28 - Legal Aspects of International Project Finance for Sustainable Energy Development

Summary

INTRODUCTION

The framework for international project finance for sustainable energy development provides for both conflicting and cooperative exchanges between parties to such contracts. Under the cooperative aspects of such contracts, host governments grant foreign investors exclusive licenses to develop and operate sustainable energy development projects. In order to ensure that the benefits of such projects are shared equitably, host governments supervise such energy projects. Limited financing options for sustainable energy projects increase the credit risk of project lenders. Specific clauses such as step-in clauses, substitution clauses, floating charges, negative pledge clauses as well as covenants clauses, are included in financing agreements for sustainable energy development. These are intended to eliminate and allocate the credit risk of project lenders.

INTERNATIONAL PROJECT FINANCE

International project finance is the primary global vehicle for financing cross-border investments. International project finance transactions are defined by the OECD as the “financing of a particular economic unit in which a lender is satisfied to consider the cash flows and earnings of that economic unit as the source of funds from which a loan will be repaid and the assets of the economic unit as collateral for the loan.” The OECD arrangement also specifies seven “essential criteria” to further define a project finance transaction:

1. Financing of export transactions with a legally and economically independent project company, for example, a special purpose company, in respect of “greenfield” investment projects generating their own revenues;

2. Appropriate sharing of risks between the partners in the project, for example, private or creditworthy public shareholders, exporters, creditors, off-takers, including adequate equity;

3. […]