SEC.
  3. The Bond Market: Bond market is usually the most risky market of the potential financing project. Bond market are established in USA, Japan and United Kingdom and in Asia and Europe is emerging in market. Bonds are usually sold to individual investors and to institutional investors. When bonds are issued to the public, based on the rating by a recognized rating agency. For example, standard & Poor’s, Moody’s and Duff & Phelps. Rating is a new concept and it primarily reflects the prospect of timely repayment. The factors that needs to be considered in Bond market rating is sovereign risks, currency risk, political risk, legal contract risks, and market for output and credit strength of the output purchaser. Credit rating is a time consuming but most successful when the process instigates. The advantages of Bond Market includes access of large and liquidated market, Longer term of debt, less onerous terms, while disadvantages include, regulatory oversight, rating, consent to changes negative arbitrage and expensive transaction cost.

According to Rule 144A debt placements has restricted secondary trading of private placements by providing flexibility in resale of security issued in private placements. Rule 144A is a Securities and Exchange Commission (SEC) rule modifying a two-year holding period requirement on privately placed securities to permit qualified institutional buyers to trade these positions among themselves. QIB is an entity that owns and invests on a discretionary basis at least $100 million in securities of unaffiliated Companies, including securities issued or guaranteed by the United States. The advantages and disadvantages is same as that of Bond market.

Investment funds are also provided by International Financing Corporation affiliated with World Bank, which helps to assist the development of specific projects throughout the world. These institutes are very fruitful to the project because they help to overcome the risks involved. The World Bank originally operated to help the member countries to borrow the money, which lacks creditworthiness to borrow at attractive rates. As it is the agenda of the World Bank to assist in the development of the territories of members by facilitating the investment of capital and promote private investment for productive purposes.

The International Bank for Reconstruction and Development (IBRD) also provide monetary funds for infrastructure and other industrial related contracts for project finance. This works with the association of World Bank in providing several of services to the project. The primary focus of the World Bank to enhance the investment of private sector. The World Bank grants loan about US$17 billion to 20billion, to member countries to subscribe to shares based on the strength of its economy. Following are some ways in which World Bank render loan for project finance;

  1. Loan Program: The borrower is unable to secure a loan for the project from another source on reasonable terms. It is lenders last resort.
  2. Guarantee Program: With the loan guarantees are also permitted. The Bank must receive in return an indemnity or counter guarantee from the host country.
  3. General Requirement: Financial support in the form of loan or guarantee is preconditioned, which is likely hood of repayment. Also, the economic evaluation of a project analyzes the economic costs and benefits of a project in the host country.
  4. Enclave Project: In certain circumstances, loans are made by the IBRD to IDA only countries. This situation will emerge only when the resources are insufficient.
  5. Indirect Support: World Bank support is crucial because it has particular power and support to influence the business sector in emerging countries.
  6. Negative Pledge: IBRD does not take any security primitive to loan the project finance, however, it does impose a negative pledge on IBRD borrowers in its loan agreements.

Similarly, there are other international institutes which are ready to support the project finance such as International Monetary Fund (IMF), International Development Association (IDA), and International Finance Corporation that have an objective to “promote economic development, increase productivity and this raise standards of living in the less-developed areas of the world including IDA members. Also, encourage economic development by encouraging growth”.

The benefits include, catalyst for participation by other entities, political risk protection, status as last resort investor, ability to invest in the private sector, flexibility in investment form. There are some regional development banks as well that helps to support the project finance entity such as African development Bank, Arab Fund for Economic and Social Development, Asian Development Bank (ADB), European Bank for Reconstruction and Development (EBRD), European Union (EU), European Investment Bank (EIB), Inter-American Development Bank (IADB) followed by Nordic Investment Bank, Nordic Development fund and OPEC. Further, there are also some bilateral agencies mentioned below:

  1. Organization for Economic Co-operation and Development (OECD): agreement ti support export credit. Method for lending includes direct lending and bank to bank or Interest Rate Equalization (Provide loan below a market rate).
  2. U.S Export-Import Bank
  3. Overseas Private Investment Corporation
  4. Export Development Program
  5. Global Environment Facility
  6. Development Loans
  7. Financing from Project participants

