Project finance typically involves multiple parties from different
jurisdictions with conflicting interests that must be protected and obligations
that must be clearly defined. The structure of project finance loan can be
limited recourse or non-recourse to the project sponsors. The underlying
rationale is to distribute risk among the participants involved. In cross
border transactions, it is important to anticipate and properly analyze the possible
risk the project could be expose to in the host state and identify solutions
that can be used to mitigate or eliminate the impact of the risks. In order to
mitigate or reduce the risks associated with jurisdictional issues, clauses
should be incorporated in the contract agreements between the counter parties
at different phases of the project.  The contracts include- Sponsor
Support Agreement, Loan Agreement, Collateral Security Agreement, Power
Purchase Agreement (PPA), Engineering Procurement and Construction (EPC)
Agreement, Operations and Maintenance Agreement (O & M), Fuel Supply
Agreement, Concession Agreement, Management Agreement, Joint Venture Agreement
and Shareholders’ Agreement. The following issues and questions can be
identified from the above scenario:
What are the applicable laws and institutional
framework that will govern the project in the host country?
What structure should the business transaction take?
What will be the currency of the transaction since the
financier and project will be based in different jurisdictions?
What is the profitability of the project?
What is the structure of the project loan?
What is the political history of the host country?
What are the other risks to be considered in that
jurisdiction and how can the project be secured from such risks?
approaches to address these issues are discussed below:

These are
policies and regulations of the host state designed to regulate cross-border
transactions. It is important to have a comprehensive knowledge of the
underlying legal and institutional framework regulating the establishment of
international projects in the host state as this varies depending on the
particular jurisdiction. It is advisable for parties to take out the services
of a local counsel to get advice on the host state legal and investment
environment. Generally, applicable laws may encompass:
Domestic laws: Information relating to the Commercial laws, Law of Corporate
Governance, Labour Laws, Land Laws, Property Acquisition, Tax Regime,
Environmental Laws, Immigration, Customs and Industry.
Administrative Framework: Information on the relevant governmental organs saddled with the
responsibility of administering international power projects, e. g obtaining
license, approvals, permits, the quality of public administration, transparency
of the system local regulations and system of dispute settlement.
  • International Standards: Applicable laws will also include guarantees provided by the host
    state for protection of foreign investments under any international
    standards. These standards can be provided on the platform of a Bilateral
    Investment Treaty (BITs) or Multilateral Investment Treaty (MITs)
    involving the states of the parties involved in this transaction. For
    instance, under the World Trade Organisation Framework (WTO), the General
    Agreement on Trade in Services (GATS)[2] will apply where services are
    provided by an investor of a member through the establishment of a service
    provider in the territory of another member.
Agreement and Language: It is essential to identify the contracts and the language of the
contracts between the parties. The loan agreement is usually in the language of
the lender, while the collateral security agreement is usually in the language
of the host state as the collaterals are most likely located within the same
jurisdiction as the project.
Choice of Law Clause: It is important that parties mutually choose the law governing the
contracts underlying the project development and incorporate in the contracts
of agreement.[3] The foundation of project finance is originally a joint
venture agreement between two parties which will invariably extend to other
parties in order to spread the risk involved. Therefore, to protect each
parties involved at every stage of the contract will require contracts
agreement designed to cover the choice of law clause governing the transaction,
insurance safeguards and settlement of investment dispute between the parties.
Parties have the flexibility to build protective clauses in the agreement to
secure their rights and interests under the contract.
Dispute Resolution: Due to the fact that many participants from different jurisdictions are
involved in negotiating separate contracts at different phases of the project
that will form a global structure with links, it is essential to safeguard the
whole network of contractual relationship by anticipating dispute among the
parties and incorporating a mechanism of resolving such dispute in event of
occurrence.[4] Parties may first resort to non-binding informal consultation
(mainly, conciliation and mediation) before proceeding to the binding
structured (judicial forums and arbitration) means of dispute resolution.[5]
Non-binding mechanisms traditionally offer the flexibility that international
market participants require to protect future relationships while binding
mechanisms offer the judicial implementation of the rules set forth in
applicable statutory law and in the contracts between the parties. [6] Parties
to international contracts more often than not utilize two types of forums
namely domestic courts and international arbitral tribunals. During
negotiation, it is important that parties agree on the choice of forum and
choice of law to be applied by the forum in the event of dispute and
incorporate in the contracts between the various parties.
