Front Cover	1
	Principles of Project Finance	4
	Copyright Page	5
	Contents	6
	List of Tables	12
	List of Figures	14
	1 Introduction	16
	2 What is Project Finance?	20
	§2.1 Introduction	20
	§2.2 Definition and Basic Characteristics	20
	§2.3 Development of Project Finance	24
	§2.4 Elements of a Project-Finance Structure	28
	§2.5 Examples of Project-Finance Structures	29
	§2.5.1 Process-Plant projects	29
	§2.5.2 Infrastructure Projects	30
	§2.5.3 Other Structures	33
	§2.6 Why Use Project Finance?	35
	§2.6.1 Why Investors Use Project Finance	36
	§2.6.2 The Benefits of Project Finance to Third Parties	40
	3 Project Development and Management	44
	§3.1 Introduction	44
	§3.2 Sponsors and Other Investors	45
	§3.2.1 Passive and Secondary Investors	47
	§3.2.2 Public-Sector Shareholders	48
	§3.3 Project Development	48
	§3.4 The Rôle of Advisors	49
	§3.4.1 Financial Advisor	50
	§3.4.2 Legal Advisor	52
	§3.4.3 Other Advisors	53
	§3.5 Joint-Venture Issues	53
	§3.6 The Project Company	55
	§3.6.1 Structure	55
	§3.6.2 Shareholder Agreement	56
	§3.6.3 Management and Operations	57
	§3.7 Public Procurement	59
	§3.7.1 Project Management	60
	§3.7.2 Advisors	61
	§3.7.3 Project Development	62
	§3.7.4 Procurement Systems	64
	§3.7.5 Pre-Qualification	67
	§3.7.6 Request for Proposals	68
	§3.7.7 Negotiation	70
	§3.7.8 Bid Evaluation	71
	§3.7.9 Dealing with Bids	72
	§3.7.10 Competitive Bidding for Sub-Contracts	73
	§3.7.11 Unsolicited Bids	74
	§3.7.12 Relationship with the Lenders	75
	§3.7.13 Contract Management	75
	4 The Project-Finance Markets	76
	§4.1 Introduction	76
	§4.2 Commercial Banks	77
	§4.2.1 Areas of Activity	77
	§4.2.2 Banks in the Market	79
	§4.3 Bonds	81
	§4.3.1 The U.S. Bond Market	82
	§4.3.2 Wrapped Bonds	85
	§4.3.3 The International Bond Market	86
	§4.4 Other Non-Bank Lenders	89
	§4.5 Other Sources of Private-Sector Debt	89
	§4.5.1 Mezzanine Debt	89
	§4.5.2 Lease Finance	90
	§4.5.3 Vendor Finance	91
	§4.5.4 Islamic Finance	92
	5 Working with Lenders	94
	§5.1 Introduction	94
	§5.2 Commercial Banks	94
	§5.2.1 Organizational Structure	94
	§5.2.2 Project Finance and Structured Finance	96
	§5.2.3 Lead Arrangers	97
	§5.2.4 Letters of Intent	99
	§5.2.5 Bank Rôles	99
	§5.2.6 Financial Model	100
	§5.2.7 Term Sheet, Underwriting, and Documentation	101
	§5.2.8 Information Memorandum and Syndication	103
	§5.2.9 Loan Agency	104
	§5.2.10 Collateralized Loan Obligations (CLOs)	105
	§5.3 Bonds	106
	§5.3.1 The Investment Bank and the Credit Rating Agencies	106
	§5.3.2 Paying Agent, Trustees and Controlling Creditor	108
	§5.4 Bank Loans Versus Bonds	108
	§5.5 Lenders’ Due-Diligence and External Advisors	110
	§5.5.1 Due Diligence	110
	§5.5.2 Legal Advisors	111
	§5.5.3 Lenders’ Engineer	111
	§5.5.4 Insurance Advisor	112
	§5.5.5 Model Auditor	112
	§5.5.6 Other Advisors	112
	§5.5.7 Pre-appointment of Lenders’ Advisors	113
	§5.5.8 Use of Advisors’ Time	113
	§5.6 Lenders and the Public-Procurement Process	114
	§5.6.1 Bank Debt	114
	§5.6.2 Bonds	115
	6 Types of Project Agreement	118
	§6.1 Introduction	118
	§6.2 BOT, BTO et al.	119