Chapter no 22

The Offering Memorandum

After the commitment of debt from financial institutions, the project sponsor prepare an offering memorandum, which explains the potential of project lender. Offering Memorandum sometimes used to raise equity for investment in the project. The offering memorandum includes the following;

  1. Project overview
  2. Borrower
  3. Project Sponsors and their involvement in the project
  4. Debt amount
  5. Uses to Proceeds: The manner in which loan proceeds will be used is important part of memorandum
  6. Collateral: Identity of collateral, and special collateral consideration
  7. Sources of Debt and Equity: total construction budget and working capital, start-up, pre-operation cost
  8. Equity Terms: Type of Equity, dates on which equity will be contributed, manner of funded, side by side construction loan, at completion of construction, also includes description of agreement that equity investors will execute to memorialize the equity contribution.
  9. Cost Overrun: How cost overrun will be funded, contingency account, a completion guarantee by the project sponsors, an explanation of fixed-price.
  10. Other Sponsors and Credit Enhancement
  11. Interest Rate; This section is left blank
  12. Repayment and Debt Amortization, mandatory and optional prepayment:
  13. Fees: Closing fee, underwriting fees
  14. Covenants
  15. Defaults
  16. Governing Laws
  17. Lawyers, advisors and Consultants

Chapter no 23

Project Finance and Debt Commitment Letter

Most project finance credit transaction instigates with the preparation of term sheet. The term sheet describes the main outline of the deal, negotiation process between the lender and the project sponsor. There is a difference that exists between letter of intent and a commitment letter. Following are some discussion on loan process in a project financing, from loan application, through the letter of intent to the commitment letter.

  1. Approaching the Project Finance Lender for Business Advice;
    Sometimes, project sponsor approaches project lender for some advice primitive to project finance and the contractors and their appropriateness in the business. The questions include, whether it is appropriate to finance, whether the project is financeable, and whether a contractor has a good reputation. There is no fiduciary relationship between a project sponsor and project lender unless project lender benefits from the transaction at the expense of the project sponsor.  
  2. The Project Finance Loan Application, Process instigating date: Project lender has no obligation to accept loan application for a project financing, if it does they lender has a duty to process and evaluate the request. The way it incepts is project sponsor circulates to potential lender offering memorandum describing the project to be financed, its terms, due diligence information and copies of important documents.
  3. The Letter of Intent- Showing Interest without a Commitment: It is sometimes called, alive and well in the world of project finance. Many lenders use this type of letter to evidence the interest in providing project financing to a project sponsor. Project lender may even do so, even the potential internal guidelines have not been satisfied, such as presentation of the potential financing for approval by the lender’s credit.
  4. Oral Commitment: AS the project lender and the project sponsor negotiating a commitment letter, project lender avoids to make an oral commitment to lend. Because oral commitment binds a lender


The Commitment letter is a document, in which the bank makes its formal offer to its customer to lend money. Commitment letter has many common factors as summarized below:

  1. Scope of the Commitment: terms of the commitment may change based on due diligence. Project sponsor will want this type of clause to be removed or limited scope.
  2. Loan Amount: The loan amount in the commitment letter will specify the aggregate amount of the loan the lender is agreeing to provide.
  3. Use of Proceeds: How the borrower can use the loan proceeds, including the explanation of the funds used to construct a project. It means how fund will be used.
  4. Repayment Terms: It is important to include the interest rate, method of interest rate calculation, frequency, of repayment, the amount of repayments, and the maturity date and otherwise include the amortization schedule.
  5. Representation and Warranties: Representation and Warranties are required for loan documentation once the detailed listing of the letter gets approved.
  6. Covenants: Agreement detailed are included in commitment letter for loan agreement.
  7. Events of Default: This provision requires specific event in the case of default that will be included in the loan documentation. For example, failure to pay, bankryocy, breach of covenants.
  8. Conditions for closing: this provision is very important and explained in board perspective, because it governs the time at which the lender is obligated to advance funds. Once bank and the borrower signs the commitment letter, each has a duty to close the financing in good faith.
  9. Terms: The commitment letter generally contains the expiration date. That is, all of the conditions to closing must have been satisfied by the project sponsors on or before a specified date. The project sponsors continue to be liable for the lender’s costs and expenses.
  10. Non-disclosure; the confidentiaty of the commitment letter is important for the lender. From a business perspective, the lender does not want the borrower to shop the commitment letter to other lenders, revealing confidential pricing information.
  11. Expenses: Regardless of whether the financing closes, each of the project sponsors are usually jointly and severally responsible for all the expenses incurred by the lender in negotiating and closing the project financing. These include the lender’s out-of-pocket expenses and the expenses and charges of its consultants and lawyers.