Project finance
is a platform on which certain projects are financed off the balance sheets of
companies.[7] It is a specialized funding structure that relies on the future
cash flow of a project as primary source of repayment without recourse to the
project sponsor’s assets for the debts or liabilities of the project.[8] It
holds the project’s assets, rights and interests as collateral security.[9] The
design of the joint venture between the sponsors is established by the joint
venture contract for the purpose of jointly financing the project. The
structure selected by the sponsors is important in project finance because it
has implications on a number of things including ownership, management, roles
and responsibilities of the sponsors, equity contribution, license and permits,
documentation, location, termination and consequently financing.
Special Project Vehicle (SPV): A joint venture does not have legal personality. In order to create a
platform on which the power project can be floated without encumbering the
balance sheet of the two sponsor companies, a Special Purpose Vehicle (SPV)
that will implement the project and raise the funding should be created.[10]
Establishing a SPV mitigates project risks and shields the sponsor from adverse
developments. The nature of the organisation of the SPV depends on many factors
including the laws of the host state.
Incorporation: The SPV should be registered and incorporated to give it a legal
personality and becomes independent from its sponsors. This provides a
safeguard for the project in the event of failing shareholders dragging a
healthy project into distress or vice versa. The sponsors will typically
incorporate the project company in the most attractive jurisdiction from a
regulatory perspective that allows the sponsors to continue to own and operate
the project company or holding company.
  • Management and Control: It is important to determine the concept of ownership and control
    of a company under the laws of the host state in order to determine the
    structure of shareholding of the company. A due diligence on the ownership
    structure to determine what form of organisational structure is prescribed
    and foreign participation in host country’s companies will determine the
    shareholding capacity of the sponsors and their equity contributions. The
    management of the project company and the relationship between the project
    sponsors should be specifically spelt out in the management agreement.
Equity Contribution: The equity contributions of the sponsors should be specifically stated
in the shareholders’ agreement to ascertain the timing and certainty of the
equity funding in order to optimally schedule the timing and dependability of
the injection of funds into the project.
Effective place of Management: The sponsors of the project company have different jurisdictions. It is
important that the place of effective management of the new company be spelt
out in the management agreement to determine its nationality and place of
Insolvency: Insolvency is the most crucial indicator of the attitude of a legal
system in its commercial framework.[11] It has a profound impact on legal
relationships. This signifies the importance of counter-parties having a prior
understanding of their positions in the event the project company goes
insolvent.[12] The divergences always focus on priority, property, contract and
liability. Under the common law jurisdiction, emphasis is on rescue and
re-organisation. In contrast in civil law jurisdictions, the insolvency process
focuses on winding companies up. One way to determine the rights and
liabilities of counterparties is to negotiate the choice of law that will apply
in case the project goes bankrupt and incorporate in the Loan agreements and
Shareholders’ agreement. Parties may consider the adoption of the 2005 UNCITRAL
Model Law on Cross-Border Insolvency.
  • Tax Regime
The tax policy
of the host state has considerable effect on the profitability of Project
finance.[13] It is important to structure the project in such a way that it
will take advantage of tax benefits in the host country. This will include
analysis and use of double taxation treaties, privileges under bilateral and
multilateral trade treaties. The place of effective management and
incorporation is also important for tax purposes.
  • Obtaining Operating Licences and Permits
In many cases,
implementing a project depends on obtaining the appropriate licences, permits
and concession ns from the host state. It is essential that these permits be
made transferable or renewable as the case may dictate in order to maintain the
on-sale value of the project. The government may negotiate certain clauses
which give it the right to revoke the licence or concession. In cases like
this, the lender can seek security through government approval of financing of
the project. Negotiations in respect of operation license, expatriate quotas
and approvals should be covered in the concessionary agreement.
finance project involves cross border transactions in which, case cost and
revenues on the same project are computed in different currencies (currency of
the financier and the host country). It is therefore instructive for the
parties to agree on the currency of transaction, its convertibility, exchange
rate and repatriation of profit.[14] The transnational and long-term nature of
international project finance makes it almost plausible that the risk of
foreign exchange will arise. Generally, parties could negotiate these terms
with the host government and include same in the concession agreement.