	§6.3 Offtake Contract	121
	§6.3.1 Types of Offtake Contract	121
	§6.3.2 PPA Structure	124
	§6.3.3 Construction Phase	124
	§6.3.4 Operation of the Plant	125
	§6.3.5 Tariff	125
	§6.3.6 Penalties	128
	§6.4 Availability-based Contract	130
	§6.4.1 Service Fee	131
	§6.4.2 Output Specification	131
	§6.4.3 Availability	132
	§6.4.4 Performance	134
	§6.4.5 Benchmarking and Market-Testing Building-Services Costs	136
	§6.4.6 Shadow Tolls	137
	§6.5 Concession Agreement	138
	§6.5.1 User Charges	138
	§6.5.2 Competition	139
	§6.5.3 Revenue Sharing	139
	§6.5.4 User Issues	139
	§6.5.5 Other Terms	140
	§6.6 Other ‘PPP-like’ Contracts	140
	7 Common Aspects of Project Agreements	144
	§7.1 Introduction	144
	§7.2 Term	145
	§7.2.1 Useful Life of the Project	145
	§7.2.2 Affordability	145
	§7.2.3 Term of the Debt	145
	§7.2.4 Equity Return	146
	§7.2.5 Residual Value	146
	§7.2.6 Flexibility	146
	§7.2.7 ‘Whole-life’ Benefits	147
	§7.2.8 Tax Efficiency	147
	§7.2.9 Variable Term	147
	§7.3 Payment Mechanism	147
	§7.3.1 Payment on Project Completion	147
	§7.3.2 Level Payments	148
	§7.3.3 Inflation Indexation	148
	§7.3.4 Third-Party Revenue	149
	§7.4 Contract Monitoring by the Offtaker/Contracting Authority	150
	§7.4.1 Design and Construction	150
	§7.4.2 Operation	151
	§7.4.3 Sub-Contracts	152
	§7.4.4 Financing	152
	§7.5 Performance Bonding and other Guarantees	152
	§7.6 Compensation Events	153
	§7.6.1 Breach of Obligation	154
	§7.6.2 Delays in Construction	154
	§7.6.3 Contract Variations	154
	§7.6.4 Changes in Law	156
	§7.6.5 Financial Equilibrium	156
	§7.7 Excusing Causes	158
	§7.8 Relief Events	158
	§7.9 Step-in by the Offtaker/Contracting Authority	159
	§7.10 Termination of the Project Agreement	160
	§7.10.1 Early Termination: Default by the Project Company	160
	§7.10.2 Early Termination: Default by the Offtaker/Contracting Authority	166
	§7.10.3 Optional Termination by the Offtaker/Contracting Authority	169
	§7.10.4 Early Termination: Force Majeure	169
	§7.10.5 Early Termination: Corruption or Fraud	171
	§7.10.6 Tax Implications of a Termination Sum Payment	171
	§7.10.7 Final Maturity of a Reverting Asset-based Project Agreement	171
	§7.10.8 Early Termination of a Non-Reverting Asset-based Project Agreement	173
	§7.10.9 Final Maturity of a Non-Reverting Asset-based Contract	174
	§7.11 Change of Ownership	175
	§7.12 Dispute Resolution	176
	8 Sub-Contracts and Other Related Agreements	178
	§8.1 Introduction	178
	§8.2 Construction Contract	179
	§8.2.1 Scope of Contract	181
	§8.2.2 Commencement of the Works	181
	§8.2.3 Contract Price, Payments, and Variations	182
	§8.2.4 Construction Supervision	183
	§8.2.5 Owner’s Risks	183
	§8.2.6 Relief Events	184
	§8.2.7 Project Completion	184
	§8.2.8 Liquidated Damages and Termination	185
	§8.2.9 Security	187
	§8.2.10 Suspension and Termination by the Construction Contractor	188
	§8.2.11 Dispute Resolution	189
	§8.3 O&M/Maintenance Contract(s)	189
	§8.3.1 Scope of Contract	189
	§8.3.2 Services	189
	§8.3.3 Fee Basis	190
	§8.3.4 Incentives and Penalties	191
	§8.3.5 Major Maintenance Contract	191