The lender should include a material adverse change (MAC) so that the lender can decline the closing of financing, or at a minimum renegotiate terms, if a material adverse change occurs to the developer, a major project participants or the project cause. The letter should be reviewed by the project finance lawyers and other consultants.



Chapter no 24

Credit and Related Documentation:


It is evident that in a nonrecourse project financing, lenders base their credit assessment on the project revenue from the operation of the facility, rather than the general assets or the credit of the project sponsors, and rely on the assets of the project, including revenue producing contracts and cash flow, as collateral for the debt. Contracts are the essential element in the project finance to make payment to the project company on the delivery of some products or services. Contracts, such as operational contract, construction contract, off-take agreement, site lease, must not interfere unduly with the expectation for debt repayment from project revenue. If the risk is allocated in an unacceptable way, then the third party credit enhancement is necessary from a creditworthy party. Commercial lender in every project finance conduct a detailed review of the project and analysis of a proposed project before the decision is to lend is made. While the intensity, scope and methodology of the credit analysis varies from institution to institution yet there are some fundamentals that almost every bank applies to credit decision as follows;

  1. Experience and Reputation of Project Sponsor
  2. Experience and reputation of Project Management Team
  3. Experience and Resources of Contractor
  4. Experience and Resources of Operator
  5. Predictability of Price and Supply of Raw Materials to be Used for Project
  6. Predictability of Price and Supply of Energy to be Used for the Project
  7. Market for Product or Service
  8. Terms and Enforceability of Off-take Contracts
  9. Completion and Cost Overrun Risks are Addressed
  10. Technology
  11. Real Estate
  12. Construction of Related Facility
  13. Permits and Licenses
  14. General Operating Expense
  15. Currency Exchange Risk
  16. Timing and Certainty of Equity Contribution
  17. Equity Returns for Equity Ownership
  18. Value of Project and Project assets
  19. Interest Rate
  20. Force Majeure
  21. Project Specific Risk

Protecting the lender from the project risks, as discussed above the anaylsis that commercial lender adheres before inception of a particular project, following are some points where the lender can protect himself from the risks associated;

  1. Due Diligence
  2. Assignment: Contract as assignable to lender as collateral
  3. Control over excess cash-flow
  4. Approval of Contract Amendments
  5. Restriction on the sale of project interest

Before lender money to the borrower, the borrower must satisfy the conditions precedent. Condition to closing are designed to ensure that the closing dates does not occur unless and until each of the elements of a feasible project are in place or waived by the bank. These include economic, technical, permit compliance, enforceable project contracts, adequate collateral agreement as viability of the project.

