As we have seen above, a project finance transaction involves a whole matrix of contracts that all need to work together to ensure that the project is built and operates as intended in order to achieve cashflows to repay the senior debt and provide a return to project investors.

From the government’s perspective, they will want to ensure that nothing in the finance documents impacts on the project company’s ability to perform its obligations under the concession agreement, or will impose greater liabilities on the government than it has agreed to bear at the time of signing the concession agreement.

There are a number of areas which a government, finance parties and the project company should consider when negotiating the finance documents:

(a)        the parties will want to ensure that the regular payments under the concession agreement are sized to cover the senior debt – this will be the case at financial close, but deductions for performance issues will impact on the amount the government pays the project company by way of availability payments, or lower than modelled traffic numbers will impact on project revenues. This will all need to be dealt with in the pre-financial close financial model (by testing the outcomes of poor performance) and in the finance documents (the lenders will typically prohibit distributions to project investors where the project isn’t performing to encourage them to take active steps to remedy the performance issues);

(b)        how the completion date is defined under the concession agreement – the lenders will want the completion date definition in the finance documents to match the concession agreement definition to ensure that post completion obligations in both documents apply at the right time;

(c)        when can the government terminate the concession agreement for delays in the completion date? The lenders will want to ensure that this is later than the point in time they are permitted to exercise step-in rights under the direct agreement with the government (see section 5.5). The lenders will want the opportunity to remedy any issues before termination of the concession agreement;

(d)        should the government be liable for increased obligations of the project company to the lenders as a result of changes to the finance documents after financial close? The government will want to restrict its liability only to those obligations it has contractually agreed to take on at financial close. It is common for concession agreements to include wording restricting the government’s obligations (e.g. to pay compensation on termination) only to obligations in the finance documents originally entered into;

(e)        is there a mismatch between the currency of project revenues (i.e. payments under the concession agreement or tolls) and the currency of the senior debt ? If the obligations don’t match the project company may have to execute currency hedging in order to pay the lenders;

(f)         is any government support required? For example, is the government required to give a guarantee (e.g. if there is a government offtaker), are any tax concessions required, is subsidy required for lower than forecast users of the project?

(g)        are there any restrictions on enforcement of security by the senior lenders, for example, they want to transfer shares in the project company to a third party but the law requires some local ownership of the project?

(h)        how should any insurance proceeds in respect the project be applied e.g. in reinstatement or in prepayment of the senior debt? The government will want the project to be reinstated and the concession agreement will provide for reinstatement in most circumstances but the lenders may want proceeds to be applied to prepay debt, particularly in a total loss scenario. There may need to be a joint insurance account for the benefit of both the lenders and the government into which proceeds of insurance are paid pending agreement on reinstatement or prepayment;

(i)         what should the government pay on termination and will this cover all amounts owing to the senior lenders? The lenders will require the compensation on termination payments to cover the senior debt. See further, section 4.6(b);

(j)         the lenders will usually expect the project company to grant security over its rights under the concession agreement. This is not usually controversial for the government and the documents will need to provide for consent to that security;

(k)        the interaction between the events of default under the concession agreement and the loan agreement – the lenders will want to ensure that the concession agreement provides for termination if there is a continuing event of default under the loan agreement in order to obtain compensation on termination from the government. This is usually included as a contractor default in the concession agreement;

(l)         the lenders will want a direct contractual relationship with the government in respect of certain matters – it is common for the government to enter into a “funders direct agreement” with the lenders.