	§8.4 Building-Services Contract	191
	§8.5 Fuel or Other Input-Supply Contract	192
	§8.5.1 Supply Basis	193
	§8.5.2 Physical Delivery Risks	195
	§8.5.3 Pricing Basis	195
	§8.5.4 Security	196
	§8.5.5 Relief Events and Change in Law	196
	§8.5.6 Default and Termination	197
	§8.6 Insurance	197
	§8.6.1 Construction-Phase Insurances	198
	§8.6.2 Operating-Phase Insurances	201
	§8.6.3 Deductibles	201
	§8.6.4 Supplier’s or Buyer’s Extensions	202
	§8.6.5 Lender Requirements	202
	§8.6.6 Reinsurance	204
	§8.6.7 Control of Litigation	204
	§8.6.8 Insurance Premium/Uninsurable Risk	205
	§8.6.9 Linear or Multi-site Projects	205
	§8.6.10 Portfolio Insurance/Self-Insurance	205
	§8.7 Site Lease and other Usage Rights	205
	§8.8 Permits and Other Rights	206
	§8.8.1 Project Permits	206
	§8.8.2 Rights of Way and Easements	207
	§8.8.3 Shared Facilities	207
	§8.8.4 Investment and Financing Permits	207
	§8.9 Amendments to and Replacement of Sub-Contracts	208
	§8.10 Parent-Company Guarantees	208
	§8.11 Direct Agreements	209
	9 Commercial Risks	212
	§9.1 Introduction	212
	§9.2 Risk Evaluation and Allocation	213
	§9.3 Analysis of Commercial Risks	215
	§9.4 Commercial Viability	216
	§9.5 Construction Risks	218
	§9.5.1 Site Acquisition and Access	219
	§9.5.2 Site Condition	219
	§9.5.3 Permits	220
	§9.5.4 The Construction Contractor	221
	§9.5.5 Construction Contract-Related Cost Overruns	224
	§9.5.6 Other Construction-Phase Costs	227
	§9.5.7 Revenue During Construction	228
	§9.5.8 Delay in Project Completion	229
	§9.5.9 Third-Party Risks	230
	§9.5.10 Inadequate Performance on Project Completion	232
	§9.5.11 The Construction Contractor’s Security	233
	§9.5.12 Projects without a Fixed-Price, Date-Certain, Turnkey Construction Contract	233
	§9.6 Revenue Risks	234
	§9.6.1 Offtake and Similar Contracts	235
	§9.6.2 Projects without Price or Volume Risk Mitigation	238
	§9.6.3 Concession Agreements and Privatized Infrastructure	241
	§9.6.4 Availability-based Contracts	244
	§9.7 Operating Risks	245
	§9.7.1 Process-Plant Projects—Technology Risk	246
	§9.7.2 Process-Plant Projects—Project Operation	247
	§9.7.3 Process-Plant Projects—Degradation	247
	§9.7.4 Concession Agreements and Availability-based Contracts—Availability and Performance	248
	§9.7.5 Maintenance and Lifecycle Costs	248
	§9.7.6 Utility Costs	250
	§9.7.7 Other Operating Costs	251
	§9.8 Input-Supply Risks	251
	§9.8.1 Input-Supply Contracts	252
	§9.8.2 When is an Input-Supply Contract Not Needed?	255
	§9.8.3 Water and Wind	255
	§9.8.4 Mineral Reserves	255
	§9.8.5 Other Utilities	256
	§9.9 Uninsured Risks and Related issues	256
	§9.9.1 Force Majeure and Insurance	257
	§9.9.2 Insurance Costs	257
	§9.9.3 Unavailability of Insurance	258
	§9.10 Environmental Risks	259
	§9.10.1 Environmental Impact Assessment	260
	§9.10.2 The Equator Principles	260
	§9.10.3 Pre-Existing Site Contamination	262
	§9.10.4 Waste Disposal	263
	§9.10.5 Change in Law	263
	§9.11 Residual-Value Risk	263
	§9.12 Contract Mismatch	263
	§9.13 Recourse to the Sponsors	265
	§9.14 Risks for an Offtaker/Contracting Authority	268