  1. Conditions precedent to closing:
  1. Execution and Delivery of credit agreement and Related financing documents
  2. Lien fillings and possession of certain collateral
  3. Availability of Funds
  4. Sponsor Support Documents
  5. Third party Support Documents and Credit Enhancement
  6. Host-Government Concessions and Guarantees
  7. Off-take Agreement
  8. Supply Agreement
  9. Construction Contract and Issuance of Notice to proceed
  10. Operation and Maintenance Agreements
  11. Permits
  12. Issuance of Consultant Report
  13. Real Estate
  14. Financial Statement of Project Company, Project Sponsor, Guarantors, and Major Project Participants
  15. Revenue and Expenses Projection
  16. Engineering Report
  17. Consultant’s report
  18. Environmental Review
  19. Legal opinions
  20. No Litigation, no default

All these above mentioned provisions shall be certified and submitted to the project lender to assess the project expected cash flow in the future. Once the project construction loan has been disbursed, the lender typically has the ability to approve subsequent drawdown based on condition precedent. This will provide that the company is in compliance with loan agreement at the time of new agreement. These include construction schedule compliance, absence of cost overruns, permit compliance, absence of liens and continuing adequate collateral arrangement.

Reports on Project Construction is necessary as it will provide overview whether the project is to be completed in time or not, status of equipment orders, deliveries and installation, minute of construction progress meetings, force majeure events and expected date of completion.

In the event default such as failure to make payment, infringement of contract, misrepresentation, failure of lien creation, perfection, or priority, a judgment being entered against the project company and insolvency or bankruptcy. There are three types of remedies, funding remedies, retention remedies and foreclosure remedies. Funding remedies helps to stop additional loan advances to the project until a problem is solved. Retention remedies permit the lender to require the establishment of cash collateral accounts by the borrower, mandate prepayments of debt, and otherwise restricts distributions by the project company to the project sponsor. Foreclosure remedies area available to lender. This includes traditional enforcement rights of any secured lender.

Chapter no 25

Export-related documentation for project finance Transactions


Like Commercial lenders, export-import financial agencies also based their credit appraisal on the project revenues from the operation of the facility, rather than the general assets or the credit of the sponsor of the facility, and rely on the assets of the facility, including revenue-producing contracts and cash flow, as collateral for the project debt. Export-import agency is a political creature as to formulate trade and other interest of the organization in the host country. 

The member of organizational for Economic Cooperation and Development (OECD) signed the arrangement for guidelines to patronize the credit, which is also called OECD consensus. The OECD renders guidelines and limits the term of export credit. Each of the member of OECD limit export credit up to 85 percent of the underlying contract value. The method for export-import financing are mentioned below;

  1. Direct Lending: In this type of lending, borrower is the importing entity and lender is the export-import bank. Loan is conditioned on the purchase of goods and services from the business in the host country.
  2. Financial Intermediary Loan: In this type of loan, the export-import banking provide funds to the bank in the organizing country, such as commercial bank, which in turn the loans to importing entity.
  3. Interest Rate Equalization: in this structure, the commercial lender renders loan to the importing entity at below-market interest rate.

The significant provisions of the project finance export credit agreement includes currency of loan, Right to prepay, Conditions precedent, representation and warranty, covenants, events of default.


Chapter no 26


The structure of project finance like most assets based transaction, is centered on the assets of the borrower. Like all lenders, project finance lenders take collateral from a borrower so that if the loan cannot be repaid the collateral can be used to repay the debts. Collateral can be used as follows;

  1. Collateral As defensive Tool: For project lender it is a defensive tool to get payment in case of default or liquaidation or any other instance that occur to project finance. Project lender desires to take control of the assets necessary to finish construction, operate the project, or sell the entire project to another entity that can operate the project and apply the proceeds ahead of all other creditors to repayments of its loan.
  2. Collateral as offensive tool: It can be used as offensive tool as well, for instance, where projects are mismanaged in such a way that the project has value and can be sold to a third party at a price that permits the lender to recover the loan advanced.
  3. Uncertainty in Collateral Protections Available to Lenders: There are some uncertainty that arises in terms of creating security interest in transnational projects. The significant of collateral whether the collateral law in the host country permit the lender to foreclose on and complete construction of, or operate, a troubled project.

The collateral package includes the blanker lien (Which covers all the assets of the project company, each asset is necessary for the construction, owner, development, construction, start-up and operation of the project), Project cash flow (It’s a long-term agreement that lender takes security interest in the cash flows generated by the project), Personal property ((All personal (moveable property) of the project company is usually part of the project lender’s collateral), Intangible assets, Permits, licenses and concessions, Contracts, Insurance proceeds (project company will provide project lender with insurance of the physical assets to protect from damages), surety bond, guarantees, liquidated damages, political risk insurance, accounts, and real property.