Exchange Rate: After currency has been determined, it is vital to also agree on the
rate at which conversion is to be done from the foreign currency to the host
state currency and include these terms in the loan agreement between the Lender
and Project Company.
Exchange Controls – The parties should examine the foreign exchange position of the host
country and understand the government’s priorities for foreign exchange. This
is because shortage of foreign currency may result in the risk that the project
company may not be able to convert local currency into foreign currency to
repay the loan. This risk may be mitigated by negotiating priority access to
foreign exchange or a guarantee of availability with the host country.[15]
However, clearance or permit for importation and exportation of fund should be
obtained from the Central Bank or board for transfer of fund.
  • Repatriation of profit: The sponsors and lender are particularly interested in ensuring
    inflow and outflow of cash from the project and that profit realised are
    extended to deplete the loan sum. It is therefore central to the
    transaction that the parties are able to transfer fund from the host
    country effectively and at a convertible currency. The right of the
    project company to transfer fund and make loan payment should be included
    in the concessionary agreement. The project company may also open an
    offshore and local account through which payments can be made smoothly.
Inflation: This risk exists when certain input costs can be subjected to price
inflation. In such cases, the project sponsor must be able to pass on these
price increases to customers. If the project output is a product whose price
levels are fixed by the government, the ability to pass on the cost increase
will be limited. Similar risks exist when the inputs are denominated in one
currency and the project outputs in another. Thus it is important to identify
any such risks and the ability to pass them on to the customers. It is not
always possible to increase tariffs particularly in power projects.
This comes at
the conceptualization of the project. A thorough examination of the viability
of the project is carried out first by the sponsors to determine its
sustainability. This will encompass duration of the proposed project, cost
implication, profit, location of facility and suitability, technological
assistance, permits, environmental impact of the project, supply of materials,
market projection, debt service capabilities, etc. An independent feasibility
study is later carried out by the lender to supplement the first study. This is
to ensure the ‘bankability’ of the project.
sponsors will want a non-recourse project financing where there is no recourse
to the sponsor’s assets for the debt or liabilities of the project company.
Non-recourse financing therefore depends purely on the merits of a project
rather than the creditworthiness of the project sponsor. The project debt
repayment depends on the cash flow sourcing from the revenue generating
contracts of the project and the assets of the project are used as collateral
for the debt.  In this case, the project sponsor has no direct legal
obligation to repay the project debt or make interest payments. The ability to
take effective security can assume crucial importance in project finance.[16]
In some jurisdictions, laws on the taking and enforcement of security,
especially movable assets, cash flows and contractual rights (such as
receivables) may not always be satisfactory.[17]
In major
international projects, it is highly likely that more than one jurisdiction
will be relevant to the security package given to the lenders. Relevant
jurisdictions may include where the project is located, where the project
company is incorporated, the sponsors and any intermediate holding companies
and where the project company’s bank accounts are located. Security package can
be both onshore and offshore. Security must satisfy any relevant formalities in
each relevant jurisdiction.[18] The structure of the loan and interest rate
should be agreed upon and included in the loan agreement. Collateral security
document should be negotiated separately. Usually, while the language of the
loan agreement is in the lenders language, the collateral security document
should be in the host state language.  It is important to instruct local
counsel in the relevant jurisdictions to confirm that the proposed security
package is appropriate and capable of being validly perfected.
stability is an important ingredient for cross-border project financing which
contributes to the success of the project. This is because the power project is
more likely to rely on governmental concessions, tax reliefs, licences or
permits.[19] Lenders and sponsors alike are interested in carrying out
background check on the political history and regulatory climate of the host
government to determine its credibility and stability. Political risks may
include the decision by a government to cancel the project or to change the
terms of the contract or not to fulfill its obligations, failure to implement
the tariff reliefs agreed upon in the contract, the risk of expropriation or
nationalization of project assets
by the government etc.