	§9.15 Why Do Projects Fail?	268
	§9.16 Loss on Default	270
	10 Macro-Economic Risks	272
	§10.1 Introduction	272
	§10.2 The Time Value of Money	273
	§10.2.1 Discounted Cash Flow	273
	§10.2.2 Internal Rate of Return	275
	§10.2.3 Problems in Using DCF and IRR Calculations	276
	§10.3 Interest-Rate Risks	280
	§10.3.1 Interest-Rate Swaps	282
	§10.3.2 Interest-Rate Caps and other Instruments	289
	§10.3.3 Scale and Timing of Interest-Rate Hedging	290
	§10.3.4 Fixed-Rate Loans or Bonds	290
	§10.3.5 Interest-Rate Hedging before Financial Close	292
	§10.3.6 Should Interest-Rate Risk be the Project Company’s Problem?	294
	§10.4 Inflation	294
	§10.4.1 Inflation Indexation of Contract Payments	295
	§10.4.2 ‘Over-Indexation’	298
	§10.4.3 Inflation-Indexed Financing	299
	§10.5 Foreign-Exchange Risks	301
	§10.5.1 Managing Foreign-Exchange Risks	302
	§10.5.2 Exchange-Rate Hedging	304
	§10.5.3 Local-Currency Debt	304
	§10.5.4 Liquidity Support	305
	§10.5.5 Catastrophic Devaluation	305
	§10.5.6 Finance in More than One Currency	306
	§10.5.7 Conversion of Local Currency Revenues	307
	§10.5.8 Fixing of Security in Local Currency	308
	§10.6 Refinancing Risk	308
	11 Regulatory and Political Risks	310
	§11.1 Introduction	310
	§11.2 Projects and Politics	311
	§11.3 Change in Law	312
	§11.3.1 Change in Law Risk	313
	§11.3.2 Categories of Change in Law	313
	§11.4 Investment Risks	315
	§11.4.1 Currency Convertibility and Transfer	316
	§11.4.2 Expropriation	319
	§11.4.3 War and Civil Disturbance	319
	§11.5 Wider Political Risks	320
	§11.5.1 Contract Repudiation/Legal Process	320
	§11.5.2 Creeping Expropriation	322
	§11.6 ‘Sub-Sovereign’ Risk	323
	§11.7 Government Support Agreement	324
	§11.8 Political-Risk Insurance and Guarantees	326
	§11.8.1 Private-Sector Insurance	326
	12 Financial Structuring	328
	§12.1 Introduction	328
	§12.2 Investors’ Analysis and Equity Structure	329
	§12.2.1 Equity IRR	329
	§12.2.2 Blended Equity IRR	330
	§12.2.3 Timing of Equity Investment	331
	§12.2.4 Other Equity-Return Measurements	333
	§12.2.5 Bringing in New Investors at Financial Close	336
	§12.3 Debt Cover Ratios	337
	§12.3.1 Annual Debt-Service Cover Ratio	337
	§12.3.2 Loan-Life Cover Ratio	338
	§12.3.3 Average ADSCR and LLCR	339
	§12.3.4 Project-Life Cover Ratio	339
	§12.3.5 Reserve-Cover Ratio	340
	§12.3.6 Calculating Cover Ratios	340
	§12.3.7 Minimum Cover Ratios and Debt Amount	341
	§12.4 Debt:Equity Ratio	342
	§12.4.1 Calculation of Debt:Equity Ratio	343
	§12.4.2 Contingency Financing	343
	§12.4.3 100% Contingent Equity	343
	§12.4.4 Projects without Equity	344
	§12.5 Debt Service Profile	344
	§12.5.1 Term of Financing	345
	§12.5.2 Average Life	346
	§12.5.3 Repayment Schedule	347
	§12.5.4 Flexible Repayment	351
	§12.6 Interest Rate and Fees	352
	§12.6.1 Interest Rate	353
	§12.6.2 Arranging and Underwriting Fees	353
	§12.6.3 Commitment Fees	354
	§12.6.4 Agency Fees	354
	§12.7 Additional Costs	355
	§12.7.1 Withholding Tax on Interest Payments	355
	§12.7.2 Mandatory Costs	355
	§12.7.3 Market Disruption	356
	§12.8 Optimizing the Financial Structure	356