The collateral documents include:

  1. Person Property Security agreement
  2. Mortgage, trust deed
  3. Pledge of Ownership interest: Project lender takes pledges of ownership interest in the project company to react quickly in an event of default.
  4. Voting Trust
  5. Offshore Accounts
  6. Disbursement Agreement

Negative Pledge is an agreement, on which project lender relies, between the project lender and the project Company that the project company will not create, directly or indirectly, any security interest, lien, or encumbrance on its assets for the benefits of other entity. It provides project lender some sort of surety that no other lender or third party will interfere the project’s assets and with its rights to repayment.

Floating Lien is another type of protection given to project lender. Project influx overtime, new laws, assets are being created and amended. Common law lien enables project lender to take a security interest in all of the projects company’s assets existing and acquired. This concept is unavailable in many countries.

Under U.C.C s9-406 a security interest in the project financings are structured to provide the lender with an immediate assignment of revenues due under the revenue producing contracts as permitted under the section. Under this section, a secured party is required to notify the account debtor to make all payments due to the project company to a project operating account held by the lender for the project company. The lender is directed to transfer funds from the operating account to pay debt service and operating expenses. Excess funds are distributed to the project owner. This section is significant because project lender might have some desire that project is not operating pursuant to the expectation, will take direction possession of funds.

In pith and marrow, it is evident that the collateral is for the security of the project lender in case, the project cash flow does not produce sufficient revenue to pay the debt. There are some types of collateral that must be given to the lender after closing, such as  Offshore accounts, intercreditor agreements, Insurance, commercial insurance and waiver of subrogation.

Chapter no. 27

Governing the project Company, Stockholder, Partnership, Joint Venture and management Agreement:

As discussed early in the previous chapters, a project company is often owned by one or more than one entity. Each with differing financial, management, and operational resources. For example, one project participants might have excellent skills of construction and planning while other with mitigation of risks.

  1. Stockholder agreement: A project financing might require an agreement between the owners of the project companies. Flexible agreement is essential because project might not be able to produce sufficient resources to operate. The provisions that must be included are: Management voting, development stage, financing responsibilities, construction stage, operating stage financing, working stage, additional capital, right to sell stock and rights of other stockholders.
  2. Partnership agreement: Whether general or limited partnership, it is selected by the participants of project company. The provisions include, name of partners, management voting, terms, development stage, right to transfer partnership interest, joint and severally liable.
  3. Joint Venture Agreement: Joint venture agreement will govern the interaction among the participants. It is, by nature, a contractual entity. It has similar provisions.
  4. Management Agreement: It must include, as it has appointed manager to manage the project. The duties include, preparation, dissemination, administration budget, financial and technical record keeping and reporting, supervision of construction, disbursement of construction funds and insurance program.

Chapter No. 28


Bankruptcy in relation to project participants in another country with assets creates a complicated risks for creditors. The risk includes whether other countries recognizes the proceedings, because there is no universal code of bankruptcy proceedings. There are two types of theories primitive to bankruptcy protections when a debtor’s creditor’s assets or both are located in another country as discussed below;

  1. Universal: Countries where bankruptcy laws on a universal approach is based, embraces the theory that the law of the country is paramount in which the bankruptcy is pending. All debtor’s participants are required to participate in proceedings.
  2. Territorial: Countries which embrace territorial proceedings consider bankruptcy law to apply only within the boarder of a country. Therefore, a debtor with multinational operation would purse bankruptcy proceedings in several countries.

Some countries embrace both territorial and Universal theory of Bankruptcy and local bankruptcy is supreme. There is very minimum of international cooperation in bankruptcy law and policy.

US law on bankruptcy is paramount and it’s universally accepted, to protect the assets of US debtors. There is less indulgence of foreign creditors with US laws. However, a foreign creditors will be prevented of receiving a distribution in the U.S bankruptcy proceedings until all US creditors are paid an equivalent amount.

