PARTIES TO A PROJECT FINANCING
Project finance transactions are complex transactions that often require numerous players in interdependent relationships. Because of this complexity, not all projects follow the same structure and not all of the participants described below partake in all projects. A typical project finance structure looks like as follows :
The description of each of the parties involved is as follows :
Project Company. The project company is the legal entity that will own, develop, construct, operate and maintain the project. The project company is generally an SPV (Special Purpose Vehicle) created in the project host country and therefore subject to the laws of that country (unless appropriate ‘commissions’ can be paid so that key government officials can grant ‘exceptions’ to the project). A project company can be created in one of two ways:
Sponsors. The equity investor(s) and owner(s) of the Project Company can be a single party, or more frequently, a consortium :
Lenders. Typically including one or more commercial banks and/or multilateral agencies and/or export credit agencies and/or bond holders.
Host Government. It is the government of the country in which the project is located. The host government is typically involved as an issuer of permits, licenses, authorizations and concessions. It also might grant foreign exchange availability projections and tax concessions. It might also be involved as an off-take purchaser or as a supplier of raw materials or fuel.
Offtaker. More typically found in utility, industrial, oil & gas and petrochemical projects. One or more parties will be contractually obligated to ‘offtake’ (purchase) some or all of the product or service produced by the project.
Suppliers. One or more parties provide raw materials or other inputs to the project in return for payment.
Contractors. The substantive performance obligations of the Project Company to design and build (D&B), and operate the project will usually be done through engineering procurement and construction (EPC) and operations and maintenance (O&M) contracts respectively.
Project Company. The project company is the legal entity that will own, develop, construct, operate and maintain the project. The project company is generally an SPV (Special Purpose Vehicle) created in the project host country and therefore subject to the laws of that country (unless appropriate ‘commissions’ can be paid so that key government officials can grant ‘exceptions’ to the project). A project company can be created in one of two ways:
- when the host government solicits bids and selects the best candidate among the bidders;
- or a company or group of companies may initiate a project on their own, with or without soliciting host government involvement.
Sponsors. The equity investor(s) and owner(s) of the Project Company can be a single party, or more frequently, a consortium :
- Industrial sponsors, who see the initiative as linked to their core business
- Public sponsors (central or local government, municipalities, or municipalized companies), whose aims center on social welfare
- Contractor/sponsors, who develop, build, or run plants and are interested in participating in the initiative by providing equity and/or subordinated debt
- Purely financial investors
Lenders. Typically including one or more commercial banks and/or multilateral agencies and/or export credit agencies and/or bond holders.
Host Government. It is the government of the country in which the project is located. The host government is typically involved as an issuer of permits, licenses, authorizations and concessions. It also might grant foreign exchange availability projections and tax concessions. It might also be involved as an off-take purchaser or as a supplier of raw materials or fuel.
Offtaker. More typically found in utility, industrial, oil & gas and petrochemical projects. One or more parties will be contractually obligated to ‘offtake’ (purchase) some or all of the product or service produced by the project.
Suppliers. One or more parties provide raw materials or other inputs to the project in return for payment.
Contractors. The substantive performance obligations of the Project Company to design and build (D&B), and operate the project will usually be done through engineering procurement and construction (EPC) and operations and maintenance (O&M) contracts respectively.
The description of each of the contracts/agreements is as follows :
Shareholders' agreement. A shareholders' agreement sets out the respective rights and obligations of the sponsors with respect to each other and the project company, with a strictly controlled dividend policy. In project financing, special attention is paid to the handling of potential conflicts of interests. This is especially the case where both private sector sponsors and the host government are equity holders.
Loan agreements. A credit agreement is the principal legal document between the banks and the project company that details the express terms on which the banks will advance funds to the project company together with any associated security documents. Some of the issues parties will need to consider are:
- the currency of the loans (should they be denominated in the principal currency of expenditure or the currency of the projected revenues?);
- the manageability of the drawdown and reporting requirements from the project company's point of view;
- and whether any control amount requirements reflect local legal requirements.
Offtake agreement. Revenue risk can be managed through an offtake agreement between the host government authority/power distribution company and the project company by providing the project company with a sufficient pre-determined revenue stream to ensure payment of its project obligations, operating costs and a return for its sponsors. An offtake agreement will typically take the form of a "take-or-pay" agreement, which provides that the offtaker has the option of either taking the project's product or paying for the product (even if it is not taken) at the agreed tariff. Long-term agreements such as these would normally be entered into for gas or electricity generation projects, since sales would not be made on a spot or retail market.
Construction agreement. A construction contract between the project company and the construction company will typically be in the form of a comprehensive turnkey contract, which should ensure that the contractor will deliver a completed and operational facility. The turnkey model provides for the project, capable of meeting its projected operating standards and contractual obligations, to be handed over and be ready for immediate operation. For that reason, it is not unusual for sponsors to try and shift all completion- related risks onto the contractor.
Supply agreements. A supply agreement between the project company and the supplier varies in sensitivity depending on the raw material or fuel used by a project and the source and ownership of supplied material. Security of supply and price certainty is of key importance for the project. It is also important that pricing and adjustments of terms are capable of being passed through under the offtake agreement in order to protect the project’s revenue projections and debt servicing capacity.
Operating and maintenance (O&M) agreement. An operating and maintenance agreement between the project company and the operator allocates facility operational risks and aims to ensure that the operator meets performance guarantees tied to maximizing revenues.
Project agreement. A project agreement between the host government and the project company depends on the degree of the government's involvement. Two major cases usually occur :
- The host government agrees to be the offtaker, purchasing all or part of the output of the project, sometimes at a set price. These projects are often in the energy, oil and mining industries, where a product or service is the output. For the provision of public facilities where usage risk inherently cannot be transferred to the private sector, such as schools and hospitals, the private-sector investor is paid by the host government for constructing the facility to the required specification and making it available for the period of the contract, as well as for provision of services such as maintenance, cleaning and catering.
- The host government can enter in a Concession Agreement with the project company, which allows the collection of tolls from users; it does not usually involve any payment by or to the host government.
Let's focus now the motivations of each parties to choose to invest through project finance.
Follow this link : Parties' motivations to project financing
Follow this link to Summary.
Follow this link : Parties' motivations to project financing
Follow this link to Summary.
In case you need more information, or are eager to get into the details of Project Finance, I recommend the following reads , that I personally bought as to create the summarized information of this Project Finance website (Amazon links) :
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