Law and Business of International Project Finance : A Resource for Governments, Sponsors, Lenders, Lawyers, and Project Participants

by Hoffman, Scott L. L.

• ISBN13: 9781571051769
• ISBN10: 1571051767
• Edition: 2nd
• Format: Hardcover
• Copyright: 2001-05-01
• Publisher: Brill Academic Pub

Table of Contents

Preface to the Second Edition	vi
Preface to the First Edition	ix
PART I --- AN INTRODUCTION TO PROJECT FINANCE	1	(32)
An Introduction to Project Finance	3	(30)
Definition of Project Finance	4	(2)
Confusion of Terms	6	(1)
Nonrecourse Project Finance	6	(2)
Limited-Recourse Project Finance	8	(1)
Structured Project Finance---Toward Greater Economic Efficiency?	8	(2)
Contrast with Other Financing Types	10	(1)
Balance Sheet Finance	10	(1)
Asset-Based Finance	11	(1)
Uses of Project Finance	11	(1)
Basic Components of Project Finance	11	(1)
Advantages of Project Finance	12	(6)
Nonrecourse Debt Financing---It Ain't Necessarily So	12	(2)
Off-Balance-Sheet Debt Treatment	14	(1)
Leveraged Debt	15	(1)
Avoidance of Restrictive Covenants in Other Transactions	16	(1)
Favorable Financing Terms	16	(1)
Internal Capital Commitment Policies	17	(1)
Political Risk Diversification	17	(1)
Risk Sharing	17	(1)
Collateral Limited to Project Assets	17	(1)
Lenders Are More Likely to Participate in a Work-Out Than Foreclose	17	(1)
Matching Specific Assets with Liabilities	17	(1)
Expanded Credit Opportunities	18	(1)
Disadvantages of Project Finance	18	(2)
Complexity of Risk Allocation	18	(1)
Increased Lender Risk	18	(1)
Higher Interest Rates and Fees	19	(1)
Lender Supervision	19	(1)
Lender Reporting Requirements	19	(1)
Increased Insurance Coverage	19	(1)
Encourages Potentially Unacceptable Risk Taking	20	(1)
International Project Finance	20	(1)
Examples of Facilities Developed with Project Finance	20	(4)
Energy Generation	20	(1)
Pipelines, Storage Facilities and Refineries	21	(1)
Mining	21	(1)
Toll Roads	21	(1)
Waste Disposal	22	(1)
Water	22	(1)
Telecommunications	22	(1)
Other Projects	23	(1)
Uses by Industrial Companies for Growth and Restructuring	23	(1)
Leisure and Sports Stadium Projects	23	(1)
Contrasting Risks	24	(1)
Chicken or the Egg: The Effect of a Project's Financing Structure on its Commercial Structure	24	(1)
Merchant Facilities: Projects Financed Without Revenue Contracts	24	(1)
Project Finance in Developing Countries	25	(3)
Other Financing Alternatives	28	(1)
Bankability, Financeability and Other Assaults on Language	28	(1)
The Law of Project Finance	28	(1)
Economic Studies of Project Finance	29	(1)
The Lessons of a Financial Crisis --- What the East Asian Financial Crisis Teaches About Project Finance	29	(4)
Increased Cost of Power	30	(1)
Power Purchase Contract Renegotiation	31	(1)
Decrease in Market Demand for Private Power	32	(1)
Conclusions	32	(1)
PART II --- RISK IDENTIFICATION, ALLOCATION AND MITIGATION	33	(68)
Project Finance Risks	35	(20)
Risk	36	(1)
The Risk Matrix	37	(1)
Project Finance Participants and Perspectives	37	(8)
Development Risks	37	(1)
Design Engineering and Construction Risks	37	(7)
Start-up Risks	44	(1)
Operating Risks	44	(1)
Objectives of Project Finance Participants	45	(1)
Risk Indentification by Participants	45	(7)
Sponsor	46	(1)
Construction Lender	46	(1)
Permanent Lender	47	(1)
Contractor	48	(1)
Operator	49	(1)
Technology Owner	49	(1)
Supplier	50	(1)
Output Purchaser	50	(1)
Host Government	50	(1)
Other Governments---Export and Transit Countries	51	(1)
Equity Investor	51	(1)
Multilateral and Bilateral Agencies	52	(1)
Development Stage Risks	52	(1)
The Joint Venture as a Risk Mitigation Device	53	(1)
A Caveat About Risk Allocation	53	(2)
Project Finance Cross-Border Risks	55	(28)
Generally	57	(1)
Currency-Related Risks	58	(9)
Generally	58	(1)
Nonconvertibility of Currency (Unavailability of Foreign Exchange)	59	(1)
Currency Transfer (Inability to Transfer Foreign Exchange Abroad)	59	(1)
Generally	59	(1)
Types and Characteristics of Exchange Controls	60	(1)
Violation of Exchange Laws	61	(1)
Enforcement of Transactions That Violate a Country's Exchange Controls	62	(1)
Exchange Permissions and Consents	62	(1)
Reducing Exposure to Exchange Controls	63	(1)
Currency Devaluation Risk Caused by Fluctuations in Foreign Exchange Rates	63	(1)
Generally	63	(1)
Indexing Revenues	64	(1)
Matching Revenue Currency to Debt Currency	64	(1)
Raising Debt in Local Currency	64	(1)
Derivatives	64	(1)
Sharing of Risk	65	(1)
Offshore Accounts	65	(1)
Special Currency Problems in Large-Scale Projects	65	(1)
Advance Approvals	66	(1)
Consent	66	(1)
Exemption	66	(1)
Summary of Currency Risk Minimization Techniques	66	(1)
Payment in Hard Currency	66	(1)
Foreign Exchange Risk Insurance	66	(1)
Indexed Local Currency Payments	66	(1)
Permit, Concession and License Risk	67	(2)
Permits	67	(1)
Concessions and Licenses	67	(2)
Expropriation Risk	69	(1)
Expatriation	70	(1)
Change of Law Risk	70	(3)
Import Tariffs	70	(1)
Export Tariffs	70	(1)
Production or Consumption Controls	71	(1)
Taxes	71	(1)
Generally	71	(1)
Taxes on Income	71	(1)
Customs Duties	72	(1)
Withholding Tax on Payment of Interest	72	(1)
Nondiscrimination	72	(1)
Environmental Controls	72	(1)
Regulation and Deregulation	72	(1)
Political Violence, Civil Unrest, War and Other Political Force Majeure Events	73	(1)
Political Collapse and Succession	73	(1)
Preemption and Priority	74	(1)
Sovereign Risk	74	(1)
Breach of Undertakings (Contract Repudiation)	74	(1)
Collateral Risk	75	(3)
What Type of Collateral Security Does the Sovereign Government Allow?	75	(1)
Are All Local Formalities Complied With?	76	(1)
What is the Priority of the Lien?	76	(1)
How is the Lien Enforced?	76	(1)
How Does the Foreclosure Process Work?	76	(1)
Collateral Trusts	77	(1)
Real Property	77	(1)
Interaction Among Risks	77	(1)
Law and Legal System Risk	78	(2)
Choice of Law	78	(1)
Agent for Process and Submission to Jurisdiction	78	(1)
Dispute Resolution	79	(1)
Fees, Approvals and Filings	79	(1)
Legal Expertise and Experience	79	(1)
General Business Law and Regulation	79	(1)
Waiver of Sovereign Immunity	80	(1)
Legal Cultures	80	(1)
Illiquidity of Equity Investment	80	(1)
Freezing or Blocking Orders	80	(1)
Export Prohibitions	81	(1)
Price Controls and Regulation	81	(1)
Commercial or Political---It May Be Both	81	(2)
Project Finance Commercial Risks	83	(18)
Introduction to Commercial Risks	84	(2)
Probability of Risk Evolving Into a Project Problem	84	(1)
Due Diligence	85	(1)
Feasibility Study In Risk Identification	85	(1)
Categories of Commercial Risk	85	(1)
Credit Risks	86	(1)
Increase in Construction Costs	86	(1)
Delay in Completion	87	(1)
Force Majeure in Construction Contracts	87	(1)
Experience and Resources of Contractor	88	(1)
Building Materials	89	(1)
Facility Site	89	(1)
Technology	89	(1)
Construction of Related Facilities	90	(1)
Shortfalls in Mineral Reserves	91	(1)
Raw Material Supply and Utilities	91	(1)
Creditworthiness of off-take Purchaser	91	(1)
Market for Product or Service	92	(1)
Shortfalls in Anticipated Capacity, Output and Efficiency	93	(1)
Operator Experience	93	(1)
General Operating Expenses	94	(1)
Sponsor Commitment	94	(1)
Management Experience	94	(1)
Permits and Licenses	94	(1)
Political Environment	95	(1)
Interest Rate	95	(1)
Force Majeure	95	(1)
Economic Projection and Feasibility Report Inaccuracy	96	(1)
Environmental	96	(1)
Contract Mismatch	97	(1)
Contract Risks Generally	97	(1)
Commercial Risk Mitigation	97	(4)
Construction Period Risk Mitigation	98	(1)
Contractual Undertakings	98	(1)
Contingency Reserve Funds and Equity and Other Funding Commitments	99	(1)
Insurance	99	(1)
Operations Period Risk Mitigation	99	(1)
Contractual Undertakings	99	(1)
Contractual Arrangements	99	(1)
Contingency Reserve Funds	99	(1)
Cash Traps	100	(1)
Insurance	100	(1)
PART III --- PROJECT FINANCE STRUCTURES	101	(36)
