Material Project Parties

The main parties to the documents, other than the finance parties, will usually be called the “Material Project Parties” given their importance to the transaction. Default by or insolvency of these parties will lead to a default under the loan agreement.

(a)        Project investors

The project investors are the ultimate shareholders of the project company. They will invest equity into the project. See section 5.3 for a discussion on the equity arrangements in relation to a project financing.

The project investors may be third party investors who have no other involvement in the project other than the contribution of equity, or they may be the “sponsors” of the project with an interest in the construction and maintenance arrangements through other of their operating subsidiaries or in any offtake or supply arrangements.

It will be important for both the lenders and the government to be satisfied that the project investors have the specialist expertise to undertake the project, in terms of the delivery of large scale projects on time and on budget.

Given the specialist expertise of the project investors, the lenders and government will also want to ensure that the project investors remain involved in the project until a point in time when the project is performing in accordance with forecast expectations. To achieve this, the project investors will be required to retain their equity ownership until at least some years after construction completion.  The concession agreement and the equity contribution agreement (referred to in section 5 below) will provide for the change of control of the project company.

The project investors may hold their investment in the project company through one or more holding companies. These may be interposed between the project investors and the project company for a number of reasons e.g. tax structuring. It is common to include a holding company where the project investors are restricted from granting security under their own corporate financing arrangements, but the project finance lenders require security to be granted over the shares in the project company. In this scenario, the holding company will grant the requisite share security.

(b)        Government

The government will be required to grant a concession (which is, in effect, a licence) to the project company to construct the project and derive a profit from it once completed and for a set period thereafter.

The project may require governmental consents, or indeed legislation to be passed, in order to proceed. Further, the government may need to grant tax concessions and rights to the intended site of the project (which may need to be compulsorily purchased from third parties). The government may be required to provide some form of government support for the project.

(c)        Project company/borrower

As we have seen above in section 3.3(c), the project company is usually a special purpose vehicle set up specifically for constructing and operating the project. It will have no assets outside of the project and no established history of trading. The project company will also be the borrower under the loan agreement.

The form of the project company will often depend on the legal framework of the host country. Certain jurisdictions may prescribe the structures required for foreign investment, for example, it may be that a certain percentage of the project company’s equity has to be held by local participants in order to satisfy foreign investment laws or to enable hard currency profits to be transmitted abroad. It may be that the project company does not need to be incorporated in the host country and, if so, the project investors may decide to incorporate the project company in a tax-efficient jurisdiction.

(d)        Financial Adviser

If a financial adviser is appointed by the project investors, it will provide advice on the bankability of the project and the structuring of the financing. It is usually a bank experienced in project finance. It will also prepare the financial model which is used to assess the financial viability of the project and any information memorandum which will include a detailed description of the project for potential funders to the project.

(e)        Construction contractor

As mentioned above, the construction contractor will often be a subsidiary of a project investor (although not in every case). It will be responsible for ensuring that the project construction completes on time and will enter into a construction contract with the project company. See further, section 6.1 below.

(f)         Operator

As mentioned above, the operator will often be a subsidiary of a project investor (although not in every case). It will be responsible for operating and maintaining the project for the duration of the project term. It will enter into an operating and maintenance agreement with the project company. See further, section 6.1 below.

(g)        Suppliers

Significant suppliers may be relevant to the transaction – this is less common on infrastructure projects compared to other sectors e.g. renewable energy transactions. Where they are relevant e.g. municipal energy from waste transactions, the key is to ensure a long term and certain source of supply from a reputable and reliable supplier, with financial support in the event of any failure to supply.

(h)        Offtakers/purchasers

On many infrastructure PPP transactions, the “offtaker” will be the government paying the availability payment for the finished asset e.g. hospital or school. On some transactions e.g. municipal energy from waste transactions, the identity of the offtaker will be important because they are the main source of revenue for the project. The key is to ensure a long term and certain offtake contract with a creditworthy entity, with financial support in the event of any failure to take or pay for the power or product.

Finance Parties

(i)         Arranger

Where there is a loan financing, the arranger is the lender or financial institution mandated by the project company to arrange the financing. It will also typically be a lender. The arrangers (there are usually more than one) will be brought in by the project company before the other lenders to structure the financing in a way considered attractive enough to encourage other lenders to participate (e.g. in terms of margin, commitment fees, tenor, types of facilities). The arranger will take an active part in negotiating the credit and security documents. The project company will pay the arrangers an arrangement fee for their services.