or naturalization occurs where a host government acquires the rights or assets
of a project or where a government measure on the aggregate deprives the
sponsors of the equity ownership or value of the investment.[20] The latter is
known as indirect expropriation and it occurs more regularly in modern times
when for instance, government of the host state may use a combination of taxes
and charges to increase its share of profit in the project.[21] However, such
anticipated risks can be mitigated by opening an offshore account, through
political risk insurance or by inserting in the concession agreements
clauses that imposes an obligation on the host state to pay adequate and prompt
compensation in case of expropriation. However, not all political risks are
likely to be borne by the government.
Of particular
importance to international project finance is the mitigation of natural and
political risks. Natural risks are force majeure such as floods and
earthquakes, civil disturbances and strikes. Power plants are particularly
susceptible to force majeure.[22] This boils down to the importance of
feasibility study. The project should be assessed in light of such risks to
ensure facility pricing and structure is commensurate with the risk profile of
the project and downside cash flow analyses are undertaken to assess how much
resistance the project structure has to such deviations.[23] Political Risks
Insurance usually covers currency non-convertibility, expropriation and
political violence. This can be obtained from the Multilateral Investment Guarantee
Agency (MIGA), International Financial Corporation (IFC) and Overseas Private
Investment Corporation (OPIC) [24] The lender can also seek guarantee from the
host government to cover risks of expropriation and availability of foreign
A cross-border
transaction of this magnitude will require the sponsors and lenders to carry
out a background check on the other participants to determine their credit
worthiness and business credibilityO &M contractor, Fuel supplier,
and Technological support.  Due diligence is carried out by experts
including the local legal representation, technical advisers, market advisers
to determine the robustness of the underlying economics of the project, the
stability and transparency of the host country’s political and legal
environment, and other risks. The representation and warranty section of the
project contracts, including the project loan agreement serve an important role
in the project due diligence process. It basically confirms legally, that certain
conditions enabling the project to commence are in place. 
[1] B.A (Hons);
LL.B (Hons); BL; LL.M (Ife Nigeria); Researcher, University of Pretoria South
[2] Under
Article 1 of the GATS framework, member states are obliged to extend Most
Favoured Nation Treatment and National Treatment to investors and investments
from other member states.
[3] J Delmon et
al International Project Finance and PPPs, A  Legal Guide to Key Growth in
Africa (2012) 43
[4] C Dugue
Dispute Resolution in International Project Finance Transactions (2000) 1077
Dispute Settlement: Investor State (2011) 14
[6] Dugue (n 4
above) 1071
[7] T Merna et
al Financing Infrastructure Projects (2002) 6
[8] A Fight
Introduction to Project Finance (2006) 3-4.
[9] H Switala
Project Finance and Obtaining Sufficient Funding for the Successful Completion
of Your Project SADB 1
[10] Delmon (n
3 above) 15.
[11] P R Wood
Principles of International Insolvency (2007) 3
[12] L Wolff
The Law of Cross Border Business Transactions- Principles Concepts and Skills
(2013) 35
[13] S L
Hoffman The Law and Business of International Project Finance (2008) 50
[14] Hoffman (n
13 above) 41.
[15] ibid
[16] Fight (n 8
above) 58
[17] Ibid
[18] Key
formalities include -requirements as to the form of the security or any
execution formalities, registration requirements other filing requirements,
translation and notarisation requirements and the payment of stamp duties or
other fees.
[19] S Gatti
Project Finance in Theory and Practice Elsevier (2008) 32
[20] A
Stephenson et al Protecting Foreign Investment by Using Bilateral Investment
Treaties (2012) 10.
[21] Hoffman (n
13 above) 48.
[22] Fight (n 8
above) 62.
[23] Ibid
[24] Hoffman (n
13 above) 41
Editor’s note: This article was originally posted by the author on 9th April, 2016 on