Suppose the project finance debtor, with assets in US and in the host country, files for bankruptcy protection in the host country. Under U.S bankruptcy law, the foreign bankruptcy proceedings representative is permitted to being a section 304 ancillary proceedings. In this proceedings, the representative can ask the court to enjoin action against a foreign debtor or its property and to deliver to the foreign representative the foreign debtors property located in United States. The court can also grant relief, as appropriate. The U.S bankruptcy court will be guided by what will ensure an economical and expeditious administration of the estate, consistent with several factors, which includes treatment of all holders of claims against or interests in the estate, protection of claim holder in United States against prejudice and inconvenience in the proceedings of claims in the foreign proceedings.


Choice of proceedings:

The debtor considering property in multiple countries will need to decide where to seek protection or ti file for bankruptcy. The law of each country where property is located will need to be determined where the proceedings should take place. Some countries do not recognize foreign bankruptcy laws. A debtor with multiple properties in different countries decides to file in one country, the proceedings and may be able to achieve bankruptcy protection in other countries by pursing ancillary proceedings in other country, such as section 304 of the U.S Bankruptcy code permits ancillary proceedings in U.S subsequent to a foreign bankruptcy protection filing.


For a international project, the solution would be reorganization agreement. This is an agreement amongst lenders and equity investors of a project, together with the major contracting parties, setting forth an overall procedure for reorganization. Under the agreement, no lender will begin an action to collect debt from a project company without affirmative vote of a percentage of creditors. Of course some mechanism of vote is necessary, and again a vote of an agreed upon percentage of creditors could be the only authorization needed. The term of this debt should be structured in advance. This is the only way, in which project participants could achieve long-term loan is through project operation. Pre-negotiated agreement is necessary if reorganization is to occur. This is because many diverse interests in a project financing- export bank. Political risks, commercial banks, a contractor, an operator, an off-take purchaser, a host government, and so forth- may make a structured reorganization impossible.






Chapter No.29

United States law Affecting Foreign Investments:

The bribery of government officials is prohibited in many countries especially in United States. The US law called Foreign Corrupt Practices Act of 1977 applies to project financing. The FCPA out-law bribery in any instance whether it’s domestic or international. It makes corrupt practices as illegal whether to officials or agents of the government and it requires accounting practices to accurately reflect payments to foreign officials and agents. FCPA was amended in 1998 as a result of combating foreign corrupt practices in international business transaction. OECD also limit corrupt practices, but it does not limit the payment to political candidates or political parties in the transaction. The amended provisions are mentioned below;

  1. Anti-bribery Prohibition; The FCPA makes it illegal to bribe foreign officials. It applies to four main categories: Issuer of securities regulated under section 12 of the Exchange Act or that are required to file reports under section 15 of the Exchange Act; Entities organized under federal or state law, entities with their principle place of business in the United States, national or resident of United States. It also applies to officers, agents, employees or stockholders acting on behalf of the entity. It restricts any business activity whether in domestic ambit or international or directing business to any person is safely prohibited in any circumstances.
  2. Accounting Provisions: FCPA also requires to satisfy the provision of accounting standards primitive of issuing securities. These standards shall require transparent accounting standards, books, and records shall fairly reflect the transactions of the corporation. Internal accounting standards should be designed and implemented to preclude any diversion of assets or other prohibited use of funds.
  3. Multilateral Agency Anti-corruption Prohibitions: The illegal activity wave also affected multilateral agencies to have transparent laws to prevent any corrupt practices.