Project Finance Participants and Their Roles	103	(10)
Project Sponsor	104	(1)
Project Company	104	(1)
Borrowing Entity	104	(1)
Commercial Lender	104	(2)
Arranging Bank	105	(1)
Managing Bank	105	(1)
Agent Bank	105	(1)
Engineering Bank	105	(1)
Security Agent	106	(1)
Bondholders	106	(1)
International (Multilateral) Agencies	106	(1)
Bilateral Agencies	106	(1)
Rating Agency	107	(1)
Supplier	107	(1)
Output Purchaser	107	(1)
Contractor	107	(1)
Operator	108	(1)
Financial Advisor	108	(1)
Technical Consultants	108	(1)
Project Finance Lawyers	108	(1)
Local Lawyers	109	(1)
Host Government	109	(3)
Insurers	112	(1)
Project Finance Structures	113	(8)
Generally	114	(1)
Commercial Loan Financing	114	(1)
Construction Phase	115	(1)
Operations Phase	115	(1)
Export Credit Financing	115	(1)
Generally	115	(1)
Types of Export-Import Financing	115	(1)
Direct Lending	115	(1)
Financial Intermediary Loans (Bank-to-Bank)	115	(1)
Interest Rate Equalization	116	(1)
Lease Financing	116	(1)
Generally	116	(1)
Advantages to the Project Company	116	(1)
Control Over the Project	117	(1)
Total Financing	117	(1)
Lower Financing Costs	117	(1)
Tax Deductibility of Rent	117	(1)
Shifting of Residual Risk	117	(1)
Equity Risk-Taker Replaces Lender as Financing Source	117	(1)
Lease Financing From the Lessor's Perspective	117	(1)
Bond Financing	117	(1)
BOT	118	(1)
Co-Financing	118	(1)
Production Payments	119	(1)
Forward Purchase Agreements	119	(2)
Selecting the Project Finance Ownership Structure	121	(16)
Generally	122	(1)
Pre-Development Activities	123	(2)
Generally	123	(1)
The Development Agreement	123	(1)
Definition of Project	123	(1)
Exclusivity	123	(1)
Roles and Responsibilities	123	(1)
Tasks and Schedule	124	(1)
Cost Funding	124	(1)
Management and Voting	124	(1)
Withdrawal	124	(1)
Abandonment	124	(1)
Confidentiality	124	(1)
Antitrust and Restrictive Trade Practices Considerations	125	(1)
Determining the Structure to Use	125	(1)
Need for Leverage	125	(1)
Grade of Investment	125	(1)
Tax Laws and Treaties	125	(1)
Project Management	125	(1)
Accounting Treatment and Objectives	126	(1)
Lender Preferences	126	(1)
Transferability of Equity Interests	126	(1)
Avoiding Parent Company Direct Involvement	126	(1)
Special-Purpose Nature of Project Company	126	(1)
Host Country Investment Requirements	127	(1)
Generally	127	(1)
Ownership of Real Estate	127	(1)
Local Participation	127	(1)
Local Formation of Project Company	128	(1)
Corporation	128	(2)
Generally	128	(1)
Reasons for Selection	128	(2)
Management	130	(1)
General Partnership	130	(1)
Generally	130	(1)
Liability	130	(1)
Reasons for Selection	131	(1)
Collateral Considerations	131	(1)
Limited Partnership	131	(1)
Generally	131	(1)
Reasons for Selection	132	(1)
Management	132	(1)
Limited Liability Company	132	(1)
Joint Venture	132	(2)
Generally	132	(1)
Reasons for Selection	133	(1)
Types	133	(1)
Project Management	133	(1)
Conflicts of Interest	133	(1)
Nature of Liability	134	(1)
European Economic Interest Groupings (``EEIG'')	134	(1)
Generally	134	(1)
Nature of Liability	134	(1)
Management	134	(1)
Collateral Considerations	134	(1)
Development Consortium	134	(1)
Preserving Flexibility	135	(1)
Fragmentation: The More the Merrier	135	(2)
PART IV --- TECHNICAL, POLITICAL AND ECONOMIC FEASIBILITY	137	(28)
The Feasibility Study and Needs Assessment	139	(8)
Purpose of Feasibility Study	139	(1)
General Description	140	(1)
Project Sponsors and Project Company	140	(1)
Project Participants	140	(1)
Technical Information	141	(1)
Economic Information	141	(1)
Contracts	141	(1)
Project Schedule	142	(1)
Government	142	(1)
Market	142	(1)
Proposed Financing Sources	143	(1)
Privatization	143	(1)
Generally	143	(1)
Types	143	(1)
Benefits	144	(1)
Effect on Project Feasibility	144	(1)
Needs Assessment	144	(1)
The Independent Engineer	145	(2)
Host Country Business Environment for Project Finance	147	(6)
Introduction	147	(1)
Political	147	(2)
Legislative and Regulatory	149	(1)
Economic Conditions	150	(1)
Project Finance in Developing Countries	150	(3)
Economic Feasibility	153	(4)
Purpose	153	(1)
Construction Budget	154	(1)
Operating Budget	154	(1)
Debt Service	154	(1)
Working Capital	154	(1)
Assumptions	154	(1)
Ratios	155	(1)
Valuation	155	(2)
Environmental Regulation and Environmental Feasibility of the Project	157	(8)
Growth of Environmental Regulation	158	(1)
Generally	158	(1)
Host Country	158	(1)
Multilateral and Bilateral Institutions	158	(1)
International Treaties	158	(1)
Home Country	159	(1)
Environmental Impact of Project	159	(2)
Site	159	(1)
Air	159	(1)
Water	159	(1)
Plant and Animal Habitats	160	(1)
Health Hazards	160	(1)
Noise	160	(1)
Aesthetics	160	(1)
Historic and Cultural Significance	160	(1)
Transportation, Public Services and Utilities	160	(1)
Indigenous People	160	(1)
Permits	161	(1)
Public Opposition	161	(1)
World Bank Environmental Standards	162	(1)
Environmental Damage and Audits	162	(1)
Future Environmental Regulation	163	(2)
PART V --- PROJECT FINANCE DOCUMENTATION	165	(212)
An Overview of Project Documentation	167	(12)
Generally	168	(1)
Transnational Contracting	168	(2)
Governing Law	169	(1)
Forum	169	(1)
Contract Formation	169	(1)
Contract Structure and Validity	169	(1)
Formalities	170	(1)
Enforceability of Risk Allocation and Remedies	170	(1)
Currency Issues	170	(1)
Government Action	170	(1)
Term	170	(1)
Language	170	(1)
Document Types	170	(1)
Amendments, Modifications and Supplements	171	(1)
Nonrecourse Provision	171	(2)
Introduction	171	(1)
Sample Provisions	172	(1)
Cooperation with Financing	173	(1)
Introduction	173	(1)
Sample Provision	173	(1)
Term	173	(1)
Completion	174	(1)
Introduction	174	(1)
Sample Provision	174	(1)
Come Hell or High Water	175	(1)
Force Majeure	176	(1)
When Things Go Wrong	177	(1)
Generally	177	(1)
Contract Damages	177	(1)
Liquidated Damages	177	(1)
Specific Performance	178	(1)
Internationalization of Contracts	178	(1)
Representations and Warranties in Project Finance Credit Agreements and Contracts	179	(30)
Generally	182	(2)
Definition	182	(1)
Purpose	183	(1)
Role of Representations and Warranties in Project Finance	184	(1)
Mechanics of Representations and Warranties	184	(2)
Affirming the Basic Assumptions	184	(1)
Legal Status	184	(1)
Authority to Enter Into Transaction	184	(1)
Additional Facts Received in Negotiation Process	184	(1)
Date Representations and Warranties Are Made	185	(1)
Materiality and Knowledge Limitations in Representations and Warranties	185	(1)
Verification of Representations and Warranties	186	(1)
Introduction to Sample Provisions	187	(1)
Formalities of Business Organization	187	(2)
Generally	187	(1)
Due Incorporation; Due Formation	187	(1)
Valid Existence	188	(1)
Good Standing	188	(1)
Power and Authority	188	(1)
Due Qualification	188	(1)
Corporation	188	(1)
General Partnership	189	(1)
Limited Partnership	189	(1)
General Partners of Limited Partnership	189	(1)
Power and Authority	189	(2)
Introduction	189	(1)
Authority to Enter Into and Perform Transaction	190	(1)
Corporate or Partnership Approval	190	(1)
Violation of Law or Judicial Order	190	(1)
Breach of Existing Agreement	190	(1)
Creation of Liens	190	(1)
Sample Provision	190	(1)
Legally Enforceable Agreement	191	(1)
Introduction	191	(1)
Sample Provision	191	(1)
Financial Statements, Project Budget and Projections	191	(4)
Introduction	191	(1)
Sample Provision for Project Finance Credit	192	(1)
Agreement for New Project	192	(1)
Project Budget	192	(1)
Projections	192	(1)
Modification of Financial Statement Representation for Existing Project	193	(1)
Generally Accepted Accounting Principles	193	(1)
Fair Presentation of Financial Condition	193	(1)
Financial Statement Representation for Contracting Party	194	(1)
Litigation	195	(1)
Introduction	195	(1)
Litigation Representation When No Litigation Exists	195	(1)
Litigation Representation When Litigation Exists	195	(1)