	13 The Financial Model	360
	§13.1 Introduction	360
	§13.2 Functions of the Financial Model	361
	§13.3 Model Inputs	362
	§13.4 Macro-Economic Assumptions	363
	§13.4.1 Inflation	363
	§13.4.2 Commodity Prices	364
	§13.4.3 Interest Rates	364
	§13.4.4 Exchange Rates and Currency of the Model	365
	§13.4.5 Economic Growth	366
	§13.5 Project Costs and Financing	366
	§13.5.1 Construction-Phase Costs	366
	§13.5.2 Construction-Phase Financing	368
	§13.6 Operating Revenues and Costs	369
	§13.7 Accounting and Taxation Issues	369
	§13.7.1 Capitalization and Depreciation of Project Costs	370
	§13.7.2 The Dividend Trap	372
	§13.7.3 Negative Equity	374
	§13.7.4 Timing of Tax Payments	375
	§13.7.5 Value-Added Tax	375
	§13.7.6 Withholding Tax	375
	§13.7.7 Exchange Rates and Tax	375
	§13.7.8 Inflation and Tax	377
	§13.8 Model Outputs	377
	§13.9 Sensitivity Analysis	378
	§13.10 The Banking Case, Base Case and Financial Close	379
	§13.11 Using the Model after Financial Close	379
	14 Project-Finance Loan Documentation	382
	§14.1 Introduction	382
	§14.2 Lenders’ Term Sheet	383
	§14.3 Construction Phase—Drawdown of Debt	383
	§14.3.1 Availability Period	384
	§14.3.2 Drawdown Procedure	384
	§14.3.3 Debt Accretion	385
	§14.4 Operating Phase—Control of Cash Flow	386
	§14.4.1 Project Accounts	386
	§14.4.2 The Cash-Flow Cascade	390
	§14.4.3 Distributions to investors	391
	§14.4.4 Cash Sweep	392
	§14.4.5 Cash clawback	394
	§14.5 Reporting Requirements	394
	§14.5.1 Construction Phase	394
	§14.5.2 Operating Phase	394
	§14.6 Debt Cancellation and Prepayment	395
	§14.6.1 Commitment Reduction	395
	§14.6.2 Partial Prepayment	396
	§14.7 Lenders’ Security	397
	§14.7.1 Mortgages and contract assignments	398
	§14.7.2 Security over project company’s shares	400
	§14.8 Conditions Precedent	401
	§14.8.1 Conditions Precedent to Financial Close	401
	§14.8.2 Conditions Precedent to Loan Drawdowns	403
	§14.8.3 MAC Clause	404
	§14.9 Representations and Warranties	404
	§14.10 Covenants	406
	§14.10.1 Positive Covenants	406
	§14.10.2 Negative Covenants	408
	§14.11 Permissions, Waivers and Amendments	409
	§14.12 Events of Default	410
	§14.13 Lenders’ Decision-Making Process	413
	§14.14 Intercreditor Issues	415
	§14.14.1 Interest-Rate Swap Providers	417
	§14.14.2 Fixed-Rate Lenders	417
	§14.14.3 Lenders with Different Security	418
	§14.14.4 Lessors	418
	§14.14.5 Subordinated or Mezzanine Lenders	418
	§14.14.6 Defaulting lender	420
	§14.15 Governing Law and Jurisdiction	420
	§14.16 Debt Refinancing	420
	§14.16.1 Basis for Refinancing	421
	§14.16.2 Debt Refinancing: The ‘Windfall’ Issue	424
	§14.16.3 Calculating the Refinancing Gain	425
	§14.16.4 What Apparent Refinancings Should be Excluded from Gain-Sharing Provisions?	429
	§14.16.5 Are refinancing gain-sharing provisions enforceable?	432
	§14.16.6 Does it Matter?	432
	§14.17 Secondary Equity Sale	433
	§14.17.1 Secondary Equity Sale—The ‘Windfall’ Issue	435
	15 Public-Sector Financial Support	438
	§15.1 Introduction	438
	§15.2 Indirect Public-Sector Financial Support	439
	§15.3 Direct Public-Sector Financial Support	439