The provisions of FCPA purported that there needs to be five elements present in order to satisfy the corrupt practice as follows;

  1. Corrupt Intent
  2. Interstate Commerce and Act in furtherance: The Act also prohibits the use of mail or call or any means of instrumentality of interstate commerce in furtherance of the prescribed activity. Thus, in any situation, any phone call or mail delivery will satisfy this requirement.
  3. Offer, Payment, Gift or Promise of Money or a thing of Value: Any device to alter human behavior.
  4. Foreign Official or foreign Political Party
  5. Exceptions and Defenses: Facilitating payment to low level officials of government is an exception, Payment authorized by local law, Promotional Expense Reimbursement, (Payment, which is directly related to the promotion, demonstration or explanation of a government officials or to a foreign official is excepted, Payment to US subsidiaries Corporations, Enforcement and Penalties (Criminal Penalties are up to $2million may be imposed against a firms for violations of the FCPA, while officials, directors, stockholders, employees and agents are subject to a fine of upto $100,000), avoiding violation of the FCPA (provide Training to all officials of government against FCPA, Due Diligence shall be undertaken, Company should undertake good-faith effort only, any misconduct occurs it should be ceased and investigated), Problem of local partners, document drafting Consideration (careful drafting can help negotiate and educate the parties about possible problems), every project finance company should represent and warrant that they have carefully read the United States Foreign Corrupt Practices Act.  

Furthermore, there are various laws that have been working in order to restrict bribery and any corrupt practices undertaken by the Companies in domestic as well as in international paradigm. For example, Securities Exchange Act of 1934 which requires that publicly traded companies disclose any material fact necessary in order to make statement made not misleading. The Mail and Wire Fraud Act make illegal the use of the mail or any interstate or international electronic communication to execute any scheme to defraud or to obtain money or property by means of false pretenses. The Internal Revenue Code section 162C (1) disallows deductions of payments made to foreign government officials if the payments would have been illegal under U.S law had they been made to U.S government officials. Section 952 and 964 of the IRC treat bribes paid by a foreign bribery of a corporation as a dividend to the U.S parent. Moreover, Currency and Foreign Transaction Reporting Act, transaction over $10,000 in currency or any suspicious activity. False Statement Act.

US has complex set of rules that restrict business arrangements by U.S companies on geopolitical grounds. Such as Trade Embargo Regulation, which is controlled by Office of Foreign Assets Control (OFAC) administers embargo applicable to foreign destinations. Also, terrorist States, Export Restrictions and Exon-Florio Amendments are in place to limit illegal activities.

Chapter no 30

Local Lawyers and Local Law;

Local lawyers and local laws of the host country is an integral part of the project feasibility report. Local lawyers are crucial for the success of the project company situated in host country and following points must be addressed in order to accommodate the local lawyer.

  1. Need and Time: Finding aesthetic lawyer and qualified for company advisory. There is a need of time in order to furnish the insight of the local law through a lawyer.
  2. Identifying Competent Lawyer; to find a large law firm is the referral that project company shall be valuing because all large law firms have capabilities of insight to international law and establishes local offices in foreign countries.
  3. Criteria for Selection: the criteria shall include competent in local and international language, experience in project finance, experience in the industry, and experience with foreign client, integrity, and reputation in general both locally and internationally.
  4. Managing Local Lawyers: Preparation of a written scope of work. Managing fee calculation.


The paramount of project sponsor is to deliver an opinion of its local counsel at closing. The opinion will further be addressed to project lender, which further renders him comfort about the governance of local law of the host country. Ironically, lender would require insight of concession rights, obligations, and the procedure to cure defaults under concession; permit necessary for project construction and operation of their status and lenders interest in collateral. All such issue are significant because it is in the best interest of the project lender and it would be imperative for local counsel to explore these issues with the project sponsor every early in the project development process.

Opinion of Legal Counsel on permits and Approvals;

  1. Purpose: to own, develop, construct and operate the project
  2. Status of Permit, approvals and Concessions
  3. Change of Law
  4. Right to lender
  5. Renewal
  6. Typical problems Encountered and Closed


Sher Afghan

Sher Afghan

An experienced legal professional (LLB, BCom & LLM) with a reputation for integrity, innovative thinking and a proven understanding of the law and legal system in New South Wales and Lahore. Aside from a lawyer, I am a Confident communicator and writer who is able to liaise directly with statutory agencies and non-statutory agencies, Research Societies, Educational institutions and other legal and non-legal parties.