Judgments and Orders	196	(1)
Introduction	196	(1)
Sample Provision	196	(1)
Existing Agreements	196	(1)
Introduction	196	(1)
Sample Provision	197	(1)
Force Majeure	197	(1)
Introduction	197	(1)
Sample Provision	197	(1)
Asset Ownership and Liens	198	(1)
Introduction	198	(1)
Sample Provision	198	(1)
Subsidiaries and Ownership of Securities	198	(1)
Introduction	198	(1)
Sample Provision	198	(1)
Operation of Business	199	(1)
Introduction	199	(1)
Sample Provision	199	(1)
Project Assets and Necessary Assignments	199	(1)
Introduction	199	(1)
Sample Provision	199	(1)
Project Contracts	200	(1)
Introduction	200	(1)
Sample Provision	200	(1)
Debt	200	(1)
Introduction	200	(1)
Sample Provision	200	(1)
Taxes	200	(1)
Introduction	200	(1)
Sample Provision	201	(1)
Regulatory and Legal Status	201	(1)
Introduction	201	(1)
Sample Provision	201	(1)
Permits	202	(1)
Introduction	202	(1)
Sample Provision	202	(1)
Compliance with Laws	203	(1)
Introduction	203	(1)
Sample Provision	203	(1)
Infrastructure	204	(1)
Introduction	204	(1)
Sample Provision	204	(1)
Completion	205	(1)
Introduction	205	(1)
Sample Provision	205	(1)
Collateral	205	(1)
Introduction	205	(1)
Sample Provision	205	(1)
Full Disclosure	206	(1)
Introduction	206	(1)
Sample Provision	206	(1)
Representations and Warranties Made in Other Project Contracts	206	(1)
Introduction	206	(1)
Sample Provision	207	(1)
No Prior Business Activity	207	(1)
Introduction	207	(1)
Sample Provision	207	(1)
Complete Project	207	(2)
Introduction	207	(1)
Sample Provision	207	(2)
Preliminary Host Country Agreements	209	(40)
Introduction	211	(1)
Bidding (Tendering) Processes	212	(5)
Generally	212	(1)
Advantages of Bidding Programs	212	(1)
Disadvantages of Bidding Programs	213	(1)
Pre-qualification of Bidders (the ``RFQ'')	213	(1)
Bid Design and Preparation of Bid Documents (the ``RFP'')	214	(1)
Generally	214	(1)
Evaluation and Scoring	214	(1)
Model Contracts	215	(1)
Bid Meetings and Bidder Questions	215	(1)
Security	216	(1)
Promotion of Public Bids by Multilateral Agencies	216	(1)
Bidding in the Project Finance Context	216	(1)
Generally	216	(1)
Special-Purpose Entities	216	(1)
The Problem of Consortium Bids	217	(1)
Letter of Intent and Memorandum of understanding	217	(1)
Concessions and Licenses	218	(3)
Generally	218	(1)
Concession Agreement	218	(1)
Terms from the Host Government's Perspective	219	(1)
Terms from the Project Company's Perspective	219	(1)
Ongoing Consents and Approvals by the Host Government	219	(1)
Example in a BOT Structure	220	(1)
Disputes	220	(1)
Legislative Approval	221	(1)
Implementation Agreements	221	(10)
Generally	221	(1)
Sovereign Guarantees	222	(1)
Expropriation	222	(1)
Permits and Other Governmental Approvals	223	(1)
Currency Concerns	223	(1)
Tax Benefits and Customs Duties Relief	224	(1)
Generally	224	(1)
Tax Holiday	224	(1)
Legislative Protection	224	(1)
War, Insurrection, General strikes and Political Violence	225	(1)
Authorization to Do Business	225	(1)
Exclusive Right to Develop Project	225	(1)
General Cooperation for Project development and Nondiscrimination	225	(1)
Good Citizenship	226	(1)
Enforcement and Dispute Resolution	226	(1)
Constitutionality Considerations of Implementation Agreements	226	(1)
Damages	227	(1)
Contrast: Country Support Agreements	227	(1)
Stabilization Clauses	227	(2)
Sovereign Guarantees from the Government's Perspective	229	(2)
Other Considerations for Preliminary Agreements	231	(6)
Infrastructure Development	231	(1)
Land and Air Transportation	231	(1)
Water Ports and Harbors	232	(1)
Power	232	(1)
Water	233	(1)
Waste Disposal	233	(1)
Communications	233	(1)
Product or Service	233	(1)
Milestones	233	(1)
Expansion Rights or Requirements	234	(1)
Social Program Support	234	(1)
Option to Acquire Raw Materials in the Host Country	234	(1)
Importation of Construction Equipment	234	(1)
Price Regulation	235	(1)
Government-Owned Natural Resources	235	(1)
Local Restriction on sale	236	(1)
Export Restrictions	236	(1)
Import Restrictions	236	(1)
Employees	236	(1)
Withholding Taxes on Loan Interest	236	(1)
Host Country Approval of Political Risk Insurance	237	(1)
The Problem of Binding Future Governments to Actions of Predecessor Governments	237	(2)
Introduction	237	(1)
The Effectiveness of Contracts with Host Governments as Risk Mitigation	238	(1)
Contractual Damages and Assurances	238	(1)
Sanctity of Contract Versus State Sovereignty	239	(1)
Waiver of Sovereign Immunity	239	(6)
Generally	239	(1)
Foreign Sovereign Immunities Act of 1976 (U.S.)	240	(1)
Generally	240	(1)
Exceptions to Immunity	240	(2)
Counterclaims	242	(1)
Extent of Sovereign Liability	242	(1)
Attachment of Sovereign's Property	242	(1)
Case Study: Waiver of Sovereign Immunity in a Project Finance Transaction	243	(2)
State Immunity Act of 1978 (U.K.)	245	(1)
Generally	245	(1)
Exceptions to Immunity	245	(1)
Application	245	(1)
Act of State Doctrine (U.S.)	245	(1)
Cooperative Risk Management	246	(3)
Construction Contracts	249	(38)
Generally	251	(1)
Important Construction Risks	252	(6)
Increase in construction Costs	253	(1)
Delay in Completion	253	(1)
Performance Guarantees	253	(1)
Force Majeure in International Construction Contracts	254	(1)
Experience, Reputation and Resources of Contractor	255	(1)
Building Materials	256	(1)
Construction of Related Facilities	256	(1)
Raw Material Supply and Utilities	256	(1)
Excuses for Contractor Nonperformance-The Owner Did It	257	(1)
Coordination	257	(1)
Creditworthiness	258	(1)
Types of Construction-Related Contracts	258	(2)
Engineering Contract	258	(1)
Procurement Contract	259	(1)
Construction Contract	259	(1)
EPC Contract	259	(1)
Fixed Price Contract	260	(1)
Cost Plus Fee Contract	260	(1)
Cost Plus Fee Contract With Maximum Price and Incentive Fee	261	(1)
Project Finance Turnkey Contract	261	(1)
Typical Provisions in Project Finance Turnkey Construction Contracts	262	(1)
Scope of Work	262	(1)
Introduction	262	(1)
Draft Provision	262	(1)
Contractor's Responsibilities	263	(2)
Introduction	263	(1)
Draft Provision	263	(2)
Project Company's Responsibilities	265	(1)
Introduction	265	(1)
Draft Provision	265	(1)
The Notice to Proceed and Commencement of Construction	266	(2)
Introduction	266	(1)
Draft Provision	267	(1)
Price	268	(1)
Introduction	268	(1)
Draft Provision	268	(1)
Payment and Retainage	269	(1)
Introduction	269	(1)
Retention Money Guarantee	269	(1)
Liens	270	(1)
Draft Provision	270	(1)
Completion Date Guarantees, Performance Guarantees and Liquidated Damages	270	(5)
Introduction	270	(1)
Mechanical Completion	270	(1)
Substantial Completion	271	(1)
Final Completion	272	(1)
Correction	272	(1)
Delay Liquidated Damages	272	(1)
Testing	273	(1)
Bonuses for Early Completion	273	(1)
Environmental Guarantees	273	(1)
Exceptions to Guarantees	274	(1)
Alternatives to Guarantees	274	(1)
Draft Provision	274	(1)
Warranties	275	(2)
Introduction	275	(1)
Draft Provision	276	(1)
Changes	277	(1)
Title to Work	277	(1)
Introduction	277	(1)
Draft Provision	277	(1)
Remedies for Breach	277	(2)
Introduction	277	(1)
Draft Provision	277	(2)
Suspension of Work and Termination	279	(1)
Introduction	279	(1)
Draft Provision	279	(1)
Payment and Performance Bonds	279	(1)
Introduction	279	(1)
Performance Bond	279	(1)
Payment Bond	280	(1)
Warranty Bond	280	(1)
Money Retention Bond	280	(1)
Draft Provision	280	(1)
Insurance	280	(1)
Introduction	280	(1)
Draft Provision	281	(1)
Force Majeure	281	(1)
Introduction	281	(1)
Draft Provision	281	(1)
Coordination Concerns	282	(1)
Introduction	282	(1)
Draft Provision	282	(1)
Training	283	(1)
Introduction	283	(1)
Draft Provision	283	(1)
Subcontractors	283	(1)
Introduction	283	(1)
Draft Provision	283	(1)
Liability Limitations	284	(1)
Introduction	284	(1)
Draft Provision	284	(1)
Site Conditions	285	(1)
Introduction	285	(1)
Draft Provision	285	(1)