	§15.4 Mezzanine Debt	442
	§15.4.1 U.S. State Infrastructure Banks	442
	§15.4.2 ‘TIFIA’ Program	443
	§15.4.3 EIB Project Bond Initiative	444
	§15.5 Standby Financing	444
	§15.6 Refinancing after Project Completion	444
	§15.7 Gap Financing	445
	§15.8 Policy Banks	446
	§15.9 Credit Guarantee Finance	447
	§15.10 Capital Grant	448
	§15.11 Viability-Gap Funding	450
	§15.12 Part-Construction of the Project	451
	§15.13 Complementary Investment	451
	§15.14 Full Debt Guarantee	451
	§15.15 First-Loss Debt Guarantee	452
	§15.16 Pari-Passu Debt Guarantee	452
	§15.17 Debt Underpinning	453
	§15.18 Minimum Revenue Guarantee (‘MRG’)	453
	§15.19 Tariff Subsidy	455
	§15.20 Public-Sector Project Company	456
	§15.21 Guarantee Funds	456
	16 Export-Credit Agencies and Development-Finance Institutions	458
	§16.1 Introduction	458
	§16.2 Export Credit Agencies	459
	§16.2.1 ECA Support for Projects	460
	§16.2.2 Berne Union	461
	§16.2.3 The OECD Consensus	462
	§16.2.4 Assumption of Risks and Scope of Cover	464
	§16.2.5 Cash Collateralization	466
	§16.2.6 Benefit of ECA Support	467
	§16.3 Political-Risk Insurance for Investors	467
	§16.4 ECAs and Bilateral DFIs	468
	§16.4.1 Japan (NEXI/JBIC)	470
	§16.4.2 Korea (K-sure/KEXIM/KDB)	471
	§16.4.3 China (SINOSURE/China Eximbank/CDB	472
	§16.4.4 United States (U.S. Exim/OPIC)	473
	§16.4.5 Germany (Hermes/KfW/DEG)	475
	§16.4.6 Italy (SACE/Simest)	475
	§16.4.7 France (COFACE/DREE/Proparco)	476
	§16.4.8 Denmark (EKF)	477
	§16.5 Multilateral Development-Finance Institutions	477
	§16.5.1 The World Bank	479
	§16.5.2 International Finance Corporation (‘IFC’)	482
	§16.5.3 International Development Association (‘IDA’)	484
	§16.5.4 Multilateral Investment Guarantee Agency (‘MIGA’)	484
	§16.5.5 Asian Development Bank	486
	§16.5.6 African Development Bank	487
	§16.5.7 European Bank for Reconstruction and Development	488
	§16.5.8 European Investment Bank	488
	§16.5.9 Inter-American Development Bank	491
	Annex: U.S. Exim ‘Project Criteria and Application Information Requirements’	492
	I General Project	492
	Information Required	492
	II Participants	494
	Information Required	494
	III Technical	494
	Information Required	494
	IV Host Country Legal/Regulatory Framework and Government Role	495
	Information Required	495
	17 Recent Market Developments and Prospects for Project Finance	496
	§17.1 Introduction	496
	§17.2 The Effect of the 2008 Financial Crisis	497
	§17.3 The ‘Basel Process’	498
	§17.4 Non-Bank Lenders	500
	§17.4.1 Institutional Lenders	500
	§17.4.2 Debt Funds	501
	§17.4.3 Public-Sector Pension Funds	502
	§17.4.4 Solvency II	502
	§17.5 Improving Project-Finance Credit Risk	502
	§17.5.1 Separate Construction Risk	503
	§17.5.2 Mezzanine Debt	504
	§17.5.3 Standby Finance	504
	§17.5.4 Blended Tenors	505
	§17.5.5 Increased Equity	505
	§17.6 New Models	506
	§17.6.1 Regulated Asset Base Finance	506
	§17.6.2 Output-Based Aid	508
	§17.6.3 Social-Impact Bonds	509
	§17.6.4 Tax Increment Finance	510
	§17.7 The Future of Project Finance	512
	Glossary and Abbreviations	514
	Index	556