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Legal Components
Published in Gene Beck, Grid Parity, 2020
Environmental law that affects the financing of renewable energy projects is made up of no less than nine major federal statues and many other state and local laws. It is the assortment and interaction of all of the federal, state and local laws that makes documentation of renewable energy project financings such a challenge. These challenges are not just a nuisance, they are a necessity if the project developer or lender is going to be prepared to achieve the level of commercial documentation necessary to protect themselves and have an enforceable set of documentation but also to have a project eligible for additional financing from third parties through the secondary market that most projects will attempt to achieve. These laws create many rights and responsibilities for all parties in the energy project and each party will attempt to maximize the attributes for their own benefit during the documentation process. Ultimately, no project will achieve final funding if everyone involved in the project doesn’t feel that they are assuming an acceptable business risk. Extensive negotiations can result in some projects never closing if one or more parties feel that the risk to them is greater than the benefits they would receive if the project were to close. Environmental risks, simply because of their potentially very large “unknown” quantity, often create the largest stumbling block in the project finance.
Lenders, risk insurers and rating agencies
Published in Hakan Şahin, Host Government Agreements and the Law in the Energy Sector, 2018
Project finance is the provision of economic funds for a project arranged in such a way that financial lenders count merely on the assets and cash flow of the project for interest and loan repayment.1 Project finance has been one of the most popular funding models for the oil and gas industry for decades. There are a number of equity investors involved in project financing including sponsors, commercial banks and other financial lending institutions. Although project finance is the most common financing model in large-scale oil and gas projects, it is not suitable for all investment scenarios. More fragile business environments, unpredictable government behaviour and other political risk phenomena can render the financing of an international energy project challenging.
A review of funding and its implications for construction clients
Published in Kim Haugbølle, David Boyd, Clients and Users in Construction, 2017
The term ‘project finance’ is defined in a variety of ways in academic literature. Writing in Harvard Business Review, Wynant (1980: 166) defined project finance as ‘a financing of a major independent capital investment that the sponsor has segregated from its assets and general purpose obligations’. This definition highlights one key feature of project finance: the notion that, in project finance, the sponsors of the project are removed from any obligations to repay the project debt or interest if the project fails (Buljevich and Park, 1999). In other words, the project is perceived as both legally and economically self-contained in any debt financing agreement. As argued by Brealey and Myers (2000), project finance involves financing the development and construction of a new project in which the loan agreement is linked closely to the prospect of the project, thereby minimising the risk exposure of the project sponsors. Nevitt and Fabozzi (2000: 1), on the other hand, define project finance as: a financing of a particular economic unit in which a lender is satisfied to look initially to the cash flow and earnings of that economic unit as the source of funds from which a loan will be repaid and to the assets of the economic unit as collateral for the loan.
Optimized real options-based approach for government guarantees in PPP toll road projects
Published in Construction Management and Economics, 2018
Faruk Buyukyoran, Selin Gundes
MRG is one of the most common and effective financial instruments held by governments that is used to mitigate demand risk in toll road projects. Experience to date suggests that investing in a public infrastructure becomes problematic for private investors in the absence of such guarantees. The underlying reason for the importance of revenue guarantees in PPP toll road projects lies in the idiosyncratic characteristics of project finance transactions. That is, unlike corporate finance principles, in a project finance scheme, lenders primarily consider the revenue stream generated by the project instead of the overall financial strength or balance sheet of the concessionaire to lend a project (Merna and Njiru 2002). Thus, yearly cash flow of a project is the main determinant in project finance agreements and the MRG scheme secures a yearly minimum income for the concessionaire. Valuation of these guarantees has come into prominence in recent years because a significant number of cases have proved that the provision of excessive guarantees imposes heavy contingent liabilities for the public sector (Brandao and Saraiva 2008). Inversely, lack of sufficient guarantees decreases the attractiveness of PPP projects for private investors as, in this case, projects do not completely fulfil the economic expectations of the concessionaire. Therefore, the level of guarantees identified in the model should take into account both of these concerns.