Financing of Infrastructure Projects: The Role of a Project Finance Counsel

Presentation by

Mohit Saraf Partner

Luthra & Luthra Law Offices

Overview

• What is Project Finance?

• Role of a Project Finance Counsel • Public Private Partnership • Financing • Risk Matrix • Project Finance Requirements Requirements L&L/NLS 2

What is Project Finance ?

• There is no strict definition but as per the international practice the definition below could be used • Project Finance is financing the development or exploitation of a right, natural resource or other asset where the bulk of the financing is not be provided by any form of share capital and is to be repaid principally out of revenues produced by the project in question L&L/NLS 3

Role of a Project Finance Counsel

• Risk allocation and mitigation through Negotiation and Documentation among the project participants • Minimizing residual risk with the SPV • Balancing conflicting interests of various project participants • Achieving successful Financial Closure by ensuring fulfillment of Project Finance requirements L&L/NLS 4

Role of a Project Finance Counsel (Cont’d)

• Structuring of Project Vehicle • Tax Structuring • Ensuring regulatory and statutory compliances L&L/NLS 5

Public Private Partnership

• Structures – Build Operate Transfer (BOT) – Build Own Operate Transfer (BOOT) – Build Transfer Operate (BTO) – Build Own Operate (BOO) – Design, Construct, Maintain & Finance (DCMF) – Design, Build, Finance & Operate (DBFO) – Disinvestment L&L/NLS 6

Financing

• Project Financing vs. Balance Sheet Financing vs. Asset Financing • Project Financing • Source of Finance – Commercial Banks – Financial Institutions – Export Credit Agencies & Multilateral Agencies – Capital Market L&L/NLS 7

Finance Risks Promoters Lenders Market Risks Supplier Shareholder’s Agreements – Credit Agreement – Security Documents Supply Agreement Offtake Agreement Insurances Insurers – Concession Agreement – Consents Government Construction & Operation Risks Project company Construction Contract Operating and Maintenance Agreement Contractor Operator Offtaker

L&L/NLS 8

Risk Matrix

• Completion Risk • Technological Risk • Supply Risk • Market Risk • Financial Risk • Political Risk • Environmental Risk • Force Majeure Risk L&L/NLS 9

Project Finance Requirements

• Hate surprises; will not accept risks which are either incapable of proper assessment or which are potentially open-ended in their effect • No change in law risk • No discriminatory taxation • Minimise “risk-dumping” on project company • No liability for consequential loss • Contracts must survive enforcement of Banks’ security L&L/NLS 10

Project Finance Requirements -

Consents

• Consents must last for duration of project • Regulators should not be able to vary the terms of consents unduly • Consents should inure to project and not just to project company • Government Support Agreements L&L/NLS 11

Project Finance Requirements -

Promoters

• All equity contributions to be provided up-front • Promoters to provide cover for cost overruns • Promoters to provide cover for gaps in undertakings including insurance.

L&L/NLS 12

Project Finance Requirements -

Concession Agreement

• Terms of concession fixed for life of project • No unduly onerous terms on project company • Extension of term for

force majeure

• Compensation for termination must repay debt • Concession should survive enforcement of security • Transferability of concession on security enforcement L&L/NLS 13

Project Finance Requirements -

Construction Contract

• • Turnkey fixed price contract • Fixed completion date

Force majeure

, price increases and completion must back to back with concession agreement • Adequate liquidated damages for late completion • Performance Guarantees L&L/NLS 14

Project Finance Requirements -

Operation & Maintenance Contract

• Proper incentives to run project properly and profitably including penalties for failure to meet targets • Ability to remove operator for poor performance L&L/NLS 15

Project Finance Requirements -

Supply Contract

• Security of supply and remedy for interruptions • Take or Pay obligation L&L/NLS 16

Project Finance Requirements -

Off-take Agreement

• Full pass-through of capital and variable costs • Foreign exchange protection • Take or Pay obligation • Credit enhancement including Government Guarantees L&L/NLS 17

• Why Security?

• Security Package – Key contracts – Physical assets – Revenue – Insurance • Direct Agreement – Cure & Step in Rights – Substitution

Security

L&L/NLS 18