The Special Problem of Compliance by the Contractor	285	(1)
with the Other Project Contracts	285	(1)
Introduction	285	(1)
Draft Provision	285	(1)
Unraveling the Project Finance Deal: Termination for Convenience	286	(1)
Compliance with Concession Terms and Conditions	286	(1)
Introduction	286	(1)
Draft Provision	286	(1)
Input Contracts	287	(18)
Introduction	288	(1)
When Input Contracts Are Not Needed	289	(1)
Important Input Risks	290	(2)
Increase in Input Costs	290	(1)
Delay in Completion of Transportation Facilities	290	(1)
Availability of Supply	290	(1)
Disruption to Transportation	291	(1)
Force Majeure in International Input Contracts	291	(1)
Experience and Resources of Input Supplier and Transporter	291	(1)
Fuel Management and the Fuel Manager	291	(1)
Quality	291	(1)
Linking Project Inputs to Outputs	292	(1)
Types of Input Contracts	292	(2)
Fixed Amount	292	(1)
Requirements	292	(1)
Output	293	(1)
Spot	293	(1)
Dedicated Reserves	293	(1)
Firm vs. Interruptible	293	(1)
Subordination of Project Costs to Debt Service	293	(1)
The Commodity Supplier as Project Partner	294	(1)
Excuses to Performance	294	(1)
Creditworthiness	294	(1)
Typical Provisions in Project Finance Input Contracts	295	(1)
Quantities and Commencement of Deliveries	295	(1)
Introduction	295	(1)
Draft Provision	295	(1)
Price	295	(1)
Introduction	295	(1)
Draft Provision	295	(1)
Payment	296	(1)
Introduction	296	(1)
Draft Provision	296	(1)
Scheduling; Metering and Weighing	296	(1)
Introduction	296	(1)
Draft Provision	296	(1)
Quality and Rejection	297	(1)
Introduction	297	(1)
Draft Provision	297	(1)
Title and Risk of Loss	297	(1)
Introduction	297	(1)
Draft Provision	298	(1)
Term	298	(1)
Introduction	298	(1)
Draft Provision	298	(1)
Force Majeure	298	(1)
Introduction	298	(1)
Uncontrollable Events	298	(1)
Change of Law	299	(1)
Draft Provision	299	(1)
Default	299	(2)
Termination Events Generally	299	(1)
Termination by Supplier	299	(1)
Termination by Project Company	300	(1)
Draft Provision	300	(1)
Remedies for Breach	301	(1)
Introduction	301	(1)
Termination Payments	301	(1)
Specific Performance	301	(1)
Alternative Inputs	301	(1)
Draft Provision	301	(1)
Reserves and Mining or Production Plans	302	(3)
Operation And Maintenance Agreements	305	(18)
Generally	306	(1)
Operating Agreement	306	(1)
Self-Operation	307	(1)
Important Operation Risks	307	(4)
Increase in Operating Costs	307	(1)
Performance Guarantees	308	(1)
Force Majeure in International Operation Contracts	308	(1)
Experience and Resources of Operator	309	(1)
Raw Material Supply and Utilities	309	(1)
Excuses for Operator Nonperformance---The Contractor Did It, The Owner Did It	310	(1)
Coordination	310	(1)
Creditworthiness	311	(1)
Fixed Price Contract	311	(1)
Cost Plus Fee Contract	311	(1)
Cost Plus Fee Contract With Maximum Price and Incentive Fee	312	(1)
Typical Provisions in Project Finance Operation and Maintenance Agreements	312	(1)
Operator's Responsibilities	312	(1)
Introduction	312	(1)
Draft Provision	313	(1)
Project Company's Responsibilities	313	(1)
Introduction	313	(1)
Draft Provision	314	(1)
Operating Standard	314	(1)
Introduction	314	(1)
Draft Provision	315	(1)
Price and Payment	315	(1)
Introduction	315	(1)
Draft Provision	315	(1)
Performance Guarantees and Liquidated Damages	316	(1)
Introduction	316	(1)
Draft Provision	316	(1)
Capital Changes	317	(1)
Introduction	317	(1)
Draft Provision	317	(1)
Remedies for Breach	317	(2)
Introduction	317	(1)
Draft Provision	317	(2)
Suspension of Services	319	(1)
Introduction	319	(1)
Draft Provision	319	(1)
Procedure at End of Agreement	319	(1)
Introduction	319	(1)
Draft Provision	320	(1)
Insurance	320	(1)
Introduction	320	(1)
Draft Provision	320	(1)
Force Majeure	321	(2)
Introduction	321	(1)
Draft Provision	321	(2)
Project Finance off-Take Sales Contracts	323	(20)
Necessity for Off-take Contracts	324	(1)
Types of Off-take Contracts	324	(2)
Great Confusion	324	(1)
Take-or-Pay	325	(1)
Take-and-Pay	325	(1)
Blended	326	(1)
Long-Term Sales Agreement	326	(1)
Spot Sales	326	(1)
Contractual Risk --- the Value of Contracts to the Project Company and as a Credit Support	326	(1)
Risks in Contract Terms and Defenses	327	(5)
Commercial Impracticability	328	(1)
General Contract Theories	329	(1)
An Example of Project Contract Risks: Output and Requirements Contracts	330	(2)
Revenue Contracts in Transnational Projects	332	(1)
Enforcement of Revenue Contracts in Transnational Projects	332	(1)
Assignment of Revenues to the Project Lenders	333	(1)
Selected Provisions in Off-take Contracts	333	(1)
Agreement for Allocation of a Portion of Production Capacity	333	(1)
Introduction	333	(1)
Draft Provision	333	(1)
Option Capacity	333	(1)
Introduction	333	(1)
Draft Provision	334	(1)
Reserve Capacity	334	(1)
Introduction	334	(1)
Draft Provision	334	(1)
Standby Charge	334	(1)
Introduction	334	(1)
Draft Provision	334	(1)
Sanctity of Contracts	335	(8)
Introduction	335	(1)
Analysis Under U.S. Law	335	(2)
Retroactivity and Settled Expectations---The Effect of Governmental Actions on Existing Contracts	337	(3)
Lessons for International Project Finance	340	(1)
Stability of Contracts in Emerging Markets---the Dabhol Project	340	(3)
Power Sales Agreements	343	(34)
Introduction	345	(1)
Revenue Contracts in Transnational Projects	346	(1)
Development Obligations	346	(1)
Performance Milestones	346	(4)
Generally	346	(1)
Approval of Project Contracts	347	(1)
Financial Closing	348	(1)
Penalties for Missed Milestones	348	(1)
Generally	348	(1)
Delayed Entry into Commercial Operation	348	(1)
Failure to Construct Facility	349	(1)
Shortfall in Nameplate Capacity	349	(1)
Commercial Operations	349	(1)
Force Majeure	350	(1)
Obligation to Deliver Power Obligation to Take Power	350	(1)
Delivery Point and Interconnection	351	(1)
Delivery Point	351	(1)
Interconnection Facilities	351	(1)
Power of Eminent Domain	351	(1)
Wheeling	351	(1)
Land Rights	352	(1)
Price for Power	352	(7)
Introduction	352	(1)
The Political Side of Energy Rates---A Lesson Learned in the U.S.	352	(1)
General Forms of Power Contract Price Provisions	352	(1)
Take-or-pay	352	(1)
Take-and-pay	352	(1)
Capacity and Energy Payments Structure	353	(1)
Capacity Payment	353	(1)
Fixed or Variable	354	(1)
Floor	354	(1)
Front-Loaded	354	(1)
Back-Loaded	354	(1)
Levelized	354	(1)
Adjustments to Capacity Charges	354	(1)
Energy Payment	355	(1)
Fixed or Variable	355	(1)
Floor	355	(1)
Forecasted	356	(1)
Indexed	356	(1)
Fuel Costs	356	(1)
Penalties and Bonuses	356	(2)
When Capacity Payments Begin	358	(1)
When Capacity Payments End	358	(1)
The Problem of Equity Return for Developing Countries	358	(1)
What If the Deal Turns Out to be a Bad One?	358	(1)
Security and Commitment of Project Sponsor	359	(2)
Security for Performance	359	(1)
Project-Based Security	360	(1)
Minimum Equity Undertaking	360	(1)
Cash and Letters of Credit	360	(1)
Tracking Accounts---Front-End Loaded	360	(1)
Force Majeure	361	(1)
Political Risk	361	(1)
Uncontrollable Events	362	(1)
Change of Law	362	(1)
Payment	362	(1)
Currency Convertibility	363	(1)
Term and Termination	363	(2)
Term	363	(1)
Termination Events	363	(1)
Termination by Power Purchaser	363	(1)
Termination by Project Company	363	(1)
Project Lenders	364	(1)
Remedies	364	(1)
Termination Payments	364	(1)
Power Purchaser's Right to Operate the Project	365	(1)
Ownership of Project at Expiration of Term	365	(1)
Penalties	365	(1)
Technical Standards	365	(1)
Operating Procedures	366	(1)
Metering	366	(1)
Third Party Sales and Project Transfers of Ownership	366	(1)
Generally	366	(1)
Right of First Refusal	366	(1)
Effects of Third Party Sales	367	(1)
``Regulatory Out'' Provisions	367	(2)
Power Purchaser Responsibilities	369	(1)
Project Company Responsibilities	369	(1)
Insurance	370	(1)
Successors to the Power Purchaser	370	(1)