(j)         Lenders

Most project financings are so large that they will need to be syndicated. This means that the debt will be shared by a number of lenders. The arranger will approach other lenders to participate in the funding. The identity of the lenders will depend on a number of factors:

(i)         does a bank want to transact in that sector and/or jurisdiction?

(ii)        does a bank have a relationship with the project investors that would encourage it to lend?

(iii)       does the law of the host country restrict who can lend e.g. are local banks required to lend, or hold the security assets?

(iv)       will any multilateral development banks or export credit agencies be involved (see below)?

Lenders on project finance transactions are usually very experienced in the market. Project finance lending is very different to corporate lending as we have seen above with an entirely different risk profile and the potential to make significant fees. Some banks do not have the appetite for such long term risk.

(k)        Multilateral development banks (MDBs) and development finance institutions (DFIs)

MDBs are institutions such as the World Bank, African Development Bank and the European Bank for Reconstruction and Development or other of the international agencies established to assist in the development of economies. MDBs will support governments in the development of projects through risk mitigation products such as political risk cover, or in other ways (e.g. direct lending, providing funds for government support).

DFIs are bilateral, regional or multilateral institutions that are supported by developed countries with a mandate to provide finance to private sector participants to promote economic growth and support social development. These are institutions such as the International Finance Corporation and European Investment Bank.

Many large infrastructure PPP projects involve MDBs or DFIs Their involvement is advantageous to the project company because they typically charge lower interest rates than commercial banks and they can lend for longer tenors or their presence attracts further private finance either because of the direct support provided by these entities e.g. by way of guaranteed financing or through their indirect support (preferential creditor status on insolvency of borrowers or political pressure they can bring to bear on the government).

(l)         Export credit agencies (ECAs)

ECAs are institutions (often public or quasi-public) that provide government backed support (loans, guarantees and insurance) to encourage the export of goods from their home country. For example, JBIC (the Japanese ECA) may lend to a PPP project for the supply of Japanese built trains.

Their assistance takes the form of guaranteeing loans to be made to the exporter or the purchaser of products, insurance cover for projects (either for political or commercial risks or both) or, in some cases, direct lending to a project.

(m)       Agent

The agent will usually be one of the lenders. In this capacity, it carries out a mainly administrative role and is responsible for co-ordinating drawdowns, dealing with communications between the parties, serving notices, calling meetings and disseminating information.

It is not the agent’s role to monitor the performance of the project. Each lender will have to do that itself.

The agent is paid an annual fee by the project company. Given the significant information flow on a project finance transaction, the fee will be higher than on a traditional corporate finance transaction.

(n)        Security agent or trustee

The security granted in respect of the project will usually be granted in favour of an agent or trustee, which holds the security on behalf of all the funders from time to time. Using this structure means that changes to the lender group (e.g. transfers by a lender to a new lender) will not result in a discharge of the security or necessitate new security to be granted.

The security trustee/agent is often one of the lenders but may also be an independent trust company. Whether the project has a security agent or security trustee will depend on whether the relevant jurisdiction recognises the concept of a “trust” (as a general rule common law jurisdictions typically do, but civil law jurisdictions do not). A discussion around this is outside the scope of this section.

Other Parties

(o)        Experts and advisers

Technical experts will be engaged by the lenders to review all critical aspects of the project. They will undertake a technical feasibility study, which will analyse the technology backing the project. Lenders are extremely cautious before lending against untried technology. Lenders will also be keen to ensure that the local infrastructure is capable of supporting the project.

The lenders’ technical adviser will advise on all aspects of project construction, confirming if milestones are being met and that the project is being constructed in accordance with the agreed parameters. They will usually provide a technical report to the funders before any money is lent and will then report on a monthly basis during construction.

Other advisers may be required depending on the project, for example, environmental consultants will be required to report on the environmental impact of the project.

(p)        Legal advisers

Lawyers are closely involved in any project financing from an early stage. Their advice is sought in relation to the structure of the transaction, to instruct and guide local counsel and to draft, review and negotiate the myriad documents that will be required. All parties will have their own separate legal advisers.

(q)        Insurers

It is essential that insurance is put in place to cover certain risks in relation to the project. These will include physical damage to the project, delay in start-up of operations and business interruption. Both the project company and the lenders will be advised by insurance advisers regarding what insurance is necessary and available in relation to the project. Lenders will be co-insured so that they can be indemnified out of insurance proceeds if one of the risks insured against arises e.g. the project is damaged or construction delayed.