Articles

A legal framework for complex projects

Business Law & Tax Review May 2008
By Charles Marais

Some of the world's largest and most challenging projects, including the construction and financing of bridges, tunnels, dams, pipelines and transmission lines, have been those that straddle international borders.

When it comes to meeting the challenges of mitigating multiple risks, structuring financing packages and insurance wraps, the most seasoned professionals are required to reach deep into their experience and imagination to produce workable solutions.

Commercial banks blanche at the idea of taking on the risks of many of these projects without strong sponsor support or even sovereign guarantees, and it is often left to the multi- and bilateral agencies who have more of an appetite for very long term tenures, which afford plenty of time for refinancing, to rise to the challenge.

Crucial for these projects is a legal environment which is conducive for the implementation of transactions of this nature. It usually starts with bilateral agreements at sovereign level which should pave the way for co-operation between the various project parties. However, the negotiating parties still have to consider the following risk areas:

• Regulatory: what laws apply?
• Political: could there be adverse government action?
• Legal: how does the system operate?
• Currency: often the revenue generated by these projects is in local currency whilst the financing obligations are in hard currency, as in some infrastructure projects.

On a commercial level, these projects are the same as any other, in that there will be a firm payment obligation as basis of project revenues, and construction and operational risks will be mitigated in familiar ways.

The "upstream or downstream" complexities which make these projects unique. For example, the upstream part of the project may be financed separately from the downstream part. Each part may be subject to its own concession or production sharing agreement. The downstream project may be at the mercy of the upstream project, where there are supply implications, as in a gas pipeline or a transmission line.

With two host governments there are the implications of:

• Two sets of political risk;
• Two government negotiating teams each with its own negotiating stance and agendas;
• Two lenders’ direct agreements; and
• Two sets of government revenue requirements.

All of these are to be accommodated in one project timetable with the knowledge that the actions of one host government will impact the other throughout the life of the project.

This will be particularly true if the government of the upstream project has more interest in the overall project than the other, which only has an interest in the downstream part. A gas off taker receiving gas from a neighbouring country for an LNG plant will be interested in both projects whereas the owner of the gas may have alternative markets.

The problems don't stop there. Consider the implications of two project companies, each owning assets in its host country. The sponsors will be interested in both project companies but will have to accommodate possible participation by the host governments in their respective project companies. Registration and regulatory requirements regarding the formation and financing of companies can vary significantly form one country to the.

Other implications of two jurisdictions are two different tax and insolvency regimes and two different systems for taking security. When it comes to tax issues, there may be different times for payment of taxes, resulting in different priorities of payment from project revenues. If project revenues are payable in one jurisdiction, how is other host government assured of payment of its taxes?

Insuring against the above risks can lead to multi-layered political risk mitigation, resulting in complexity and time delays in structuring all these layers together. Certainly, sponsors will want to harmonise cover, but the export credit agencies and multilaterals may be reluctant to do so. Ultimately, it's a question of achieving a balance which is bankable and addresses the most significant political risks.

An aspect of cross border projects which requires careful consideration is that of dispute resolution. One cannot emphasise strongly enough the need to have dispute resolution provisions which lead to certain, if not necessarily speedy, resolutions to disputes.

It is prudent to employ local lawyers or lawyers with the appropriate international reach and who have in-depth knowledge of risk allocation, funding and structuring in addition to documentation experience, as early as possible. It is difficult to reopen negotiations once an obstacle is encountered and, as the process is dynamic and ongoing, changes are inevitable. The legal team should multi-disciplined.

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Charles Marais

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