Common Risk Allocation in Developing Country Power Purchase Agreements	370	(7)
Construction	370	(1)
Cost Overrun	370	(1)
Delay	371	(1)
Failure to Achieve Performance Standards	371	(1)
Operating	371	(1)
Cost Overrun	372	(1)
Operating Performance Shortfall	372	(1)
Fuel	372	(1)
Price	373	(1)
Supply	373	(1)
Transportation	373	(1)
Market	373	(1)
Demand	374	(1)
Price	374	(1)
Inflation	374	(1)
Exchange Rate Fluctuations	374	(1)
Political	374	(3)
PART VI---CREDIT ENHANCEMENT	377	(2)
Project Finance Credit Enhancement	379	(3)
Introduction to Credit Enhancement in Project Financings	382	(1)
Guarantees	383	(2)
Generally	383	(1)
Sponsor	384	(1)
Third Party	384	(1)
Contrast to Put Options	385	(1)
Collateral	385	(1)
Transnational Guarantees	385	(2)
Introduction	385	(1)
Varying Interpretation of Terms	385	(1)
Payments and Currency Risks	386	(1)
Tax Implications	386	(1)
Foreign Law	386	(1)
Limited Guarantees	387	(1)
Generally	387	(1)
Claw-back	387	(1)
Cash Deficiency	387	(1)
Completion	387	(1)
The Risk With Unlimited Guarantees	388	(1)
Indirect ``Guarantees''	388	(1)
Take-or-Pay Contracts	388	(1)
Take-and-Pay Contracts	389	(1)
Other Forms	389	(1)
Implied Guarantees and Undertakings	389	(1)
Generally	389	(1)
Comfort Letter	389	(1)
Put Options	390	(1)
Generally	390	(1)
Regulatory Put	390	(1)
Contrast to Guarantees	390	(1)
Letters of Credit	391	(1)
Surety Obligations	391	(1)
Bid Bonds	391	(1)
Performance Bonds	391	(1)
Payment Bonds	391	(1)
Warranty Bonds	392	(1)
Retention Money Bonds	392	(1)
Labor and Material Payment Bond	392	(1)
Commercial Insurance	392	(5)
Generally	392	(1)
Commercial Insurance and the Project Lender	393	(1)
Additional Insured	393	(1)
Loss Payee	393	(1)
Non-Vitiation Clauses	393	(1)
Reinsurance	394	(1)
Waiver of Subrogation	394	(1)
Collateral Security	394	(1)
Other Insurance Issues	394	(1)
Types of Commercial Insurance	395	(1)
Contractor's All Risks	395	(1)
Advanced Loss of Revenue	395	(1)
Marine Cargo	395	(1)
Marine Advanced Loss of Revenue	395	(1)
Operator's All Risks	395	(1)
Operator's Loss of Revenue	395	(1)
Third Party Liability	395	(1)
Employers's Liability/Workers' Compensation	396	(1)
Finite Risk	396	(1)
Trade Disruption	396	(1)
The ``Commercially Available in the Marketplace'' Standard	396	(1)
Exchange Controls	396	(1)
Export Financing Requirements	397	(1)
Political Risk Insurance, B Loan Programs and Guarantees	397	(17)
Generally	397	(1)
Multilateral Investment Guarantee Agency	397	(1)
Generally	397	(1)
Eligibility	398	(1)
Coverage	399	(1)
International Finance Corporation	400	(1)
World Bank Guarantees	401	(1)
Asian Development Bank	402	(1)
Inter-American Development Bank	402	(1)
Overseas Private Investment Corporation (US)	403	(4)
United States Export-Import Bank	407	(1)
Ministry of International Trade and Industry (Japan)	408	(1)
Export-Import Bank of Japan	409	(1)
Export Credit Guarantee Department of the United Kingdom Department of Trade and Industry	409	(1)
Compagnie Francaise d'Assurances Commerciale Exterieure	410	(1)
Export Development Corporation of Canada	410	(1)
Other OCED Government Insurance Entities	410	(1)
Other OCED Export Credit Agencies	411	(1)
Commercial Insurance	411	(1)
Scope of Coverage	411	(1)
MIGA Cooperative Underwriting Program	411	(1)
Portfolio Political Risk Insurance	412	(1)
Assignment Rights	412	(1)
Political Risk Insurance for Bond Financing in Emerging Market Project Finance	412	(1)
Credit Evaluation of Political Risk Insurance Policies	413	(1)
Warranty	414	(1)
Liquidated Damages in Fixed-Price Construction Contracts and Other Liquidated Damages	414	(1)
Indemnification Obligations	415	(1)
Sovereign Guarantees	416	(2)
Project	416	(1)
World Bank	416	(1)
Are Sovereign Guarantees Useful Without World Bank Involvement?	417	(1)
Availability of Funds to Pay Guarantee Claims	417	(1)
Are Sovereign Guarantees From the Host Government Always Necessary?	417	(1)
Others Forms of Government Credit Enhancement	418	(2)
Generally	418	(1)
Government Subordination	418	(1)
Government-Funded Accounts	418	(1)
Pledge of Receivables	419	(1)
Government Account Supported with Local Country Bank Letter of Credit	419	(1)
Use of State Devolution Account as Collateral	420	(1)
Replacement of the State-Owned off-Take Purchaser with a More Creditworthy Purchaser	420	(1)
Implementation Agreements	420	(1)
Reserve Funds	421	(1)
Cash Calls	421	(1)
Subordination of Project Costs to Debt Service	422	(1)
Hedging Strategies	422	(1)
The Commodity Supplier as Project Partner	422	(1)
PART VII --- DEBT AND EQUITY FINANCING	423	(565)
Financing Sources For The Project	425	(50)
Generally	428	(2)
Banks and Institutional Lenders	430	(1)
The Equity Markets	430	(1)
Domestic Equity Markets and Equity Placements	430	(1)
International Equity Markets	430	(1)
The Bond Markets	431	(4)
Generally	431	(1)
Credit Ratings	431	(1)
Sovereign Risk Analysis	432	(1)
Currency Risk Analysis	432	(1)
Political Risk Analysis	432	(1)
Legal (Contract) Risk Analysis	432	(1)
Market for Output	433	(1)
Advantages	433	(1)
Large and Liquid Market	433	(1)
Longer Term of Debt	433	(1)
Less Onerous Terms	433	(1)
Disadvantages	434	(1)
Regulatory Oversight	434	(1)
Ratings	434	(1)
Consents to Changes to Underlying Project Are Difficult	434	(1)
Negative Arbitrage	434	(1)
Expensive Transaction Costs	434	(1)
The Mini-Perm and Amortizing Mini-Perm	434	(1)
Rule 144A Debt Placements (US)	435	(2)
Advantages	436	(1)
Large and Liquid Market	436	(1)
Longer Term of Debt	436	(1)
Less Onerous Terms	436	(1)
Limited Regulatory Oversight	436	(1)
Disadvantages	436	(1)
Consents to Changes to Underlying Project Are Difficult	436	(1)
Negative Arbitrage	436	(1)
Investment Funds	437	(1)
The World Bank Group Financing Sources	437	(18)
Global and Regional Multilateral Involvement	437	(1)
The International Bank for Reconstruction and Development (IBRD)	437	(1)
Generally	437	(2)
Loan Program	439	(1)
Guarantee Program	440	(1)
General Requirements	441	(1)
Enclave Projects	442	(1)
Indirect Support	443	(1)
Negative Pledge	443	(1)
International Monetary Fund (IMF)	443	(1)
International Development Association (IDA)	444	(1)
International Finance Corporation(IFC)	445	(1)
Generally	446	(1)
Loan Program	446	(1)
Equity Program	447	(1)
Guarantee Program	447	(1)
Benefits of IFC Participation	447	(1)
Role of World Bank Group Credit in Project Financings	448	(1)
Financing from the IBRD and IDA	448	(1)
IBRD Financing for Enclave Projects	449	(1)
IDA Credits	449	(1)
Equity Financing	450	(1)
Debt Refinancing	450	(1)
Role of World Bank Group Guarantees in Project Financings	450	(1)
IBRD Guarantees	450	(1)
IBRD Indirect (Financed) Guarantee Coverage	450	(1)
When Are World Bank Guarantees Available?	451	(1)
IDA Guarantees	452	(1)
Other Credit Support---Take-or-Pay and Take-and-Pay Contracts	452	(1)
Benefits of World Bank Involvement	452	(1)
Catalyst for Participation by Other Entities	453	(1)
Financial Resources	453	(1)
Ability to Lend to Developing Countries	453	(1)
Ability to Finance Government Investment	453	(1)
Favorable Maturities and Interest Rates on Debt	453	(1)
Political Risk Protection and Comfort	454	(1)
Ability to Influence Governmental Actions Through Cross-Default Provisions in Loan Agreements	454	(1)
Ability to Influence Governmental Actions Through Decisions About Financing Future Governmental Projects	454	(1)
Influence over Macroeconomic Policies that May Affect a Project	454	(1)
Less Emphasis on Project Risks	454	(1)
Use of World Bank Procurement Policies	454	(1)
Use of World Bank Management Requirements	455	(1)
Regional Development Banks	455	(3)
Generally	455	(1)
African Development Bank	455	(1)
Arab Fund for Economic and Social Development	455	(1)
Asian Development Bank	455	(1)
European Bank for Reconstruction and Development	456	(1)
European Union	456	(1)
European Investment Bank	456	(1)
Inter-American Development Bank	457	(1)
