Over the last two decades, project finance has grown in popularity as a method of financing infrastructure projects in developing countries. Furthermore, the use of project financing raises serious legal concerns about developing-country governments’ ability to control the provision of public services that are inextricably linked to these infrastructure projects. There are several advantages to project financing, including the ability for investors to participate directly in an inaccessible and profitable, albeit risky, market, and the ability to participate in high-risk investments without jeopardizing creditworthiness. Large international commercial banks, such as ABN Amro and Citibank, or multilateral lending agencies, such as the International Finance Corporation (IFC) and the European Bank for Reconstruction and Development, are the primary project lenders (EBRD). They will almost certainly request that some topics be included in a term sheet.
The first step in project financing is usually for the sponsors or promoters to form a project company, also known as a vehicle or special entity, that will build, own, and operate the project facility. As a result, project finance benefits sectors or industries where projects can be built as a separate entity from their sponsors or promoters.
As an example, consider the project company, which is the party that borrows money for the project. The lenders make loans to the project company, with the project’s assets and cash flow serving as security for the loans.
Definitions and interpretations
Project finance is defined by the European Investment Bank as “a loan granted primarily against cash flows generated by the project, rather than relying on a corporate balance sheet, the security value of physical assets, or other forms of security.”
A project developer is the project’s sponsor or borrower.
A Power Purchase Agreement (PPA) is a contract that is one of the requirements for a lender to lend money to a project. This is a contract that states that “there will be a ready market for the project at the end.”
A term sheet is an outline of the main project and investment terms and conditions. It is not a legal document in and of itself, but rather a set of draft proposals that must be approved by all parties involved.
Because project transactions typically involve many parties from various jurisdictions, the laws of many different jurisdictions may apply to any given transaction. As a result, each party’s uncertainty or fear translates into a specific risk. It is critical to analyze the terms sheet, PPA, or PSA and, if necessary, find the appropriate regulations or legal tools to mitigate any risks.
The risks differ for each project; they are usually country-specific, and they vary depending on the type of project you want to undertake.
There are various types of risks, with the magnitude varying from project to project. The following are some of the most common types of risk to consider at any price:
– Sponsorship danger
– Pre-completion dangers
– The risk of inflation and currency depreciation
– operational dangers
– Technological dangers
– Completion danger
– Input danger
– Approvals, regulatory risks, and environmental conce
– The risk of absorption and sale
– Political dangers
When all risks – financial, construction and completion risks, technology and performance risks, foreign exchange and availability risks – are critically examined, it is possible to conclude that they are more related to government policies, or political or ideological activities. Linking political risk to regulatory risk Louis T. Wells Jr. defined political and regulatory risks as a major impediment to private investment in developing and transition economies’ infrastructure sectors in the majority of his research “Threats to a project’s profitability arising from government action or inaction rather than changes in economic market conditions: in any case, action or inaction of political authorities or their agents, rather than changes in economic market conditions. There must be a direct cause of change in profitability in the supply and demand of goods and services ” (Moran H Theodore, 1999). The long gestation periods of infrastructure projects cause planning and political risk. Projects are subject to policy changes during these lengthy periods (Vickerman, 2002).
Despite the allure of project financing, the magnitude of the extensive political risk involved is enormous. The political risk will be mentioned and analyzed extensively in this report as the primary risk for the project developer.