This Article is written by Lakshay Kewalramani and can be contacted via email at [email protected]. The article discusses the Role of Lawyers in Project Finance Deal.

Project Finance Deal

Project finance involves the development and financing of infrastructure and spans various industries and locations around the world. Infrastructure Projects in India are sometimes owned and managed by the Government or a Government undertaking. Given the massive investments required in infrastructure, which plays a pivotal role in economic development, there is now broad consensus that private sector participation in this activity must be encouraged for better and faster projects. Nowadays most Infrastructure projects are in the nature of private-public partnership. Example: – An electricity generation project which private sector builds, owns, operates for a certain period of time (called the concession period) and finally transfers back to Government (this concept is called BOOT).

Typical Project Pattern

• Projects are implemented in a Special Purpose Vehicle (SPV) which is distinct corporate entity.
• Project Sponsors take an equity stake in the SPV like for example 15-30% of the project cost
• SPV enters into contractual arrangements with project Contractors, off-takers, operators, and Government and project lenders. For example In Indian road projects, where private enterprise would construct, operate and maintain the road during the concession Period and would earn an assured annuity from NHAI.

It is therefore important to have experienced legal advisors who will advise the SPV and the sponsors on appropriate risk allocation and ensure that the legal and structural framework is compiled.

Key Project Parties

• Project Sponsors – To subscribe a significant proportion of equity shares in the project vehicle.

• Project Vehicle – Selects and appoints all the project contractors, negotiates and executes the contracts, raises the financing, supervises constructions and commissioning, and operates the project either directly or through an Operations and Maintenance (O&M) Contractor.

• Lendors – To provide debt to finance the constructions of the project. Typically a consortium of lenders, led by the “Lead Bank”, ascertains a bankable project cost and in consulations with the SPV and the project sponsors a “Means of Finance”.

• EPC Contractor – EPC Contractor designs the project, procures all the engineering skills and equipment to construct the project, erects all the project facilities, ensures test and trial runs.

• O&M Contractor – Responsible for operating and maintaining the plant in line. Performance parameters that need to be achieved during operations are pre-defined in an O&M Contract.

• Government – It provides a concession to the SPV to set up the project and ensures that a proper legislative and regulatory framework exists that allows the concerned SPV to compete on a “level playing field” along with existing, possibly govt. owned entities in the same field.

Project Contracts

Some of the key project contracts 

• Shareholders Agreement – An agreement between all of SPV’s shareholders, including Project Sponsors. That establishes Shareholding pattern, Shareholder’s representation in management, Shareholder’s Exit Process and Right of First Refusal etc.

• EPC (Engineering, Procurement and Construction) Contract – An agreement between the SPV and the EPC contractor that establishes designing, procuring, constructing etc. as laid down in the contract, guaranteed and Min. Performance parameters, Responsibility of the contractor to rectify the plant if it fails guaranteed and Min. Performance parameters and penalties/Liquidated Damages.

• Project Loan Agreements – An agreement between the SPV and the project lenders that establishes CPs, amount of loan, tenor, moratorium, repayment obligations, interests rate, Events of default and remedies available to lenders under conditions of default.

• O&M Contract – An agreement between the SPV and the O&M contractor that establishes responsibility to operate the plant, maintenance obligations that will ensure that the project is maintained as per industry standards, Bonus payment to the O&M contractor, for exceeding pre-determined performance parameters and penalties for under achievement etc.

• Power Purchase Agreement (PPA) – A power purchase agreement is a contract between two parties, one who generates electricity for the purpose of sale (the seller) and one who is looking to purchase electricity (the buyer). The PPA agreement includes all of the commercial terms for the sale of any project between the parties, including when the project will begin its commercial operation, schedule for delivery of a specific type of any material, penalties, payment terms, and termination.

Some Typical Condition Precedents in power project financing are as under

• Completion of acquisition of land for the project
• Complete tie-up of the project equity, identification of project sponsors, and execution of a satisfactory Shareholders Agreement
• Execution of a bankable EPC contract
• Completition of Environmental Impact Assessment studies and receipt of clearances from the Ministry of Environment and Forests from the State Pollution Control Board.
• Execution of a bankable PPA
• Execution of a bankable O&M agreement
• Tie up all of debt, execution of loan documentation with all project lenders
• Creation of security (mortgage of land/hypothecation of assets)

Conclusion

Understanding the basics of Project Finance is extremely important for a Lawyer to work upon the Legal due diligence in Project Finance. The nature of project finance work also means that lawyers in this field gain a huge amount of knowledge in Finance, Contract Drafting. Lawyers will be involved in not only the negotiation and drafting, but will also be expected to review and comment upon the documentation being drafted by attorneys located in each other jurisdiction applicable to the transaction. As a result, Lawyers are often required to understand key documentation issues with the client. Attorneys also spend a great deal of time reviewing the agreements, including the agreements mentioned above like PPA, O&M, SPV etc. Applicable to a project, in order to prepare detailed due diligence report for the client. The purpose of such due diligence reports is to advise the clients on contingent liabilities and legal risks associated with a project that would be substantial to an investment or a lending decision. Given the technical nature of the project agreements, Lawyers will be expected to take the information in coordinating input from the various technical, financial, insurance and market consultants hired by the clients to assist in the due diligence and documentation process.