Inter-American Investment Corporation	457	(1)
Islamic Development Bank	457	(1)
Nordic Investment Bank	458	(1)
Nordic Development Fund	458	(1)
OPEC Fund for International Development	458	(1)
Bilateral Agencies	458	(8)
Generally	458	(1)
The OECD Consensus	459	(1)
Methods of Export-Import Financing	460	(1)
Direct Lending	460	(1)
Financial Intermediary Loans (Bank-to-Bank)	461	(1)
Interest Rate Equalization	461	(1)
U.S. Export-Import Bank	461	(1)
Export-Import Bank of Japan	462	(1)
Overseas Private Investment Corporation	463	(1)
Office National du Decroire (Belgium)	464	(1)
Export Development Corporation (Canada)	464	(1)
Eksportkreditraadet (Denmark)	464	(1)
Finish Export Credit Limited (Finland)	465	(1)
Compagnie Francaise d'Assurance pour le Commerce Exterieur (France)	465	(1)
Kreditanstalt fur Wiederaufbau (Germany)	465	(1)
Instituto Centrale per il Credito a Medio Termine (Italy)	465	(1)
Netherlands	465	(1)
Export Credit Guarantee Department (United Kingdom)	465	(1)
Export Finance and Insurance Corporation (Australia)	465	(1)
Oesterreichische Kontrollbank AG (Austria)	465	(1)
Garanti-Instituttet for Eksportkreditt (Norway)	466	(1)
Swedish International Development Authority	466	(1)
Export Credit Insurance Company (Spain)	466	(1)
Export-Import Bank of Korea	466	(1)
Other Bilateral Support	466	(1)
Global Environment Facility	466	(1)
Subordinated Debt	466	(2)
Generally	466	(1)
Subordinated Debt Terms in Project Financings	467	(1)
Funding	467	(1)
Conditions to Funding	467	(1)
Other Indebtedness	467	(1)
Payment Blockage Periods	467	(1)
Amendment of Senior Debt Documents	467	(1)
Amendment of Project Contracts	468	(1)
Development Loans	468	(1)
Introduction	468	(1)
Definition	468	(1)
Goals of project Sponsor	468	(1)
Goals of Developmental Lender	468	(1)
Financing from Project Participants	469	(1)
Other Sources	470	(2)
Generally	470	(1)
Host Government	470	(1)
Contractor	470	(1)
Generally	470	(1)
Retainage as Financing	471	(1)
No Right of Offset	471	(1)
Financings Consistent With The Koran	472	(1)
Securitizations of Project Cash Flows	472	(3)
Generally	472	(1)
Benefits of Securitization	473	(1)
Structure of Securitizations	473	(2)
The Offering Memorandum	475	(6)
Purpose	476	(1)
Key provisions	476	(1)
Project Overview	476	(1)
Borrower	476	(1)
Project Sponsors	476	(1)
Debt Amount	477	(1)
Uses of Proceeds	477	(1)
Collateral	477	(1)
Sources of Debt and Equity	477	(1)
Equity Terms	477	(1)
Cost Overruns	478	(1)
Other Sponsor Guarantees and Credit Enhancement	478	(1)
Interest Rate	478	(1)
Repayment and Debt Amortization; Mandatory and Optional Prepayments	479	(1)
Commitment, Drawdown and Cancellation of Commitment	479	(1)
Fees	479	(1)
Conditions to Closing and Drawdown of Funds	479	(1)
Conditions to Each Drawdown of Funds	480	(1)
Covenants	480	(1)
Defaults	480	(1)
Governing Law	480	(1)
Lawyers, advisors and Consultants	480	(1)
Project Finance Debt Commitment Letters	481	(1)
The Term Sheet	482	(3)
Approaching the project Finance Lender for Business Advice	482	(1)
The Project Finance Loan Application---When Should the Process Begin?	483	(1)
The Letter of Intent---Showing Interest Without a Commitment	483	(1)
The Oral Commitment	484	(1)
The Commitment	485	(8)
The Commitment and its Scope	485	(1)
Introduction	485	(1)
Sample Provision	485	(1)
The Loan Amount	485	(1)
Introduction	485	(1)
Sample Provision	486	(1)
Use of Proceeds	486	(1)
Introduction	486	(1)
Sample Provision	486	(1)
Repayment Terms	486	(1)
Introduction	486	(1)
Sample Provision	486	(1)
Representations and Warranties	487	(1)
Introduction	487	(1)
Sample Provision	487	(1)
Covenants	487	(1)
Introduction	487	(1)
Sample Provision	488	(1)
Events of Default	488	(1)
Introduction	488	(1)
Sample Provision	489	(1)
Conditions to Closing	489	(1)
Introduction	489	(1)
Sample Provision	489	(2)
Term	491	(1)
Introduction	491	(1)
Sample Provision	491	(1)
Non-disclosure	491	(1)
Introduction	491	(1)
Sample Provision	491	(1)
Expenses	492	(1)
Introduction	492	(1)
Sample Provision	492	(1)
Material Adverse Change	492	(1)
Introduction	492	(1)
Sample Provision	492	(1)
General Recommendations on Commitment Letters	493	(2)
Credit and Related Documentation for Project Finance Transactions	495	(561)
The Commercial Lender's Perspective	503	(1)
Analysis of Project Risks in the Credit Appraisal Process by the Commercial Lender	504	(7)
Experience and Reputation of Project Sponsor	504	(1)
Experience and Reputation of Project Management Team	504	(1)
Experience and Resources of Contractor	505	(1)
Experience and Resources of Operator	505	(1)
Predictability of Price and Supply of Raw Material to be Used for the Project	505	(1)
Predictability of Price and Supply of Energy to be Used for the Project	506	(1)
Market for Product or Service	506	(1)
Terms and Enforceability of off-Take Contracts	506	(1)
Completion and Cost Over-run Risks are Addressed	506	(1)
Technology	507	(1)
Real Estate	507	(1)
Construction of Related Facilities	507	(1)
Permits and Licenses	508	(1)
General Operating Expenses	508	(1)
Political Environment	508	(1)
Currency and Exchange Risks	509	(1)
Timing and Certainty of Equity Contributions	509	(1)
Equity Returns for Equity Owners	509	(1)
Value of Project and Project Assets as Collateral	509	(1)
Interest Rate	509	(1)
Force Majeure	510	(1)
Project-Specific Risks	511	(1)
Protecting the Lender from Project Risks	511	(1)
Due Diligence	511	(1)
Assignments	511	(1)
Control Over Excess Cash Flow	511	(1)
Approval of Contract Amendments	512	(1)
Restrictions on Sale of Project Interests	512	(1)
Overview of Project Finance Credit Agreements	512	(1)
Significant Provisions of the Project Finance Credit Agreement	513	(1)
Conditions Precedent to Closing	513	(12)
Generally	513	(1)
Organization and Existence of Project Company, Project Sponsors, Guarantors and Other Major Participants; Copies of Governing Documents of Project Company, Project Sponsors, Guarantors and Other Major Project Participants	513	(1)
Generally	514	(1)
Draft Provision	514	(1)
Execution and Delivery of Credit Agreement and Related Financing Documents	515	(1)
Generally	515	(1)
Draft Provision	515	(1)
Lien Filings and Possession of Certain Collateral	515	(1)
Generally	515	(1)
Draft Provision	515	(1)
Availability of Funds	515	(1)
Generally	515	(1)
Draft Provision	515	(1)
Related Equity Documents and Availability of Funds	516	(1)
Generally	516	(1)
Draft Provision	516	(1)
Sponsor Support Documents	516	(1)
Generally	516	(1)
Draft Provision	516	(1)
Third-Party Support Documents and Credit Enhancement	516	(1)
Generally	516	(1)
Draft Provision	516	(1)
Host Government Concessions and Licenses	517	(1)
Generally	517	(1)
Draft Provision	517	(1)
Off-take Agreements	517	(1)
Generally	517	(1)
Draft Provision	517	(1)
Supply Agreements	517	(1)
Generally	517	(1)
Draft Provision	517	(1)
Construction Contract and Issuance of the Notice to Proceed	518	(1)
Generally	518	(1)
Draft Provision	518	(1)
Operation and Maintenance Agreements	518	(1)
Generally	518	(1)
Draft Provision	518	(1)
Permits	518	(1)
Generally	518	(1)
Draft Provision	519	(1)
Insurance and Insurance Consultant's Report	519	(1)
Generally	519	(1)
Draft Provision	520	(1)
Real Estate	520	(1)
Generally	520	(1)
Draft Provision	520	(1)
Financial Statements of Project Company, Project Sponsors, Guarantors and Major Project Participants	520	(1)
Generally	520	(1)
Draft Provision	521	(1)
Construction Budget and Construction Drawdown Schedule	521	(1)
Generally	521	(1)
Draft Provision	521	(1)
Revenue and Expense Projections	521	(1)
Generally	521	(1)
Draft Provision	522	(1)
Engineering Reports	522	(1)
Generally	522	(1)
Draft Provision	522	(1)
Consultant's Reports	522	(1)
Generally	522	(1)
Draft Provision	522	(1)
Environmental Review	523	(1)
Generally	523	(1)
Draft Provision	523	(1)
Legal Opinions	523	(1)
Generally	523	(1)
Draft Provision	524	(1)
No Material Adverse Change	524	(1)
Generally	524	(1)
Draft Provision	524	(1)
No Defaults	524	(1)
Generally	524	(1)
Draft Provision	524	(1)
No Litigation	524	(1)
Generally	524	(1)
Draft Provision	524	(1)
Other Conditions Precedent	525	(1)
Generally	525	(1)
Draft Provision	525	(1)
Conditions Precedent to Each Construction Loan Drawdown	525	(3)
Generally	525	(1)
Recertification of Representations and Warranties	525	(1)
Generally	525	(1)
Draft Provision	525	(1)
No Change in Law	526	(1)
Generally	526	(1)
Draft Provision	526	(1)
Permit Status	526	(1)
Generally	526	(1)
Draft Provision	526	(1)
No Default	526	(1)
Generally	526	(1)
Draft Provision	526	(1)
No Material Adverse Change	527	(1)
Generally	527	(1)
Draft Provision	527	(1)
No Litigation	527	(1)
Generally	527	(1)
Draft Provision	527	(1)
Construction Progress	527	(1)
Generally	527	(1)
Draft Provision	527	(1)
Construction Budget and Funds Available to Complete the Project	527	(1)
Generally	527	(1)
Draft Provision	527	(1)
Lien Waivers	528	(1)
Generally	528	(1)
Draft Provision	528	(1)
Other Conditions Precedent	528	(1)
Generally	528	(1)
Draft Provision	528	(1)
Conditions Precedent to Conversion of Construction Loan to a Term Loan	528	(3)
Generally	528	(1)
Recertification of Representations and Warranties	529	(1)
Generally	529	(1)
Draft Provision	529	(1)
No Change in Law	529	(1)
Generally	529	(1)
Draft Provision	529	(1)
Permit Status	529	(1)
Generally	529	(1)
Draft Provision	529	(1)
No Default	530	(1)
Generally	530	(1)
Draft Provision	530	(1)
No Material Adverse Change	530	(1)
Generally	530	(1)
Draft Provision	530	(1)
No Litigation	530	(1)
Generally	530	(1)
Draft Provision	530	(1)
Completion	530	(1)
Generally	530	(1)
Draft Provision	531	(1)
Other Conditions Precedent	531	(1)
Generally	531	(1)
Draft Provision	531	(1)
Representations and Warranties	531	(1)
Covenants	531	(18)
Generally	531	(1)
Reports on Project Construction and Completion	532	(1)
Generally	532	(1)
Mechanical Completion	533	(1)
Operation Completion	533	(1)
Final Completion	533	(1)
Draft Provision	533	(1)
Reports on Project Operation	533	(1)
Generally	533	(1)
Draft Provision	533	(1)
Notice of Certain Events	534	(1)
Generally	534	(1)
Draft Provision	534	(1)
Maintain Existence	534	(1)
Generally	534	(1)
Draft Provision	534	(1)
Maintain Interest in Project	534	(1)
Generally	534	(1)
Draft Provision	535	(1)
Pay Taxes	535	(1)
Generally	535	(1)
Draft Provision	535	(1)
Compliance with Laws	535	(1)
Generally	535	(1)
Draft Provision	536	(1)
Obtain and Maintain all Approvals, Permits and Licenses	536	(1)
Generally	536	(1)
Draft Provision	536	(1)
No Merger or Consolidation	536	(1)
Generally	536	(1)
Draft Provision	536	(1)
Engineering Standards for Construction and Operation	537	(1)
Generally	537	(1)
Draft Provision	537	(1)
Maintenance of Properties	537	(1)
Generally	537	(1)
Draft Provision	537	(1)
Environmental Compliance	537	(1)
Generally	537	(1)
Draft Provision	537	(1)
Insurance and Insurance Proceeds	537	(1)
Generally	537	(1)
Draft Provision	538	(1)
Performance of Project Documents	538	(1)
Generally	538	(1)
Draft Provision	538	(1)
Amendment, Modification, Termination, Replacement, Etc. of Project Documents	539	(1)
Generally	539	(1)
Draft Provision	539	(1)
Change Orders	539	(1)
Generally	539	(1)
Draft Provision	540	(1)
Engaging in Other Business	540	(1)
Generally	540	(1)
Draft Provision	540	(1)
Indebtedness	540	(1)
Generally	540	(1)
Draft Provision	540	(1)
Liens	541	(1)
Generally	541	(1)
Draft Provision	541	(1)
Investments	541	(1)
Generally	541	(1)
Draft Provision	541	(1)
Dividends and Restricted Payments	541	(1)
Generally	541	(1)
Draft Provision	542	(1)
Maximization of Use of Export Financing, Sponsor Support, Subordinated Debt	542	(1)
Generally	542	(1)
Draft Provision	542	(1)
Mandatory Prepayment on Occurrence of Certain Events from Excess Cash Flow	542	(1)
Generally	542	(1)
Draft Provision	543	(1)
Financial Tests	543	(1)
Generally	543	(1)
Draft Provision	543	(1)
Special Milestones	544	(1)
Generally	544	(1)
Draft Provision	544	(1)
Change in Project	544	(1)
Generally	544	(1)
Draft Provision	544	(1)
Project Support	544	(1)
Generally	544	(1)
Draft Provision	544	(1)
Financial Reporting	545	(1)
Generally	545	(1)
Use of Proceeds	545	(1)
Generally	545	(1)
Draft Provision	545	(1)
Security Documents	545	(1)
Generally	545	(1)
Draft Provision	546	(1)
Operating Budget	546	(1)
Generally	546	(1)
Draft Provision	546	(1)
Accounts	546	(1)
Generally	546	(1)
Draft Provision	547	(1)
Guarantee Obligations of Others	547	(1)
Generally	547	(1)
Draft Provision	547	(1)
Sale of Assets	547	(1)
Generally	547	(1)
Draft Provision	547	(1)
Capital Expenditures	548	(1)
Generally	548	(1)
Draft Provision	548	(1)
Transactions with Affiliates	548	(1)
Generally	548	(1)
Draft Provision	548	(1)
Construction Cost Overruns	548	(1)
Generally	548	(1)
Draft Provision	549	(1)
Other Covenants	549	(1)
Events of Default	549	(9)
Generally	549	(1)
Payment	549	(1)
Generally	549	(1)
Draft Provision (Project Company)	550	(1)
Draft Provision (Project Participant)	550	(1)
Breach of Covenants	550	(1)
Generally	550	(1)
Draft Provision	550	(1)
Breach of Representation or Warranty	551	(1)
Generally	551	(1)
Draft Provision (Project Company)	551	(1)
Draft Provision (Project Participant)	551	(1)
Filing of Bankruptcy Petition	552	(1)
Generally	552	(1)
Draft Provision (Project Company)	552	(1)
Draft Provision (Project Participant)	552	(1)
Commencement of Bankruptcy	552	(1)
Generally	552	(1)
Draft Provision (Project Company)	553	(1)
Draft Provision (Project Participant)	553	(1)
Judgments	553	(1)
Generally	553	(1)
Draft Provision	554	(1)
Final Acceptance Date	554	(1)
Generally	554	(1)
Draft Provision	554	(1)
Government Approvals	554	(1)
Generally	554	(1)
Draft Provision	555	(1)
Project Contracts	555	(1)
Generally	555	(1)
Draft Provision	555	(1)
Abandonment	556	(1)
Generally	556	(1)
Draft Provision	556	(1)
Expropriation	556	(1)
Generally	556	(1)
Draft Provision	556	(1)
Ownership and Control	556	(1)
Generally	556	(1)
Draft Provision	556	(1)
Payment of Obligations	557	(1)
Generally	557	(1)
Draft Provision (Project Company)	557	(1)
Draft Provision (Project Participants)	557	(1)
Breach of Credit Support	557	(1)
Generally	557	(1)
Draft Provision	558	(1)
Security Documents	558	(1)
Generally	558	(1)
Draft Provision	558	(1)
Remedies	558	(1)
Governing Law	559	(1)
Limitations on Recourse	559	(2)
Export Credits Documentation for Project Finance Transactions	561	(4)
The Export Lender's Perspective	561	(1)
Generally	561	(1)
OECD Consensus	562	(1)
Methods of Export-Import Financing	562	(1)
Direct Lending	562	(1)
Financial Intermediary Loans (Bank-to Bank)	563	(1)
Interest Rate Equalization	563	(1)
Export-Import Banks	563	(1)
Overview of Project Finance Export Credits Agreements	563	(1)
Significant Provisions of the Project Finance Export	563	(2)
Credits Agreement	563	(1)
Currency of Loan	563	(1)
Right to Prepay	564	(1)
Conditions Precedent	564	(1)
Representations and Warranties	564	(1)
Covenants	564	(1)
Events of Default	564	(1)
PART VIII --- COLLATERAL	565	(30)
Project Collateral	567	(28)
The Role of Collateral in a Project Financing	569	(1)
Generally	569	(1)
Collateral as a Defensive Tool	569	(1)
Collateral as an Offensive Tool	570	(1)
Uncertainty in Collateral Protections Available to Lenders --- You Can't Always Get What You Want	570	(1)
The Collateral Package	570	(3)
The ``Blanket'' Lien	570	(1)
Project Cash Flow	570	(1)
Personal Property	571	(1)
Intangible Assets	571	(1)
Permits, Licenses and Concessions	571	(1)
Contracts	572	(1)
Insurance Proceeds	572	(1)
Surety Bonds	572	(1)
Guarantees	572	(1)
Liquidated Damages	572	(1)
Political Risk Insurance	573	(1)
Accounts	573	(1)
Real Property	573	(1)
Collateral Documents	573	(3)
Generally	573	(1)
Personal Property Security Agreement	574	(1)
Mortgage, Deed of Trust and Indenture	574	(1)
Pledge of Ownership Interests	574	(1)
Voting Trust	575	(1)
Offshore Accounts	575	(1)
Disbursement Agreement	575	(1)
Negative Pledges	576	(1)
The Floating Lien	577	(1)
Other Collateral Problems	577	(3)
Types of Liens Allowed	577	(1)
Common Law Countries	577	(1)
Civil Law Countries	577	(1)
Developing Countries	578	(1)
Local Formalities	578	(1)
Denomination of Liens in Local Currency	578	(1)
Priority of Lien	578	(1)
Enforcement	578	(1)
Foreclosure	579	(1)
Real Property	579	(1)
The Problem of Transferability of Project Ownership and Operation Rights	579	(1)
Limited Potential Purchasers of Collateral	580	(1)
If You Think You're So Smart...	580	(1)
Collateral Trusts	580	(1)
Security Interests in Project Contracts	580	(9)
Contract Assignment and Anti-Assignment Clauses	581	(3)
Consents to Assignment---Approving Assignments and Enhancing the Contract's Value as Collateral	584	(1)
The Secured Party's Perspective	584	(2)
The Contracting Party's Perspective	586	(1)
The Project Company's Perspective	586	(1)
The Host Government's Perspective	586	(1)
The Project Finance Lender's Rights Under U.C.C.§9-318	587	(2)
The Project Finance Lender's Liability for Obligations Arising Under Assigned Contracts	589	(1)
Offshore Collateral Accounts	589	(1)
Intercreditor Agreements	590	(2)
Generally	590	(1)
Goals of Lenders in an Intercreditor Relationship	591	(1)
Typical Intercreditor Arrangements	591	(1)
Generally	591	(1)
Nonrecourse Nature of Project Debt	591	(1)
Project Contracts	591	(1)
Insurance	591	(1)
General Terms of Intercreditor Agreements	592	(1)
Commercial Insurance	592	(2)
Additional Insured	593	(1)
Loss Payee	593	(1)
Non-Vitiation Clauses	593	(1)
Reinsurance	593	(1)
Waiver of Subrogation	594	(1)
Other Insurance Issues	594	(1)
Adapting Collateral Security Laws to a Global Economy	594	(1)
PART IX --- PROJECT SPONSOR AND INVESTOR AGREEMENTS	595	(6)
Governing the Project Company: Stockholder, Partnership, Joint Venture and Management Agreements	597	(4)
Generally	597	(1)
Stockholder's Agreements	598	(1)
Partnership Agreements	598	(1)
Joint Venture Agreements	599	(1)
Management Agreements	599	(2)
PART X --- SPECIAL TOPICS IN PROJECT FINANCE	601	(66)
Bankruptcy	603	(6)
Introduction	603	(1)
Types	604	(1)
Universal	604	(1)
Territorial	604	(1)
Universal and Territorial	604	(1)
U.S. Debtor Filing for Bankruptcy Protection in U.S. and With Foreign Assets	605	(1)
Foreign Debtor Filing for Bankruptcy Protection Abroad and Has U.S. Assets	605	(1)
Selection of Bankruptcy Forum for the Debtor with Multi-Country Assets	606	(1)
Structuring Bankruptcy Solutions Before Closing	607	(2)
United States Laws Affecting Foreign Investments	609	(16)
Introduction	612	(1)
Foreign Corrupt Practices Act Generally	612	(2)
Anti-Bribery Prohibition	613	(1)
Accounting Provisions	614	(1)
Multilateral Agency Anti-corruption Prohibitions	614	(1)
Anti-Bribery Provisions of the FCPA	614	(7)
Corrupt Intent	614	(1)
Interstate Commerce and Acts in Furtherance	615	(1)
Offer, Payment, Gift or Promise of Money or a Thing of Value	615	(1)
Foreign Official	616	(1)
For the Purpose of Influencing the Foreign Official, in His ``Official Capacity,'' to Assist the Company in Obtaining or Retaining Business	617	(1)
Exceptions and Defenses	617	(1)
``Facilitating'' Payments	617	(1)
Payments Lawful Under Local Law	617	(1)
Promotional Expense Reimbursement	618	(1)
Payments by Subsidiaries of U.S. Corporations	618	(1)
Enforcement and Penalties	618	(1)
Avoiding Violations of the FCPA	619	(1)
The Problem of the Local Partner	619	(1)
Document Drafting Considerations	620	(1)
Representations	620	(1)
Conditions Precedent	620	(1)
Covenants	620	(1)
Termination	620	(1)
The Securities Exchange Act of 1934	621	(1)
The Mail and Wire Fraud Acts	621	(1)
The Internal Revenue Code	621	(1)
The Currency and Foreign Transactions Reporting Act	621	(1)
False Statements Act	622	(1)
National Security and Related Political Considerations	622	(3)
Introduction	622	(1)
Trade Embargo Regulations	622	(1)
Terrorist States	623	(1)
Anti-terrorism Regulations	623	(1)
Arms Export Control Act	623	(1)
Export Restrictions	623	(1)
Exon-Florio Amendment	623	(2)
Local Lawyers And Overview of Local Laws	625	(6)
Introduction	625	(1)
Local Lawyers	625	(2)
Need and Timing	625	(1)
Identifying Competent Lawyers	626	(1)
Criteria for Selection	626	(1)
Managing Local Lawyers	626	(1)
Overview of Local Laws	627	(1)
Local Counsel Opinions	627	(1)
Opinion of Counsel on Permits and Approvals	627	(4)
Purpose of Opinion	627	(1)
Status of Permits, Approvals and Concessions	627	(2)
Change of Law	629	(1)
Rights of Lender	629	(1)
Renewal	629	(1)
Typical Problems Encountered and Disclosed	629	(2)
Dispute Resolution In Project Finance Transactions	631	(12)
Introduction	632	(1)
On Whether to Litigate or to Arbitrate	632	(2)
Advantages of Arbitration	632	(1)
Advantages of Litigation	633	(1)
Can a Party Select Both?	633	(1)
Alternatives to Arbitration and Litigation	633	(1)
Which is ``Best'' for a Project Financing?	633	(1)
Inconsistent Preferences	634	(1)
Lender	634	(1)
Project Company	634	(1)
Contractor and Operator	634	(1)
Off-take Purchaser	634	(1)
Inconsistent Procedures	635	(1)
Consistency	635	(1)
Uniformity	635	(1)
Consolidation	635	(1)
Choice of Law	636	(1)
Substantive Law	636	(1)
Procedural Law	636	(1)
Renvoi	636	(1)
Lex Mercatoria	636	(1)
New York Law	637	(1)
Failure to Select a Law	637	(1)
Choice of Forum	637	(1)
Litigation	637	(1)
Arbitration---The New York Convention	637	(1)
Failure to Select a Law	638	(1)
Developing Countries	638	(1)
Choice of Panel	638	(2)
American Arbitration Association	638	(1)
International Chamber of Commerce	638	(1)
London Court of International Arbitration	639	(1)
United Nations Commission on International Trade Law	639	(1)
Inter-American Commercial Arbitration Commission	639	(1)
Stockholm Chamber of Commerce	639	(1)
International Centre for Settlement of Investment Disputes	639	(1)
Others	639	(1)
Disputes Involving Project Participants Not Parties to the Contract in Dispute	640	(1)
Challenging Arbitration Awards	640	(3)
Multilateral Agency Prohibitions On Anti-Competitive Activity	643	(18)
Introduction	644	(1)
Procurement Guidelines	645	(1)
Generally	645	(1)
World Bank	645	(1)
Inter-American Development Bank	645	(1)
European Bank for Reconstruction and Development	645	(1)
Organization of American States Inter-American Convention Against Corruption	646	(4)
Council of Europe Criminal Law Convention on Corruption	650	(2)
Organization for Economic Cooperation and Development (OECD) Recommendation of the Council on the Tax Deductibility of Bribes to Foreign Public Officials	652	(1)
Organization for Economic Cooperation and Development (OECD) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions	653	(1)
European Union Convention on the Fight Against Corruption Involving Officials of the European Communities or Officials of the Member States of the European Union	654	(1)
United Nations	654	(2)
International Chamber of Commerce Rules of Conduct to Combat Extortion and Bribery	656	(5)
Merchant Facilities-Project Finance Without Contractually-Assured Revenue Flows	661	(6)
Definition of Merchant Facility	661	(2)
Market Risk	663	(1)
Management of Commodity Input Risk	664	(2)
Generally	664	(1)
Long-term Contracts	664	(1)
Linking Inputs and Outputs	664	(1)
Reserve Funds	664	(1)
Cash Calls	665	(1)
Subordination of Project Costs to Debt Service	665	(1)
Hedging Strategies	665	(1)
The Commodity Supplier as Project Partner	665	(1)
Management of Commodity Output Risk	666	(1)
Loan Covenants for the Merchant Project	666	(1)
Resources
A Selected Bibliography	667	(8)
Glossary of Project Finance Terms	675	(12)
A Checklist of Due Diligence Considerations For a Project Financing	687	(10)
Table of Cases	697	(2)
Index	699